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, 1998
------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to _________
Commission file number 1-4851
------
THE SHERWIN-WILLIAMS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-0526850
- ------------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Prospect Avenue, N.W., Cleveland, Ohio 44115-1075
------------------------------------------ -------------------
(Address of principal executive offices) (Zip Code)
(216) 566-2000
- --------------------------------------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $1.00 Par Value - 171,940,904 shares as of October 31, 1998.
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,
---------------------------------- -----------------------------------
1998 1997 1998 1997
-------------- ---------------- ---------------- ---------------
Net sales $ 1,341,431 $ 1,346,531 $ 3,823,363 $ 3,789,669
Costs and expenses:
Cost of goods sold 753,529 763,140 2,181,057 2,165,108
Selling, general and administrative expenses 404,795 398,065 1,217,574 1,204,954
Interest expense 18,276 20,250 56,291 62,387
Interest and net investment income (1,288) (1,350) (4,776) (6,388)
Other 3,621 3,785 9,674 10,251
-------------- ---------------- ---------------- ---------------
1,178,933 1,183,890 3,459,820 3,436,312
-------------- ---------------- ---------------- ---------------
Income before income taxes 162,498 162,641 363,543 353,357
Income taxes 61,750 63,430 138,147 137,809
-------------- ---------------- ---------------- ---------------
Net income $ 100,748 $ 99,211 $ 225,396 $ 215,548
============== ================ ================ ===============
Net income per common share:
Basic $ 0.59 $ 0.58 $ 1.31 $ 1.25
============== ================ ================ ===============
Diluted $ 0.58 $ 0.57 $ 1.29 $ 1.24
============== ================ ================ ===============
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,
1998 1997 1997
-------------- -------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 3,371 $ 3,530 $ 18,241
Accounts receivable, less allowance 705,424 546,314 672,106
Inventories
Finished goods 553,130 587,680 581,118
Work in process and raw materials 135,493 133,988 133,830
-------------- -------------- --------------
688,623 721,668 714,948
Other current assets 265,641 260,741 247,939
-------------- -------------- --------------
Total current assets 1,663,059 1,532,253 1,653,234
Goodwill 1,141,565 1,161,129 1,203,107
Intangible assets 296,583 310,221 310,099
Deferred pension assets 294,086 276,086 269,848
Other assets 77,538 63,854 69,853
Property, plant and equipment 1,407,356 1,357,844 1,318,695
Less allowances for depreciation and amortization 688,673 665,586 638,330
-------------- -------------- --------------
718,683 692,258 680,365
-------------- -------------- --------------
Total assets $ 4,191,514 $ 4,035,801 $ 4,186,506
============== ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 148,295 $ 106,913 $ 287,380
Accounts payable 398,395 424,184 430,503
Compensation and taxes withheld 125,213 118,709 117,268
Current portion of long-term debt 62,704 53,926 53,150
Other accruals 361,630 367,392 370,158
Accrued taxes 126,887 44,539 158,333
-------------- -------------- --------------
Total current liabilities 1,223,124 1,115,663 1,416,792
Long-term debt 783,103 843,919 799,594
Postretirement benefits other than pensions 204,116 199,839 198,863
Other long-term liabilities 267,434 284,200 209,396
Shareholders' equity
Common stock - $1.00 par value:
171,998,570, 172,907,418 and 172,810,409 shares
outstanding at Sept. 30, 1998, Dec. 31, 1997
and Sept. 30, 1997, respectively 205,634 204,538 204,441
Other capital 136,498 119,695 115,792
Retained earnings 1,769,834 1,602,882 1,574,292
Accumulated other
comprehensive income (41,108) (33,517) (31,234)
Treasury stock, at cost (357,121) (301,418) (301,430)
-------------- -------------- --------------
Total shareholders' equity 1,713,737 1,592,180 1,561,861
-------------- -------------- --------------
Total liabilities and shareholders' equity $ 4,191,514 $ 4,035,801 $ 4,186,506
============== ============== ==============
