1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Period Ended March 31, 1996
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________ to ______________________
Commission file number 1-4851
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THE SHERWIN-WILLIAMS COMPANY
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(Exact name of registrant as specified in its charter)
OHIO 34-0526850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Prospect Avenue, N.W., Cleveland, Ohio 44115-1075
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(Address of principal executive offices) (Zip Code)
(216) 566-2000
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $1.00 Par Value -- 85,631,781 shares as of April 30, 1996.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Thousands of dollars, except per share data
Three months ended March 31,
----------------------------
1996 1995
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Net sales $ 857,771 $ 716,796
Costs and expenses:
Cost of goods sold 520,278 424,237
Selling, general and administrative expenses 299,659 264,625
Interest expense 5,436 647
Interest and net investment income (1,597) (2,584)
Other 2,393 135
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826,169 687,060
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Income before income taxes 31,602 29,736
Income taxes 12,009 11,003
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Net income $ 19,593 $ 18,733
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Net income per share $ 0.23 $ 0.22
============================================================================
See notes to condensed consolidated financial statements.
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THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars
March 31, Dec. 31, March 31,
1996 1995 1995
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ASSETS
Current assets
Cash and cash equivalents $ 12,849 $ 249,484 $ 137,995
Short-term investments 0 20,000 0
Accounts receivable, less allowance 479,586 334,304 378,346
Inventories:
Finished goods 496,354 395,817 452,272
Work in process and raw materials 100,680 67,270 66,823
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597,034 463,087 519,095
Other current assets 244,128 172,023 173,217
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Total current assets 1,333,597 1,238,898 1,208,653
Deferred pension assets 237,499 233,574 227,714
Other assets 638,505 212,224 151,960
Property, plant and equipment 1,071,221 987,434 913,318
Less allowances for depreciation and
amortization 548,493 531,077 498,706
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522,728 456,357 414,612
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Total assets $2,732,329 $2,141,053 $2,002,939
============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 315,100 $ 0 $ 0
Accounts payable 326,124 276,863 301,087
Compensation and taxes withheld 70,125 78,148 58,883
Other accruals 319,274 232,035 232,329
Accrued taxes 45,733 31,891 36,577
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Total current liabilities 1,076,356 618,937 628,876
Long-term debt 127,393 24,018 20,752
Postretirement benefits other than pensions 182,757 175,766 173,164
Other long-term liabilities 125,343 110,206 118,549
Shareholders' equity
Common stock - $1.00 par value:
85,599,279, 85,454,813 and 85,119,519
shares outstanding at March 31, 1996,
December 31, 1995 and March 31, 1995,
respectively 101,258 101,110 100,698
Other capital 185,773 182,311 163,303
Retained earnings 1,246,784 1,242,167 1,101,191
Cumulative foreign currency translation
adjustment (20,472) (20,657) (19,794)
Treasury stock, at cost (292,863) (292,805) (283,800)
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Total shareholders' equity 1,220,480 1,212,126 1,061,598
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Total liabilities and shareholders' equity $2,732,329 $2,141,053 $2,002,939
============================================================================================
See notes to condensed consolidated financial statements.
4
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
Three months ended March 31,
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1996 1995
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OPERATIONS
Net income $ 19,593 $ 18,733
Non-cash adjustments:
Depreciation 17,780 15,039
Amortization of intangible assets 6,484 3,475
Increase in deferred pension assets (3,925) (1,752)
Other 1,502 7,523
Change in current assets and liabilities-net (98,228) (99,515)
Other (3,982) (4,249)
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Net operating cash (60,776) (60,746)
INVESTING
Capital expenditures (31,891) (22,097)
Decrease in short-term investments 20,000
Acquisitions of assets (491,983) (9,635)
Decrease in other investments 21,173
Other 138 (9,483)
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Net investing cash (482,563) (41,215)
FINANCING
Increase in short-term borrowings 381,474
Payments of short-term borrowings (96,724)
Increase in long-term debt 105,205 1,000
Payments of long-term debt (70,988) (743)
Payments of cash dividends (14,976) (13,610)
Treasury stock acquired (30) (1,152)
Proceeds from stock options exercised 2,886 3,143
Other (143) (97)
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Net financing cash 306,704 (11,459)
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Net decrease in cash and cash equivalents (236,635) (113,420)
Cash and cash equivalents at beginning of year 249,484 251,415
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Cash and cash equivalents at end of period $ 12,849 $ 137,995
=============================================================================
Taxes paid on income $ 4,110 $ 14,604
Interest paid on debt 4,000 335
See notes to condensed consolidated financial statements.
