EXHIBIT 13
THE 2002 ANNUAL REPORT TO SHAREHOLDERS
[PICTURE]
THE SHERWIN-WILLIAMS COMPANY
2002 ANNUAL REPORT
PROUD OF THE COMPANY WE KEEP
OUR FUNDAMENTAL ALLEGIANCE TO THE CUSTOMERS WE SERVE, THE SHAREHOLDERS
WE WORK FOR AND THE EMPLOYEES WE EMBRACE IS A GUIDING PRINCIPLE. IT'S
WHY FOR 137 YEARS, SHERWIN-WILLIAMS - AMERICA'S PAINT COMPANY - HAS
BEEN THE LEADING FORCE IN THE COATINGS INDUSTRY.
CONTENTS
Financial Highlights
1
Operating Segments
4
Letter to Shareholders
6
Company Overview
10
Citizenship
18
Stores Map/Subsidiaries
20
Financial Performance
21
NET EXTERNAL SALES BY SEGMENT
(millions of dollars) Net External Sales % of Sales
- ------------------------------------------------------------------------------------
Paint Stores Segment $3,302 63.7%
Consumer Segment $1,178 22.7%
Automotive Finishes Segment $ 454 8.8%
International Coatings Segment $ 244 4.7%
Administrative Segment $ 7 .1%
- ------------------------------------------------------------------------------------
Total Consolidated Sales $5,185 100.0%
The Sherwin-Williams Company recruits, selects and hires the best possible
people available -- without discrimination based on race, religion, color,
creed, sex, national origin, age, disability, status as a special disabled
veteran, veteran of the Vietnam era or any other unlawful consideration.
FINANCIAL HIGHLIGHTS
(thousands of dollars except per share data) 2002 2001 2000
-------------------------------------------
Net sales $ 5,184,788 $5,066,005 $5,211,624
- ---------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting principle $ 310,701 $ 263,158 $ 16,026
Cumulative effect of change in accounting principle - net of income taxes of $64,476 (183,136)
----------- ---------- ----------
Net income $ 127,565 $ 263,158 $ 16,026
- ---------------------------------------------------------------------------------------------------------------------------------
Per common share:
Fully-diluted:
Income before cumulative effect of change in accounting principle $ 2.04 $ 1.68 $ .10
Cumulative effect of change in accounting principle - net of income taxes (1.20)
----------- ---------- ----------
Net income $ .84 $ 1.68 $ .10
Basic:
Income before cumulative effect of change in accounting principle $ 2.07 $ 1.69 $ .10
Cumulative effect of change in accounting principle - net of income taxes (1.22)
----------- ---------- ----------
Net income $ .85 $ 1.69 $ .10
Cash dividends $ .60 $ .58 $ .54
Book value $ 9.01 $ 9.66 $ 9.22
- ---------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding (thousands) 150,438 155,557 161,912
Return on sales (1) 6.0% 5.2% .3%
Return on net operating assets employed (RONAE) (2) 35.7% 27.5% 8.6%
Return on beginning shareholders' equity (1) 20.9% 17.9% .9%
Total debt to capitalization 28.0% 29.3% 33.5%
Interest coverage (3) 13.3x 8.8x 3.3x
Current ratio 1.4 1.3 1.4
Total technical expenditures (4) $ 88,721 $ 86,222 $ 83,627
[BAR CHART]
SALES
(millions of dollars)
1996 4,133
1997 4,881
1998 4,934
1999 5,004
2000 5,212
2001 5,066
2002 5,185
[BAR CHART]
INCOME PER SHARE - DILUTED(1)
1996 1.33
1997 1.50
1998 1.57
1999 1.80
2000 .10
2001 1.68
2002 2.04
(1) Based on income before cumulative effect of change in accounting principle.
See Note 2, pages 43-45 of this report.
(2) Based on income before income taxes and cumulative effect of change in
accounting principle divided by average net accounts receivable,
inventories, property, plant and equipment and accounts payable.
(3) Ratio of income before income taxes, cumulative effect of change in
accounting principle and interest expense to interest expense.
(4) See Note 1, page 42 of this report, for a description of technical
expenditures.
1
[PICTURE OF PAINT CONTAINER]
2 STRENGTH. STABILITY. SECURITY.
TWIST & POUR(TM)
Since the July 2002 launch of our new Twist & Pour(TM) paint containers, the
number of outlets that carry our Dutch Boy(R) brand has more than tripled.
[PICTURE OF PAINT CONTAINERS]
3
[PICTURE OF COLLAGE OF OPERATING SEGMENTS]
PAINT STORES
PRODUCTS SOLD: Paints, stains, caulks, applicators, wallcoverings,
floorcoverings, spray equipment and related products
MARKETS SERVED: Do-It-Yourselfers, professional painting contractors, home
builders, property managers, architects, interior designers, industrial, marine,
aviation, flooring and original equipment manufacturer (OEM) product finishes
MAJOR BRANDS SOLD: Sherwin-Williams(R), FlexBon Paints(TM), Con-Lux(R), Old
Quaker(TM), Mercury(R), Brod Dugan(R), Mautz(R) Pro-Line(R), SeaGuard(R),
ArmorSeal(R), Kem(R) Hi-Temp, Cook(TM), Sher-Wood(R), Powdura(R), Polane(R) and
Kem Aqua(R)
OUTLETS: 2,643 Sherwin-Williams stores in the United States, Canada, Mexico,
Puerto Rico and the Virgin Islands
CONSUMER
PRODUCTS SOLD: Branded, private label and licensed brand paints, stains,
varnishes, industrial products, wood finishing products, applicators,
corrosion inhibitors, aerosols and related products
MARKETS SERVED: Do-It-Yourselfers, professional painting contractors and
industrial maintenance
MAJOR BRANDS SOLD: Dutch Boy(R), Krylon(R), Minwax(R), Cuprinol(R),
Thompson's(R) WaterSeal(R), Formby's(R), Red Devil(R), Pratt & Lambert(R),
Martin Senour(R), H&C(TM), White Lightning(R), Dupli-Color(R) and Rubberset(R)
OUTLETS: Leading mass merchandisers, home centers, independent paint dealers,
hardware stores, automotive retailers and industrial distributors in the United
States, Canada and Mexico
4 STRENGTH. STABILITY. SECURITY.
[PICTURE OF COLLAGE OF OPERATING SEGMENTS] OPERATING SEGMENTS
AUTOMOTIVE FINISHES
PRODUCTS SOLD: High performance interior and exterior coatings for the
automotive, fleet and heavy truck markets, as well as thousands of associated
products
MARKETS SERVED: Automotive jobbers, wholesale distributors, collision repair
facilities, dealerships, fleet owners and refinishers, production shops, body
builders and OEM product finishers
MAJOR BRANDS SOLD: Sherwin-Williams(R), Martin Senour(R), Western(R),
Lazzuril(TM), Excelo(TM), Baco(TM) and ScottWarren(TM)
OUTLETS: 179 company-operated branches in the United States, Canada, Jamaica and
Chile, and other operations in the United States, Canada, Mexico, Brazil,
Jamaica, Chile and Italy
INTERNATIONAL COATINGS
PRODUCTS SOLD: Architectural paints, stains, varnishes, industrial maintenance
products, aerosols, product finishes, wood finishing products and related
products
MARKETS SERVED: Do-It-Yourselfers, professional painting contractors,
independent dealers, industrial maintenance and OEM product finishes
MAJOR BRANDS SOLD: Sherwin-Williams(R), Dutch Boy(R), Krylon(R), Kem-Tone(R),
Martin Senour(R), Pratt & Lambert(R), Minwax(R), Sumare(TM), Ronseal(TM),
Globo(TM), Pulverlack(TM), Colorgin(TM), Andina(TM), Tri-Flow(R),
Thompson's(R) WaterSeal(R) and Marson(TM)
OUTLETS: Distribution in 19 countries through wholly-owned subsidiaries, joint
ventures and licensees of technology, trademarks and tradenames, including 58
company-operated architectural and industrial stores in Chile, Brazil and
Uruguay
5
WE ARE PLEASED TO REPORT THAT 2002 WAS A SOLID YEAR FOR THE SHERWIN-WILLIAMS
COMPANY. AFTER 2001 DID NOT MEASURE UP TO OUR EXPECTATIONS, WE WERE DETERMINED
TO RETURN OUR COMPANY TO A HIGH LEVEL OF FINANCIAL PERFORMANCE. OUR EFFORTS THIS
PAST YEAR RESULTED IN STRONG CASH FLOW AND A SUBSTANTIAL IMPROVEMENT IN
OPERATING INCOME ON A MODERATE SALES INCREASE. IN THESE TIMES OF SLUGGISH
ECONOMIC GROWTH, MOUNTING INTERNATIONAL TENSIONS AND DAILY HEADLINES ABOUT
COMPANIES ACCUSED OF MISLEADING THEIR EMPLOYEES, SHAREHOLDERS AND THE FINANCIAL
COMMUNITY, SHERWIN-WILLIAMS STANDS TALL.
[PHOTO OF CHRISTOPHER M. CONNOR] [PHOTO OF JOSEPH M. SCAMINACE]
CHRISTOPHER M. CONNOR JOSEPH M. SCAMINACE
Chairman and Chief Executive Officer President and Chief Operating Officer
6 STRENGTH. STABILITY. SECURITY.
LETTER TO SHAREHOLDERS
We have always placed the highest value on the integrity, ethics and
morality of our company. We stand behind the fairness and accuracy of our
financial reports with confidence. This is a company founded on, and recognized
for, these fundamental principles. Throughout 2002, we continued to invest
energy and capital in building our core businesses, expanding our distribution,
increasing our technological leadership and improving our operational
efficiency.
Our consolidated net sales for the year grew 2.3% to $5.18 billion.
Income before the cumulative effect of change in accounting principle increased
18.1% to $310.7 million from $263.2 million in 2001. Diluted income per common
share before the accounting change reached a new high of $2.04 per share; a
21.4% increase over the $1.68 per share posted a year earlier. Given the
challenges we faced throughout the year we are pleased with our earnings
performance.
For the second year in a row, the Company's net operating cash flow
exceeded $550 million. This strong cash generation was achieved through a
combination of improved profitability and continued stringent working capital
management. During the year, we reduced our receivable days from 56 to 52 and
trimmed inventory levels by six days. These working capital improvements
contributed $84 million to cash from operations.
We put this cash to work during the year to strengthen our balance
sheet and further invest in our future. We retired $101.9 million of debt, which
helped bring our debt to total capital ratio down to 28% from 29.3% last year.
We invested $126.5 million in long-term assets, and our Paint Stores Segment
purchased the assets of FlexBon Paint Company, including 24 stores in Florida.
We made cash dividend payments of $91 million and purchased 6.7 million shares
of the company's common stock on the open market for treasury. At year end,
our cash and cash equivalents stood at $164.0 million, an increase of $45.2
million over the end of 2001. On the strength of our earnings and cash position,
in 2003 our Board of Directors approved our 24th consecutive increase in
quarterly dividends.
PAINT STORES SEGMENT
Net sales for our Paint Stores Segment increased by 3.7% over 2001 to
$3.3 billion. Comparable-store sales improved by 1.9% over the prior year.
Operating profit from the Segment came in at $398.5 million, a 2.7% increase
over 2001.
Our Paint Stores Segment stayed focused on the task of serving the
professional user, and our sales to contractors continued to grow, particularly
in the residential and property management markets. We were also encouraged by
the strong do-it-yourself (DIY) sales performance. However, the demand for
industrial coatings in both the Original Equipment Manufacturer (OEM) product
finishes and industrial maintenance markets remained soft.
During the year, we added 70 net new stores, bringing our total to
2,643 stores in North America. We also launched a three-year program to refresh
the interiors of our stores. By year-end, we had completed 840 stores, including
fresh paint, new graphics, merchandise resets and an upgraded point-of-sale
(POS) computer system.
In 2002, we introduced two new color systems in our stores.
Sherwin-Williams COLOR(TM) is an interior/exterior palette of more than 1,000
clean bright colors. Our new Martha Stewart Signature(TM) color palette will
broaden our appeal to the growing female home-decorating market.
Our industrial maintenance customers are under constant pressure to
improve productivity. We responded by launching a line of products under the
ExpressTech(TM) brand, that significantly shorten recoat cycles and reduce
downtime.
MONEY MAGAZINE: SHERWIN-WILLIAMS WAS RANKED IN THE TOP TEN OF 404 COMPANIES
EVALUATED IN A RECENT STUDY THAT MEASURED "EARNINGS QUALITY". (OCTOBER 2002)
As our North American OEM customers move their operations overseas, our
Chemical Coatings Division has followed. In the fall of 2002, we broke ground on
the first of two dedicated chemical coatings liquid and powder manufacturing
facilities in China.
CONSUMER SEGMENT
External net sales in the Consumer Segment increased 3.2% to $1.2
billion in 2002 versus the prior year. Sales throughout the year benefited from
a strengthening domestic DIY market combined with aggressive promotion of many
new and existing paint, aerosol and wood care products.
7
BUSINESSWEEK: SHERWIN-WILLIAMS WAS HIGHLIGHTED AS AN "EFFICIENT" COMPANY DUE TO
DILIGENT WORKING CAPITAL MANAGEMENT. (DECEMBER 2002)
Operating profit for the Segment increased 73.8% to $192.5 million
versus $110.8 million last year. This dramatic improvement in operating profit
was primarily generated from a combination of higher sales volumes, improved
overhead absorption due to architectural paint volume gains and reduced
manufacturing and administrative expense stemming from our Operational
Excellence program.
In our first full year of operations since realigning the Consumer
Segment into three operating divisions, Consumer, Diversified Brands and Wood
Care, we have renewed our emphasis on brand building, product innovation and
solidifying our strong retail relationships. Our new Dutch Boy(R) Twist &
Pour(TM) container is a good example of how our focus on innovation is helping
us to build our brands and expand our distribution.
AUTOMOTIVE FINISHES SEGMENT
Our Automotive Finishes Segment experienced a sales decrease of 2.2% to
$453.8 million for the year. Sales for the Segment were adversely impacted by
weakness in the collision repair market and unfavorable currency exchange rates
relative to last year. If we exclude the effects of currency fluctuations,
sales for the Segment would have improved 1.2% for the year.
FORBES.COM: SHERWIN-WILLIAMS WAS SINGLED OUT AS A COMPANY WITH "STALWART YIELDS"
AS DEFINED BY A RIGID, THREE-POINT CRITERIA FOR DETERMINING DIVIDEND QUALITY.
(JANUARY 2003)
Operating profit for the Segment increased 6.3% to $54.5 million from
$51.2 million in 2001. Lower raw material costs early in the year and tight
manufacturing and administrative expense control contributed to this profit
improvement.
While these results fell short of our expectations, we are encouraged
by the many positive steps taken by our Automotive Finishes Segment over the
past year. Since bringing the entire organization together in our World
Automotive Center in Warrensville Heights, Ohio, we have introduced 82 new
automotive paint products and revolutionized the delivery of color formulas to
the industry. Our A-Plus(TM) Program membership continued to grow,
underscoring our focus on, and commitment to, the collision repair market.
In 2002, the Segment added 6 new branches in North America, bringing
the total number of company-operated branches in the U.S., Canada, Jamaica and
Chile to 179.
INTERNATIONAL COATINGS SEGMENT
Net sales in our International Coatings Segment decreased 8.8% to
$244.2 million in 2002. Sales decreases in U.S. dollars were the result of
unfavorable currency exchange rates. If we exclude the effects of currency
exchange fluctuations, net sales for the Segment increased 3.3% versus 2001.
The Segment realized an operating loss for the year of $5.6 million
compared to an operating profit of $4.8 million in 2001. In addition to the
negative impact of currency fluctuation, these results include charges totaling
$11.9 million taken during the year for the impairment of assets.
Despite weak economic conditions in South America and unfavorable
foreign currency exchange rates, our operations improved and our organization is
poised to capitalize on future economic recovery in this region. During this
past year, we added 6 new stores in Chile and Brazil bringing our total to 58
company-operated stores in South America. Our Operational Excellence initiative
is helping us to become the low cost supplier to independent paint retailers
across the region. And the transfer of technology developed in the United States
has enabled us to commercialize new product faster and for less cost.
In the United Kingdom, our Ronseal business posted its highest market
share figures ever and recorded its tenth consecutive year of market share
growth in the retail wood care category.
BOARD AND MANAGEMENT CHANGES
In February 2003, Susan J. Kropf, President and Chief Operating Officer
of Avon Products, Inc., was appointed to
8 STRENGTH. STABILITY. SECURITY.
our Board of Directors. We welcome Susan to our Board and look to her knowledge
and experience to assist us in the future.
In October, Alexander Zalesky was appointed to the position of
President & General Manager of our International Division. Alex joined
Sherwin-Williams from Eastman Chemical Co., where, over the past twenty years,
he served in various engineering, sales and management assignments throughout
North and South America. Most recently, Alex was General Manager of Eastman
Chemical's Global Coatings business. Alex brings to this position a strong and
diverse international management background, and we are fortunate to have him on
our team.
LEAD PIGMENT LITIGATION
In previous years, Sherwin-Williams has elected not to engage in public
discussions regarding lawsuits involving our historic manufacture or use of
white lead pigment in paint. Given the heightened publicity this issue received
over the past year, we feel it is appropriate to offer some perspective.
The industry, including Sherwin-Williams, played an important role in
funding the "no strings attached" research that identified the risks associated
with poorly maintained lead paint and in disseminating that information to
health officials. In 1955, the industry's efforts resulted in the adoption of a
voluntary standard which essentially removed lead pigment from interior
residential paint. Over twenty years later, in 1978, the federal government
banned the use of any lead ingredients in paint for residential and most
commercial purposes. By the late 1930's, virtually none of Sherwin-William's
interior architectural paints contained lead pigments.
We are joined in most of these cases with several other defendants with
whom we have maintained an excellent working relationship in the litigation.
Over the past fifteen years we have never lost a case, nor have we ever settled.
We believe that our arguments, and more importantly our actions, are solid and
on the right side of the law.
Because we recognize that elevated blood lead levels in children is an
important public health issue, we are working with various community-based
organizations to help address it. Most of these organizations concentrate their
efforts on public education, training and lead hazard control through
effective property maintenance.
BARRON'S: SHERWIN-WILLIAMS WAS INCLUDED IN A SELECT FEW LIST OF COMPANIES THAT
HAVE MORE THAN SUFFICIENT ASSETS TO FUND THEIR FUTURE PENSION PLAN OBLIGATIONS.
(OCTOBER 2002)
OUTLOOK FOR 2003
We expect modest growth in the paint and coatings industry in 2003. The
forces that hindered economic recovery during 2002 are likely to linger
through most of this year. Regardless of market conditions, Sherwin-Williams
anticipates continued improvements in sales and earnings.
We cannot guarantee what our growth will be in 2003. We can guarantee
that we will continue to expand the distribution of our products by opening
new stores, strengthening relationships with our retail partners and forging
new relationships. We will introduce innovative new products that will increase
our customers' productivity and satisfaction. We will strengthen our brands and
provide unparalleled service to our customers.
Throughout its illustrious 137-year history, The Sherwin-Williams
Company has been blessed by the extraordinary talent, commitment and dedication
of its employees. Our success is due to their hard work and loyalty. We give
thanks to our customers, suppliers and shareholders for their trust and
confidence, and for the privilege of being able to say: We are proud of the
company we keep.
/s/ Christopher M. Connor
- ------------------------------------
CHRISTOPHER M. CONNOR
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/s/ Joseph M. Scaminace
- -------------------------------------
JOSEPH M. SCAMINACE
PRESIDENT AND CHIEF OPERATING OFFICER
9
WITH AN INDUSTRY-LEADING COMBINATION OF NEW PRODUCTS, NEW SERVICES AND NEW
IDEAS, OUR PAINT STORES SEGMENT GREW MARKET SHARE IN EACH OF THE MARKET SEGMENTS
IN WHICH WE COMPETE.
As the exclusive outlet for Sherwin-Williams(R) branded architectural
and industrial paints, stains and products, we completely control our channel of
distribution. This puts us in a unique position to sustain consistent growth and
outperform the market - even in the most challenging of economic environments.
During the past year, we added or acquired 70 stores, bringing the
total to 2,643 company-operated stores serving a diverse customer base. This
customer base is comprised of architectural and industrial painting contractors,
residential and commercial builders, property managers, OEM product finishers
and do-it-yourself homeowners.
Color played a key role in our 2002 operations with the launch of our
COLOR(TM) program and the introduction of Martha Stewart Signature(TM) Colors.
Six years in the making, COLOR is a new interior/exterior palette that offers
more than 1,000 interior colors and double the number of exterior colors
previously offered. Brighter, cleaner colors, along with larger paint strips,
fan decks and architectural kits, make color selection easier than ever - an
important consideration for our full spectrum of customers.
The Martha Stewart Signature Colors represent 416 exclusive colors
available only in Sherwin-Williams(R) paints. Do-it-yourself customers can
decorate with confidence using the 39 palette cards containing guidance for
color coordinating. These colors are the foundation for a complete line of
coordinating home furnishings including fabric, floor covering and furniture.
Improving our well-known and widely accepted products is an ongoing
process within the Paint Stores Segment. We created our Exterior Excellence
program to improve our key exterior products with brighter, bolder colors,
expanded
[PICTURE OF SHERWIN-WILLIAMS PAINT STORE]
10 STRENGTH. STABILITY. SECURITY.
PAINT STORES SEGMENT
[PICTURE OF COLLAGE OF PAINT STORES SEGMENT]
low-temperature features, extended warranties, and improved durability and fade
resistance. This sets the stage for our Interior Excellence initiative in 2003.
A further enhancement to the Sherwin-Williams shopping experience is
our comprehensive store refresh program. We've concluded the first year of a
three-year program that saw 840 stores receive complete refreshes where walls
were faux finished and products were totally re-merchandised for a more
customer-friendly experience. Similarly, we expanded access to SherLink(TM),
our 24/7 password-protected business tool designed to provide customers access
to on-line ordering and a searchable product catalog.
INDUSTRIAL MAINTENANCE AND MARINE markets represent significant growth
opportunities for the Paint Stores Segment. In response to customer demand for
shorter recoat times, faster returns to service and improved paint line
productivity, we introduced our new ExpressTech(TM) products. These products
incorporate true technological innovations and are generating dramatic
end-user savings in labor, materials and time.
CHEMICAL COATINGS DIVISION supplies product finishes to OEM through 9
manufacturing plants and 83 dedicated facilities in North America. To be better
positioned in the globalization of the OEM product finishing industry, we have
established two dedicated chemical coatings liquid and powder manufacturing
facilities in China. Our Chemical Coatings business was adversely affected by a
weak manufacturing segment and reduced business investment that impacted office
furniture, industrial equipment, plastics and electronic markets. Still, we
managed to increase market share and significantly grow our OEM account base.
[PICTURE OF COLOR CARDS]
11
BRAND STRENGTH. IT'S WHAT MOST COMPANIES TODAY ARE INTENSELY FOCUSED ON
ACHIEVING. AT SHERWIN-WILLIAMS, THAT'S EXACTLY WHAT WE HAVE ACHIEVED IN THE
THREE OPERATING UNITS THAT COMPRISE OUR CONSUMER SEGMENT.