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,
--------------------------------
1998 1997
-------------- --------------
OPERATIONS
Net income $ 225,396 $ 215,548
Non-cash adjustments:
Depreciation 71,380 66,110
Amortization of goodwill and intangible assets 37,545 37,080
Increase in deferred pension assets (18,000) (15,357)
Net increase in postretirement liability 4,277 3,886
Other 3,628 10,906
Change in current assets and liabilities-net (56,405) (68,427)
Proceeds of insurance settlement 53,937
Costs incurred for disposition of operations (12,146) (14,520)
Other (36,508) (28,666)
-------------- --------------
Net operating cash 219,167 260,497
INVESTING
Capital expenditures (108,273) (122,061)
Acquisitions of assets (877,321)
Increase in other investments (15,133) (12,317)
Other 12,598 (845)
-------------- --------------
Net investing cash (110,808) (1,012,544)
FINANCING
Net increase in short-term borrowings 41,382 118,776
Increase in long-term debt 711,505
Payments of long-term debt (52,790) (3,609)
Payments of cash dividends (58,444) (52,552)
Proceeds from stock options exercised 15,968 7,633
Treasury stock acquired (55,703)
Costs related to issuance of debt (14,253)
Other 1,069 908
-------------- --------------
Net financing cash (108,518) 768,408
-------------- --------------
Net (decrease) / increase in cash and cash equivalents (159) 16,361
Cash and cash equivalents at beginning of year 3,530 1,880
-------------- --------------
Cash and cash equivalents at end of period $ 3,371 $ 18,241
============== ==============
Taxes paid on income $ 56,796 $ 69,147
Interest paid on debt 66,706 53,528
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended September 30, 1998 and 1997
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 Annual Report on Form 10-K for the fiscal year
ended December 31, 1997. 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, 1998 are not necessarily indicative of the
results to be expected for the fiscal year ending December 31, 1998.
NOTE B--DIVIDENDS
Dividends paid on common stock during each of the first three quarters of 1998
and 1997 were $.1125 per share and $.10 per share, respectively.
NOTE C--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
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
(Thousands of dollars) September 30, September 30,
--------------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ------
Dividend and royalty income $ 601 $ 723 $ 2,000 $ 2,591
Net income (expense) of financing
and investing activities 159 (1,693) 3,432 494
Settlement of environmental matters 3,500 3,500
Foreign exchange losses (5,482) (881) (10,943) (7,306)
The net income (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, the net
pre-tax expense associated with the Company's investment in broad-based
corporate owned life insurance and, in the nine months ended September 30, 1998,
the net gain related to the sale of the Company's joint venture interest in
American Standox, Inc. The settlement of environmental matters in the third
quarter of 1998 resulted from an additional settlement with certain insurance
carriers pertaining to environmental related matters similar to those occurring
in the fourth quarters of 1997 and 1996.
6
NOTE E--COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this statement had no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires other
comprehensive income to include foreign currency translation adjustments and
minimum pension liability adjustments, which prior to adoption were reported
separately in shareholders' equity. The September 30, 1997 and December 31, 1997
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
Total comprehensive income, which includes net income and other comprehensive
income, amounted to $93,846,000 and $90,483,000 during the third quarter of 1998
and 1997, respectively, and $217,806,000 and $203,296,000 for the first nine
months of 1998 and 1997, respectively.
NOTE F--RECLASSIFICATION
Certain amounts in the 1997 and the nine months ended September 30, 1998
financial statements and footnotes have been reclassified to conform with the
third quarter 1998 presentation.
