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 September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
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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 -- 85,851,851 shares as of October 31, 1996.
2
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 Sept. 30, Nine months ended Sept. 30,
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1996 1995 1996 1995
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Net sales $ 1,171,010 $ 911,387 $ 3,174,035 $ 2,532,912
Costs and expenses:
Cost of goods sold 678,773 520,889 1,874,324 1,461,908
Selling, general and administrative expenses 338,242 273,970 968,354 809,630
Interest expense 6,566 612 19,016 1,821
Interest and net investment income (1,539) (2,997) (4,837) (7,623)
Other 1,120 (52) 5,629 2,274
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1,023,162 792,422 2,862,486 2,268,010
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Income before income taxes 147,848 118,965 311,549 264,902
Income taxes 59,298 44,017 121,504 98,014
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Net income $ 88,550 $ 74,948 $ 190,045 $ 166,888
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Net income per share $ 1.02 $ 0.87 $ 2.20 $ 1.95
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars
Sept. 30, Dec. 31, Sept. 30,
1996 1995 1995
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ASSETS
Current assets
Cash and cash equivalents $ 6,194 $ 249,484 $ 211,308
Short-term investments 0 20,000 5,000
Accounts receivable, less allowance 584,023 334,304 417,218
Inventories:
Finished goods 476,538 395,817 391,819
Work in process and raw materials 103,978 67,270 73,694
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580,516 463,087 465,513
Other current assets 223,313 172,023 183,885
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Total current assets 1,394,046 1,238,898 1,282,924
Deferred pension assets 245,244 233,574 231,671
Other assets 749,561 212,224 152,346
Property, plant and equipment 1,154,790 987,434 964,313
Less allowances for depreciation and
amortization 601,577 531,077 521,723
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553,213 456,357 442,590
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Total assets $ 2,942,064 $ 2,141,053 $ 2,109,531
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 221,321 $ 0 $ 0
Accounts payable 367,522 276,863 262,587
Compensation and taxes withheld 97,705 78,148 77,675
Other accruals 344,724 232,035 224,175
Accrued taxes 95,361 31,891 53,684
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Total current liabilities 1,126,633 618,937 618,121
Long-term debt 137,641 24,018 22,711
Postretirement benefits other than pensions 183,220 175,766 175,264
Other long-term liabilities 126,874 110,206 114,699
Shareholders' equity
Common stock - $1.00 par value:
85,827,633, 85,454,813 and 85,105,727
shares outstanding at Sept. 30, 1996,
December 31, 1995 and Sept. 30, 1995,
respectively 101,508 101,110 100,933
Other capital 193,247 182,311 168,626
Retained earnings 1,387,214 1,242,167 1,222,065
Cumulative foreign currency translation
adjustment (20,530) (20,657) (20,375)
Treasury stock, at cost (293,743) (292,805) (292,513)
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Total shareholders' equity 1,367,696 1,212,126 1,178,736
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Total liabilities and shareholders' equity $ 2,942,064 $ 2,141,053 $ 2,109,531
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
Nine months ended Sept. 30,
--------------------------------
1996 1995
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OPERATIONS
Net income $ 190,045 $ 166,888
Non-cash adjustments:
Depreciation 55,632 45,987
Amortization of intangible assets 20,208 10,152
Increase in deferred pension assets (11,670) (5,709)
Other 5,431 11,568
Change in current assets and liabilities-net (37,798) (95,107)
Costs incurred for disposition of operations (4,652) (3,766)
Other (17,528) (9,053)
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Net operating cash 199,668 120,960
INVESTING
Capital expenditures (85,969) (74,967)
Decrease in short-term investments 20,000 (5,000)
Acquisitions of assets (599,754) (35,596)
Increase in other investments, net 20,388
Other 5,287 (4,375)
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Net investing cash (640,048) (119,938)
FINANCING
Increase in short-term borrowings 2,219,471
Payments of short-term borrowings (2,027,525)
Increase in long-term debt 119,004
Payments of long-term debt (75,379) (784)
Payments of cash dividends (44,998) (40,890)
Treasury stock acquired (9,865)
Proceeds from stock options exercised 8,200 7,794
Other (1,683) 2,616
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Net financing cash 197,090 (41,129)
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Net decrease in cash and cash equivalents (243,290) (40,107)
Cash and cash equivalents at beginning of year 249,484 251,415
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Cash and cash equivalents at end of period $ 6,194 $ 211,308
==============================================================================================================
Taxes paid on income $ 71,711 $ 86,348
Interest paid on debt 17,278 1,447
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Thousands of dollars, except per share data, unless otherwise indicated)
Periods ended September 30, 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 and nine months ended
September 30, 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 each of the first three quarters 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 Nine months ended
September 30, September 30,
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1996 1995 1996 1995
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Dividend and royalty income $ 1,001 $ 1,032 $ 3,780 $ 8,848
Provisions for environmental
remediation (3,000)
Provisions for disposition and
termination of operations (1,500)
Net expense of financing and
investing activities (2,955) (2,388) (10,568) (6,815)