On the strength of brands like Dutch Boy(R), Minwax(R) and Krylon(R) the
Consumer, Wood Care and Diversified Brands Divisions delivered strong
performances in 2002.
CONSUMER DIVISION - The introduction of our new Twist & Pour(TM)
container in 2002 represents the first significant change to one-gallon paint
packaging in generations. The Twist & Pour innovation has received numerous
consumer and industry awards, as well as immediate consumer acceptance due to
its ease of use and clean-up benefits. Since the introduction of Twist & Pour,
the number of outlets that carry our Dutch Boy(R) brand has tripled.
In addition to its array of powerful brands like Dutch Boy(R), Pratt &
Lambert(R), Martin Senour(R) and Cuprinol(R), our Consumer Division is a major
supplier of private label products to leading retailers.
Our 14 manufacturing facilities and 8 distribution centers are
governed by a culture of continuous improvement. The division continues its
mission of maximizing efficiencies, productivity and quality through our
Operational Excellence and Six Sigma initiatives, which have yielded
improvements in customer service, inventory levels and asset utilization.
WOOD CARE DIVISION - High performance products that deliver long
lasting beauty and protection are why consumers have made us the market leader
in interior stains and finishes and exterior waterproofing products. Familiar
brands like Minwax(R) and Thompson's(R) WaterSeal(R) are known for their
reliability and ease of use.
These brands are widely available in a variety of retail outlets
including home improvement stores, home centers, mass merchants, hardware stores
and paint stores. Our new Minwax(R) Super Fast-Drying Polyurethane for Floors is
a
[PHOTO]
12 STRENGTH. STABILITY. SECURITY.
CONSUMER SEGMENT
[PICTURE OF COLLAGE OF CONSUMER SEGMENT]
popular choice among contractors and do-it-yourselfers who want to speed up
project time. New for 2002 was our Thompson's(R) WaterSeal(R) Advanced
Waterproofer which provides one-coat maximum strength protection and one-day
clean-and-treat application.
DIVERSIFIED BRANDS DIVISION - 2002 marked the return of the famous "No
runs, no drips, no errors" television campaign for our Krylon(R) spray paint
brand - a contributing factor to our strong sales and profit gains in the
Division. We also introduced several key new products that extended our market
leadership position in aerosol paints. Krylon(R) Fusion for Plastic(TM) is the
first paint product designed to bond to plastics with no sanding or priming -
features that earned it the Editor's Choice Award from Popular Mechanics.
Dupli-Color(R) Metal Cast(TM) captures the anodized effect in an aerosol paint.
The Diversified Brands Division is a leading supplier of professional
brushes and rollers marketed under the Sherwin-Williams(R) and Rubberset(R)
brands. New extension poles for use with our rollers in each brand were
introduced in 2002. We are also a leading supplier of caulks and sealants
through our White Lightning(R) brand.
Our private label manufacturing capabilities serve several mass
merchants with aerosol paints and cleaning products.
[PICTURE OF COLLAGE OF MINWAX WITH BRUSH]
13
THE COMPREHENSIVE DISTRIBUTION PLATFORM OF OUR AUTOMOTIVE SEGMENT CONSISTS OF
THOUSANDS OF AUTOMOTIVE REFINISH DISTRIBUTORS. OUR FOREIGN LICENSING
AGREEMENTS AND WHOLLY OWNED SUBSIDIARIES GIVE US A PRESENCE IN NEARLY 30
COUNTRIES. IN 2002, WE ADDED SIX NEW BRANCHES IN NORTH AMERICA, BRINGING TO
179 THE TOTAL NUMBER OF COMPANY-OPERATED BRANCHES IN THE UNITED STATES, CANADA,
JAMAICA AND CHILE.
Centralizing our technical, sales and marketing teams at our World
Automotive Center in Warrensville Heights has resulted in numerous strategic and
operational benefits. For example, we were able to introduce 82 new automotive
paint products. These include our exclusive Ure-Flex(TM) Technology Premium
Plus Clearcoat and Ure-Flex(TM) Spectra Prime/Spectra Seal - products that offer
industry-leading performance and are certified by the original equipment
manufacturers for warranty repairs.
Our commitment to excellence in product quality and customer service
led to the creation of our Advanced Product Quality Planning team and the
application of SixSigma methods and practices to drive continuous improvements
in customer service. Our unparalleled supply chain management expertise,
industry leading automotive refinish technology and a complete associated
products program sets us apart in our ability to service our customers. In
short, we succeed by making our customers more successful.
In 2002, our customers continued to take advantage of our automotive
finishing e-technology. This technology successfully combines the convenience
of the internet with our local service and delivery capabilities. Customers can
go on-line to purchase products, utilize our Formula Finder color formula
retrieval and smart scale mixing resource, access environmental compliance
reporting tools and obtain the latest real time information on color and
product technology.
We've also added 80 new members to our A-Plus(TM) Program, bringing
total membership to 828. The A-Plus(TM)
[PHOTO]
14 STRENGTH. STABILITY. SECURITY.
AUTOMOTIVE FINISHES SEGMENT
[PICTURE OF COLLAGE OF AUTOMOTIVE FINISHES SEGMENT]
Program is a value-added program with training and certification, business
management and customer service components. Membership is comprised of industry
leading collision repair centers who exceed our stringent quality and process
requirements.
Our involvement with NASCAR grew in 2002, and continues to underscore
the acceptance of Sherwin-Williams(R) automotive paint in the most elite and
discriminating circles. Sherwin-Williams Automotive Finishes Corp. was the
coatings supplier of choice for 25 Winston Cup teams and 10 Busch Series teams
in 2002. In fact, this past year, Sherwin-Williams took the checkered flag in
23 of the 36 Winston Cup events.
The Automotive Finishes Segment also played a key role in a unique and
high profile community project that put our products to an all-season climatic
test. North-east Ohio's weather has been described as anywhere from
unpredictable to downright harsh. So when GuitarMania(R)* needed to shield the
100 fiberglass work-of-art guitars from the elements, they turned to
Sherwin-Williams Automotive Finishes Corp.
While we were glad to provide technical know-how and assistance to this
worthy cause, our singular focus is in the automotive market where we have been
developing and manufacturing coatings for the past 80 years. The more than 280
employees at our 350,000-square-foot, state-of-the-art, World Automotive Center
are dedicated to developing and delivering the highest performance,
technologically driven, customer-oriented products and services available
anywhere in the world.
[PICTURE OF COATINGS PRODUCTS]
* GuitarMania(R) is a public art project benefiting United Way Services and the
Rock and Roll Hall of Fame and Museum's education fund.
15
THERE WERE MANY BRIGHT SPOTS THAT ILLUMINATED THE LANDSCAPE OF OUR
INTERNATIONAL COATINGS SEGMENT IN 2002. IN VIRTUALLY ALL OF OUR MARKETS, WE WERE
ABLE TO GAIN SHARE AND ESTABLISH A GREATER PRESENCE THROUGH EXPANDED
DISTRIBUTION.
Our ability to share advanced domestic technologies has enabled us to broaden
our product offerings and establish market leadership in numerous areas.
Despite weak economic conditions in South America and unfavorable
foreign currency exchange rates, our operations improved. Our organization is
positioned well to take advantage of future economic stabilization and
recovery in these regions.
The International Coatings Segment distributes the Sherwin-Williams(R)
brand along with a variety of well-known regional brands in 19 countries. We
operate through wholly-owned subsidiaries, joint ventures, licensing
agreements and independent distributors. In 2002, we added 6 new stores in Chile
and Brazil bringing our total to 58 company-operated stores.
BRAZIL - With more than 900 employees and three manufacturing sites,
Sherwin-Williams do Brasil is our largest foreign subsidiary. Several powerful
brands and comprehensive distribution provides us strength in the markets in
which we compete. Our Colorgin(TM) brand gives us market leadership in aerosols,
which are distributed through home centers, mass retailers and hardware stores.
We are also the market leader in the industrial maintenance category with our
Sumare(TM) brand, which is sold in our company stores and directly to customers.
As the market share leader in products used in hospitals, on floors and in
kitchens and baths, we continue to grow our architectural coatings business.
We enjoy success in niche powder coatings markets as well. Recognizing the
special needs of a diverse customer base, we have assigned key account
specialists to sharpen our focus and improve customer service.
CHILE - Solid relationships with leading retailers, along with our
direct retail and wholesale operations, give us
[PICTURE OF PRODUCT DISPLAYS]
16 STRENGTH. STABILITY. SECURITY.
INTERNATIONAL COATINGS SEGMENT
[PICTURE OF COLLAGE OF INTERNATIONAL COATINGS SEGMENT]
broad market coverage in all major paint segments, including architectural,
industrial and marine, chemical coatings and aerosols. We are the leader in
aerosols with our Marson(TM) brand and are growing our presence in the
independent paint dealer channel with our Andina(TM) brand. Transferred domestic
technology continues to create opportunities for us in industrial and marine
markets, and new products from the General Polymers line of our Paint Stores
Segment will keep us on the leading edge of the industrial flooring markets.
ARGENTINA - In Argentina, we were able to strengthen our market share
and overall awareness, perception and preference for our paint products in the
architectural segment. This segment represents an overwhelming majority of our
business in Argentina where we are considered the supplier of choice. The
country is beset by economic challenges, including a GNP that contracted by
12.5%, unemployment levels that soared to more than 40% and a 230%+ currency
devaluation. However, we remain confident of future market share gains and
continued strong distribution with independent paint dealers and home centers.
UNITED KINGDOM - Ronseal Limited posted its highest market share
figures ever and recorded its tenth consecutive year of market share growth in
the retail wood care category with our Woodcare line of products. Our entrance
into the exterior garden care sector with our Ronseal(TM) Gardencare(TM) line
has also been extremely successful. Although gallon volume was somewhat sluggish
due to excessive rainfall in 2002, we are excited about this category going
forward. We were recognized by the largest do-it-yourself retailer in the UK
as their supplier of the year in 2002. Additionally, we have made significant
investments in waterborne technology and facilities in response to increasing
consumer demand for more water-based products.
[PICTURE OF BUS]
17
BEING RECOGNIZED AS AMERICA'S PAINT COMPANY
IS AN HONOR. SERVING THE CUSTOMERS WHO AWARDED US THAT DISTINCTION IS A PRIVI-
LEGE. ACCEPTING THE RESPONSIBILITY THAT COMES WITH SUCH PRAISE IS OUR DUTY. THE
MEN AND WOMEN OF SHERWIN-WILLIAMS LIVE OUR VALUES IN THEIR DAILY WORK AND SHARE
THEIR VALUES IN THE COMMUNITIES IN WHICH THEY LIVE.
GUITARMANIA(R)
Chicago had its cows. Buffalo its buffaloes. Pigs poked around
Cincinnati, moose roamed Toronto, and fish flew out of the water in Baltimore.
In 2002, Cleveland got its guitars.
Across North America's great cities, local artists are showcasing their
creativity by decorating giant fiberglass figures that represent the essence of
their city. These figures are then displayed around the city and later
auctioned. The campaign's goals are to energize the city and ignite civic pride,
while raising funds for local charities.
In Cleveland, home to the Rock and Roll Hall of Fame, deciding on the
right fiberglass symbol was easy: the Fend-er(R)Stratocaster(R)guitar.
Giant 10-foot-high fiberglass guitars became canvases for prominent
local artists and a "Who's Who" of pop icons and celebrities. Yoko Ono, Peter
Max, Joe Walsh, Keith Richards and Graham Nash were just a few of the note-
worthy artists involved.
As a key strategic partner in GuitarMania(R), Sherwin-Williams
developed official GuitarMania paints for the artists and clear-coated all
guitars for display.
In June 2002, nearly 100 guitars went on public display at the Rock
and Roll Hall of Fame to rave reviews. They appeared around the city for the
remainder of the summer. Permanent homes were determined by a live auction in
November, with proceeds benefiting United Way Services, the Rock and Roll Hall
of Fame and Museum's education fund and the Make-A-Wish Foundation of Northeast
Ohio.
[COLLAGE OF GUITARMANIA]
18 STRENGTH STABILITY SECURITY
CITIZENSHIP
[COLLAGE OF CITIZENSHIP]
GRAFFITI HURTS(R)
Cleaning up graffiti is a costly effort for cities across America. In
addition to the drain on tax dollars - which could be used for schools, parks,
roads and other community improvements - graffiti causes a decrease in
surrounding property values, a decrease in a resident's feeling of safety and an
overall decrease in local commerce.
Formed in 1996 by Keep America Beautiful, Inc., through a grant from
Sherwin-Williams and its Krylon(R) brand of aerosol paints, The Graffiti
Hurts(R) Program is dedicated to raising awareness about the harmful effects of
graffiti through grass roots education and community involvement.
"PIECE OF THE PENTAGON" AWARD
In May, Sherwin-Williams was presented with a "Piece of the Pentagon"
award for our company's donation of 10,000 gallons of paint to help repair
damage caused by the September 11 terrorist attack.
Approximately 1,000 contractors are working 20 hours a day, six days a
week to rebuild the damaged 400,000-square-foot portion of the Pentagon.
Completion is anticipated in spring 2003.
In presenting the award, Pentagon Renovation Program Manager Lee Evey
said, "The contribution made by Sherwin-Williams is representative of the
American spirit to see the Pentagon made whole again."
CLEARCORPS CARES ABOUT KIDS
Sherwin-Williams is a proud partner of CLEARCorps, an organization
dedicated to protecting children from lead poisoning. CLEARCorps is an
AmeriCorps service program that was created in 1995 through a partnership
between the Shriver Center and the National Paint and Coatings Association. With
financial support from companies like Sherwin-Williams, CLEARCorps is able to
provide on-site, family-centered education, training and lead hazard control
services.
19
STORES MAP/SUBSIDIARIES
[MAP OF STORES/AUTOMOTIVE BRANCHES]
SUBSIDIARIES
FOREIGN
Coatings S.R.L.
Compania Sherwin-Williams, S.A. de C.V.
Eurofinish S.r.l.
Kriesol S.A.
Productos Quimicos y Pinturas, S.A. de C.V.
Proquipsa, S.A. de C.V.
Pulverlack Nordeste Ltda.
Quetzal Pinturas, S.A. de C.V.
Ronseal (Ireland) Limited
Ronseal Limited
Sherwin-Williams (Caribbean) N.V.
Sherwin-Williams (West Indies) Limited
Sherwin-Williams Argentina I.y C.S.A.
Sherwin-Williams Automotive Europe S.P.A.
Sherwin-Williams Automotive Northern
Europe BVBA
Sherwin-Williams Canada Inc.
Sherwin-Williams Cayman Islands Limited
Sherwin-Williams Chile S.A.
Sherwin-Williams do Brasil Industria
e Comercio Ltda.
Sherwin-Williams Paints (Dongguan)
Company Limited
Sherwin-Williams Japan Co., Ltd.
Sherwin-Williams (Shanghai) Paints
Company Limited
Sherwin-Williams Singapore PTE Ltd.
The Sherwin-Williams Company
Resources Limited
DOMESTIC
Contract Transportation Systems Co.
DIMC, Inc.
Dupli-Color Products Company
Sherwin-Williams Automotive Finishes
Corp.
Sherwin-Williams Realty Holdings, Inc.
SWIMC, Inc.
The Sherwin-Williams Acceptance
Corporation
Thompson Minwax International Corp.
- - PAINT STORES
- - AUTOMOTIVE BRANCHES
Today, Sherwin-Williams has 2,880 paint stores and automotive branches
worldwide. More than 90% of the U.S. population lives within a 50-mile radius of
a Sherwin-Williams paint store.
20
FINANCIAL PERFORMANCE
[PICTURE OF PORTION OF STOCK CERTIFICATE]
FINANCIAL TABLE OF CONTENTS
Cautionary Statement Regarding Forward-Looking Information
22
Financial Summary
23
Management's Discussion and Analysis of Financial Condition and Results of
Operations
24
Report of Management
35
Report of Independent Auditors
36
Consolidated Financial Statements and Notes
37
Directors, Officers, Operating Presidents
59
Shareholder Information
60
21
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
Certain statements contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Letter to Shareholders," and
elsewhere in this report constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are based upon
management's current expectations, estimates, assumptions and beliefs concerning
future events and conditions and may discuss, among other things, anticipated
future performance (including sales and earnings), expected growth, future
business plans and the costs and potential liability for environmental-related
matters and the lead pigment and lead-based paint litigation. 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)
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.
22
FINANCIAL SUMMARY
(MILLIONS OF DOLLARS EXCEPT AS NOTED AND PER SHARE DATA)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
OPERATIONS
NET SALES............................................... $ 5,185 $ 5,066 $ 5,212 $ 5,004 $ 4,934
COST OF GOODS SOLD...................................... 2,846 2,846 2,904 2,755 2,804
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............ 1,785 1,730 1,740 1,673 1,598
IMPAIRMENT OF OTHER ASSETS.............................. 352
INTEREST EXPENSE........................................ 40 55 62 61 72
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.............. 497 424 143 490 440
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE........................ 311 263 16 304 273
NET INCOME.............................................. 128 263 16 304 273
FINANCIAL POSITION
INVENTORIES............................................. $ 625 $ 633 $ 704 $ 703 $ 683
ACCOUNTS RECEIVABLE - NET............................... 494 523 594 606 605
WORKING CAPITAL......................................... 422 366 436 437 458
PROPERTY, PLANT AND EQUIPMENT - NET..................... 665 673 722 712 719
TOTAL ASSETS............................................ 3,432 3,628 3,751 4,033 4,051
LONG-TERM DEBT.......................................... 507 504 621 622 730
TOTAL DEBT.............................................. 522 615 740 742 848
SHAREHOLDERS' EQUITY.................................... 1,342 1,488 1,472 1,699 1,716
PER SHARE INFORMATION
AVERAGE SHARES OUTSTANDING (THOUSANDS).................. 150,438 155,557 161,912 167,925 172,162
BOOK VALUE.............................................. $ 9.01 $ 9.66 $ 9.22 $ 10.25 $ 10.03
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE - DILUTED.............. 2.04 1.68 .10 1.80 1.57
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE - BASIC................ 2.07 1.69 .10 1.81 1.58
NET INCOME - DILUTED.................................... 0.84 1.68 .10 1.80 1.57
NET INCOME - BASIC...................................... 0.85 1.69 .10 1.81 1.58
CASH DIVIDENDS.......................................... .60 .58 .54 .48 .45
FINANCIAL RATIOS
RETURN ON SALES(1)...................................... 6.0% 5.2% .3% 6.1% 5.5%
ASSET TURNOVER.......................................... 1.5X 1.4x 1.4x 1.2x 1.2x
RETURN ON ASSETS(1)..................................... 9.1% 7.3% .4% 7.5% 6.7%
RETURN ON EQUITY(2)..................................... 20.9% 17.9% .9% 17.7% 17.1%
DIVIDEND PAYOUT RATIO(1)................................ 29.3% 34.6% 549.9% 26.6% 28.5%
TOTAL DEBT TO CAPITALIZATION............................ 28.0% 29.3% 33.5% 30.4% 33.1%
CURRENT RATIO........................................... 1.4 1.3 1.4 1.4 1.4
INTEREST COVERAGE(3).................................... 13.3X 8.8x 3.3x 9.0x 7.1x
WORKING CAPITAL TO SALES................................ 8.1% 7.2% 8.4% 8.7% 9.3%
EFFECTIVE INCOME TAX RATE(1)............................ 37.5% 38.0% 88.9% 38.0% 38.0%
GENERAL
CAPITAL EXPENDITURES.................................... $ 127 $ 83 $ 133 $ 134 $ 146
TOTAL TECHNICAL EXPENDITURES(4)......................... 89 86 84 78 73
ADVERTISING EXPENDITURES................................ 222 236 276 265 283
REPAIRS AND MAINTENANCE................................. 52 48 48 46 45
DEPRECIATION............................................ 104 109 109 105 98
AMORTIZATION OF INTANGIBLE ASSETS....................... 12 39 51 50 50
SHAREHOLDERS OF RECORD (TOTAL COUNT).................... 9,604 10,281 10,813 11,475 11,929
NUMBER OF EMPLOYEES (TOTAL COUNT)....................... 25,752 25,789 26,095 25,697 24,822
SALES PER EMPLOYEE (THOUSANDS OF DOLLARS)............... $ 201 $ 196 $ 200 $ 195 $ 199
SALES PER DOLLAR OF ASSETS.............................. 1.51 1.40 1.39 1.24 1.22
(1) Based on income before cumulative effect of change in accounting principle.
See Note 2, pages 43 through 45 of this report.
(2) Based on income before cumulative effect of change in accounting principle
and shareholders' equity at beginning of year.
(3) Ratio of income before income taxes, cumulative effect of change in
accounting principle and interest expense to interest expense.
(4) See Note 1, page 42 of this report, for a description of technical
expenditures.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements and accompanying footnotes
included in this report have been prepared in accordance with accounting
principles generally accepted in the United States based upon management's best
estimates and judgements. Management uses assumptions based on historical
results and other assumptions that they believe are reasonable to form the basis
for determining appropriate carrying values of assets and liabilities that are
not readily available from other sources. Actual results could differ from those
estimates. Also, materially different amounts may result under materially
different conditions or from using materially different assumptions. However,
management currently believes that any materially different amounts resulting
from materially different conditions or material changes in facts or
circumstances are unlikely.
All of the Company's significant accounting policies that are followed
in the preparation of the consolidated financial statements are disclosed in
Note 1, on pages 41 through 43 of this report. In addition, the following
procedures utilized by management directly impact many of the estimates and
assumptions used to arrive at reported amounts in the consolidated financial
statements.
Management records an allowance for doubtful accounts receivable, based
on historical experience and expected trends, to reduce accounts receivable to
their net realizable value. 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 for obsolete and discontinued
inventories 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.
Management's business and technical judgement is used in determining
which intangible assets have indefinite lives and in determining the useful
lives of finite-lived intangible assets in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." As required by SFAS No. 142, management performed transitional
impairment testing during the first quarter of 2002 and annual impairment
testing of goodwill and indefinite-lived intangible assets during the fourth
quarter of 2002. See Note 2, pages 43 through 45 of this report, for a
discussion of the reductions in carrying value recorded during 2002. Fair values
of goodwill and indefinite-lived intangible assets were estimated by management
using a discounted cash flow valuation model, incorporating discount rates
commensurate with the risks involved for each reporting unit. Growth models were
developed using both industry and company historical results and forecasts.
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," whenever events or changes in circumstances
indicate that the carrying value of an asset or asset group may not be
recoverable or the useful life has changed, impairment tests are performed.
Undiscounted future cash flows are used to calculate the fair value of
long-lived assets to determine if such assets are impaired. Where impairment is
identified, management determines fair values for assets using a discounted cash
flow valuation model, incorporating discount rates commensurate with the risks
involved for each group of assets. Growth models are developed using both
industry and company historical results and forecasts. See Note 2, page 44 of
this report, concerning the reduction in carrying value of long-lived assets of
a foreign subsidiary in accordance with SFAS No. 144.