5
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended March 31, 1996 and 1995
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K for the fiscal year ended
December 31, 1995. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The consolidated results for the three months ended March 31,
1996 are not necessarily indicative of the results to be expected for the
fiscal year ending December 31, 1996.
NOTE B--DIVIDENDS
Dividends paid on common stock during the first quarter of 1996 and 1995 were
$.175 per share and $.16 per share, respectively.
NOTE C--INVESTMENT IN LIFE INSURANCE
The Company invests in broad-based corporate owned life insurance. The cash
surrender value of the policies, net of policy loans, are included in Other
Assets. The net expense associated with such investment is included in Other
Costs and Expenses.
NOTE D--OTHER COSTS AND EXPENSES
Significant items included in other costs and expenses are as follows:
Three months ended
--------------------------
Thousands of dollars MARCH 31, March 31,
1996 1995
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Dividend and royalty income $ 1,159 $ 6,547
Net expense of financing and
investing activities (3,661) (1,704)
Provisions for environmental remediation (3,000)
Provisions for disposition and termination of operations (1,500)
The net expense of financing and investing activities represents the realized
gains or losses associated with disposing of fixed assets, the net gain or loss
associated with the investment of certain long-term asset funds and the net
pre-tax expense associated with the Company's investment in broad-based
corporate owned life insurance.
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NOTE E--ACQUISITION AND MERGER
Effective January 10, 1996, the Company, through its wholly-owned subsidiary,
SWACQ, Inc., acquired all outstanding stock and completed its merger with Pratt
& Lambert United, Inc. (Pratt & Lambert) for a total cash purchase price of
approximately $400,000. The excess purchase price over the fair value of the
net assets acquired is being amortized over 40 years using the straight-line
method.
For financial statement purposes, the acquisition is being accounted for under
the purchase method of accounting. Accordingly, the results of operations of
Pratt & Lambert since the date of acquisition are included in the Company's
statements of consolidated income. The following unaudited pro forma combined
condensed statement of consolidated income for the three months ended March 31,
1995 was prepared in accordance with Accounting Principles Board Opinion No. 16
and assumes the merger had occurred on January 1, 1995. The following pro
forma data reflects adjustments for interest expense, net investment income,
depreciation expense and amortization of intangible assets. In management's
opinion, the pro forma financial information is not indicative of the results
of operations which would have occurred had the acquisition of Pratt & Lambert
taken place on January 1, 1995 or of future results of operations of the
combined companies under the ownership and operation of the Company.
UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENT OF CONSOLIDATED INCOME
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Thousands of dollars, Three months ended
except per share data March 31, 1995
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Net sales $ 803,796
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Net income 13,766
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Net income per share 0.16
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NOTE F--RECLASSIFICATION
Certain amounts in the 1995 financial statements have been reclassified to
conform with the 1996 presentation.
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NOTE G--COMPUTATION OF NET INCOME PER SHARE
Three months ended
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Thousands of dollars, except per share data MARCH 31, March 31,
1996 1995
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Fully Diluted
Average shares outstanding 85,566,564 85,057,930
Options - treasury stock method 664,912 532,865
Assumed conversion of 6.25% convertible
subordinated debentures 15,884
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Average fully diluted shares 86,231,476 85,606,679
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Net income $ 19,593 $ 18,733
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Net income per share $ 0.23 $ 0.22
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Primary
Average shares outstanding 85,566,564 85,057,930
Options - treasury stock method 631,037 527,925
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Average shares and equivalents 86,197,601 85,585,855
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Net income $ 19,593 $ 18,733
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Net income per share $ 0.23 $ 0.22
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All 6.25% Convertible Subordinated Debentures outstanding at January 1,
1995 were converted to common stock during the first quarter of 1995
without incurring further interest.