7
NOTE G--COMPUTATION OF NET INCOME PER COMMON SHARE
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ---------------------------------
Thousands of dollars, except per share data 1998 1997 1998 1997
-------------- -------------- -------------- --------------
Basic
Average common shares outstanding 172,162,726 172,333,456 172,544,814 171,984,285
============== ============== ============== ==============
Net income $ 100,748 $ 99,211 $ 225,396 $ 215,548
============== ============== ============== ==============
Net income per common share $ 0.59 $ 0.58 $ 1.31 $ 1.25
============== ============== ============== ==============
Diluted
Average common shares outstanding 172,162,726 172,333,456 172,544,814 171,984,285
Non-vested restricted stock grants 229,367 284,667 238,389 331,022
Stock options - treasury stock method 844,910 1,685,068 1,312,691 1,682,514
-------------- -------------- -------------- --------------
Average common shares outstanding assuming dilution 173,237,003 174,303,191 174,095,894 173,997,821
============== ============== ============== ==============
Net income $ 100,748 $ 99,211 $ 225,396 $ 215,548
============== ============== ============== ==============
Net income per common share $ 0.58 $ 0.57 $ 1.29 $ 1.24
============== ============== ============== ==============
Net income per common share has been computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128 adopted for the quarter ending
December 31, 1997. All net income per common share amounts shown for the three
months and nine months ended September 30, 1997 have been restated to conform to
the provisions of SFAS No. 128. The adoption of SFAS No. 128 increased basic net
income per common share by $.01 per common share for the three months and nine
months ended September 30, 1997 from the previous method of computing primary
net income per common share. There was no effect on diluted net income per
common share for either period of 1997.
8
NOTE H--BUSINESS SEGMENTS
Net External Sales/Operating Profit
- -----------------------------------
Three months ended September 30,
---------------------------------------------------------------
Thousands of dollars 1998 1997
------------------------------ --------------------------------
NET Net
EXTERNAL OPERATING External Operating
SALES PROFIT Sales Profit
-------------- -------------- -------------- --------------
Paint Stores $ 789,298 $ 86,977 $ 752,360 $ 80,786
Coatings 548,740 107,070 591,246 114,401
Other 3,393 2,847 2,925 2,963
-------------- -------------- -------------- --------------
Segment totals $ 1,341,431 196,894 $ 1,346,531 198,150
============== ==============
Corporate expenses-net (34,396) (35,509)
------------- ------------
Income before income taxes $ 162,498 $ 162,641
============== ==============
Nine months ended September 30,
---------------------------------------------------------------
Thousands of dollars 1998 1997
-------------------------------- ------------------------------
NET Net
EXTERNAL OPERATING External Operating
SALES PROFIT Sales Profit
-------------- -------------- -------------- --------------
Paint Stores $ 2,130,682 $ 168,527 $ 2,001,300 $ 152,366
Coatings 1,683,102 295,259 1,779,919 301,145
Other 9,579 10,005 8,450 8,888
-------------- -------------- -------------- --------------
Segment totals $ 3,823,363 473,791 $ 3,789,669 462,399
============== ==============
Corporate expenses-net (110,248) (109,042)
------------- ------------
Income before income taxes $ 363,543 $ 353,357
============== ==============
=================================================================================================================================
Intersegment Transfers
- ----------------------
Three months ended September 30, Nine months ended September 30,
---------------------------------------- ------------------------------------------
Thousands of dollars 1998 1997 1998 1997
-------------- -------------- -------------- --------------
Coatings $ 315,776 $ 292,961 $ 858,457 $ 795,557
Other 5,966 5,366 17,714 15,961
-------------- -------------- -------------- --------------
Segment totals $ 321,742 $ 298,327 $ 876,171 $ 811,518
============== ============== ============== ==============
=================================================================================================================================
Operating profit is total revenue, including realized profit on intersegment
transfers, less operating costs and expenses.
Net external sales and operating profits of consolidated foreign subsidiaries
were $138.8 million and $11.3 million, respectively, for the third quarter of
1998 compared to $142.7 million and $16.9 million, respectively, in the third
quarter of 1997. For the first nine months of 1998, net external sales and
operating profits were $411.8 million and $30.3 million, respectively, and, for
the first nine months of 1997, $407.0 million and $39.9 million, respectively.
Identifiable assets of these subsidiaries totaled $175.7 million and $204.1
million at September 30, 1998 and 1997, respectively. Domestic operations
accounted for the remaining net external sales, operating profits and
identifiable assets. Corporate expenses and identifiable assets do not include
any significant foreign operations. No single geographic area outside the United
States was significant relative to consolidated net external sales or
consolidated identifiable assets.