To determine the Company's ultimate obligation under its defined
benefit pension plans and other postretirement benefit plans, management must
estimate the future cost of benefits and attribute that cost to the time period
during which each covered employee works. To record the related net assets and
obligations of such benefit plans, management uses assumptions related to
inflation, investment returns, mortality, employee turnover, rate of
compensation increases, medical costs and discount rates. Management, along with
third-party actuaries, reviews all of these assumptions on an ongoing basis to
ensure that the most reasonable information available is being considered. For
2003 expense recognition, the Company will use a discount rate of 6.55 percent,
an expected rate of return on plan assets of 8.00 percent and a rate of
compensation increase of 4.00 percent. Use of these assumptions will result in a
higher calculated pension expense. See Note 5, pages 47 and 48 of this report,
for information concerning the Company's defined benefit pension plans and
postretirement benefits.
The Company is self-insured for certain liabilities, primarily worker's
compensation claims, employee benefits, and automobile, property and general
liability claims. Claims filed but unsettled and estimated claims incurred but
not reported are accrued based upon management's estimates of the aggregate
liability for claims incurred using historical experience and actuarial
assumptions followed in the insurance industry.
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 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. See Note 7, on page 50 of this report, for information concerning the
accrual for extended environmental-related activities.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management is continually re-evaluating the Company's operating
facilities against its long-term strategic goals. Through December 31, 2002, at
the time of commitment to a formal shutdown plan of an operating facility,
provisions were made for all estimated qualified exit costs in accordance with
Emerging Issues Task Force (EITF) 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," and other
related accounting guidance. For all exit or disposal activities initiated
subsequent to December 31, 2002, SFAS No. 146, "Accounting for Costs from Exit
or Disposal Activities" is effective and will be adopted by the Company for all
subsequent exit or disposal activities. SFAS No. 146 requires, among other
things, that a liability for costs associated with an exit or disposal activity
be recognized when the liability is incurred rather than at the time of
commitment to a formal shutdown plan. Estimates of such costs are determined by
contractual agreement or estimated by management based on historical experience.
At the time of the announcement of closure, property, plant and equipment and
other long-lived assets are tested for impairment in accordance with SFAS No.
144 due to the change in circumstances as indicated by the pending exit or
disposal. If an impairment is determined to exist, the carrying value of the
long-lived assets is reduced to fair value estimated by management using a cash
flow valuation model, incorporating discount rates commensurate with the risks
involved for each group of assets. None of the Company's operating facilities
were identified for possible closure during 2002. See Note 4, pages 46 and 47 of
this report, for remaining accrued costs of sites closed in prior years.
FINANCIAL CONDITION - 2002
The Company's financial condition continued to improve in 2002. The
Company ended the year with $164.0 million in cash and cash equivalents - an
increase of $45.2 million over the end of 2001. The Company's current ratio
increased to 1.39 at December 31, 2002 from 1.32 at the end of 2001. Total debt
declined to $521.7 million at December 31, 2002 from $615.4 million at the end
of last year. Total debt as a percentage of total capitalization improved to
28.0 percent from 29.3 percent at the end of 2001 in spite of the decrease in
total capitalization resulting from the $183.1 million charge for the cumulative
effect of change in accounting principle in 2002. For the second year in a row,
the Company's net operating cash flow exceeded $550 million aided by improved
profitability and stringent working capital control. Net operating cash flow for
2002 was $558.9 million compared to $561.6 million in 2001. The decrease of $2.7
million in net operating cash is related primarily to a reduction in cash
generated by the change in working capital accounts. As shown in the Statements
of Consolidated Cash Flows, on page 39 of this report, the change in working
capital accounts generated cash of $84.4 million in 2002 compared to $192.4
million of cash generated in 2001. The continued generation of cash through
working capital reduction occurred as a result of a continued focus by
management on improving collections of accounts receivable, accelerating
inventory turnover and properly matching accounts payable with revenue for
related merchandise. Partially offsetting the working capital cash generation in
2001 was an unusual tax-related payment of $65.7 million made to the U.S.
Internal Revenue Service to stop interest accruing on a contested tax issue. Net
operating cash flow activities during 2002 provided the funds necessary to
support the investment of $126.5 million in long-term assets, debt reductions of
$95.3 million, treasury stock purchases of $190.3 million, cash dividend
payments of $91.0 million, and acquisitions of $26.6 million. The Company's
Consolidated Balance Sheets and Statements of Consolidated Cash Flows, on pages
38 and 39 of this report, provide more detailed financial information concerning
the Company's financial position and cash flows.
Management considers, and often utilizes, a measurement of cash flow
that is not in accordance with accounting principles generally accepted in the
United States to be a useful tool in determining the discretionary amount of the
Company's net operating cash. Management reduces net operating cash, as shown in
the Statements of Consolidated Cash Flows, by the amount expended for capital
expenditures and the payment of cash dividends. The resulting value is referred
to by management as "Free Cash Flow" which may not be comparable to values
considered by other entities using the same terminology. The reader is cautioned
that the following value should not be compared to other entities unknowingly.
The amount shown below should not be considered an alternative to net operating
cash or other cash flow amounts in accordance with accounting principles
generally accepted in the United States disclosed in the Statements of
Consolidated Cash Flows, on page 39 of this report. Free Cash Flow as defined
and used by management of the Company is determined as follows:
(thousands of dollars)
2002 2001 2000
---- ---- ----
NET OPERATING CASH
(PAGE 39).............. $ 558,917 $ 561,646 $ 463,344
CAPITAL EXPENDITURES
(PAGE 39).............. (126,530) (82,572) (132,778)
PAYMENTS OF CASH
DIVIDENDS (PAGE 39).... (91,007) (90,984) (88,124)
---------- ---------- ----------
FREE CASH FLOW........... $ 341,380 $ 388,090 $ 242,442
========== ========== ==========
Goodwill, which represents the excess of cost over the fair value of
net assets acquired in purchase business combinations, decreased $120.2 million
and intangible assets decreased $118.5 million in 2002. The decreases in
goodwill and intangible assets in 2002 resulted primarily from adjusting the
carrying values for impairment as required by SFAS No. 142. Foreign currency
adjustments and amortization of intangible assets with finite lives further
reduced the carrying values of goodwill and intangible assets.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Intangible assets with finite lives include costs related to designing,
developing, obtaining and implementing internal use software that are
capitalized and amortized in accordance with Statement of Position 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use." Partially offsetting the decrease in the values of goodwill and
intangible assets are increases resulting from purchase business combinations
completed in 2002. See Note 2, on pages 43 through 45 of this report, for a
description of the asset impairments recorded in accordance with SFAS No. 142
during the first and fourth quarters of 2002 and a tabular reference of the
movement in the carrying values of goodwill and intangible assets. In
accordance with the requirements of SFAS No. 142, goodwill and intangible
assets deemed to have indefinite lives are no longer amortized after January 1,
2002. Excluding after-tax amortization expense of $24.1 million from 2001 and
$32.6 million from 2000 to be comparable with 2002, net income would have been
$287.2 million or $1.83 per diluted common share in 2001 and $48.6 million or
$.30 per diluted common share in 2000.
Deferred pension assets of $414.6 million at December 31, 2002
represent the excess of the fair market value of the assets in the Company's
defined benefit pension plans over the actuarially-determined projected benefit
obligations. The 2002 increase in deferred pension assets of $21.0 million
represents primarily the recognition of the current year net pension credit of
$23.0 million. The net pension credit decreased $6.4 million in 2002 due
primarily to the recognition of a portion of the previously unrecognized
actuarial loss. The unrecognized actuarial loss relates primarily to a lower
actual return on plan assets compared to the expected return on plan assets and
the effects of changes in plan assumptions. The decrease in the actual return on
plan assets during 2002 was primarily the result of returns on equity
investments that were below the expected return rate of 8.5 percent. The
expected long-term rate of return on assets has been lowered from 8.5 percent to
8.0 percent to reflect the lower returns anticipated on equity investments in
the future. The assumed discount rate used to compute the actuarial present
value of projected benefit obligations was decreased from 6.75 percent to 6.55
percent at December 31, 2002 due to decreased rates of high-quality, long-term
investments. In addition, the assumed long-term rate of compensation increase
was decreased from 4.50 percent to 4.00 percent. The net pension credit is
expected to decrease approximately $24.0 million to an expense of $1.0 million
in 2003, due to the net impact of changing these assumptions and the recognition
of a greater portion of the unrecognized actuarial loss. See Note 5, on pages 47
and 48 of this report, for a detailed description of the defined benefit pension
plans and for more financial information concerning the defined benefit pension
plans' obligations, assets and net pension credit.
Net property, plant and equipment decreased $8.1 million to $664.6
million at December 31, 2002. The decrease was due primarily to depreciation
expense of $103.7 million, impairment charges on assets held for use in
Argentina of $9.0 million, foreign currency translation adjustments of $8.0
million, disposition of the Graphic Arts business unit of $5.1 million and other
dispositions and retirements of fixed assets. Partially offsetting these
decreases in fixed assets were capital expenditures of $126.5 million and fixed
assets acquired in purchase business combinations. Capital expenditures during
2002 in the Paint Stores Segment were primarily attributable to the opening of
new paint stores, new color selector fixtures, new point-of-sale equipment, the
relocation of certain stores and the normal replacement and upgrading of store
equipment. In the Consumer, Automotive Finishes and International Coatings
Segments, capital expenditures during 2002 were primarily related to efficiency
improvements in production and distribution facilities and information systems
hardware. In addition, the Consumer Segment constructed a 350,000 square foot
distribution center in Atlanta, Georgia. The Administrative Segment incurred
capital expenditures primarily for upgrading the Company's headquarters building
and information systems hardware. In 2003, the Company expects to spend
approximately the same amount for capital expenditures as in 2002. Most
significant capital expenditures will relate to various capacity and
productivity improvement projects at manufacturing and distribution facilities,
new store openings, new point-of-sale equipment and new or upgraded information
systems hardware. The Company does not anticipate the need for any specific
long-term external financing to support these capital expenditures.
There were no short-term borrowings outstanding under the Company's
commercial paper program at December 31, 2002 or 2001. During the year,
borrowings were made under the Company's commercial paper program that is fully
backed by and limited to the borrowing availability under the Company's
revolving credit agreements. The aggregate maximum borrowing capacity under the
current revolving credit agreements as of January 3, 2003 is $718.0 million. Due
to the seasonality of the Company's business and the need for available cash
prior to the primary selling season and collecting accounts receivable, the
Company expects to borrow under the commercial paper program throughout most of
2003.
The current portion of long-term debt at December 31, 2002 decreased to
$15.0 million from $111.9 million at December 31, 2001 due primarily to the
payment of $100.0 million of 6.5% Notes on February 1, 2002. The current portion
of long-term debt at December 31, 2002 represents current maturities of various
promissory notes and other obligations.
Long-term debt increased $3.2 million to $506.7 million at December 31,
2002 compared to 2001, primarily due to the increase in carrying value of the
6.85% Notes resulting from a net premium of $4.8 million received in the
discontinuation of interest rate swap contracts. See Note 6, on pages 49 and 50
of
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
this report, for a detailed description of the Company's long-term debt
outstanding and other financing programs available.
Other accruals, representing liabilities or portions of long-term
liabilities due within twelve months, declined to $298.0 million from $326.9
million due primarily to a change in the way the Company funds its matching
requirements in the Employee Stock Purchase and Savings Plan. Additionally, a
reduction in current interest payable on debt and other investment amounts
further decreased the balance at December 31, 2002. Prior to 2002, a portion of
the Company's matching contribution to the Employee Stock Purchase and Savings
Plan consisted of an annual variable match, based on the Company's annual return
on equity, which was paid subsequent to the annual results of the Company being
finalized. The variable match accrued at December 31, 2001 was $18.4 million.
Beginning January 1, 2002, the Company eliminated the variable match and began
matching up to six percent of compensation and paying the matching amount every
time the employee receives earned compensation. See Note 9, on pages 51 and 52
of this report, for further information concerning the Employee Stock Purchase
and Savings Plan.
The Company's long-term postretirement benefit liability increased $3.7
million to $213.7 million from $210.0 million due to the excess of the net
postretirement benefit expense over the benefit payments. The current portion of
the postretirement benefit liability, amounting to $15.2 million at December 31,
2002, is included in Other accruals. The assumed discount rate used to calculate
the actuarial present value of the postretirement benefit obligations was
decreased from 6.75 percent to 6.55 percent at December 31, 2002 due to the
reduced rates of high-quality, long-term investments. The assumed health care
cost trend rates were revised during 2002 for years 2003 through 2010. The
revised rates reflect escalating health care costs that continued to exceed the
previously established rates. The trend rate for 2003 is now at a more
representative 9.0 percent annual increase decreasing gradually to 5.5 percent
in 2010. See Note 5, on pages 47 and 48 of this report, for further information
on the Company's postretirement benefit obligations.
Other long-term liabilities increased $1.2 million during 2002 due
primarily to the recognition of a minimum pension liability for an under-funded
foreign defined benefit pension plan of $7.4 million partially offset by a
reduction in environmental-related liabilities due to current year expenditures
exceeding the current year provision. See Note 7, on page 50 of this report, for
information concerning the Company's environmental-related and other long-term
liabilities.
Shareholders' equity declined $145.9 million during 2002 to $1,341.9
million at December 31, 2002 from $1,487.8 million last year. The reduction in
shareholders' equity resulted primarily from the purchase of treasury stock and
other comprehensive losses that were not fully offset by increased retained
earnings and other capital. The Company purchased 6.7 million shares of its
common stock during 2002 for treasury at a cost of $190.3 million. The Company
acquires its own common stock for general corporate purposes and, depending on
its cash position and market conditions, it may acquire additional shares in the
future. The Company had remaining authorization at December 31, 2002 to purchase
10.3 million shares of its common stock. Other comprehensive losses resulted
from foreign currency translation adjustments of $48.3 million and the recording
of a $8.3 million adjustment due to the recognition of a minimum pension
liability related to an under-funded foreign defined benefit pension plan.
Retained earnings increased $36.6 million during 2002 due to net income of
$127.6 million, after recording the after-tax cumulative effect of a change in
accounting principle of $183.1 million, partially offset by $91.0 million in
cash dividends paid. Net increases in common stock and other capital of $66.8
million were due to the tax impact of certain Employee Stock Purchase and
Savings Plan transactions and stock option activity. See the Statements of
Consolidated Shareholders' Equity and Comprehensive Income, on page 40 of this
report, and Note 8, on pages 50 and 51 of this report, for more information
concerning shareholders' equity.
The changes in Cumulative other comprehensive loss consisted mainly of
foreign currency translation adjustments in the consolidated balance sheets. The
foreign currency translation loss increases of $48.3 million in 2002, $40.9
million in 2001 and $18.0 million in 2000 were attributable to weakness in
several foreign operations' functional currencies. Most significantly, the
Argentine government, beginning in January 2002, announced plans to discontinue
its currency board policy of maintaining a one-to-one fixed exchange rate
between the peso and U.S. dollar and attempted to implement a controlled
devaluation. The change in the currency translation rate of the Argentine peso
did not have a material impact on the overall results of operations of the
International Coatings Segment. However, the related impact of the currency
fluctuation on the Argentine economy and related economies in South America
caused sales and profits of the Argentina subsidiary to decrease. In addition,
due to the reduction in the currency exchange rate and in projected cash flows
of the Argentina subsidiary, an impairment of the current carrying values of
long-lived assets of $9.0 million was charged against current operations during
the first quarter of 2002. See Note 2, on page 44 of this report, for more
information concerning the reduction in carrying value of long-lived assets.
The Company's cash dividend payout target per common share is 30.0
percent of the prior year diluted net income per common share. The 2002 annual
cash dividend of $.60 per common share represented 35.7 percent of 2001 diluted
net income per common share. The Board of Directors elected to continue
increasing the cash dividend anticipating reductions in net income to be
temporary. The 2002 annual dividend represented the twenty-third consecutive
year that the dividend has increased and a
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
compounded annual rate of increase of 20.8 percent since the dividend was
reinstated in the fourth quarter of 1979. At a meeting held on February 5, 2003,
the Board of Directors increased the quarterly cash dividend to $.155 per common
share. This quarterly dividend, if approved in each of the remaining quarters of
2003, would result in an annual dividend for 2003 of $.62 per common share or a
30.4 percent payout of the prior year's diluted income per common share before
cumulative effect of change in accounting principle.
The Company believes that it has properly valued its assets in
accordance with all present accounting principles generally accepted in the
United States and recorded all known liabilities that existed as of the balance
sheet date for which a value is available or an amount can be estimated. In
addition, the Company may be subject to potential liabilities, as described in
the following, which cannot reasonably be estimated due to the uncertainties
involved.
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 may be filed against the Company in the
future asserting similar or different legal theories and seeking similar or
different types of damages and relief.
During September 2002, a jury trial commenced in the first phase of the
action brought by the State of Rhode Island against the Company and the other
defendants. The sole issue before the court in this first phase was whether lead
pigment in paint constitutes a public nuisance under Rhode Island law. This
first phase did not consider the issues of liability or damages, if any, related
to the public nuisance claim. In October 2002, the court declared a mistrial as
the jury, which was split four to two in favor of the defendants, was unable to
reach a unanimous decision. This was the first legal proceeding against the
Company to go to trial relating to the Company's lead pigment and lead-based
paint litigation. Additional legal proceedings pending in other jurisdictions
have been scheduled for trial during 2003, and the Company believes it is
possible that additional legal proceedings could be scheduled for trial during
2003 and subsequent years.
Litigation is inherently subject to many uncertainties. Adverse court
rulings or determinations of liability could affect the lead pigment and
lead-based paint litigation against the Company and encourage an increase in the
number and nature of future claims and proceedings. In addition, from time to
time, various legislation and administrative regulations have been enacted or
proposed to impose obligations on present and former manufacturers of lead
pigments and lead-based paints respecting asserted health concerns associated
with such products and to overturn court decisions in which the Company and
other manufacturers have been successful. Due to the uncertainties involved,
management is unable to predict the outcome of 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 potential
costs and liabilities related to such litigation, or any such legislation and
regulations. The Company has not accrued any amounts for such litigation. Any
potential liability that may result from such litigation or such legislation and
regulations cannot reasonably be estimated. However, based upon, among other
things, the outcome of such litigation to date, management does not currently
believe that the costs or potential liability ultimately determined to be
attributable to the Company arising out of such litigation will have a material
adverse effect on the Company's results of operations, liquidity or financial
condition.
The operations of the Company, like those of other companies in our
industry, are subject to various federal, state and local environmental laws and
regulations. These laws and regulations not only govern our current operations
and products, but also impose potential liability on the Company for past
operations which were conducted utilizing practices and procedures that were
considered acceptable under the laws and regulations existing at that time. The
Company expects environmental laws and regulations to impose increasingly
stringent requirements upon the Company and our industry in the future. The
Company believes that it conducts its operations in compliance with applicable
environmental laws and regulations and has implemented various programs designed
to protect the environment and promote continued compliance.
The Company is involved with environmental compliance, investigation
and remediation activities at some of its current and former sites (including
sites which were previously owned and/or operated by businesses acquired by the
Company). The Company, together with other parties, has been designated a
potentially
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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 accrued appropriate amounts. The Company
expects the contingent liabilities related to these facilities to be resolved
over an extended period of time.
Due to the uncertainties surrounding the investigations and remediation
activities at some of the Company's sites and third-party sites, 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 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, or cash flow. See Note 7, on page 50 of this report, for
discussion of the environmental-related accruals included in the Consolidated
Balance Sheets.
Depreciation of capital expenditures and other expenses related to
ongoing environmental compliance measures are included in the normal operating
expenses of conducting business. The Company's capital expenditures,
depreciation and other expenses related to ongoing environmental compliance
measures were not material to the Company's financial condition, liquidity, cash
flow or results of operations during 2002. The Company does not expect that such
capital expenditures, depreciation and other expenses will be material to the
Company's financial condition, liquidity, cash flow or results of operations in
2003.
The Company is exposed to market risk associated with interest rates
and foreign currency exposure. The Company occasionally utilizes derivative
instruments as part of its overall financial risk management policy, but does
not use derivative instruments for speculative or trading purposes. At December
31, 2001 and during the first two quarters of 2002, the Company partially hedged
risks associated with fixed interest rate debt by entering into various interest
rate swap agreements (see Note 6, on page 49 of this report). The interest rate
swap agreements were unwound during the second and third quarters of 2002 and
the Company received a net amount of $4.8 million. This net premium was recorded
as an increase in the value of the underlying debt instrument and will primarily
increase net investment income over the original life of the swaps. The Company
also entered into foreign currency option and forward contracts to hedge against
value changes in foreign currency (see Note 11, on page 53 of this report). The
Company believes it may experience continuing losses from foreign currency
translation. However, the Company does not expect currency translation,
transaction or hedging contract losses to have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
The Company has certain obligations and commitments to make future
payments under contractual obligations and commercial commitments. The following
table summarizes the Company's contractual obligations and commercial
commitments as of December 31, 2002:
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(thousands of dollars) Payments Due
--------------------------------------------------------
Within After
Contractual Obligations Total 1 Year 2-3 Years 4-5 Years 5 Years
----------------------- -------- -------- --------- --------- --------
Long-term debt.................. $521,683 $ 15,001 $ 1,341 $ 200,000 $305,341
Operating leases................ 443,837 109,518 169,004 93,121 72,194
-------- -------- --------- --------- --------
Total contractual obligations... $965,520 $124,519 $ 170,345 $ 293,121 $377,535
======== ======== ========= ========= ========
Commitment Expiration
--------------------------------------------------------
Within After
Commercial Commitments Total 1 Year 2-3 Years 4-5 Years 5 Years
---------------------- -------- -------- --------- --------- --------
Standby letters of credit....... $ 13,273 $ 13,273
Other commercial commitments.... 25,540 24,941 $ 437 $ 105 $ 57
-------- -------- --------- --------- --------
Total commercial commitments.... $ 38,813 $ 38,214 $ 437 $ 105 $ 57
======== ======== ========= ========= ========
Certain borrowings contain a minimum net worth covenant. At December
31, 2002, the Company was in compliance with the covenant. The Company's Notes,
Debentures and revolving credit agreements (see Note 6, on page 49 of this
report) contain various default and cross-default provisions. In the event of
default under any one of these arrangements, acceleration of the maturity of any
one or more of these borrowings may result. The Company believes that such an
event is not reasonably likely to occur.
The Company offers product warranties for certain products. The
specific terms and conditions of such warranties vary depending on the product
or customer contract requirements. The Company does not distinguish between
product warranty claim settlements and all credits, refunds and product
replacements made to maintain high customer satisfaction. The Company estimates
and accrues the costs of unsettled product warranty claims based on historical
results and experience. The Company periodically assesses the adequacy of its
accrual for product warranty claims and adjusts the accrual as necessary.
Changes in the Company's accrual for product warranty claims during
2002, including customer satisfaction settlements during the year, were as
follows:
Balance at January 1, 2002............ $ 14,074
Charges to expense.................... 25,023
Settlements........................... 23,587
--------
Balance at December 31, 2002.......... $ 15,510
========
RESULTS OF OPERATIONS - 2002 VS 2001
Consolidated net sales for 2002 increased 2.3 percent to $5.2 billion
from $5.1 billion in 2001. Strong domestic architectural paint sales resulting
from an increasingly favorable do-it-yourself (DIY) market and aggressive
promotion of new products and new color palettes was the most significant factor
contributing to the sales gain during the year. Curtailing the sales improvement
was continuing sluggishness in the domestic commercial architectural, industrial
maintenance, product finishes and automotive product lines. Poor economic
conditions in South America related to weak currency exchange rates in Argentina
and Brazil continue to negatively impact international sales in U.S. dollars.