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 and nine months
ended September 30, 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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Three months ended Nine months ended
September 30, 1995 September 30, 1995
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Net sales $ 1,016,601 $ 2,843,388
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Net income 72,273 159,098
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Net income per share 0.84 1.86
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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 Nine months ended
September 30, September 30,
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1996 1995 1996 1995
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Fully Diluted
Average shares outstanding 85,810,223 85,219,169 85,699,102 85,160,079
Options - treasury stock method 684,320 547,742 685,674 556,301
Assumed conversion of 6.25% Convertible
Subordinated Debentures 5,295
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Average fully diluted shares 86,494,543 85,766,911 86,384,776 85,721,675
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Net income $ 88,550 $ 74,948 $ 190,045 $ 166,888
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Net income per share $ 1.02 $ 0.87 $ 2.20 $ 1.95
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Primary
Average shares outstanding 85,810,223 85,219,169 85,699,102 85,160,079
Options - treasury stock method 662,956 539,280 659,733 546,236
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Average shares and equivalents 86,473,179 85,758,449 86,358,835 85,706,315
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Net income $ 88,550 $ 74,948 $ 190,045 $ 166,888
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Net income per share $ 1.02 $ 0.87 $ 2.20 $ 1.95
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All 6.25% Convertible Subordinated Debentures outstanding at December 31, 1994
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 September 30, Nine months ended September 30,
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1996 1995 1996 1995
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NET Net NET Net
EXTERNAL OPERATING External Operating EXTERNAL OPERATING External Operating
SALES PROFIT Sales Profit SALES PROFIT Sales Profit
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Paint Stores $ 705,593 $ 75,389 $ 610,854 $ 59,308 $ 1,839,608 $ 139,581 $ 1,633,949 $ 112,414
Coatings 461,853 90,429 297,011 68,793 1,324,299 226,469 888,631 179,744
Other 3,564 3,333 3,522 3,128 10,128 9,948 10,332 9,031
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Segment totals $ 1,171,010 169,151 $ 911,387 131,229 $ 3,174,035 375,998 $ 2,532,912 301,189
============ =========== ============ ============
Corporate expenses-net (21,303) (12,264) (64,449) (36,287)
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Income before income taxes $ 147,848 $ 118,965 $ 311,549 $ 264,902
=========== =========== =========== ===========
====================================================================================================================================
Intersegment Transfers
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Three months ended September 30, Nine months ended September 30,
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1996 1995 1996 1995
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Coatings $ 233,119 $ 230,355 $ 673,534 $ 615,504
Other 5,176 4,673 15,628 13,821
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Segment totals $ 238,295 $ 235,028 $ 689,162 $ 629,325
=========== =========== =========== ===========
===================================================================================================================================
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 increased 28.5 percent in the third quarter and 25.3
percent in the first nine months of 1996 over the comparable 1995 periods.
Excluding the results of operations of Pratt & Lambert United, Inc. (Pratt &
Lambert) acquired during January 1996, and other smaller acquisitions acquired
since the third quarter of 1995, comparable sales increased 9.7 and 7.3 percent
for the same periods. Increased paint gallons sold to both retail and wholesale
customers in the Paint Stores Segment led to sales increases of 15.5 and 12.6
percent for the third quarter and nine months, respectively. Wholesale customers
include professional painter, contractor, industrial and commercial maintenance
accounts. Excluding the effects of all acquisitions, the Paint Stores Segment's
sales increased 11.1 percent for the quarter and 8.9 percent for the first nine
months while comparable-store sales were up 11.3 and 9.1 percent for the same
periods. Incremental sales from acquisitions helped achieve sales increases in
the Coatings Segment of 55.5 and 49.0 percent for the third quarter and nine
months, respectively. Excluding acquisitions, sales increased 7.1 and 4.6
percent due primarily to increased gallons sold to national customers and
increased sales from new customers and new products in its diversified product
lines. Revenue generated by real estate operations in the Other Segment
increased slightly over 1995 for the third quarter but year-to-date revenue
remains lower than last year.
Low margins on the acquired businesses caused consolidated gross profit as a
percent of sales to decline to 42.0 percent for the third quarter from 42.8
percent last year and to 40.9 percent for the first nine months from 42.3
percent last year. Excluding the acquisitions, margins were higher than last
year for both time periods. The Paint Stores Segment's third quarter and
year-to-date margins, both including and excluding acquisitions, were higher
than last year primarily due to increased retail sales. Margins in the Coatings
Segment excluding all acquisitions were higher than last year for the quarter
and nine months due to stable raw material costs, favorable operating costs and
increased sales of higher-margin products.