Export sales 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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Consolidated net sales decreased 0.4 percent in the third quarter and increased
0.9 percent in the first nine months of 1998 over the comparable 1997 periods.
Net sales in the Paint Stores Segment increased 4.9 percent in the third quarter
and 6.5 percent in the first nine months primarily due to increased paint
gallons sold to both retail and wholesale customers, combined with sales gains
in each of the remaining product lines (wallcoverings, floorcoverings, spray
equipment and associated products). Comparable-store sales were up 2.6 percent
in the quarter and 4.4 percent in the first nine months. Net sales in the
Coatings Segment decreased 7.2 percent in the third quarter and 5.4 percent
year-to-date due principally to weak do-it-yourself coatings sales, poor market
conditions in South America and the continuing effects of the 1997 loss of
certain coatings, aerosol and detergent business. A soft automotive refinish
collision repair market curtailed automotive sales within the Coatings Segment.
Revenue generated by real estate operations in the Other Segment increased 16.0
percent in the quarter and 13.3 percent in the first nine months, as vacated
space was leased to new tenants, after large declines in 1997 due to the loss of
a large tenant in one of its office buildings.
Consolidated gross profit as a percent of sales improved to 43.8 and 43.0
percent for the third quarter and first nine months, respectively, from 43.3 and
42.9 percent for the comparable periods in 1997. The Paint Stores Segment's
gross profit margins were higher than last year for the quarter and
year-to-date, primarily due to favorable product mix. Gross profit margins in
the Coatings Segment were higher than last year for the third quarter and first
nine months due primarily to selective selling price increases, favorable
effects of the loss of certain lower margin business in 1997, and Paint Stores'
volume gains which helped reduce the pressure on gross margins from increased
titanium dioxide costs.
Consolidated selling, general and administrative expenses as a percent of sales
were 0.6 percentage points unfavorable as compared to last year for the third
quarter and were flat to last year for the first nine months. The Paint Stores
Segment's third quarter and year-to-date SG&A ratio was slightly higher than
last year. SG&A expenses as a percent of sales for the third quarter and first
nine months in the Coatings Segment were unfavorable due to the sales shortfall.
However, general and administrative cost reductions in the Coatings Segment
helped mitigate the effect of the year-to-date sales shortfall.
Interest expense in the third quarter and first nine months was lower than the
comparable periods of last year due to the reduction of total debt since the end
of September 1997. Average short-term borrowing rates were slightly lower for
the third quarter and slightly higher for the nine months than the comparable
periods in the prior year.
10
Other costs and expenses were lower than last year for the quarter due primarily
to current year income from the settlement of environmental matters and net
income from investing and financing activities versus prior year net expense,
partially offset by higher foreign exchange losses. For the first nine months of
1998, other costs and expenses were lower than last year primarily due to the
settlement of environmental matters and to increased net income from investing
and financing activities resulting partially from the net gain on the sale of
the Company's joint venture interest in American Standox, Inc. during the first
quarter of 1998. Higher foreign currency exchange losses offset a portion of
these favorable variances for the first nine months.
Net income for the third quarter of 1998 increased 1.5 percent over last year to
$100,748,000, or $.58 per common share - diluted, from $99,211,000, or $.57 per
common share - diluted, in 1997. Year-to-date net income through September 30,
1998 increased 4.6 percent to $225,396,000, or $1.29 per common share - diluted,
from $215,548,000, or $1.24 per common share - diluted, in 1997.
FINANCIAL CONDITION
- -------------------
During the first nine months of 1998, cash and cash equivalents decreased $0.2
million, net long-term debt decreased $52.0 million and short-term borrowings
increased $41.4 million. Short-term borrowings incurred during the nine months
relate to the Company's commercial paper program, which had unused borrowing
availability of $958.6 million at September 30, 1998. This program is backed by
the Company's revolving credit agreements, whose maximum borrowing amount is
$1,080.0 million. The increase in short-term borrowings since the end of last
year relates to capital expenditures of $108.3 million, cash dividends of $58.4
million and normal operating needs for seasonally higher accounts receivable and
inventories. The decrease in long-term debt since December 31, 1997 is primarily
due to the payment of a $50.0 million floating rate note during the first
quarter.