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NOTE H--BUSINESS SEGMENTS
Net External Sales/Operating Profit
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Three months ended March 31,
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Thousands of dollars 1996 1995
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NET Net
EXTERNAL OPERATING External Operating
SALES PROFIT Sales Profit
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Paint Stores $ 474,697 $ 5,508 $ 444,031 $ 725
Coatings 379,779 43,376 269,338 37,913
Other 3,295 3,339 3,427 2,784
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Segment totals $ 857,771 52,223 $ 716,796 41,422
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Corporate expenses - net (20,621) (11,686)
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Income before income taxes $ 31,602 $ 29,736
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=======================================================================================
Intersegment Transfers
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Three months ended March 31,
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Thousands of dollars 1996 1995
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Coatings $ 178,653 $ 164,147
Other 5,172 4,466
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Segment totals $ 183,825 $ 168,613
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=======================================================================================
Operating profit is total revenue, including realized profit on
intersegment transfers, less operating costs and expenses.
Export sales, sales of foreign subsidiaries, and sales to any individual
customer were each less than 10% of consolidated sales to unaffiliated
customers during all periods presented.
Intersegment transfers are accounted for at values comparable to normal
unaffiliated customer sales.
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ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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Consolidated net sales during the first quarter of 1996 increased 19.7 percent,
to $857,771,000, over the comparable 1995 period. The majority of this
increase was related to the January 1996 acquisition of Pratt & Lambert United,
Inc. (Pratt & Lambert) and other smaller acquisitions which occurred at various
times since the first quarter of 1995. Excluding these acquisitions,
comparable sales increased 2.4 percent. Sales in the Paint Stores Segment
increased 6.9 percent, or 5.3 percent excluding the effects of the
acquisitions. Comparable store sales were up 4.1 percent. Increased gallons
sold to wholesale customers, which includes professional painters, contractors
and industrial and maintenance accounts, combined with improved retail demand
generated the majority of these increases. Incremental sales from acquisitions
caused the Coatings Segment's sales to increase 41.0 percent over the first
quarter of 1995. Excluding these acquisitions, sales declined 2.5 percent
primarily due to weather-related home center sales declines and reduced gallon
sales to many national customers. Revenue generated by real estate operations
in the Other Segment decreased 3.9 percent from 1995.
Consolidated gross profit as a percent of sales declined to 39.3 percent from
40.8 percent in 1995. Excluding the effects of all acquisitions, first quarter
margins exceeded last year. Sales increases in higher-margin product lines led
to improved margins in the Paint Stores Segment. Margins in the Coatings
Segment declined from last year primarily due to low margins of the acquired
businesses which also have lower SG&A percent of sales ratios.
Consolidated selling, general and administrative expenses as a percent of sales
were lower than last year for the first quarter. Excluding all acquisitions,
the SG&A percentage compared to 1995 was slightly higher. The Paint Stores
Segment's containment of selling and administrative expenditures allowed its
SG&A percentage to remain essentially equal to last year. The Coatings
Segment's SG&A expenses as a percent of sales were lower than last year
primarily due to controlled administrative spending at its acquired businesses.
Excluding all acquisitions, the Coatings Segment's SG&A percentage was higher
than last year due primarily to increased merchandising costs related to new
products and new customers.
The increase in interest expense from the first quarter of 1995 is due to
increased long-term debt and the incurrence of short-term borrowings during the
first quarter of 1996. Net investment income decreased from last year due to
reduced average cash balances but was favorably impacted by increased average
yields.
Other costs and expenses in the first quarter were adversely affected by
reduced dividend and royalty income which resulted from the 1995 receipt of a
dividend from an unconsolidated subsidiary and increased net expenses of
financing and investing activities. Non-recurring 1995 provisions for
environmental remediation and for disposition and termination of operations
partially offset these increases to other costs and expenses.