Excluding the effects of currency exchange rate fluctuations relative to last
year, consolidated net sales increased 3.8 percent in 2002.
Net sales in the Paint Stores Segment in 2002 increased 3.7 percent to
$3.3 billion from $3.2 billion last year due primarily to double-digit increases
in architectural paint volume sales to contractors and DIY customers. These
sales increases were partially offset by flat or declining sales of the domestic
commercial architectural, industrial maintenance and product finishes
categories. Comparable-store sales, which include sales only from stores open
for more than twelve calendar months, increased 1.9 percent in 2002. During
2002, the Paint Stores Segment added 70 net new stores - 46 net new stores were
opened and 24 stores were added through acquisition. At the end of 2002, this
Segment had 2,643 stores in operation in the United States, Canada, Mexico,
Puerto Rico and the U.S. Virgin Islands. The Paint Stores Segment's objective is
to expand its store base an average of three percent each year. In addition, the
Paint Stores Segment added new color features to its entire store chain during
2002, refreshed the interior design, signage and color of about one-third of the
existing stores and upgraded the point-of-sale devices in approximately half of
the stores. It is expected that the remaining stores' point-of-sale devices will
be upgraded in the first two quarters of 2003 and the remaining stores'
interiors will be refreshed over the next two years.
External net sales of the Consumer Segment increased 3.2 percent to
$1.2 billion compared to $1.1 billion last year. Consumer Segment sales
throughout the year have increasingly benefited from the improving DIY market.
The Segment continued its aggressive promotion of many new and existing paint,
aerosol and wood care products. Sales in the improving DIY market and sales of
new products more than offset the adverse effects of a sluggish domestic economy
and sales declines to Kmart Corporation which has been operating under a
bankruptcy reorganization plan and in the Cleaning Solutions Business Unit. In
2003, this
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Segment plans to continue its aggressive promotions of its new and existing
products. Based on the latest information available, it is not expected that the
Kmart Corporation bankruptcy reorganization will have a significant adverse
impact on the overall sales of this Segment.
The Automotive Finishes Segment's external net sales decreased 2.2
percent to $454 million from $464 million in 2001. Improved vehicle refinish
sales were not enough to offset unfavorable currency exchange rates and price
competition. Excluding the effects of currency exchange fluctuations relative to
last year, net sales for the Segment increased 1.2 percent in 2002. There were
179 automotive branches open at the end of 2002 in the United States, Canada,
Chile and Jamaica.
External net sales in the International Coatings Segment were down 8.8
percent, in U. S. dollars, to $244 million from $268 million at the end of last
year due primarily to unfavorable currency exchange rates. Excluding the effects
of currency exchange rate fluctuations relative to last year, net sales for the
Segment increased 3.3 percent in 2002. Poor economic conditions in Brazil and in
Argentina, following an attempt by the government to control the value of the
peso at the beginning of 2002, adversely impacted sales volumes and sales in
local currencies for the year. In spite of the poor economic conditions that
existed, a sales volume increase of 5.6 percent was achieved by the
International Coatings Segment. Competitive pricing and a shift in sales to
lower priced products caused the shortfall in sales compared to the volume gain.
Due to the relationship of competitive pricing and lower priced product sales,
it is not possible to determine the impact each had on the sales shortfall.
Forecasts for 2003 include little improvement in the economic position of most
South American countries although our foreign operations expect to continue to
gain market share.
Consolidated gross profit increased $119.0 over last year and increased
as a percent of sales to 45.1 percent from 43.8 percent in 2001. Higher
consolidated sales volume levels accounted for $58.1 million of the gross profit
improvement. Higher-margin product sales mix and lower product costs in the
Paint Stores Segment combined with moderating raw material costs, improved
overhead absorption related to architectural paint volume gains and
manufacturing expense reductions due to plant closures in the Consumer Segment
enhanced consolidated gross profit margins approximately $62.4 million. The
Automotive Finishes Segment's margins were essentially flat during 2002 due to
moderating raw material costs early in the year, favorable customer/product sale
mix and improved manufacturing absorption due to cost reductions that could not
offset a shortfall in volume of OEM coatings and similar products. The
International Coatings Segment's margins were lower than last year due to
economic and competitive pressures. This Segment's margins were also lower due
to a $9.0 million impairment charge during the first quarter of 2002 recorded
for property, plant and equipment in Argentina in accordance with SFAS No. 144.
With certain raw material costs beginning to rise during the last quarter of
2002 and international economic and competitive pressures continuing, the gross
profit improvements experienced in 2002 are not expected to continue in 2003.
Consolidated selling, general and administrative (SG&A) expenses for
2002 increased $54.7 million, or 3.2 percent, to $1.78 billion versus $1.73
billion last year. As a percent of sales, SG&A increased to 34.4 percent from
34.1 percent in 2001. Increased spending was primarily due to higher expenses
associated with additional investment in our businesses. In the Paint Stores
Segment, SG&A increased $88.4 million primarily due to additional investments in
new and acquired stores and new color palettes. The Consumer Segment's SG&A
expenses decreased $18.1 million and the percentage of sales ratio was favorable
to last year primarily due to continued cost control and higher sales levels. In
the Automotive Segment, SG&A expenses as a percent of sales were flat with last
year due to the sales shortfall that was partially offset by tight expense
control. In the International Coatings Segment, SG&A expenses declined $24.9
million in U.S. dollar spending as well as a percentage of sales primarily due
to currency exchange rate fluctuations and tight expense control. The
Administrative Segment's SG&A expenses increased $13.2 million due primarily to
increased spending related to information technology hardware and software
licenses and increased fees for outside professional and consulting services.
Interest expense decreased $14.2 million in 2002 versus 2001 due to
average short-term borrowing rates that were 2.82 average basis points lower in
2002 and lower average outstanding short-term and long-term debt.
Other expense - net increased $6.7 million in 2002 compared to 2001
primarily due to foreign currency related losses that increased $6.2 million,
provisions for environmental matters that increased $3.0 million and expenses
from financing and investing activities that increased $9.1 million. Partially
offsetting these increases was a reduction in the provisions for disposition and
termination of operations of $7.1 million and a reduction in other expenses of
$4.3 million. Increases in expenses from financing and investing activities were
due primarily to non-recurring gains realized from the sale of certain fixed
assets of $8.0 million in 2001 that were partially offset by lower financing
expenses related to lower long-term debt outstanding in 2002. See Note 11, on
page 53 of this report, for more information concerning the Other expense - net
caption.
Effective January 1, 2002, the Company adopted SFAS No. 142. 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
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
impairment charge of $183.1 million, or $1.21 per share, in the first quarter of
2002. The transitional impairment charge was recorded as a cumulative effect of
change in accounting principle in accordance with SFAS No. 142.
Income before income taxes and cumulative effect of change in
accounting principle increased $72.7 million, or 17.1 percent, to $497.2 million
for 2002. Increased gross profit, net investment income and reduced interest
expense combined for a $134.1 million improvement in income. This improvement
was partially offset by increased SG&A expenses and Other expense - net of $61.4
million. Net income declined $135.6 million in 2002 due primarily to the
cumulative effect of change in accounting principle of $183.1 million net of
income taxes. For the year, diluted income per common share before cumulative
effect of change in accounting principle increased to $2.04 per share compared
to $1.68 per share in 2001. Diluted net income per common share for 2002 was
$0.84 per share due to the cumulative effect of change in accounting principle
net of income taxes of $1.20 per share for the full year of 2002. In accordance
with the requirements of SFAS No. 142, goodwill and intangible assets deemed to
have indefinite lives are no longer amortized after January 1, 2002. Excluding
after-tax amortization expense of $24.1 million from 2001 and $32.6 million from
2000 to be comparable with 2002, net income would have been $287.2 million or
$1.83 per diluted common share in 2001 and $48.6 million or $.30 per diluted
common share in 2000.
Management considers a measurement that is not in accordance with
accounting principles generally accepted in the United States a useful
measurement of the operational profitability of the Company. Some investment
professionals also utilize such a measurement as an indicator of the value of
profits and cash that are generated strictly from operating activities, putting
aside working capital and certain other balance sheet changes. For this
measurement, management increases net income for significant non-operating and
non-cash expense items to arrive at an amount known as "Earnings Before
Interest, Taxes, Depreciation and Amortization." The resulting value is referred
to by management and investment professionals as "EBITDA." The reader is
cautioned that the following value for EBITDA should not be compared to other
entities unknowingly. EBITDA should not be considered an alternative to net
income or cash flows from operating activities as an indicator of operating
performance or as a measure of liquidity. The reader should refer to the
determination of net income and cash flows from operating activities in
accordance with accounting principles generally accepted in the United States
disclosed in the Statements of Consolidated Income and Statements of
Consolidated Cash Flows, on page 37 and 39 of this report. EBITDA as used by
management of the Company is calculated as follows:
(thousands of dollars)
2002 2001 2000 (1)
--------- --------- ---------
Net income (Page 37)......... $ 127,565 $ 263,158 $ 16,026
Cumulative effect of
change in accounting
principle (Page 37)........ 183,136
Income taxes (Page 37)....... 186,463 161,291 127,380
Impairment of other
assets (Page 37)........... 352,040
Interest expense
(Page 37).................. 40,475 54,627 62,026
Depreciation (Page 39)....... 103,659 109,187 108,906
Amortization (Page 39)....... 11,989 38,911 51,124
--------- --------- ---------
EBITDA $ 653,287 $ 627,174 $ 717,502
========= ========= =========
(1)Excludes the impairment of other assets charge in 2000 for comparability.
Refer to the table in the following section concerning the effect of the
impairment charge on reported operations.
RESULTS OF OPERATIONS - 2001 VS 2000
Consolidated net sales decreased 2.8 percent to $5.1 billion in 2001.
The most significant factors impacting sales during the year came from
discontinued paint programs at certain customers in the Consumer Segment,
continuing poor domestic and South American economic conditions and continuing
weakness in foreign currency exchange rates. Excluding the effects of the
discontinued paint programs at certain customers, consolidated net sales would
have been down 1.2 percent for the year.
Net external sales in the Paint Stores Segment during 2001 increased
0.6 percent to $3.19 billion as higher architectural paint sales offset sales
shortfalls in the product finishes and associated product categories. Sales in
this Segment continued to be impacted by the sluggish domestic economy and
weakness in product finishes sales. Sales to professional painters and
industrial maintenance users showed gains for the year. Comparable-store sales,
including sales only from stores open for more than twelve calendar months,
decreased 1.3 percent in 2001. This Segment ended 2001 with 2,573 stores in
operation compared to 2,488 stores in operation at the end of 2000. The
objective of the Paint Stores Segment is to expand its store base an average of
approximately three percent each year. In 2001, the Segment added 85 net new
stores through new store openings or acquisition and anticipated it would add
approximately 50 net new stores in 2002.
External sales in the Consumer Segment decreased 9.0 percent during
2001 to $1.1 billion. Excluding the discontinued paint programs at certain
customers, external sales for this Segment would have decreased 2.4 percent for
the year. The Consumer Segment sales comparisons in 2002 were impacted by the
anticipated loss of sales caused by the pending disposition of the Cleaning
Solutions Group business. This Segment also continued to be impacted by the
sluggish domestic economy, which it expected would continue through 2002. The
Segment's plans for 2002 included new product introductions and expansion of its
pres-
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ence at certain retailers and new customer accounts in preparation of an
eventual economic recovery. At the end of 2001, management of this Segment could
not determine the potential adverse impact on sales of the outcome of the
pending bankruptcy filing for reorganization by the Kmart Corporation.
External sales in the Automotive Finishes Segment decreased 5.9 percent
during 2001 to $464.2 million due primarily to the continuing negative impact of
the soft domestic economy on this Segment's OEM sales that could not be offset
by higher collision repair sales throughout the year. The Company had expected
that stronger collision repair sales, an increase in the number of automotive
branches and sales from new product and color introductions would result in a
sales increase for this Segment in 2002.
External sales in the International Coatings Segment for 2001 decreased
9.0 percent to $268.0 million. The sales decrease, in U.S. dollars, was due
primarily to unfavorable currency exchange rates. Excluding the effects of
currency exchange fluctuations relative to 2000, net sales for the Segment
increased 5.2 percent for 2001. Net sales for the year, in local currencies,
continued to be impacted by competitive pricing and a shift in sales to lower
priced products due to continued poor market and macroeconomic conditions in
Brazil and Argentina. The Company had anticipated only minimal sales volume
improvements in the International Coatings Segment in 2002 as economic
conditions were not expected to improve in most South American countries in
which we operate, especially in Argentina where a government controlled currency
devaluation was being implemented at the beginning of 2002.
Consolidated gross profit as a percent of sales decreased to 43.8
percent from 44.3 percent in 2000. The Company's gross profit margin was
impacted by raw material cost increases, inflated energy costs and higher
distribution costs during the first half of 2001 versus 2000. Additionally,
gross profit was impacted by rising health care and other employee benefit
costs. The Paint Stores Segment's 2001 gross profit margin was flat versus 2000
as a favorable paint product sales mix and selective selling price increases
were offset by a charge of $2.1 million for the costs associated with closing a
manufacturing facility in the Chemical Coatings Division. Gross profit margin in
the Consumer Segment for 2001 was below 2000 due to the sales shortfall and
competitive pricing pressures that prohibited selling price increases sufficient
to offset higher year-over-year raw material, distribution and energy costs
earlier in the year. Gross profit margin was essentially flat in 2001 versus the
prior year in the Automotive Finishes Segment. Selective selling price
increases, a favorable product sales mix, and provisions for qualified exit
costs recorded in 2000 improved the margin comparison in this Segment, while
lower production volume and higher raw material, distribution and energy costs
earlier in 2001 offset these improvements. Gross profit margin in the
International Coatings Segment during 2001 decreased primarily due to price
competition and a market shift in product sales to lower priced products in the
face of higher U.S. dollar denominated raw material costs.
Consolidated selling, general and administrative expenses (SG&A) for
2001 were $1,729.9 million, which was $10.5 million below the prior year's
spending level. As a percent of sales, SG&A increased to 34.1 percent from 33.4
percent in 2000 due primarily to lower sales. Overall, SG&A in all Segments was
impacted by rising health care and other employee benefit costs. The Paint
Stores Segment's SG&A ratio was slightly unfavorable compared to 2000 primarily
due to incremental increases in expenses associated with the 85 stores added
through new store openings or acquisition. In spite of the sluggish market
conditions, the Paint Stores Segment continued to invest in its business by
opening or acquiring stores and maintaining customer service. A slightly
favorable SG&A ratio in the Consumer Segment for 2001 as compared to 2000 was
primarily a result of certain SG&A cost reductions in response to lower sales
activity. In dollar spending, Consumer Segment SG&A for 2001 was approximately
$37.0 million below 2000. The Automotive Finishes Segment's SG&A was higher for
2001 as the Segment continued some incremental spending in order to maintain its
market share and customer service levels in a competitive market. The
International Coatings Segment's SG&A was favorable for 2001 due primarily to
weaker foreign currencies and the effect on stating SG&A in U.S. dollars. As a
percent of sales, this Segment's SG&A ratio increased due to lower sales volume.
Consolidated segment operating profit for 2001 increased to $424.4
million or 8.4 percent of sales compared to $143.4 million or 2.8 percent of
sales in 2000. During the fourth quarter of 2000, the Company recognized an
impairment charge of $352.0 million against segment operating profit in the
Consumer Segment to reduce the carrying values of certain assets, primarily
goodwill, to their estimated fair values in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." Segment operating profit of the Paint Stores Segment in 2001
decreased to $388.0 million or 12.2 percent of sales as a favorable paint
product sales mix and selective selling price increases could not offset the
expense associated with closing a manufacturing facility in the Chemical
Coatings Division and the incremental expenses related to new store openings.
The Consumer Segment's operating profit in 2001 was $110.8 million or 9.7
percent of external sales due primarily to reduced sales and competitive pricing
pressures that prohibited selling price increases sufficient to offset higher
year-over-year raw material, distribution and energy costs earlier in 2001.
Segment operating profit of the Automotive Finishes Segment decreased to $51.2
million or 11.0 percent of external sales primarily due to lower production
volume and higher raw material, distribution and energy costs earlier in 2001
and incremental SG&A spending in order to maintain its market share and customer
service levels in a competitive market. Segment operat-
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ing profit of the International Coatings Segment in 2001 decreased to $4.8
million or 1.8 percent of external sales primarily due to increased price
competition and a market shift in product sales to lower priced products in the
face of higher U.S. dollar denominated raw material costs. There are certain
risks in transacting business internationally, such as changes in applicable
laws and regulatory requirements, political instability, general economic and
labor conditions, fluctuations in currency exchange rates and expatriation
restrictions, which could adversely affect the financial condition or results of
operation of the Company's consolidated foreign subsidiaries. Corporate expenses
decreased in 2001 primarily due to the reduction in certain information systems
expenses and decreased interest expense which were partially offset by increases
in certain unallocated employee benefit expenses. Refer to Note 16, on pages 56
through 58 of this report, for additional reportable segment information.
Interest expense decreased in 2001 primarily due to lower average
short-term debt outstanding and rates. Interest coverage was 8.8 times in 2001.
Fixed charge coverage, which is calculated using interest and rent expense, was
5.2 times in 2001.
Interest and net investment income decreased in 2001 primarily due to
lower average balances of cash and cash equivalents, partially offset by higher
average yields. Other expense - net for 2001 was essentially flat with 2000, as
gains from the sale of certain assets were partially offset by provisions for
environmental matters in 2001. See Note 11, on page 53 of this report, for
further detail on Other expense - net. As shown in Note 12, on page 54 of this
report, the effective income tax rate was 38.0 percent in 2001 due to the impact
of certain investment vehicles.
Net income increased in 2001 to $263.2 million from $16.0 million in
2000. Net income per share-diluted increased to $1.68 per share compared to $.10
per share last year. See Note 13, on page 55 of this report, for detailed net
income per share computations.
Management utilizes a measurement of profitability for calculating
comparable results and ratios for 2000 that is not in accordance with accounting
principles generally accepted in the United States. For comparative purposes
only to other years and other companies that do not include impairments of
assets, the following reconciliation is provided. Management has presented
results and ratios excluding the impairment charge for comparative purposes
only. The reader is cautioned that the following adjusted values and ratios
should not be compared to the operations of other entities unknowingly. The
amounts shown below should not be considered alternatives to net income, net
income per common share or any ratio presented in accordance with accounting
principles generally accepted in the United States as disclosed in the
Statements of Consolidated Income, on page 37 of this report.
The following table summarizes the effect of the charge for the
impairment of other assets recorded in 2000 on the Company's operating results
and select ratios:
(thousands of dollars) Results/Ratios
Results/Ratios Effect of Excluding
As Reported Impairment Charge Impairment Charge
-------------- ----------------- -----------------
Income before income taxes.......................... $ 143,406 $ 352,040 $ 495,446
Income taxes........................................ 127,380 58,412 185,792
Net income.......................................... 16,026 293,628 309,654
Basic net income per share.......................... .10 1.80 1.90
Diluted net income per share........................ .10 1.80 1.90
Return on sales..................................... .3% 5.9%
Return on net operating assets employed (RONAE)..... 8.6% 29.8%
Return on beginning shareholders' equity............ .9% 18.2%
EBITDA (See description on page 32 of this report).. $ 365,462 $ 352,040 $ 717,502
Interest coverage................................... 4.3x 9.0x
34
REPORT OF MANAGEMENT
Shareholders
The Sherwin-Williams Company
We have prepared the accompanying consolidated financial statements and
related information included herein for the years ended December 31, 2002, 2001
and 2000. The primary responsibility for the integrity of the financial
information rests with management. This information is prepared in accordance
with accounting principles generally accepted in the United States, based upon
our best estimates and judgments and giving due consideration to materiality.
The Company maintains accounting and control systems which are designed
to provide reasonable assurance that assets are safeguarded from loss or
unauthorized use and which produce records adequate for preparation of financial
information. There are limits inherent in all systems of internal control based
on the recognition that the cost of such systems should not exceed the benefits
to be derived. We believe our systems provide this appropriate balance.
The Board of Directors pursues its responsibility for these financial
statements through the Audit Committee, composed exclusively of independent
directors. The Committee meets periodically with management, internal auditors
and our independent auditors to discuss the adequacy of financial controls, the
quality of financial reporting and the nature, extent and results of the audit
effort. Both the internal auditors and independent auditors have private and
confidential access to the Audit Committee at all times.
/s/ C. M. Connor
- -------------------------------------
C. M. Connor
Chairman and Chief Executive Officer
/s/ S. P. Hennessy
- -------------------------------------
S. P. Hennessy
Senior Vice President - Finance and Chief Financial Officer
/s/ J. L. Ault
- -------------------------------------
J. L. Ault
Vice President - Corporate Controller
35
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
The Sherwin-Williams Company
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of The
Sherwin-Williams Company and subsidiaries as of December 31, 2002, 2001 and
2000, and the related statements of consolidated income, cash flows and
shareholders' equity and comprehensive income for each of the three years in the
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of The Sherwin-Williams Company and subsidiaries at December 31, 2002,
2001 and 2000, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States.
As disclosed in Note 2 to the consolidated financial statements, in
2002 the Company changed its method of accounting for goodwill and
indefinite-lived intangible assets.
/s/ ERNST & YOUNG LLP
- -------------------------------------
Cleveland, Ohio
January 24, 2003
36
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
Year ended December 31,
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
NET SALES................................................. $ 5,184,788 $ 5,066,005 $ 5,211,624
COST OF GOODS SOLD........................................ 2,846,201 2,846,376 2,904,013
GROSS PROFIT.............................................. 2,338,587 2,219,629 2,307,611
PERCENT TO NET SALES.................................... 45.1% 43.8% 44.3%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.............. 1,784,527 1,729,855 1,740,367
PERCENT TO NET SALES.................................... 34.4% 34.1% 33.4%
IMPAIRMENT OF OTHER ASSETS................................ 352,040
INTEREST EXPENSE.......................................... 40,475 54,627 62,026
INTEREST AND NET INVESTMENT INCOME........................ (5,050) (4,087) (4,981)
OTHER EXPENSE - NET....................................... 21,471 14,785 14,753
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................ 497,164 424,449 143,406
INCOME TAXES.............................................. 186,463 161,291 127,380
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE....................... 310,701 263,158 16,026
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - NET OF INCOME TAXES OF $64,476.............. (183,136)
----------- ----------- -----------
NET INCOME................................................ $ 127,565 $ 263,158 $ 16,026
=========== =========== ===========
INCOME PER SHARE:
BASIC:
BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE........................ $ 2.07 $ 1.69 $ .10
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - NET OF INCOME TAXES....................... (1.22)
----------- ----------- -----------
NET INCOME............................................. $ .85 $ 1.69 $ .10
=========== =========== ===========
DILUTED:
BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE........................ $ 2.04 $ 1.68 $ .10
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - NET OF INCOME TAXES....................... (1.20)
----------- ----------- -----------
NET INCOME............................................. $ .84 $ 1.68 $ .10
=========== =========== ===========
See notes to consolidated financial statements.