Consolidated selling, general and administrative expenses as a percent of sales
were favorable to last year for the quarter and first nine months due to
lower-than-average expenses for the acquired businesses. The Paint Stores
Segment's SG&A expenses as a percent of sales, both including and excluding
acquisitions, were favorable to last year for the third quarter and nine months
due to controlled spending combined with the increased sales. SG&A expenses as a
percent of sales in the Coatings Segment were unfavorable to last year after
excluding the effects of acquisitions due primarily to increased advertising and
merchandising costs related to new customers and the introduction of new
products.
Interest expense remained higher than last year for the third quarter and nine
months due to the increase in long-term debt and short-term borrowings during
1996 which resulted from the financing of acquisitions and working capital
earlier in the year. Net investment income was lower than last year for both
periods due to lower average cash and short-term investment balances offset
partially by higher average yields.
Other costs and expenses were higher than last year for both the third quarter
and first nine months of 1996 due primarily to increased expenses related to the
Company's investment in broad-based corporate owned life insurance.
Net income for the third quarter of 1996 increased to $88,550,000, or $1.02 per
share, from $74,948,000, or $.87 per share, in 1995. Net income for the first
nine months of 1996 increased to $190,045,000, or $2.20 per share, from
$166,888,000, or $1.95 per share, in 1995. Excluding the results of operations
of all acquisitions and the related financing costs, net income increased 15.2
and 12.7 percent for the quarter and nine months, respectively.
10
In accordance with the consensus guidance in Emerging Issues Task Force No.
87-11, "Allocation of Purchase Price to Assets to be Sold", all third quarter
and year-to-date 1996 results of operations exclude the results of operations of
certain Pratt & Lambert subsidiaries through their respective dates of sale.
These subsidiaries, which were sold during the third quarter of 1996, include
essentially all operations of Pierce & Stevens Corp., a manufacturer of
specialty chemicals, and Miracle Adhesives Corporation, a manufacturer of
adhesives for the construction industry. The total operating profit related to
these subsidiaries prior to their sale, approximately $577,000 in the third
quarter and $2,988,000 through the first nine months of 1996, has been excluded
from the statement of consolidated income. The Company considered estimated
proceeds from the sales of these subsidiaries in its preliminary allocation of
purchase price pursuant to APB Opinion No. 16.
During the first nine months of 1996, cash and cash equivalents decreased $243.3
million, long-term debt increased $113.6 million and short-term borrowings,
amounts incurred less payments, increased $221.3 million. Cumulative short-term
borrowings of $2,219.5 million incurred during the year relate to the Company's
commercial paper program, which had unused borrowing availability of $378.7
million at September 30, 1996. This program is backed by the Company's revolving
credit agreements. The increase in long-term debt is primarily related to the
Company's issuance of two $50.0 million long-term notes. The proceeds of these
borrowings and the decline in cash were used for the acquisition of Pratt &
Lambert and other smaller acquisitions, payments of both Pratt & Lambert and the
Company's long-term debt and short-term borrowings totaling $2,102.9 million,
capital expenditures of $86.0 million, cash dividends of $45.0 million and
normal operating needs. The Company's current ratio of 1.24 remains favorable at
September 30, 1996. The decrease in this ratio from 2.08 at the end of last
year's third quarter occurred primarily due to the increased short-term
borrowings and related decrease in cash. Other Assets increased $537.3 million
since December 31, 1995, of which approximately 511.9 million related to
goodwill and intangible assets acquired during the year. Goodwill was reduced in
the quarter primarily due to a re-allocation of the purchase price of Pratt &
Lambert due to the difference between the carrying amount of certain Pratt &
Lambert subsidiaries at the date of sale and the proceeds from the sale.
Since September 30, 1995, cash and cash equivalents decreased $205.1 million,
net short-term borrowings increased $221.3 million and long-term debt increased
$114.9 million. Cash generated by operations during this period of $361.4
million and total short-term borrowing proceeds of $2,220.1 million were offset
by asset acquisitions of $600.0 million, payments of debt of $2,102.9 million,
capital expenditures of $119.4 million, payments of cash dividends of $58.7
million, treasury stock acquisitions of $8.4 million and normal working capital
needs. The Company expects to remain in a borrowing position throughout 1996.
Capital expenditures during the first nine months of 1996 represented primarily
the costs of updating or installing point-of-sale terminals at the paint stores,
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 nine months of 1996, approximately 23,900 shares of our own
stock were received in exchange from the exercise of stock options. We did not
acquire any of our own shares through open market purchases during this time. 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 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 September
30, 1996.
(b) Reports on Form 8-K
None.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SHERWIN-WILLIAMS COMPANY
November 13, 1996 By: /s/ J.L. Ault
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J.L. Ault
Vice President-
Corporate Controller
November 13, 1996 By: /s/ L.E. Stellato
-----------------
L.E. Stellato
Vice President, General
Counsel and Secretary