Net income for the first quarter of 1996 increased to $19,593,000, or $.23 per
share, from $18,733,000, or $.22 per share, in 1995. Excluding the results of
operations of all acquisitions and the related costs of financing the
acquisitions from the 1996 first quarter results, net income increased to
$20,420,000, or $.24 per share.
In accordance with the consensus guidance in Emerging Issues Task Force No.
87-11, "Allocation of Purchase Price to Assets to be Sold", all first quarter
1996 results of operations exclude the results of operations of certain Pratt &
Lambert subsidiaries which are currently being offered for sale. These
subsidiaries include all non-wood products' operations of Pierce & Stevens
Corp., a manufacturer of specialty chemicals, and Miracle Adhesives
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Corporation, a manufacturer of adhesives for the construction industry. The
total operating profit related to these subsidiaries, approximately $558,000,
has been excluded from the statement of consolidated income for the three
months ended March 31, 1996. The Company has considered proceeds from the
sales of these subsidiaries in its allocation of purchase price pursuant to APB
Opinion No. 16, and expects ultimate sales to occur within one year from the
original acquisition date.
FINANCIAL POSITION
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During the first quarter, cash and cash equivalents decreased $236.6 million,
long-term debt increased $105.2 million and short-term borrowings increased
$381.5 million. These funds were used for acquisitions of assets of $492.0
million, payments of short-term borrowings and long-term debt of $167.7
million, capital expenditures of $31.9 million, cash dividends of $15.0 million
and normal operating needs for seasonally-higher accounts receivable and
inventories. The Company continues to maintain a favorable financial position
with a current ratio of 1.24 at March 31, 1996. The decrease in this ratio
from 2.00 at December 31, 1995 and the corresponding decrease in working
capital occurred primarily due to the increased short-term borrowings. The
increase in Other Assets of $426.3 million since December 31, 1995 is primarily
related to acquisitions of intangible assets and goodwill recorded pursuant to
the acquisitions. The increase in short-term borrowings and long-term debt
occurred due to the Company's issuance of two $50.0 million long-term notes and
the incurrence of short-term borrowings under its existing commercial paper
program. The proceeds from these borrowings were used to acquire Pratt &
Lambert and other smaller acquisitions, repayment of Pratt & Lambert debt, and
to finance seasonally high working capital. The Company has additional unused
short-term borrowing availability of $284.9 million at March 31, 1996 under its
commercial paper program. This program is backed by the Company's revolving
credit agreements.
Since March 31, 1995, cash and cash equivalents decreased $125.1 million,
short-term borrowings increased $382.1 million and long-term debt increased
$108.6 million. Cash generated by operations during this period of $282.7
million was offset by acquisitions of assets of $556.4 million, payments of
short-term borrowings and long-term debt of $167.8 million, capital
expenditures of $118.2 million, payments of cash dividends of $55.9 million,
acquisitions of treasury stock of $16.2 million and normal working capital
needs. The Company expects to remain in a borrowing position throughout 1996.
Capital expenditures during the first quarter of 1996 resulted primarily from
the costs of relocating or remodeling paint stores and the expansion or upgrade
of distribution centers and manufacturing and research facilities. We do not
anticipate the need for any specific external financing to support our capital
programs.
During the first quarter of 1996, approximately 1,500 shares of our own stock
were received in exchange from the exercise of stock options. During the first
quarter of 1996, the Company did not acquire any shares of its stock through
open market purchases. We acquire our own stock for general corporate purposes
and, depending upon our cash position and market conditions, we may acquire
shares of our own stock in the future.
The Company and certain other companies are defendants in lawsuits arising from
the manufacture and sale of lead pigments and lead paints. It is possible that
additional lawsuits may be filed against the Company in the future with similar
allegations. The various existing lawsuits seek damages for personal injuries
and property damage, along with costs incurred to abate the lead related paint
from buildings. The Company believes that such lawsuits are without merit and
is vigorously defending them. The Company does not believe that any potential
liability which may ultimately be determined to be attributable to the Company
arising out of such lawsuits will have a material adverse effect on the
Company's business 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
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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 the environmental laws and regulations to impose
increasingly stringent requirements upon the Company and our industry in the
future. The Company believes it conducts its operations in compliance with
applicable environmental laws and regulations and has implemented various
programs designed to protect the environment and ensure continued compliance.