37
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
December 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS ................................. $ 164,012 $ 118,814 $ 2,896
ACCOUNTS RECEIVABLE, LESS ALLOWANCE ....................... 493,935 523,278 594,162
INVENTORIES:
FINISHED GOODS ........................................... 534,984 530,916 597,472
WORK IN PROCESS AND RAW MATERIALS ........................ 89,666 101,847 106,255
----------- ----------- -----------
624,650 632,763 703,727
DEFERRED INCOME TAXES ..................................... 116,228 104,672 104,662
OTHER CURRENT ASSETS ...................................... 107,168 127,418 146,092
----------- ----------- -----------
TOTAL CURRENT ASSETS ..................................... 1,505,993 1,506,945 1,551,539
GOODWILL .................................................... 552,207 672,397 705,547
INTANGIBLE ASSETS ........................................... 186,039 304,506 310,392
DEFERRED PENSION ASSETS ..................................... 414,589 393,587 364,351
OTHER ASSETS ................................................ 108,884 77,802 96,462
PROPERTY, PLANT AND EQUIPMENT:
LAND ...................................................... 62,069 64,447 65,546
BUILDINGS ................................................. 436,214 441,418 431,524
MACHINERY AND EQUIPMENT ................................... 1,034,286 1,024,701 980,560
CONSTRUCTION IN PROGRESS .................................. 44,936 34,070 52,779
----------- ----------- -----------
1,577,505 1,564,636 1,530,409
LESS ALLOWANCES FOR DEPRECIATION .......................... 912,905 891,948 808,030
----------- ----------- -----------
664,600 672,688 722,379
----------- ----------- -----------
TOTAL ASSETS ................................................ $ 3,432,312 $ 3,627,925 $ 3,750,670
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
SHORT-TERM BORROWINGS ..................................... $ 106,854
ACCOUNTS PAYABLE .......................................... $ 522,339 $ 454,410 448,799
COMPENSATION AND TAXES WITHHELD ........................... 146,987 141,640 137,211
CURRENT PORTION OF LONG-TERM DEBT ......................... 15,001 111,852 12,920
OTHER ACCRUALS ............................................ 297,991 326,854 334,891
ACCRUED TAXES ............................................. 101,178 106,597 74,568
----------- ----------- -----------
TOTAL CURRENT LIABILITIES ................................ 1,083,496 1,141,353 1,115,243
LONG-TERM DEBT .............................................. 506,682 503,517 620,675
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS ................. 213,749 209,963 208,673
OTHER LONG-TERM LIABILITIES ................................. 286,495 285,328 334,215
SHAREHOLDERS' EQUITY:
PREFERRED STOCK - CONVERTIBLE, PARTICIPATING, NO PAR VALUE:
41,806 AND 168,305 SHARES OUTSTANDING AT
DECEMBER 31, 2002 AND 2001, RESPECTIVELY ................. 41,806 168,305
UNEARNED ESOP COMPENSATION ................................ (41,806) (168,305)
COMMON STOCK - $1.00 PAR VALUE:
148,910,487, 153,978,356 AND 159,558,335 SHARES
OUTSTANDING AT DECEMBER 31, 2002, 2001 AND 2000,
RESPECTIVELY ............................................. 209,836 208,031 206,848
OTHER CAPITAL ............................................. 265,635 200,643 158,650
RETAINED EARNINGS ......................................... 2,157,485 2,120,927 1,948,753
TREASURY STOCK, AT COST ................................... (1,029,894) (837,284) (678,778)
CUMULATIVE OTHER COMPREHENSIVE LOSS ....................... (261,172) (204,553) (163,609)
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............................... 1,341,890 1,487,764 1,471,864
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................. $ 3,432,312 $ 3,627,925 $ 3,750,670
=========== =========== ===========
See notes to consolidated financial statements.
38
STATEMENTS OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
Year ended December 31,
-----------------------------------------
2002 2001 2000
---------- ---------- ----------
OPERATING ACTIVITIES
NET INCOME ................................................... $ 127,565 $ 263,158 $ 16,026
ADJUSTMENTS TO RECONCILE NET INCOME TO NET OPERATING CASH:
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ........ 183,136
DEPRECIATION ............................................... 103,659 109,187 108,906
AMORTIZATION OF INTANGIBLE ASSETS .......................... 11,989 38,911 51,124
IMPAIRMENT OF OTHER ASSETS ................................. 352,040
IMPAIRMENT OF LONG-LIVED ASSETS HELD FOR USE ............... 19,948
IMPAIRMENT OF LONG-LIVED ASSETS HELD FOR DISPOSAL .......... 6,402 4,719
PROVISIONS FOR QUALIFIED EXIT COSTS ........................ 262 5,302 3,304
PROVISIONS FOR ENVIRONMENTAL-RELATED MATTERS ............... 8,609 5,609
DEFERRED INCOME TAXES ...................................... 19,747 15,677 (26,886)
DEFINED BENEFIT PENSION PLANS NET CREDIT ................... (23,013) (29,366) (29,629)
INCOME TAX EFFECT OF ESOP ON OTHER CAPITAL ................. 22,380 22,902
NET INCREASE IN POSTRETIREMENT LIABILITY ................... 4,086 2,990 3,682
FOREIGN CURRENCY RELATED LOSSES ............................ 8,435 2,277 2,115
OTHER ...................................................... 11,660 1,101 9,980
CHANGE IN WORKING CAPITAL ACCOUNTS:
DECREASE IN ACCOUNTS RECEIVABLE ............................ 3,588 61,497 21,264
(INCREASE) DECREASE IN INVENTORIES ......................... (229) 72,132 6,188
INCREASE (DECREASE) IN ACCOUNTS PAYABLE .................... 81,733 10,233 (21,790)
(DECREASE) INCREASE IN ACCRUED TAXES ....................... (5,483) 31,468 (11,744)
OTHER ...................................................... 4,778 17,035 (22,645)
UNUSUAL TAX-RELATED PAYMENT .................................. (65,677)
INCREASE IN LONG-TERM ACCRUED TAXES .......................... 3,009 419 10,005
PAYMENTS FOR ENVIRONMENTAL - RELATED MATTERS ................. (12,036) (17,565) (9,105)
PAYMENTS FOR QUALIFIED EXIT COSTS ............................ (3,663) (3,326) (6,173)
UNFUNDED PENSION LOSSES - NET OF TAXES ....................... (8,334)
OTHER ........................................................ (2,909) 11,280 1,963
--------- --------- ---------
NET OPERATING CASH ......................................... 558,917 561,646 463,344
INVESTING ACTIVITIES
CAPITAL EXPENDITURES ......................................... (126,530) (82,572) (132,778)
ACQUISITIONS OF BUSINESSES ................................... (26,649) (15,162) (60,108)
INCREASE IN OTHER INVESTMENTS ................................ (16,144) (16,614) (51,163)
PROCEEDS FROM SALE OF ASSETS ................................. 11,778 9,866 7,670
OTHER ........................................................ (15,016) 13,590 (16,659)
--------- --------- ---------
NET INVESTING CASH ......................................... (172,561) (90,892) (253,038)
FINANCING ACTIVITIES
NET (DECREASE) INCREASE IN SHORT-TERM BORROWINGS ............. (106,854) 106,854
INCREASE IN LONG-TERM DEBT ................................... 6,633 8,487
PAYMENTS OF LONG-TERM DEBT ................................... (101,938) (16,210) (116,344)
PAYMENTS OF CASH DIVIDENDS ................................... (91,007) (90,984) (88,124)
PROCEEDS FROM STOCK OPTIONS EXERCISED ........................ 37,516 17,798 6,419
TREASURY STOCK PURCHASED ..................................... (190,320) (157,088) (146,857)
OTHER ........................................................ (4,727) (786) 3,898
--------- --------- ---------
NET FINANCING CASH ......................................... (343,843) (354,124) (225,667)
EFFECT OF EXCHANGE RATE CHANGES ON CASH ...................... 2,685 (712) (366)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......... 45,198 115,918 (15,727)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 118,814 2,896 18,623
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $ 164,012 $ 118,814 $ 2,896
========= ========= =========
INCOME TAXES PAID ............................................ $ 103,447 $ 129,435 $ 156,514
INTEREST PAID ................................................ 42,041 55,769 64,400
See notes to consolidated financial statements.
39
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
Unearned
Preferred ESOP Common Other Retained
Stock Compensation Stock Capital Earnings
---------- ------------ --------- ---------- ------------
Balance at January 1, 2000 ..................... $ 206,309 $ 150,887 $ 2,020,851
Comprehensive income:
Net income ................................... 16,026
Foreign currency translation .................
Comprehensive loss ..........................
Treasury stock purchased .......................
Stock issued (tendered)
for exercise of options ...................... 534 8,121
Restricted stock grants (net activity) ......... 5 3,176
Stock acquired for trust ....................... (1,199)
Treasury stock transferred to trust ............ (2,335)
Cash dividends - $.54 per share ................ (88,124)
--------- --------- -----------
Balance at December 31, 2000 ................... 206,848 158,650 1,948,753
Comprehensive income:
Net income ................................... 263,158
Foreign currency translation .................
Comprehensive income .......................
Treasury stock purchased .......................
Issuance of preferred stock
to pre-fund ESOP ............................. $ 250,000 $ (250,000)
Income tax effect of ESOP ...................... 22,902
Redemption of preferred stock .................. (81,695) 81,695
Stock issued (tendered)
for exercise of options ...................... 1,031 19,947
Stock tendered in connection ...................
with restricted stock grants .................
Restricted stock grants (net activity) ......... 152 979
Stock acquired for trust ....................... (1,835)
Cash dividends - $.58 per share ................ (90,984)
--------- ----------- --------- --------- -----------
Balance at December 31, 2001 ................... 168,305 (168,305) 208,031 200,643 2,120,927
Comprehensive income:
Net income ................................... 127,565
Foreign currency translation .................
Minimum pension liability, net of taxes ......
Comprehensive income .......................
Treasury stock purchased ....................... (3,040)
Redemption of preferred stock .................. (126,499) 126,499
Income tax effect of ESOP ...................... 22,380
Stock issued (tendered)
for exercise of options ...................... 1,792 41,498
Stock tendered in connection
with restricted stock grants .................
Restricted stock grants (net activity) ......... 13 3,082
Stock acquired for trust ....................... (76)
Revocable trust stock sold -
including realized gain ...................... 1,148
Cash dividends - $.60 per share ................ (91,007)
--------- ----------- --------- --------- -----------
Balance at December 31, 2002 ................... $ 41,806 $ (41,806) $ 209,836 $ 265,635 $ 2,157,485
========= =========== ========= ========= ===========
Cumulative
Other
Treasury Comprehensive
Stock Loss Total
----------- ------------- -----------
Balance at January 1, 2000 ..................... $ (533,891) $ (145,624) $ 1,698,532
Comprehensive income:
Net income ................................... 16,026
Foreign currency translation ................. (17,985) (17,985)
-----------
Comprehensive loss .......................... (1,959)
Treasury stock purchased ....................... (146,857) (146,857)
Stock issued (tendered)
for exercise of options ...................... (365) 8,290
Restricted stock grants (net activity) ......... 3,181
Stock acquired for trust ....................... (1,199)
Treasury stock transferred to trust ............ 2,335
Cash dividends - $.54 per share ................ (88,124)
----------- ---------- -----------
Balance at December 31, 2000 ................... (678,778) (163,609) 1,471,864
Comprehensive income:
Net income ................................... 263,158
Foreign currency translation ................. (40,944) (40,944)
-----------
Comprehensive income ....................... 222,214
Treasury stock purchased ....................... (157,088) (157,088)
Issuance of preferred stock
to pre-fund ESOP .............................
Income tax effect of ESOP ...................... 22,902
Redemption of preferred stock ..................
Stock issued (tendered)
for exercise of options ...................... (532) 20,446
Stock tendered in connection ...................
with restricted stock grants ................. (886) (886)
Restricted stock grants (net activity) ......... 1,131
Stock acquired for trust ....................... (1,835)
Cash dividends - $.58 per share ................ (90,984)
----------- ---------- -----------
Balance at December 31, 2001 ................... (837,284) (204,553) 1,487,764
Comprehensive income:
Net income ................................... 127,565
Foreign currency translation ................. (48,285) (48,285)
Minimum pension liability, net of taxes ...... (8,334) (8,334)
-----------
Comprehensive income ....................... 70,946
Treasury stock purchased ....................... (187,280) (190,320)
Redemption of preferred stock ..................
Income tax effect of ESOP ...................... 22,380
Stock issued (tendered)
for exercise of options ...................... (4,562) 38,728
Stock tendered in connection
with restricted stock grants ................. (768) (768)
Restricted stock grants (net activity) ......... 3,095
Stock acquired for trust ....................... (76)
Revocable trust stock sold -
including realized gain ...................... 1,148
Cash dividends - $.60 per share ................ (91,007)
----------- ---------- -----------
Balance at December 31, 2002 ................... $(1,029,894) $ (261,172) $ 1,341,890
=========== ========== ===========
See notes to consolidated financial statements.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements include all
controlled subsidiaries. Inter-company accounts and transactions have been
eliminated.
USE OF ESTIMATES. The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
NATURE OF OPERATIONS. The Company is engaged in the manufacture,
distribution and sale of coatings and related products to professional,
industrial, commercial and retail customers primarily in North and South
America.
REPORTABLE SEGMENTS. See Note 16.
CASH FLOWS. The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in
the consolidated balance sheets for cash and cash equivalents
approximate fair value.
SHORT-TERM INVESTMENTS: The carrying amounts reported in the
consolidated balance sheets for marketable debt and equity securities
are based on quoted market prices and approximate fair value.
INVESTMENTS IN SECURITIES: The Company maintains certain
long-term investments, classified as available for sale securities, in
a fund to provide for payment of health care benefits of certain
qualified employees. The estimated fair values of these securities,
included in Other assets, of $4,092, $10,182, and $15,913 at December
31, 2002, 2001, and 2000, respectively, are based on quoted market
prices.
LONG-TERM DEBT (INCLUDING CURRENT PORTION): The fair values of
the Company's publicly traded debentures, shown below, are based on
quoted market prices. The fair values of the Company's non-traded debt,
also shown below, are estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements. See Note 6 for information concerning
the interest rate swap contracts.
DECEMBER 31,
---------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- ------------------------ ------------------------
CARRYING FAIR Carrying Fair Carrying Fair
AMOUNT VALUE Amount Value Amount Value
-------- -------- -------- ------- --------- ---------
PUBLICLY TRADED DEBT ........ $508,134 $543,971 $603,762 $598,529 $613,709 $592,113
NON-TRADED DEBT ............. 13,549 12,390 13,184 12,571 19,886 17,752
DERIVATIVE INSTRUMENTS: The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, effective
January 1, 2001 with no impact on the Company's results of operations,
liquidity or financial condition. SFAS No. 133 requires all deriva-
tive instruments to be recorded as either assets or liabilities at fair
value. Gains or losses resulting from changes in the values of those
derivative instruments may be recognized immediately or deferred
depending on the use of the derivative or whether it's designated as a
hedge. The Company utilizes derivative instruments as part of its
overall financial risk management policy. The Company does not use
derivative instruments for speculative or trading purposes. The Company
entered into interest rate swap contracts during 2002 and 2001
primarily to hedge against interest rate risks. See Note 6. The Company
also entered into option and forward currency exchange contracts in
2002 and 2001 primarily to hedge against foreign currency risk
exposure. See Note 11.
NON-TRADED INVESTMENTS: It was not practicable to estimate
the fair value of the Company's investment in certain non-traded
investments because of the lack of quoted market prices and the
inability to estimate fair values without incurring excessive costs.
The carrying amounts, included in Other assets, of $11,435, $13,771,
and $25,143 at December 31, 2002, 2001, and 2000, respectively, repre-
sent the Company's best estimate of current economic values for these
investments.
INVESTMENT IN LIFE INSURANCE. The Company invests in broad-based
corporate owned life insurance. The cash surrender values of the policies, net
of policy loans, are included in Other assets. The net expense associated with
such investment is included in Other expense - net. Such expense was immaterial
to Income before income taxes and cumulative effect of change in accounting
principle.
IMPAIRMENT OF LONG-LIVED ASSETS. The Company evaluates the
recoverability of long-lived assets and the related estimated remaining lives at
each balance sheet date. The Company records an impairment or change in useful
life whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable or the useful life has changed in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." See Note 2.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
GOODWILL. Goodwill represents the cost in excess of fair value of net
assets acquired in business combinations accounted for by the purchase method.
For acquisitions prior to July 1, 2001, goodwill was amortized on a
straight-line basis over the expected period of benefit ranging from 10 to 40
years until December 31, 2001. Accumulated amortization of goodwill was
$104,746 and $84,827 as of December 31, 2001 and 2000, respectively. Effective
January 1, 2002, the Company adopted SFAS No. 142 that discontinues amortization
of goodwill and requires goodwill to be tested periodically for impairment. See
Note 2.
INTANGIBLES. Intangible assets include trademarks, non-compete
covenants and certain intangible property rights. Prior to January 1, 2002,
intangible assets were amortized on a straight-line basis over the expected
period of benefit ranging from 2 to 40 years. Effective January 1, 2002,
pursuant to the adoption of SFAS No. 142, trademarks have been classified as
indefinite-lived assets and are no longer amortized. The cost of non-compete
covenants and certain intangible property rights are amortized on a
straight-line basis over the expected period of benefit as follows:
Useful Life
-----------
Non-compete covenants................. 2 - 10 years
Certain intangible property rights.... 3 - 15 years
Accumulated amortization of intangible assets, which includes
impairment charges recorded in 2002 and net writeoffs of fully-amortized
intangible assets in 2001, was $226,294, $99,797, and $135,815 at December 31,
2002, 2001, and 2000, respectively. See Note 2.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is
stated on the basis of cost. Depreciation is provided principally by the
straight-line method. The major classes of assets and ranges of depreciation
rates are as follows:
Buildings............................. 2% - 6-2/3%
Machinery and equipment............... 4% - 33-1/3%
Furniture and fixtures................ 5% - 33-1/3%
Automobiles and trucks................ 10% - 33-1/3%
LETTERS OF CREDIT. The Company occasionally enters into standby letter
of credit agreements to guarantee various operating activities. These
agreements, which expire in 2003, provide credit availability to the various
beneficiaries if certain contractual events occur. Amounts outstanding under
these agreements totaled $13,273, $14,400, and $12,230 at December 31, 2002,
2001, and 2000, respectively.
FOREIGN CURRENCY TRANSLATION. All consolidated non-highly inflationary
foreign operations use the local currency of the country of operation as the
functional currency and translate the local currency asset and liability
accounts at year-end exchange rates while income and expense accounts are trans-
lated at average exchange rates. The resulting translation adjustments are
included in Cumulative other comprehensive loss, a component of Shareholders'
equity.
COMPREHENSIVE INCOME. At December 31, 2002, the ending accumulated
balance of cumulative other comprehensive loss consisted of adjustments for
foreign currency translation of $252,838 and minimum pension liability of
$8,334. At December 31, 2001 and 2000, the ending accumulated balance of
cumulative other comprehensive loss consisted solely of foreign currency
translation adjustments.
REVENUE RECOGNITION. Substantially all revenues are recognized when
products are shipped and title has passed to unaffiliated customers.
TECHNICAL EXPENDITURES. Total technical expenditures include research
and development costs, quality control, product formulation expenditures and
other similar items. Research and development costs included in technical expen-
ditures were $36,019, $37,193, and $33,927 for 2002, 2001, and 2000,
respectively.
ADVERTISING EXPENSES. The cost of advertising is expensed as incurred.
The Company incurred $221,572, $236,259, and $276,078 in advertising costs
during 2002, 2001, and 2000, respectively.
ENVIRONMENTAL MATTERS. Capital expenditures for ongoing environmental
compliance measures are recorded in the consolidated balance sheets, and
related expenses are included in the normal operating expenses of conducting
business. The Company is involved with environmental compliance, investigation
and remediation activities at some of its current and former sites and at a
number of third-party sites. The Company accrues for certain environmental
remediation-related activities for which commitments or clean-up plans have been
developed and for which costs can be reasonably estimated. All accrued amounts
are recorded on an undiscounted basis. Accrued environmental remediation-related
expenses include direct costs of remediation and indirect costs related to the
remediation effort, such as compensation and benefits for employees directly
involved in the remediation activities and fees paid to outside engineering,
consulting and law firms. See Notes 7 and 11.
EMPLOYEE STOCK PURCHASE AND SAVINGS PLAN AND PREFERRED STOCK. The
Company accounts for the Employee Stock Purchase and Savings Plan in
accordance with Statement of Position (SOP) No. 93-6. The Company recognizes
compensation expense for amounts contributed to the plan and the plan uses
dividends on unallocated preferred shares to service debt. Unallocated
preferred shares held by the plan are not considered outstanding in calculating
earnings per share of the Company. See Note 9.
STOCK-BASED COMPENSATION. At December 31, 2002, the Company had two
stock-based compensation plans accounted for under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
for Stock Issued to Employees," and related interpretations, as more fully
described in Note 10. No stock-based compensation expense is reflected in net
income. Pro-forma information regarding the impact of stock-based compensation
on net income and income per share is required by SFAS No. 123, "Accounting for
Stock-Based Compensation." Such pro-forma information, determined as if the
Company had accounted for its employee stock options under the fair value method
of that statement, is illustrated in the following table:
2002 2001 2000
---- ---- ----
NET INCOME, AS REPORTED ......... $ 127,565 $ 263,158 $16,026
LESS: TOTAL STOCK-BASED
COMPENSATION EXPENSE
DETERMINED UNDER FAIR
VALUE BASED METHOD FOR
ALL AWARDS, NET OF
RELATED TAX EFFECTS ........... (9,442) (9,266) (6,409)
--------- --------- -------
PRO-FORMA NET INCOME ............ $ 118,123 $ 253,892 $ 9,617
========= ========= =======
INCOME PER SHARE:
BASIC - AS REPORTED ........... $ .85 $ 1.69 $ .10
BASIC - PRO-FORMA ............. $ .79 $ 1.63 $ .06
DILUTED - AS REPORTED ......... $ .84 $ 1.68 $ .10
DILUTED - PRO-FORMA ........... $ .78 $ 1.62 $ .06
The fair value for these options was estimated as of the date of grant
using a Black-Scholes option-pricing model with the following weighted-average
assumptions for all options granted:
2002 2001 2000
---- ---- ----
RISK-FREE INTEREST RATE ................ 2.15% 4.00% 6.29%
EXPECTED LIFE OF OPTION ................ 3 YEARS 3 YEARS 3 YEARS
EXPECTED DIVIDEND YIELD OF STOCK ....... 2.18% 2.00% 2.00%
EXPECTED VOLATILITY OF STOCK ........... .333 .353 .305
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, it is management's opinion that the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
EARNINGS PER SHARE. Shares of preferred stock held in an unallocated
account of the ESOP (see Note 9) and common stock held in a revocable trust (see
Note 8) are not considered outstanding shares for basic or diluted income per
share calculations. All references to "shares or per share information"
throughout this report relate to common shares, unless otherwise indicated.
Basic income per common share amounts are computed based on the weighted-average
number of common shares outstanding during the year. Diluted income per common
share amounts are computed based on the weighted-average number of common shares
outstanding plus all dilutive securities potentially outstanding during the
year. See Note 13. All references to income or losses per common share
throughout this report are stated on a diluted per common share basis, unless
otherwise indicated.
PRODUCT WARRANTIES. The Company offers product warranties for certain
products. The specific terms and conditions of such warranties vary depending on
the product or customer contract requirements. The Company does not distinguish
between product warranty claim settlements and all credits, refunds and product
replacements settled to maintain high customer satisfaction. The Company
estimates and accrues the costs of unsettled product warranty claims based on
historical results and experience. The Company periodically assesses the
adequacy of its accrual for product warranty claims and adjusts the accrual as
necessary.
Changes in the Company's accrual for product warranty claims during
2002, including customer satisfaction settlements during the year, were as
follows:
Balance at January 1, 2002 .......... $ 14,074
Charges to expense .................. 25,023
Settlements ......................... 23,587
--------
Balance at December 31, 2002 ........ $ 15,510
========
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. During 2002, the
Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including certain lease termination costs and
severance-type costs. SFAS No. 146 requires liabilities associated with exit or
disposal activities to be expensed as incurred and will impact the timing of
recognition for exit or disposal activities that are initiated after December
31, 2002. The Company will apply the provisions of SFAS No. 146 to any future
exit or disposal activities that are initiated after December 31, 2002. Also
during 2002, the Company adopted the disclosure requirement provisions of SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
See stock-based compensation section above for SFAS No. 148 pro-forma
disclosures.
RECLASSIFICATION. Certain amounts in the 2001 and 2000 consolidated
financial statements have been reclassified to conform with the 2002
presentation.
NOTE 2--CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE AND OTHER
IMPAIRMENTS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." In accordance with SFAS No. 142, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
Excluding after-tax amortization expense of $24,090 from 2001 and $32,564 from
2000 to be comparable with 2002, net income would have been $287,248 or $1.83
per diluted common share in 2001 and $48,590 or $.30 per diluted common share
in 2000.
Goodwill and intangible assets that are no longer amortized are
required by SFAS No. 142 to be periodically tested for impairment. During the
first quarter of 2002, the Company completed the transitional impairment test
required by SFAS No. 142 and recognized an impairment charge of $247,612
($183,136 after taxes or $1.21 per diluted common share) to reduce the carrying
values of goodwill and certain indefinite-lived intangible assets to their
estimated fair values. The transitional impairment charge was accounted for as a
cumulative effect of change in accounting principle. The transitional
impairment of goodwill totaled $129,392 ($105,714 after taxes or $.70 per
diluted common share) and related primarily to international operations in the
International Coatings and Automotive Finishes Segments. Weakened foreign
currency exchange rates and economic conditions, particularly in South America,
negatively impacted profit and cash flow in U.S. dollars. The transitional
impairment of indefinite-lived intangible assets aggregated $118,220 ($77,422
after taxes or $.51 per diluted common share). The impairment of
indefinite-lived intangible assets related principally to trademarks in the
Consumer Segment associated with the acquisition of Thompson Minwax Holding
Corp. and was due primarily to a shortfall in sales from levels anticipated at
the time of acquisition. In addition, certain trademarks in the International
Coatings Segment were impaired. Fair values of goodwill and indefinite-lived
intangible assets were estimated using a discounted cash flow valuation model,
incorporating discount rates commensurate with the risks involved for each group
of assets.
During the first quarter of 2002, a devaluation of the Argentine peso
indicated that an impairment of other long-lived assets for the Argentina
subsidiary was probable. Fair values and the resulting impairment were
determined in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." A reduction of $8,997 ($5,848 after taxes) in
the carrying value of other long-lived assets of the Automotive and
International Coatings Segments' Argentina reporting units was charged to cost
of goods sold ($6,502) and selling, general and administrative expenses ($2,495)
in the first quarter.
As required by SFAS No. 142, October 1 has been established for the
annual impairment review of goodwill and indefinite-lived intangible assets. The
annual impairment review of all appropriate assets was performed as of October
1, 2002 resulting in reductions in the carrying values of goodwill of $2,401
($2,401 after taxes) and indefinite-lived intangible assets of $1,206 ($826
after taxes). The total of $3,607 ($3,227 after taxes) was charged to cost of
goods sold ($801) and selling, general and administrative expenses ($2,806) in
the fourth quarter. The impairment of goodwill related to a cash flow shortfall
in certain international operations acquired in the acquisition of Thompson
Minwax Holding Corp. and the impairment of indefinite-lived intangible assets
related to lower-than-anticipated sales of certain acquired domestic and
international brands. Fair values of goodwill and indefinite-lived intangible
assets were estimated using a discounted cash flow valuation model,
incorporating discount rates similar to rates used in the transitional
impairment analysis due to the short period of time between the two tests.
In addition, an impairment of other long-lived assets in the Consumer
Segment was deemed probable relating to the capitalized costs of software due
to the replacement and significant changes in the utilization of certain
software. A reduction in the carrying value of capitalized software costs of
$7,344 ($4,467 after taxes) was charged to selling, general and administrative
expenses in the fourth quarter.
During the fourth quarter of 2000, the Company recognized an
impairment charge against current operations of $352,040 ($293,628 after taxes
or $1.80 per diluted common share) to reduce the carrying values of certain
assets to their estimated fair values in accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets to be Disposed of." Charges
of $342,522 reduced goodwill while the remaining portion of the charge primarily
reduced fixed assets. The impaired assets are part of the Consumer Segment
related to the previous acquisitions of Thompson Minwax Holding Corp. and Pratt
& Lambert United, Inc., and purchases of the assets of Sunshine Quality
Products, Inc. and the Household and Professional Products Division of Grow
Group, Inc. Current losses, cash flow deficiencies and cash flow shortfalls from
expectations indicated an impairment review was necessary. Undiscounted future
cash flows estimated by management established that impairment existed. The
amount of reduction in the carrying value was estimated using a discounted
cash flow valuation model, incorporating discount rates commensurate with the
risks involved for each group of assets, to determine the fair value of the
reporting units.
Amortization of intangible assets subject to amortization is as follows
for the next five years: $11,800 in 2003, $11,700 in 2004, $9,900 in 2005,
$8,400 in 2006 and $8,400 in 2007.
SFAS No. 142 required a complete review of the useful life and
classification of all intangible and other assets. As a result, certain assets
have been reclassified from Other assets to Intangible assets in the 2001 and
2000 accompanying consolidated balance sheets to conform to the 2002
classifications.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
A summary of changes in the Company's carrying value of goodwill by
reportable operating segment is as follows:
Automotive International Consolidated
Goodwill Paint Stores Consumer Finishes Coatings Totals
- --------------------------------------- ------------ ----------- ----------- ------------- ------------
Balance at January 1, 2000 ............ $ 51,499 $ 829,632 $ 51,707 $ 106,717 $ 1,039,555
Acquisitions ........................ 33,417 6,763 4,638 44,818
Impairment charged to operations .... (342,522) (342,522)
Amortization ........................ (3,494) (23,339) (1,820) (3,426) (32,079)
Currency and other adjustments ...... (290) (8) (790) (3,137) (4,225)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 .......... 81,132 463,763 55,860 104,792 705,547
Acquisitions ........................ 4,905 (142) 727 5,490
Amortization ........................ (3,747) (13,697) (1,825) (2,870) (22,139)
Currency and other adjustments ...... (404) (12) (4,262) (11,823) (16,501)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 .......... 81,886 450,054 49,631 90,826 672,397
ACQUISITIONS ........................ 13,230 1,417 14,647
TRANSITIONAL IMPAIRMENTS ............ (5,387) (16,571) (19,009) (88,425) (129,392)
IMPAIRMENT CHARGED TO OPERATIONS .... (2,401) (2,401)
CURRENCY AND OTHER ADJUSTMENTS ...... 746 (3,790) (3,044)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2002 .......... $ 89,729 $ 434,229 $ 28,249 $ 0 $ 552,207
=========== =========== =========== =========== ===========
A summary of changes in the Company's carrying value of intangible
assets is as follows:
Intangible assets subject to amortization Trademarks Total
------------------------------------------- with indefinite intangible
Software All other Subtotal lives assets
-------- --------- -------- --------------- -----------
DECEMBER 31, 2002
- -----------------
GROSS .......................... $ 72,501 $ 70,200 $142,701 $ 269,632 $ 412,333
ACCUMULATED AMORTIZATION ....... (15,793) (54,311) (70,104) (156,190) (226,294)
--------- ------------ -------- --------- ---------
NET VALUE .................... $ 56,708 $ 15,889 $ 72,597 $ 113,442 $ 186,039
========= ============ ======== ========= =========
December 31, 2001
- -----------------
Gross .......................... $ 68,917 $ 66,854 $135,771 $ 268,532 $ 404,303
Accumulated amortization........ (11,900) (49,375) (61,275) (38,522) (99,797)
--------- ------------ -------- --------- ---------
Net value .................... $ 57,017 $ 17,479 $ 74,496 $ 230,010 $ 304,506
========= ============ ======== ========= =========
December 31, 2000
- -----------------
Gross .......................... $ 57,802 $ 117,941 $175,743 $ 270,464 $ 446,207
Accumulated amortization........ (6,496) (96,725) (103,221) (32,594) (135,815)
--------- ------------ -------- --------- ---------
Net value .................... $ 51,306 $ 21,216 $ 72,522 $ 237,870 $ 310,392
========= ============ ======== ========= =========
NOTE 3--INVENTORIES
Inventories are stated at the lower of cost or market with cost
determined principally on the last-in, first-out (LIFO) method. The following
presents the effect on inventories, net income and net income per share had the
Company used the first-in, first-out (FIFO) inventory valuation method adjusted
for income taxes at the statutory rate and assuming no other adjustments. This
information is presented to enable the reader to make comparisons with
companies using the FIFO method of inventory valuation.
2002 2001 2000
--------- --------- ---------
PERCENTAGE OF TOTAL
INVENTORIES ON LIFO .... 87% 88% 89%
EXCESS OF FIFO COST
OVER LIFO COST.......... $100,226 $112,669 $110,124
INCREASE (DECREASE) IN
NET INCOME DUE TO LIFO.. 8,088 (1,567) (7,916)
INCREASE (DECREASE) IN
NET INCOME PER SHARE
DUE TO LIFO ............ .05 (.01) (.05)
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
NOTE 4--DISPOSITION AND TERMINATION OF OPERATIONS
The Company is continually re-evaluating its operating facilities
against its long-term strategic goals. Upon commitment to a formal shutdown
plan of an operating facility, provisions were 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 in effect prior to January 1, 2003 (See Note 1
concerning accounting guidance to be followed after December 31, 2002).
Qualified exit costs include primarily post-closure rent expenses, incremental
post-closure costs and costs of employee terminations. Adjustments may be made
to prior provisions for qualified exit costs if information becomes available
upon which more accurate amounts can be reasonably estimated. Concurrently,
property, plant and equipment is tested for impairment in accordance with SFAS
No. 144 and, if impairment exists, the carrying value of the related assets is
reduced to estimated net fair value. Adjustments may be made for subsequent
revisions in estimated net fair value, not to exceed original asset carrying
value before impairment.
No formal shutdown plans were approved during 2002. During the fourth
quarter of 2001, formal plans were approved to close two manufacturing
facilities in the Paint Stores and Consumer Segments. During 2000, two research
centers in the Automotive Finishes Segment and a distribution center in the
Consumer Segment were closed. Qualified exit costs were accrued and asset
impairment charges recorded for all of these facilities.
The following tables provide the remaining liabilities relating to
qualified exit costs at December 31, 2002, 2001 and 2000, and activity for the
years then ended:
Actual Adjustments to
Balance at Provisions expenditures prior provisions Balance at
December 31, in Cost of charged to in Other December 31,
Exit Plan 2001 goods sold accrual expense - net 2002
- ------------------------------------- ------------ ---------- ------------ ---------------- ------------
CONSUMER MANUFACTURING FACILITY:
SEVERANCE AND RELATED COSTS ....... $ 1,454 $(1,321) $ 133
OTHER EXIT COSTS .................. 1,946 (256) $ 1,100 2,790
PAINT STORES MANUFACTURING FACILITY:
SEVERANCE AND RELATED COSTS ....... 710 (667) (43)
OTHER EXIT COSTS .................. 290 43 333
AUTOMOTIVE FINISHES RESEARCH CENTERS:
OTHER EXIT COSTS .................. 575 (1) 574
EXIT COSTS INITIATED PRIOR TO 2000 .. 14,904 (1,419) (838) 12,647
------- -------- ------- ------- -------
TOTALS .............................. $19,879 $(3,664) $ 262 $16,477
======= ======== ======= ======= =======
Actual Adjustments to
Balance at Provisions expenditures prior provisions Balance at
December 31, in Cost of charged to in Other December 31,
Exit Plan 2000 goods sold accrual expense - net 2001
- ------------------------------------------ ------------ ---------- ------------ ---------------- ------------
Consumer manufacturing facility:
Severance and related costs ............ $ 1,454 $ 1,454
Other exit costs ....................... 1,946 1,946
Paint Stores manufacturing facility:
Severance and related costs ............ 710 710
Other exit costs ....................... 290 290
Automotive Finishes research centers:
Severance and related costs ............ $ 278 $ (278)
Other exit costs ....................... 777 (202) 575
Exit costs initiated prior to 2000 ....... 16,848 (2,846) $ 902 14,904
------- -------- ------- ------- -------
Totals ................................... $17,903 $4,400 $(3,326) $ 902 $19,879
======= ======== ======= ======= =======
Actual Adjustments to
Balance at Provisions expenditures prior provisions Balance at
December 31, in Cost of charged to in Other December 31,
Exit Plan 1999 goods sold accrual expense - net 2000
- ---------------------------------------- ------------- ---------- ------------ ---------------- ------------
Automotive Finishes research centers:
Severance and related costs .......... $ 278 $ 278
Other exit costs ..................... 777 777
Exit costs initiated prior to 2000 ..... $ 20,772 $(6,173) $ 2,249 16,848
------- -------- ------- ------- -------
Totals ................................. $ 20,772 $ 1,055 $(6,173) $ 2,249 $17,903
======= ======== ======= ======= =======
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
Less than 5 percent of the ending accrual for qualified exit costs at
December 31, 2002 relates to facilities shutdown in 2001 and 2000 that is
expected to be incurred by the end of 2003. The remaining portion of the ending
accrual primarily represents post-closure contractual and demolition expenses
related to certain owned facilities which are closed and being held for disposal
or involved in ongoing environmental-related remediation activities. The
Company cannot reasonably estimate when such matters will be concluded to permit
disposition.
Charges for the impairment of long-lived assets held for disposal,
included in Other expense - net, were $6,402 and $4,719 in 2001 and 2000,
respectively. There was no charge for the impairment of long-lived assets in
2002. The total impact on net income relating to provisions for qualified exit
costs and charges for the impairment of long-lived assets held for disposal
aggregated $168 (no per share effect), $7,608 ($.05 per share), and $5,215 ($.03
per share) in 2002, 2001 and 2000, respectively.
NOTE 5 -- PENSION, HEALTH CARE AND OTHER BENEFITS
The Company provides certain health care benefits for active employees.
The plans are contributory and contain cost-sharing features such as deductibles
and coinsurance. There were 16,301, 16,512, and 16,811 active employees entitled
to receive benefits under these plans as of December 31, 2002, 2001 and 2000,
respectively. The cost of these benefits for active employees is recognized as
claims are incurred and amounted to $70,169, $68,158, and $58,782 for 2002,
2001, and 2000, respectively. The Company has a fund, to which it no longer
intends to contribute, that provides for payment of health care benefits of
certain qualified employees. Distributions from the fund were $8,134, $8,113,
and $7,410 in 2002, 2001, and 2000, respectively.
Employees of the Company who were hired prior to January 1, 1993 and
who are not members of a collective bargaining unit, and certain employees added
through acquisitions, are eligible for certain health care and life insurance
benefits upon retirement from active service, subject to the terms, conditions
and limitations of the applicable plans. There were 4,719, 4,837, and 4,855
retired employees entitled to receive benefits as of December 31, 2002, 2001,
and 2000, respectively. The plans are unfunded.
The assumed health care cost trend rate was revised during the year
ended December 31, 2002 to 9.0 percent for 2003 decreasing gradually to 5.5
percent for 2010 and thereafter. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects as of December 31, 2002:
One-Percentage-Point
------------------------
Increase (Decrease)
-------- ----------
Effect on total of service and
interest cost components............ $ 612 $ (593)
Effect on the postretirement
benefit obligation.................. $ 8,887 $ (8,577)
The Company provides pension benefits to substantially all employees
through noncontributory defined contribution or defined benefit plans.
The Company's annual contribution for its domestic defined contribution
pension plan, which is based on six percent of compensation for covered
employees, was $41,569 for 2002. Prior to January 1, 2002, the Company's
annual contribution was based on five percent of compensation for covered
employees and amounted to $35,991 and $33,043 in 2001 and 2000, respectively.
Assets in employee accounts of the domestic defined contribution pension plan
are invested in various mutual funds as directed by the participants. These
mutual funds do not own a significant number of shares of the Company's common
stock. Effective January 1, 2002, the domestic defined contribution plan
ceased admitting new participants.
The Company's annual contribution for its foreign defined contribution
pension plans, which is based on various percentages of compensation for
covered employees up to certain limits, was $1,260, $1,458, and $1,547 for 2002,
2001, and 2000, respectively. Assets in employee accounts of the foreign defined
contribution pension plans are invested in various mutual funds. These mutual
funds do not own a significant number of shares of the Company's common stock.
Eligible domestic salaried employees hired or re-hired on or after
January 1, 2002 become participants in a revised domestic defined benefit plan
upon completion of six months of service. All participants in the domestic
salaried defined benefit plan prior to the revision will retain the previous
defined benefit formula for computing benefits with certain modifications for
active employees. All employees who become participants subsequent to January 1,
2002 will be credited with contribution credits that are the equivalent of six
percent of their earnings. Contribution credits will be converted into units to
account for each participant's benefits, although these units will not
constitute an actual allocation of assets. Such participants in the revised
domestic defined benefit plan will receive a variable annuity benefit upon
retirement or a distribution upon termination (if vested). The variable
annuity benefit is subject to the hypothetical returns achieved on each
participant's allocation of units from investments in various mutual funds as
directed by the participant. Contribution credits to the revised domestic
defined benefit plan will be funded through
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
the existing excess of plan assets over benefit obligations.
At December 31, 2002, domestic defined benefit pension plan assets
included 1,700,200 shares of the Company's common stock with a market value of
$48,031, which was 10.0 percent of total plan assets. Dividends received during
the year on Company common stock was $1,069.
At December 31, 2002, one of the Company's foreign defined benefit
pension plans was under-funded by $8,294 with a projected benefit obligation of
$28,464, an accumulated benefit obligation of $22,913, and a fair value of
plan assets of $14,619. In addition, the Company has an unfunded foreign defined
benefit pension plan obligation of $417.
A summary of the obligation and assets of the defined benefit pension
plans and the obligation for postretirement health care and life insurance
benefits is as follows:
Defined Benefit Pension Plans Other Postretirement Benefits
---------------------------------------- --------------------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
BENEFIT OBLIGATION:
BALANCE AT BEGINNING OF YEAR .............. $ 203,848 $ 194,879 $ 170,632 $ 267,118 $ 247,936 $ 225,686
SERVICE COST .............................. 5,182 2,952 2,990 3,898 3,753 3,821
INTEREST COST ............................. 13,399 13,092 12,504 16,567 16,301 15,649
ACTUARIAL LOSS (GAIN) ..................... 10,369 5,339 8,957 (3,806) 14,012 15,930
PLAN AMENDMENTS ........................... 1,206 875 738 (6,778)
PLAN MERGERS .............................. 9,446
OTHER - NET ............................... 235 202 208
BENEFITS PAID ............................. (13,439) (13,491) (10,596) (15,192) (14,884) (13,150)
---------- ---------- ---------- ----------- --------- ---------
BALANCE AT END OF YEAR .................... 220,800 203,848 194,879 261,807 267,118 247,936
PLAN ASSETS:
BALANCE AT BEGINNING OF YEAR .............. 537,992 554,454 523,453
ACTUAL RETURN ON PLAN ASSETS .............. (42,573) (1,551) 25,534
PLAN MERGERS .............................. 17,017
OTHER - NET ............................... (2,138) (1,420) (954)
BENEFITS PAID ............................. (13,439) (13,491) (10,596)
---------- ---------- ----------
BALANCE AT END OF YEAR .................... 479,842 537,992 554,454
EXCESS (DEFICIENCY) OF PLAN ASSETS
OVER BENEFIT OBLIGATION:
BALANCE AT END OF YEAR .................... 259,042 334,144 359,575 (261,807) (267,118) (247,936)
UNRECOGNIZED ACTUARIAL LOSS ............... 156,058 56,734 2,080 45,706 51,134 37,752
UNRECOGNIZED PRIOR SERVICE COST (CREDIT) .. 2,684 2,345 2,320 (12,848) (8,879) (11,689)
---------- ---------- ---------- ----------- --------- ---------
EXCESS (DEFICIENCY) RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS ............... $ 417,784 $ 393,223 $ 363,975 $ (228,949) $(224,863) $(221,873)
========== ========== ========== =========== ========= =========
EXCESS (DEFICIENCY) RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS CONSISTS OF:
PREPAID BENEFIT COST ...................... $ 414,589 $ 393,587 $ 364,351
LONG-TERM ACCRUED BENEFIT LIABILITY........ (7,391) $ (213,749) $(209,963) $(208,673)
AMOUNT INCLUDED IN CURRENT LIABILITIES .... (1,320) (364) (376) (15,200) (14,900) (13,200)
CUMULATIVE OTHER
COMPREHENSIVE LOSS ...................... 11,906
---------- ---------- ---------- ----------- --------- ---------
$ 417,784 $ 393,223 $ 363,975 $ (228,949) $(224,863) $(221,873)
========== ========== ========== =========== ========= =========
WEIGHTED-AVERAGE ASSUMPTIONS AS
OF DECEMBER 31:
DISCOUNT RATE ............................. 6.55% 6.75% 7.00% 6.55% 6.75% 7.00%
EXPECTED LONG-TERM RATE
OF RETURN ON ASSETS ..................... 8.00% 8.50% 8.50%
RATE OF COMPENSATION INCREASE ............. 4.00% 4.50% 5.00%
HEALTH CARE COST TREND RATE ............... 8.90% 9.50% 6.00%
NET PERIODIC BENEFIT (CREDIT) COST:
SERVICE AND INTEREST COST ................. $ 18,581 $ 16,044 $ 15,494 $ 20,465 $ 20,054 $ 19,470
NET AMORTIZATION AND DEFERRAL ............. 3,280 943 (490) (1,544) (2,149) (2,814)
EXPECTED RETURN ON ASSETS ................. (44,874) (46,353) (44,633)
---------- ---------- ---------- ----------- --------- ---------
NET PERIODIC BENEFIT (CREDIT) COST ........ $ (23,013) $ (29,366) $ (29,629) $ 18,921 $ 17,905 $ 16,656
========== ========== ========== =========== ========= =========
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
NOTE 6--LONG-TERM DEBT
Due Date 2002 2001 2000
---------- -------- ----------- ---------
6.85% Notes ......................................... 2007 $204,202 $ 199,839 $ 199,807
7.375% Debentures ................................... 2027 149,917 149,914 149,910
7.45% Debentures .................................... 2097 149,420 149,414 149,408
5% to 8.5% Promissory Notes ......................... Through 2005 1,643 3,319 8,882
9.875% Debentures ................................... 2016 1,500 1,500 11,500
10.25% Promissory Note partially secured
by land and building .............................. 2003 1,108 1,179
6.5% Notes .......................................... 2002 99,989
-------- ----------- ---------
Long-term debt before SFAS No. 133 adjustments .... 506,682 505,094 620,675
Fair value adjustments to 6.85% Notes in
accordance with SFAS No.133 ....................... (1,577)
-------- ----------- ---------
$506,682 $ 503,517 $ 620,675
======== =========== =========
Maturities of long-term debt are as follows for the next five years:
$15,001 in 2003; $625 in 2004; $715 in 2005; zero in 2006, and $200,000 in 2007.