The Company is involved with environmental compliance and remediation
activities at some of its current and former sites. The Company, together with
other parties, has also been designated a potentially responsible party under
federal and state environmental protection laws for the remediation of
hazardous waste at a number of third-party sites, primarily Superfund sites.
In general, these laws provide that potentially responsible parties may be held
jointly and severally liable for investigation and remediation costs regardless
of fault. The Company may be similarly designated with respect to additional
third-party sites in the future.
Although the Company continuously assesses its potential liability for
remediation activities with respect to its past operations and third-party
sites, any potential liability ultimately determined to be attributable to the
Company is subject to a number of uncertainties including, among others, the
number of parties involved with respect to any given site, the volumetric
contribution which may be attributed to the Company relative to that
attributable to other parties, the nature and magnitude of the wastes involved,
and the method and extent of remediation. The Company has accrued for certain
environmental remediation activities relating to its past operations and
third-party sites, including Superfund sites, for which commitments or clean-up
plans have been developed or for which costs or minimum costs can be reasonably
estimated. These environmental-related accruals are adjusted as information
becomes available upon which more accurate costs can be reasonably estimated.
In the opinion of the Company's management, any potential liability ultimately
attributed to the Company for its environmental-related matters will not have a
material adverse effect on the Company's financial condition, liquidity or cash
flow.
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PART II. OTHER INFORMATION
Item 1. Legal Proceeding
----------------
On December 19, 1995, the Michigan Department of Environmental Quality issued a
letter of violation with regard to the Company's Holland, Michigan facility
alleging that certain equipment located at such facility did not have proper
permits in violation of Michigan's Air Pollution Control Act. The relief
sought by the Department includes corrective measures and civil penalties.
Taking into effect the voluntary nature of the disclosures made by the Company,
the Company reasonably expects such penalties to be less than $110,000.
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits
(11) Computation of Net Income Per Share - See Note G to
Condensed Consolidated Financial Statements (Unaudited).
(27) Financial Data Schedule for the period ended March 31,
1996.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated January
8, 1996 (and a Current Report on Form 8-K/A dated February 8,
1996 amending such Form 8-K) reporting in Item 2 that the
Company, through its wholly-owned subsidiary, SWACQ, Inc., had
completed its merger with Pratt & Lambert United, Inc. The
Company filed as part of Item 7 of such Current Report the
following financial statements and pro forma financial
information:
(i) Audited Consolidated Balance Sheets of Pratt &
Lambert as of December 31, 1994 and 1993 and audited
Statements of Consolidated Income, Statements of
Consolidated Shareholders' Equity and Statements of
Consolidated Cash Flows for the fiscal years ended
December 31, 1994 and 1993 which were incorporated
therein by reference from Pratt & Lambert's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994;
(ii) Unaudited Consolidated Condensed Balance Sheet of
Pratt & Lambert as of September 30, 1995 and
Unaudited Consolidated Income Statement and Statement
of Consolidated Cash Flows for the nine months ended
September 30, 1995 which were incorporated therein by
reference from Pratt & Lambert's Quarterly Report on
Form 10-Q for the quarterly period ended September
30, 1995;
(iii) Unaudited Pro Forma Combined Condensed Balance Sheet
which combines the Unaudited Consolidated Condensed
Balance Sheet of Pratt & Lambert with the Unaudited
Consolidated Balance Sheet of the Company as of
September 30, 1995, along with a description of the
pro forma adjustments; and
(iv) Unaudited Pro Forma Combined Condensed Statements of
Income which combine the consolidated results of
Pratt & Lambert with the consolidated results of the
Company for the year ended December 31, 1994 and for
the nine months ended September 30, 1995, along with
a description of the related pro forma adjustments.
13
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SHERWIN-WILLIAMS COMPANY
May 14, 1996 By: /s/ J.L. Ault
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J.L. Ault
Vice President-
Corporate Controller
May 14, 1996 By: /s/ L.E. Stellato
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L.E. Stellato
Vice President, General
Counsel and Secretary