Interest expense on long-term debt was $37,029, $44,582, and $46,569
for 2002, 2001, and 2000, respectively.
Among other restrictions, the Company's Notes, Debentures and
revolving credit agreements contain certain covenants relating to liens, merger
and sale of assets, consolidated net worth and change of control as defined in
the agreements. In the event of default under any one of these arrangements,
acceleration of the maturity of any one or more of these borrowings may result.
The Company is in compliance with all covenants.
During 2001, the Company entered into four separate interest rate swap
contracts and entered into an additional two interest rate swap contracts in
2002. All six interest rate swap contracts were with a bank to hedge against
changes in the fair value of a portion of the Company's 6.85% Notes. Each
interest rate swap contract had a notional amount of $25,000. The Company agreed
to receive interest at a fixed rate of 6.85% and pay interest at six-month
London Inter-bank Offered Rates plus points that vary by contract. These
contracts were designated as perfect fair value hedges of the 6.85% Notes.
Accordingly, changes in the fair value of these contracts were recorded as
assets or liabilities and offset changes in the carrying value of the 6.85%
Notes. During 2002, the Company unwound all of the interest rate swap contracts
and received a net premium of $4,762 from the bank for discontinuation of the
contracts. The net premium increased the carrying amount of the 6.85% Notes and
is being amortized to income over the remaining maturity of the Notes using the
effective interest method. At December 31, 2001, the fair value of the four
separate interest rate swap contracts represented unrealized losses of $1,577
which was included in Other long-term liabilities on the balance sheet. The
weighted-average interest rate on these four swap contracts was 3.98 percent
at December 31, 2001. There were no interest rate swap agreements outstanding at
December 31, 2002 and 2000.
The Company has 364-day and multi-year amended revolving credit
agreements. The current agreements with effective dates of December 27, 2002 and
January 3, 2001 reflect the following: 1) a 364-day agreement aggregating
$110,000 expiring on December 26, 2003; and 2) a multi-year agreement
aggregating $608,000, with $190,400, and $417,600 expiring on January 3, 2005
and 2006, respectively. There were no borrowings outstanding under any
revolving credit agreement during all years presented.
At December 31, 2000, borrowings outstanding under the commercial paper
program totaled $106,854 and are included in Short-term borrowings on the
balance sheet. The weighted-average interest rate related to these borrowings
was 6.6% at December 31, 2000. There were no borrowings outstanding under this
program at December 31, 2002 and 2001, respectively. The Company uses the
revolving credit agreements to satisfy its commercial paper program's dollar
for dollar liquidity requirement. Effective January 3, 2003, the aggregate
maximum borrowing capacity under the revolving credit agreements limits the
commercial paper program to a maximum borrowing capability of $718,000.
On October 6, 1997, the Company issued $50,000 of debt securities
consisting of 5.5% notes, due October 15, 2027, with provisions that the
holders, individually or in the aggregate, may exercise a put option annually
on October 15th that would require the Company to repay the securities. On Octo-
ber 15, 2000 and 1999, individual debt security holders exercised put options
requiring the Company to repay $7,960 and $38,945 of these debt securities,
respectively. The remaining balance of these debt securities of $3,095 is
included in Current portion of longterm debt on the balance sheets at December
31, 2002, 2001 and 2000.
On December 24, 1997, the Company filed a shelf registration with the
Securities and Exchange Commission covering $150,000 of unsecured debt
securities with maturities greater
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
than nine months from the date of issue. The Company may issue these securities
from time to time in one or more series and will offer the securities on terms
determined at the time of sale. There were no borrowings outstanding under this
registration at December 31, 2002, 2001, and 2000.
On August 18, 1998, the Company filed a universal shelf registration
statement with the Securities and Exchange Commission to issue debt
securities, common stock and warrants up to $1,500,000. The registration was
effective September 8, 1998. There were no borrowings outstanding under this
registration at December 31, 2002, 2001, and 2000.
NOTE 7--OTHER LONG-TERM LIABILITIES
Included in Other long-term liabilities at December 31, 2002, 2001, and
2000 were accruals for extended environmental-related activities of $105,110,
$111,003 and $116,594, respectively. The accruals represent the Company's
provisions for its estimated potential long-term liability for
environmental-related activities relating to its past operations and third party
sites. 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). In addition, the Company, together with other parties, has been
designated a potentially responsible party under federal and state environmental
protection laws for the investigation and remediation of environmental con-
tamination and hazardous waste at a number of third-party sites, primarily
Superfund sites. In general, these laws provide that potentially responsible
parties may be held jointly and severally liable for investigation and
remediation costs regardless of fault.
The Company initially provides for the estimated costs of
environmental-related activities relating to its past operations and third-party
sites for which commitments or clean-up plans have been developed and when such
costs can be reasonably estimated. These estimated costs are determined based on
currently available facts regarding each site. If the best estimate of costs
can only be identified as a range and no specific amount within that range can
be determined more likely than any other amount within the range, the minimum of
the range is provided. 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 pro-
cedure 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. Estimated costs
of current investigations and remediation-related activities are included in
Other accruals on the consolidated balance sheets.
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. Also, in the
future the Company, together with other parties, may be designated a potentially
responsible party with respect to additional third-party sites. The Company does
not believe that any additional potential liability ultimately attributed to
the Company in excess of amounts provided for its environmental-related matters,
which may result from the resolution of such matters, will have a material
adverse effect on the Company's financial condition, liquidity, or cash flow.
NOTE 8--CAPITAL STOCK
At December 31, 2002, there were 300,000,000 shares of common stock and
30,000,000 shares of serial preferred stock authorized for issuance. Of the
authorized serial preferred stock, 3,000,000 shares have been designated as
cumulative redeemable serial preferred stock which may be issued pursuant to
the Company's shareholders' rights plan if the Company becomes the target of
coercive and unfair takeover tactics and 1,000,000 shares have been designated
as convertible participating serial preferred stock (see Note 9). An aggregate
of 16,157,277 shares, 17,964,052 shares, and 19,184,038 shares of common stock
at December 31, 2002, 2001 and 2000, respectively, were reserved for future
grants of restricted stock and the exercise and future grants of stock options.
Common shares outstanding shown in the following table include 475,628 shares,
507,943 shares, and 432,518 shares of common stock held in a revocable trust at
December 31, 2002, 2001, and 2000, respectively. The revocable
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
trust is used to accumulate assets for the purpose of funding the ultimate
benefit obligation of certain non-qualified plans. Transactions between the
Company and the trust are accounted for in accordance with EITF No. 97-14, which
requires the assets held by the trust be consolidated with the Company's
accounts.
Common shares Common shares
in Treasury Outstanding
----------- -----------
Balance at January 1, 2000 ..................................... 40,645,546 165,663,601
Shares tendered as payment for options exercised ............. 8,757 (8,757)
Shares issued for exercise of stock options .................. 533,991
Shares transferred to revocable trust ........................ (165,000) 165,000
Net shares issued under restricted stock grants .............. 4,500
Treasury stock purchased ..................................... 6,800,000 (6,800,000)
---------- -----------
Balance at December 31, 2000 ................................... 47,289,303 159,558,335
Shares tendered as payment for options exercised ............. 19,995 (19,995)
Shares issued for exercise of stock options .................. 1,031,486
Shares tendered in connection with restricted stock grants ... 42,970 (42,970)
Net shares issued under restricted stock grants .............. 151,500
Treasury stock purchased ..................................... 6,700,000 (6,700,000)
---------- -----------
BALANCE AT DECEMBER 31, 2001 ................................... 54,052,268 153,978,356
SHARES TENDERED AS PAYMENT FOR OPTIONS EXERCISED ............. 173,044 (173,044)
SHARES ISSUED FOR EXERCISE OF STOCK OPTIONS .................. 1,791,675
NET SHARES ISSUED UNDER RESTRICTED STOCK GRANTS .............. 13,500
TREASURY STOCK PURCHASED ..................................... 6,700,000 (6,700,000)
---------- -----------
BALANCE AT DECEMBER 31, 2002 ................................... 60,925,312 148,910,487
========== ===========
NOTE 9--STOCK PURCHASE PLAN AND PREFERRED STOCK
As of December 31, 2002, 12,744 employees contributed to the Company's
Employee Stock Purchase and Savings Plan (ESOP), a voluntary defined
contribution plan available to all eligible salaried employees. Effective
January 1, 2002, the ESOP was amended to allow participants to contribute, on a
pre-tax basis only, the lesser of 20 percent of their annual compensation or
the maximum dollar amount allowed under the Internal Revenue Code. Such
participant contributions may be invested in a variety of mutual funds or a
Company common stock fund. The ESOP was further amended to permit
participants to diversify employee contributions previously allocated to the
Company common stock fund into a variety of mutual funds in twenty percent
(20%) increments over a five-year period. The Company matches current
contributions up to 6 percent of annual compensation. Company match
contributions are required to be invested in the Company common stock fund.
Prior to January 1, 2002, participants in the ESOP were allowed to contribute
up to 11 percent of their annual compensation, up to 7 percent of which could
be made on a pre-tax basis, to purchase common shares of the Company or invest
in a government fund. Employees making contributions to purchase Company
common stock received a matching contribution from the Company of 50 percent of
the employee's pre and post tax contributions, up to a maximum of 7 percent of
their annual compensation, plus an additional variable match based on the
Company's return on equity (54 percent for the year ended 2001). See Note 5 for
information related to changes in other annual contributions from the Company
effective January 1, 2002.
The Company made contributions to the ESOP on behalf of participating
employees, representing amounts authorized by employees to be withheld from
their earnings on a pre-tax basis, of $38,921, $27,374, and $26,636 in 2002,
2001, and 2000, respectively. The Company's matching contributions to the ESOP
charged to operations were $27,916, $33,744, and $28,070 for 2002, 2001, and
2000, respectively.
At December 31, 2002, there were 23,796,694 shares of the Company's
common stock being held by the ESOP, representing 16.0 percent of the total
number of voting shares outstanding. Shares of Company common stock credited to
each member's account under the ESOP are voted by the trustee under instructions
from each individual plan member. Shares for which no instructions are received,
along with any unallocated shares held in the ESOP, are voted by the trustee in
the same proportion as those for which instructions are received.
On April 18, 2001, the Company issued 250,000 shares of convertible
participating serial preferred stock, no par value with cumulative quarterly
dividends of ten dollars per share, for $250,000 to the ESOP. The ESOP financed
the acquisition of the preferred stock by borrowing $250,000 from the Company
at the rate of 8 percent per annum. This borrowing is payable over ten years
in equal quarterly installments.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
Each share of preferred stock is entitled to one vote upon all matters presented
to the Company's shareholders and generally vote with the common stock
together as one class. The preferred stock is held in an unallocated account by
the ESOP until compensation expense related to the Company's contributions is
earned at which time contributions will be credited to the members' accounts. At
December 31, 2002 and 2001, there were no allocated or committed-to-be-released
preferred shares outstanding. The value of the preferred stock is redeemable and
convertible into the Company's common stock at the option of the ESOP based on
the relative fair value of the preferred and common stock at time of conversion.
The ESOP redeemed 126,499 shares and 81,695 shares of preferred stock for cash
in 2002 and 2001, respectively.
NOTE 10--STOCK PLAN
The Company's 2003 Stock Plan permits the granting of stock options,
restricted stock and stock appreciation rights to eligible employees. The 2003
Stock Plan was adopted during 2002 to succeed the Company's 1994 Stock Plan
that expires February 16, 2003 which succeeded the 1984 Stock Plan that expired
February 15, 1994. Although no further grants may be made under either the 1994
or 1984 Stock Plan, all rights granted under such plans remain. The number of
shares which may be awarded under the 2003 Stock Plan will not exceed 8,500,000
shares, plus the shares authorized but not granted under the 1994 Stock Plan as
of the expiration thereof. No stock appreciation rights have been granted.
Grants of restricted stock, which generally require four years of
continuous employment from the date of grant before vesting and receiving the
shares without restriction, have been awarded to certain officers and key
employees under the 1994 Stock Plan. The number of shares to be received without
restriction is based on the Company's performance relative to a peer group of
companies. No shares of restricted stock vested during 2002 or 2000. During
2001, 116,000 shares of restricted stock vested and were delivered to officers
and employees. There were 401,500 shares of restricted stock outstanding at
December 31, 2002. Unamortized deferred compensation expense with respect to the
restricted stock grants amounted to $3,267, $5,691, and $3,036 at December 31,
2002, 2001, and 2000, respectively, and is being amortized over the four-year
vesting period. Deferred compensation expense aggregated $3,097, $1,130, and
$3,180 in 2002, 2001, and 2000, respectively.
A summary of restricted stock granted during 2002, 2001, and 2000 is as
follows:
2002 2001 2000
---- ---- ----
SHARES GRANTED....................... 13,500 188,500 4,500
WEIGHTED-AVERAGE FAIR VALUE
OF RESTRICTED SHARES GRANTED
DURING YEAR........................ $ 26.22 $ 25.72 $19.63
Grants of non-qualified and incentive stock options have been awarded
to certain officers and key employees under the plans at prices not less than
fair market value of the shares, as defined by the plans, at the date of grant.
The options generally become exercisable to the extent of one-third of the
optioned shares for each full year following the date of grant and generally
expire ten years after the date of grant. The number of options and period of
service required before the options may be exercised are determined by the Board
of Directors at the time of grant. No options may be exercised more than ten
years from the date of the grant.
A summary of the Company's non-qualified and incentive stock option
activity and related information for the years ended December 31, 2002, 2001 and
2000 is shown in the following table:
2002 2001 2000
------------------------- ------------------------- -------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
OPTIONED EXERCISE Optioned Exercise Optioned Exercise
SHARES PRICE Shares Price Shares Price
----------- --------- ------------ --------- ------------- ---------
OUTSTANDING BEGINNING OF YEAR ......... 14,129,176 $ 23.19 12,588,310 $ 22.47 10,724,653 $ 22.78
GRANTED ............................... 3,064,900 25.47 3,070,700 24.29 2,820,900 19.75
EXERCISED ............................. (1,791,675) 20.94 (1,031,486) 17.26 (533,991) 12.02
CANCELED .............................. (224,179) 24.03 (498,348) 24.10 (423,252) 24.62
----------- -------- ------------ -------- ------------ --------
OUTSTANDING END OF YEAR ............... 15,178,222 $ 23.90 14,129,176 $ 23.19 12,588,310 $ 22.47
=========== ======== ============ ======== ============ ========
EXERCISABLE AT END OF YEAR ............ 9,258,221 $ 23.69 7,681,476 $ 23.75 5,923,537 $ 23.31
WEIGHTED-AVERAGE FAIR VALUE OF
OPTIONS GRANTED DURING YEAR .......... $ 5.48 $ 5.36 $ 4.72
RESERVED FOR FUTURE GRANTS ............ 979,055 3,834,876 6,595,728
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
Exercise prices for optioned shares outstanding as of December 31, 2002
ranged from $15.38 to $35.34. A summary of these options by range of exercise
prices is as follows:
Outstanding Exercisable
------------------------------------------- -----------------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Range of Optioned Exercise Contractual Optioned Exercise
Exercise Prices Shares Price Life (years) Shares Price
- ---------------------- ---------- ---------- ------------ --------- ----------
< $19.00 ............. 299,886 $ 16.76 2.64 270,748 $ 16.63
$19.00 - $22.99 .... 4,814,976 20.13 6.60 3,888,748 20.17
$23.00 - $28.99 .... 8,521,668 25.27 6.16 3,590,683 25.62
> $28.99 ............. 1,541,692 29.46 5.24 1,508,042 29.43
---------- --------- ---- --------- --------
15,178,222 $ 23.90 6.04 9,258,221 $ 23.69
========== ========= ==== ========= ========
The Company's 1997 Stock Plan for Nonemployee Directors provides for
the granting of stock options and restricted stock to members of the Board of
Directors who are not employees of the Company. There were 400,000 shares
authorized as available for grant under the 1997 Stock Plan. The Board of
Directors authorizes grants made pursuant to the 1997 Stock Plan.
The Company has elected to follow APBO No. 25 and related
interpretations in accounting for its employee stock options. Under APBO No. 25,
because the exercise price of the Company's employee stock options is not less
than the market price of the shares at the date of grant, no compensation
expense is recognized in the financial statements. See Note 1 for proforma
information and the alternative fair value accounting provided for under SFAS
No. 123.
NOTE 11--OTHER EXPENSE - NET
Included in the Other expense - net caption of the Statements of
Consolidated Income are the following:
2002 2001 2000
-------- -------- --------
DIVIDEND AND ROYALTY INCOME.......... $(3,341) $(3,922) $(4,144)
NET EXPENSE (INCOME) OF
FINANCING AND INVESTING
ACTIVITIES ......................... 7,284 (1,796) 10,926
PROVISIONS FOR ENVIRONMENTAL
MATTERS - NET (SEE NOTE 7) ......... 8,609 5,609
DISPOSITION AND TERMINATION
OF OPERATIONS EXPENSE -
NET (SEE NOTE 4) ................... 168 7,304 6,968
FOREIGN CURRENCY EXCHANGE
LOSSES - NET ....................... 8,435 2,277 2,115
OTHER INCOME ........................ (4,154) (3,478) (8,466)
OTHER EXPENSE ....................... 4,470 8,791 7,354
------- ------- -------
$21,471 $14,785 $14,753
======= ======= =======
The net expense (income) of financing and investing activities
includes fees related to debt issuance and financing services, the net realized
gains or losses from disposing of fixed assets, the net gain or loss associated
with the investment in certain long-term asset funds and the net pre-tax expense
associated with the Company's investment in broad-based corporate owned life
insurance.
Foreign currency exchange losses - net include foreign currency
transaction gains and losses and realized and unrealized gains and losses from
foreign currency option and forward contracts. All foreign currency option and
forward contracts outstanding at December 31, 2002 have maturity dates of less
than twelve months and are undesignated hedges with changes in fair value being
recognized in earnings in accordance with SFAS No. 133. These derivative
instrument values are included in either Other current assets or Other
accruals on the balance sheet and were immaterial at December 31, 2002 and 2001.
There were no foreign currency option and forward contracts outstanding at
December 31, 2000.
Other income includes items of revenue and other gains that are
unrelated to the primary business purpose of the Company. Each individual item
of other income is immaterial; no single category of items exceeded $1,000.
Other expense includes expense items and losses that are unrelated to
revenues associated with the primary business purpose of the Company. Each
individual item of other expense is immaterial. The only components of other
expense that exceed $1,000 relate to joint venture losses of $1,500 and $2,700
in 2001 and 2000, respectively, and a loss of $3,500 associated with long-term
non-trade receivables in 2001.
NOTE 12--INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes using the
enacted tax rates and
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
laws that are currently in effect. Significant components of the Company's
deferred tax assets and liabilities as of December 31, 2002, 2001 and 2000 are
as follows:
2002 2001 2000
---- ---- ----
DEFERRED TAX ASSETS:
DISPOSITIONS, ENVIRON-
MENTAL AND OTHER
SIMILAR ITEMS ........... $ 48,452 $ 54,856 $ 55,220
OTHER ITEMS (EACH
LESS THAN 5 PERCENT
OF TOTAL ASSETS) ........ 138,515 107,726 98,107
-------- -------- --------
TOTAL DEFERRED
TAX ASSETS ............ $186,967 $162,582 $153,327
======== ======== ========
DEFERRED TAX LIABILITIES:
DEPRECIATION AND
AMORTIZATION ............ $ 29,082 $ 49,164 $ 35,691
DEFERRED EMPLOYEE
BENEFIT ITEMS ........... 63,165 58,535 50,333
-------- -------- --------
TOTAL DEFERRED
TAX LIABILITIES ....... $ 92,247 $107,699 $ 86,024
======== ======== ========
Significant components of the provisions for income taxes are as
follows:
2002 2001 2000
---- ---- ----
CURRENT:
FEDERAL .................. $138,541 $118,882 $125,393
FOREIGN .................. 9,549 9,893 6,211
STATE AND LOCAL .......... 16,410 16,839 22,662
-------- -------- --------
TOTAL CURRENT .......... 164,500 145,614 154,266
DEFERRED:
FEDERAL .................. 20,770 15,374 (27,386)
FOREIGN .................. (1,498) (2,458) 6,213
STATE AND LOCAL .......... 2,691 2,761 (5,713)
-------- -------- --------
TOTAL DEFERRED ......... 21,963 15,677 (26,886)
-------- -------- --------
TOTAL PROVISIONS FOR
INCOME TAXES ............. $186,463 $161,291 $127,380
======== ======== ========
Significant components of income before income taxes and cumulative
effect of change in accounting principle as used for income tax purposes, are as
follows:
2002 2001 2000
---- ---- ----
DOMESTIC ................... $458,535 $393,200 $ 90,412
FOREIGN .................... 38,629 31,249 52,994
-------- -------- --------
$497,164 $424,449 $143,406
======== ======== ========
A reconciliation of the statutory federal income tax rate to the
effective tax rate follows:
2002 2001 2000
---- ---- ----
STATUTORY FEDERAL INCOME
TAX RATE ................. 35.0% 35.0% 35.0%
EFFECT OF:
STATE AND LOCAL
INCOME TAXES ............ 2.5 3.0 7.7
INVESTMENT VEHICLES ...... 0.8 1.3 (7.3)
IMPAIRMENT OF
OTHER ASSETS ............ 51.0
OTHER - NET .............. (0.8) (1.3) 2.5
---- ---- ----
EFFECTIVE TAX RATE ......... 37.5% 38.0% 88.9%
==== ==== ====
A portion of the transitional impairment charge recorded in the first
quarter of 2002 (see Note 2) related to goodwill that was not deductible for tax
purposes. This is not reflected in the statutory federal income tax rate
reconciliation above because the transitional impairment charge was recorded as
a cumulative effect of change in accounting principle. The remaining portion of
the impairment charge created federal, state, foreign and local deferred tax
benefits in the amount of $64,476 due to the temporary differences between the
carrying amounts for financial statement purposes and amounts used for tax
purposes.
A portion of the impairment of other assets charge in 2000 related to
goodwill was not deductible for tax purposes. The effect is reflected separately
in the statutory federal income tax reconciliation above. The state and local
tax effect is not shown separately. The remaining portion of the impairment
charge created federal, state and local deferred tax benefits due to the
significant temporary differences between the carrying amounts for financial
statement purposes and amounts used for tax purposes.
The provisions for income taxes include estimated taxes payable on that
portion of retained earnings of foreign subsidiaries expected to be received by
the Company. A provision was not made with respect to $266 of retained earnings
at December 31, 2002 that have been invested by foreign subsidiaries. It is not
practicable to estimate the amount of unrecognized deferred tax liability for
undistributed foreign earnings.
Netted against the Company's other deferred tax assets are valuation
reserves of $14,459, $10,200 and $9,082 at December 31, 2002, 2001, and 2000,
respectively, resulting from the uncertainty as to the realization of the tax
benefits from certain foreign net operating losses and certain other foreign
assets.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
NOTE 13--NET INCOME PER SHARE
2002 2001 2000
------------- ------------ ------------
Income before cumulative effect of change in accounting principle ..... $ 310,701 $ 263,158 $ 16,026
Cumulative effect of change in accounting principle -
net of income taxes of $64,476 ...................................... (183,136)
------------- ------------ ------------
Net income ............................................................ $ 127,565 $ 263,158 $ 16,026
============= ============ ============
BASIC
Average common shares outstanding ................................... 150,437,900 155,557,085 161,911,789
============= ============ ============
Income per common share:
Income before cumulative effect of change in accounting principle .. $ 2.07 $ 1.69 $ .10
Cumulative effect of change in accounting principle ................ (1.22)
------------- ------------ ------------
Net income ......................................................... $ .85 $ 1.69 $ .10
============= ============ ============
DILUTED
Average common shares outstanding ................................... 150,437,900 155,557,085 161,911,789
Non-vested restricted stock grants .................................. 318,433 321,500 279,300
Stock options -- treasury stock method .............................. 1,678,977 1,014,950 503,982
------------- ------------ ------------
Average shares assuming dilution .................................... 152,435,310 156,893,535 162,695,071
============= ============ ============
Income per common share:
Income before cumulative effect of change in accounting principle .. $ 2.04 $ 1.68 $ .10
Cumulative effect of change in accounting principle ................ (1.20)
------------- ------------ ------------
Net income ......................................................... $ .84 $ 1.68 $ .10
============= ============ ============
NOTE 14--SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2002
------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER FULL YEAR
------------ ----------- ----------- ----------- -----------
NET SALES....................................... $ 1,149,178 $ 1,453,198 $ 1,426,266 $1,156,146 $ 5,184,788
GROSS PROFIT.................................... $ 492,104 $ 651,810 $ 645,293 $ 549,380 $ 2,338,587
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE............. $ 34,785 $ 107,525 $ 111,333 $ 57,058 $ 310,701
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - NET OF INCOME TAXES OF $64,476.... (183,136) (183,136)
------------ ----------- ----------- ---------- -----------
NET INCOME (LOSS)............................... $ (148,351) $ 107,525 $ 111,333 $ 57,058 $ 127,565
============ =========== =========== ========== ===========
INCOME PER SHARE:
BASIC:
BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.............. $ .23 $ .71 $ .74 $ .38 $ 2.07
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - NET OF INCOME TAXES.. (1.21) (1.22)
------------ ----------- ----------- ---------- -----------
NET INCOME (LOSS)............................ $ (.98) $ .71 $ .74 $ .38 $ .85
============ =========== =========== ========== ===========
DILUTED:
BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.............. $ .23 $ .70 $ .73 $ .38 $ 2.04
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - NET OF INCOME TAXES.. (1.21) (1.20)
------------ ----------- ----------- ---------- -----------
NET INCOME (LOSS)............................ $ (.98) $ .70 $ .73 $ .38 $ .84
============ =========== =========== ========== ===========
Net income (loss) in the fourth quarter was increased by $1,829 ($.01
per share) due to certain year-end adjustments. Gross profit increased by
$11,733 primarily as a result of physical inventory adjustments of $10,390.
Selling, general and administrative expenses decreased $667 due to various
year-end adjustments. Other expense-net increased $9,586 due primarily to the
provisions for environmental matters of $8,609.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
2001
------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
------------ ----------- ----------- ----------- -----------
Net sales............................... $ 1,158,370 $ 1,407,514 $ 1,366,768 $ 1,133,353 $ 5,066,005
Gross profit............................ $ 489,023 $ 608,537 $ 601,039 $ 521,030 $ 2,219,629
Net income.............................. $ 36,924 $ 90,480 $ 90,321 $ 45,433 $ 263,158
Net income per share - basic............ $ .23 $ .58 $ .58 $ .30 $ 1.69
Net income per share - diluted.......... $ .23 $ .58 $ .58 $ .29 $ 1.68
Net income in the fourth quarter was decreased by $2,092 ($.01 per
share) due to certain year-end adjustments. Gross profit increased by $18 as a
result of physical inventory adjustments of $4,418 offset by fourth quarter
provisions for qualified exit costs associated with certain facility closings of
$4,400. Selling, general and administrative expenses decreased $11,735 due
primarily to the reduction of $10,368 in certain annual selling expenses related
to lower sales. Other expense-net increased $14,972 due primarily to the
provisions for environmental matters of $5,609 and to charges for the impairment
of long-lived assets held for disposal and adjustments to prior provisions for
qualified exit costs of $7,304.
NOTE 15--OPERATING LEASES
The Company leases certain stores, warehouses, manufacturing
facilities, office space and equipment. Renewal options are available on the
majority of leases and, under certain conditions, options exist to purchase
certain properties. Rental expense for operating leases was $151,555, $141,072,
and $130,552 for 2002, 2001, and 2000, respectively. Certain store leases
require the payment of contingent rentals based on sales in excess of specified
minimums. Contingent rentals included in rent expense were $15,752, $13,479, and
$12,423 in 2002, 2001, and 2000, respectively. Rental income, as lessor, from
real estate leasing activities and sublease rental income for all years
presented was not significant.
Following is a schedule, by year and in the aggregate, of future
minimum lease payments under noncancellable operating leases having initial or
remaining terms in excess of one year at December 31, 2002:
2003.............................................................. $ 109,518
2004.............................................................. 93,424
2005.............................................................. 75,580
2006.............................................................. 56,473
2007.............................................................. 36,648
Later years....................................................... 72,194
---------
Total minimum lease payments...................................... $ 443,837
=========
NOTE 16 - REPORTABLE SEGMENT INFORMATION
The Company reports its segment information in five reportable segments
- - the Paint Stores, Consumer, Automotive Finishes, International Coatings
(collectively, the "Operating Segments") and Administrative Segments - in
accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 requires an enterprise to report segment
information in the same way that management internally organizes its business
for assessing performance and making decisions regarding allocation of
resources. See pages 4, 5 and 10 through 17 of this report for descriptive
information about the Operating Segments.
The Company's chief operating decision maker has been identified as the
Chief Executive Officer because he has final authority over performance
assessment and resource allocation decisions. Because of the global, diverse
operations of the Company, the chief operating decision maker regularly receives
discrete financial information about each reportable segment as well as a
significant amount of additional financial information about certain aggregated
divisions, business units and subsidiaries of the Company. The chief operating
decision maker uses all such financial information for performance assessment
and resource allocation decisions. Factors considered in determining the five
reportable segments of the Company include the nature of the business
activities, existence of managers responsible for the operating and
administrative activities and information presented to the Board of Directors.
The chief operating decision maker evaluates the performance of the Operating
Segments and allocates resources based on profit or loss and cash generated from
operations before income taxes, excluding corporate expenses and financing gains
and losses. The accounting policies of the reportable segments are the same as
those described in Note 1.
The Paint Stores Segment consists of 2,643 company-operated specialty
paint stores in the United States, Canada, Virgin Islands, Puerto Rico and
Mexico. Each division of the Segment is engaged in the related business activity
of selling the Company's own manufactured coatings and related products to
end-use customers. During 2002, this Segment opened 46 net new stores, acquired
24, remodeled 16 and relocated 32. The net new and acquired stores consisted of
62 stores in the United States, 2 in Canada, 2 in Puerto Rico, and 4 in Mexico.
In 2001, there were 85 net new stores opened or acquired (83 in the United
States). In 2000, there were 92 net new stores opened or acquired (79 in the
United States). This Segment manufactures original equipment manufacturer (OEM)
product finishes sold through certain shared or dedicated paint stores and by
direct outside sales representatives. In addition to stores, operations in
Mexico include outside selling functions to dealers and other distributors.
The Paint Stores Segment is the exclusive North American marketer and
seller of Sherwin-Williams(R) branded architectural coatings, industrial and
marine products, OEM product finishes and related items produced by its product
finishes manufacturing and by the Consumer Segment including that
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED)
Segment's Mexico manufacturing facility. The loss of any single customer would
not have a material adverse effect on the business of this Segment. A map on
page 20 of this report shows the number of paint stores and their geographical
location.
The Consumer Segment develops, manufactures and distributes a variety
of paint, coatings and related products to third party customers and the Paint
Stores Segment. Approximately 46 percent of the total sales of the Consumer
Segment in 2002, including inter-segment transfers, represented products sold
through the Paint Stores Segment. Sales and marketing of certain control-branded
and private labeled products is performed by a direct sales staff. The products
distributed through third party customers are intended for resale to the
ultimate end-user of the product. The Consumer Segment has sales to certain
customers that, individually, may be a significant portion of the sales of the
Segment. However, the loss of any single customer would not have a material
adverse effect on the overall profitability of the Segment. This Segment incurs
most of the Company's capital expenditures related to ongoing environmental
compliance measures.
The Automotive Finishes Segment develops, manufactures and distributes
a variety of motor vehicle finish, refinish and touch-up products primarily
throughout North and South America, the Caribbean Islands, and Italy. This
Segment also licenses certain technology and trade names worldwide. Sher-
win-Williams(R) branded automotive finish and refinish products are distributed
throughout North America solely through this Segment's network of 128
company-operated automotive branches in the United States and 16 in Canada.
Additional automotive branches in Jamaica (14) and Chile (21) complete this
Segment's worldwide network. At December 31, 2002, this Segment included
consolidated operations in 8 foreign countries and realized income from
licensing agreements in 14 foreign countries. A map on page 20 of this report
shows the number of branches and their geographical location.
The International Coatings Segment develops, licenses, manufactures and
distributes a variety of paint, coatings and related products worldwide. The
majority of the sales from licensees and subsidiaries occur in South America,
the Segment's most important international market. This Segment sells its
products through 34 company-operated specialty paint stores in Chile, 23 in
Brazil, and 1 in Uruguay and by outside selling functions to dealers and other
distributors. At December 31, 2002, this Segment included consolidated
operations in 7 foreign countries, 4 foreign joint ventures and income from
licensing agreements in 19 foreign countries.
The Administrative Segment includes the administrative expenses of the
Company's corporate headquarters sites. This Segment also includes interest
expense which is unrelated to retail real estate leasing activities, investment
income, certain foreign currency transaction losses related to dollar-denomi-
nated debt and foreign currency option and forward contracts, certain expenses
related to closed facilities and environmental-related matters, and other
expenses which are not directly associated with any Operating Segment.
Administrative expenses do not include any significant foreign operations. Also
included in the Administrative Segment is a real estate management unit that is
responsible for the ownership, management, leasing of non-retail properties held
primarily for use by the Company, including the Company's headquarters site, and
disposal of idle facilities. Sales of the Administrative Segment represent
external leasing revenue of excess headquarters space or leasing of facilities
no longer used by the Company in its operations. Gains and losses from the sale
of property are not a significant operating factor in determining the
performance of this Segment.
Net external sales of all consolidated foreign subsidiaries were $488
million, $504 million, and $540 million for 2002, 2001, and 2000, respectively.
Operating profits of all consolidated foreign subsidiaries were $18 million, $17
million, and $32 million for 2002, 2001, and 2000, respectively. Domestic
operations account for the remaining net sales and operating profits. Long-lived
assets consist of net property, plant and equipment, goodwill, and intangibles.
Long-lived assets of consolidated foreign subsidiaries totaled $98 million, $211
million, and $245 million at December 31, 2002, 2001, and 2000, respectively.
The consolidated total of long-lived assets for the Company was $1,403 million,
$1,650 million, and $1,738 million at December 31, 2002, 2001, and 2000,
respectively. During 2002, the reduction in the carrying value of long-lived
assets of consolidated foreign subsidiaries resulted primarily from a
devaluation of the Argentine peso, other foreign currency translation rate
declines and an impairment of long-lived assets of the Argentina subsidiary. No
single geographic area outside the United States was significant relative to
consolidated net external sales or operating profits. Export sales and sales to
any individual customer were each less than 10 percent of consolidated sales to
unaffiliated customers during all years presented.
In the reportable segment financial information that follows, operating
profit is total revenue, including inter-segment transfers, less operating costs
and expenses. Identifiable assets are those directly identified with each
reportable segment. Administrative Segment assets consist primarily of cash and
cash equivalents, investments, deferred pension assets, and headquarters
property, plant and equipment. The operating margin for each Operating Segment
is based upon total external sales and inter-segment transfers. Domestic
inter-segment transfers are accounted for at the approximate fully absorbed
manufactured cost plus distribution costs. International inter-segment transfers
are accounted for at values comparable to normal unaffiliated customer sales.
The reportable segment financial information has been restated for 2001 and 2000
to reflect certain reorganizations between segments effective January 1, 2002.
Reportable segment information for 1999 and 1998 has not been restated due to
the insignificant effect of the reorganizations and the prohibitive cost to
assimilate all the required information.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(MILLIONS OF DOLLARS)
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
NET EXTERNAL SALES
Paint Stores ......................................... $ 3,302 $ 3,185 $ 3,166 $ 3,002 $ 2,822
Consumer ............................................. 1,178 1,142 1,251 1,224 1,282
Automotive Finishes .................................. 454 464 493 471 474
International Coatings ............................... 244 268 294 299 348
Administrative ....................................... 7 7 8 8 8
------- ------- ------- ------- -------
Consolidated totals .................................. $ 5,185 $ 5,066 $ 5,212 $ 5,004 $ 4,934
OPERATING PROFITS
Paint Stores ......................................... $ 399 $ 388 $ 410 $ 377 $ 347
Consumer ............................................. 193 110** (208)* 155 125
Automotive Finishes .................................. 54 51 61 67 65
International Coatings ............................... (6) 5 17 34 24
Administrative:
Interest expense ................................... (40) (54) (60) (59) (70)
Corporate expenses and other ....................... (103) (76) (77) (84) (51)
------- ------- ------- ------- -------
Income before income taxes and cumulative
effect of change in accounting principle ........... $ 497 $ 424** $ 143* $ 490 $ 440
IDENTIFIABLE ASSETS
Paint Stores ......................................... $ 967 $ 954 $ 1,014 $ 930 $ 881
Consumer ............................................. 1,162 1,272 1,347* 1,778 1,823
Automotive Finishes .................................. 274 329 349 279 275
International Coatings ............................... 130 285 315 320 382
Administrative ....................................... 899 788 726 726 690
------- ------- ------- ------- -------
Consolidated totals .................................. $ 3,432 $ 3,628 $ 3,751* $ 4,033 $ 4,051
CAPITAL EXPENDITURES
Paint Stores ......................................... $ 56 $ 36 $ 48 $ 49 $ 57
Consumer ............................................. 37 18 40 40 37
Automotive Finishes .................................. 3 11 29 10 8
International Coatings ............................... 10 7 6 11 15
Administrative ....................................... 21 11 10 24 29
------- ------- ------- ------- -------
Consolidated totals .................................. $ 127 $ 83 $ 133 $ 134 $ 146
DEPRECIATION
Paint Stores ......................................... $ 44 $ 47 $ 45 $ 42 $ 38
Consumer ............................................. 33 31 28 29 30
Automotive Finishes .................................. 9 9 9 8 8
International Coatings ............................... 4 6 6 6 6
Administrative ....................................... 14 16 21 20 16
------- ------- ------- ------- -------
Consolidated totals .................................. $ 104 $ 109 $ 109 $ 105 $ 98
OPERATING SEGMENT MARGINS
Paint Stores ......................................... 12.1% 12.2% 12.9% 12.5% 12.3%
Consumer ............................................. 8.9% 5.3%** (9.5)%* 7.6% 6.1%
Automotive Finishes .................................. 11.1% 10.2% 11.5% 13.3% 12.8%
International Coatings ............................... (2.4)% 1.9% 5.8% 11.4% 6.9%
------- ------- ------- ------- -------
Operating segment totals ............................. 10.3% 9.2%** 4.5%* 10.8 % 9.8%
INTERSEGMENT TRANSFERS
Paint Stores ......................................... $ 1 $ 1 $ 2 $ 8 $ 5
Consumer ............................................. 989 929 929 817 771
Automotive Finishes .................................. 34 34 36 31 34
International Coatings ............................... 1
Administrative ....................................... 4 9 11 12 11
------- ------- ------- ------- -------
Segment totals ....................................... $ 1,029 $ 973 $ 978 $ 868 $ 821
* Includes charge and reduction in asset value of $352 in 2000 for impairment
of other assets. See note 2.
** Includes amortization expense of $21 in the Consumer Segment and $29 in
income before income taxes and cumulative effect of change in accounting
principle for goodwill and intangible assets that are no longer amortized
as of January 1, 2002 in accordance with SFAS No. 142. The effect on any
other segment was not significant. Due to the impairment of other assets in
2000, disclosure of the effect of amortization expense on segment operating
profit prior to 2001 is not meaningful.
58
DIRECTORS, OFFICERS, OPERATING PRESIDENTS
BOARD OF DIRECTORS CORPORATE OFFICERS OPERATING PRESIDENTS
JAMES C. BOLAND, 63* CHRISTOPHER M. CONNOR, 46** THOMAS S. BRUMMETT, 57
Vice Chairman Chairman and Chief Executive Officer President & General Manager
CAVS/Gund Arena Company Eastern Division
JOSEPH M. SCAMINACE, 49** Paint Stores Group
JOHN G. BREEN, 68 President and Chief Operating Officer
Retired, former Chairman, Chief ROBERT J. DAVISSON, 42
Executive Officer and President SEAN P. HENNESSY, 45** President & General Manager
The Sherwin-Williams Company Senior Vice President - Finance and Southeastern Division
Chief Financial Officer Paint Stores Group
DUANE E. COLLINS, 66
Chairman THOMAS E. HOPKINS, 45** TIMOTHY A. KNIGHT, 38
Parker-Hannifin Corporation Senior Vice President - President & General Manager
Human Resources Diversified Brands Division
CHRISTOPHER M. CONNOR, 46
Chairman and Chief Executive Officer CONWAY G. IVY, 61** BLAIR P. LaCOUR, 56
The Sherwin-Williams Company Senior Vice President - Corporate President & General Manager
Planning and Development Mid Western Division
DANIEL E. EVANS, 66 Paint Stores Group
Retired, former Chairman, Chief JOHN L. AULT, 57**
Executive Officer and Secretary Vice President - JOHN G. MORIKIS, 39**
Bob Evans Farms, Inc. Corporate Controller President
Paint Stores Group
SUSAN J. KROPF, 54 CYNTHIA D. BROGAN, 51
President and Chief Operating Officer Vice President and Treasurer RONALD P. NANDOR, 43**
Avon Products, Inc. President & General Manager
MARK J. DVOROZNAK, 44 Automotive Division
ROBERT W. MAHONEY, 66* Vice President - Corporate Audit
Retired, former Chairman, Chief and Loss Prevention STEVEN J. OBERFELD, 50
Executive Officer and President President & General Manager
Diebold, Incorporated JAMES J. SGAMBELLONE, 45 South Western Division
Vice President - Taxes and Paint Stores Group
GARY E. McCULLOUGH, 44* Assistant Secretary
Senior Vice President - Americas HARVEY P. SASS, 45
Wm. Wrigley Jr. Company LOUIS E. STELLATO, 52** President & General Manager
Vice President, General Counsel Wood Care Division
A. MALACHI MIXON, III, 62 and Secretary
Chairman and Chief Executive Officer THOMAS W. SEITZ, 54**
Invacare Corporation RICHARD M. WEAVER, 48 President & General Manager
Vice President - Administration Consumer Division
CURTIS E. MOLL, 63*
Chairman and Chief Executive Officer ROBERT A. TAYLOR, 49
MTD Holdings Inc President & General Manager
Chemical Coatings Division
JOSEPH M. SCAMINACE, 49 Paint Stores Group
President and Chief Operating Officer
The Sherwin-Williams Company ALEXANDER ZALESKY, 43**
President & General Manager
RICHARD K. SMUCKER, 54* International Division
President and Co-Chief Executive
Officer
The J. M. Smucker Company
* Audit Committee Member
** Executive Officer as defined by the Securities Exchange Act of 1934
59
SHAREHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held in the Landmark
Conference Center, 927 Midland Building, 101 Prospect Avenue, N.W., Cleveland,
Ohio on Wednesday, April 23, 2003 at 9:00 A.M., local time.
INVESTOR RELATIONS
Conway G. Ivy
The Sherwin-Williams Company 101 Prospect Avenue, N.W. Cleveland,
Ohio 44115-1075 Internet: www.sherwin.com
FORM 10-K
The Company's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission, is available without charge. To obtain a copy, contact the
Investor Relations Office.
DIVIDEND REINVESTMENT PROGRAM
A dividend reinvestment program is available to shareholders of common
stock. For information, contact our transfer agent, The Bank of New York.
HEADQUARTERS
The Sherwin-Williams Company
101 Prospect Avenue, N.W.
Cleveland, Ohio 44115-1075
(216) 566-2000
INDEPENDENT AUDITORS
Ernst & Young LLP Cleveland, Ohio
STOCK TRADING
Sherwin-Williams Common Stock- Symbol, SHW-is traded on the New York Stock
Exchange.
TRANSFER AGENT & REGISTRAR
The Bank of New York
Shareholder Relations
Department-11E
P.O. Box 11258
Church Street Station
New York, NY 10286
1-866-537-8703
E-mail address:
Shareowner-svcs@Email.bony.com
Internet: www.stockbny.com
COMMON STOCK TRADING STATISTICS
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
High ......................... $ 33.24 $ 28.23 $ 27.625 $ 32.875 $ 37.875
Low .......................... 21.75 19.73 17.125 18.75 19.438
Close December 31 ............ 28.25 27.50 26.313 21.00 29.375
Shareholders of record ....... 9,604 10,281 10,813 11,475 11,929
Shares traded (thousands) .... 193,256 162,219 158,349 161,118 128,942
QUARTERLY STOCK PRICES AND DIVIDENDS
2002 2001
- ----------------------------------------- ---------------------------------------
QUARTER HIGH LOW DIVIDEND Quarter High Low Dividend
- ------- ------- ------- -------- ------- ------- ------- --------
1ST $ 29.65 $ 23.50 $ .15 1st $ 27.25 $ 23.52 $ .145
2ND 33.24 27.65 .15 2nd 26.51 19.73 .145
3RD 30.46 22.70 .15 3rd 23.88 19.95 .145
4TH 29.23 21.75 .15 4th 28.23 21.27 .145
60
THE SHERWIN-WILLIAMS COMPANY
101 PROSPECT AVENUE, N.W.
CLEVELAND, OHIO 44115-1075
WWW.SHERWIN.COM