Since September 30, 1997, cash and cash equivalents decreased $14.9 million,
short-term borrowings decreased $139.1 million and net long-term debt decreased
$6.9 million. Cash generated by operations during this period of $398.2 million
was used for capital expenditures of $150.2 million, payments of cash dividends
of $74.9 million, total debt reduction of $146.0 million, and normal working
capital needs. The Company expects to remain in a borrowing position throughout
1998.
Capital expenditures during the first nine months of 1998 represented primarily
the costs of upgrading or installing point-of-sale terminals at the paint
stores, upgrading and installing other computer hardware, and construction,
capacity expansion or upgrade of distribution centers and manufacturing
facilities. We do not anticipate the need for any specific external financing to
support our capital programs.
11
During the third quarter and nine months of 1998, the Company received 2,711 and
35,236 shares, respectively, of its common stock in exchange from the exercise
of stock options. During the third quarter and nine months of 1998, the Company
acquired 970,000 and 1,970,000 shares, respectively, of its common stock through
open market purchases for treasury purposes. The Company acquires shares of its
common stock for general corporate purposes and, depending upon its cash
position and market conditions, the Company may acquire additional shares of its
common stock in the future. The Company has authorization to purchase an
additional 8,030,000 shares of its common stock.
The Company and certain other companies are defendants in a number of 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 involving the abatement
of lead related paint from buildings and medical monitoring costs. 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 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 promote continued compliance.
The Company is involved with environmental compliance and remediation activities
at some of its current and former sites (including former sites which were
previously owned and/or operated by businesses acquired by the Company). The
Company, together with other parties, has also been designated a potentially
responsible party under federal and state environmental protection laws for the
remediation of 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.
12
The Company accrues for certain environmental remediation-related 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. The Company continuously
assesses its potential liability for 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. 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
attributable 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 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.
YEAR 2000 READINESS
- -------------------
The Company is engaged in a company-wide project to prepare its business for the
change in date from the year 1999 to 2000. The Company has assembled a Year 2000
project team consisting of Company employees and third party consultants. The
goal of the Year 2000 project is to assure that there are no major interruptions
in the Company's business operations relating to the transition to the Year
2000. The scope of the Company's Year 2000 project includes (a) identifying and
taking appropriate corrective action to remedy the Company's software, hardware
and embedded technology, (b) working with key third parties, including financial
institutions, customers and suppliers, with which the Company does business
electronically to ensure that such business is not adversely affected by the
Year 2000, and (c) contacting other key third parties and requesting assurances
that such third parties will be Year 2000 compliant. The status of the Year 2000
project is reported regularly to senior management and the Board of Directors.
The Year 2000 project team has implemented a compliance process to address Year
2000 issues in the Company's software and hardware systems and embedded
technology consisting of the following nine steps: (1) inventory, (2) risk
assessment, (3) prioritization, (4) impact analysis, (5) remediation, (6)
testing, (7) certification, (8) deployment, and (9) approval. The Company's
mission critical systems have been the project team's top priority. The
Company's mission critical systems include systems which are the most essential
to the Company to continue its operations without interruption. The Company
believes it has completed its compliance process through the impact analysis
phase for approximately 83% of its mission critical software and hardware
systems, with approximately 50% of its mission critical software and hardware
systems having been remediated and 33% currently being remediated. With regard
to embedded technology, the Company is currently in the inventory and risk
assessment phases to determine how much of such technology is mission critical
and how much is non-mission critical. The Company's target for completing its
compliance process for all of its mission critical systems is mid-1999. The
Company's target for completing its compliance process for its non-mission
critical systems is the end of 1999.
13
The Company is in contact with certain key third parties, including financial
institutions, customers and suppliers, with which the Company does business
electronically to address potential Year 2000 issues. The Company is directly
working with certain key third parties to remediate and test affected systems
where practicable. The Company is also in the process of sending surveys to
other key third parties requesting information regarding the status of such
third parties' Year 2000 readiness. Based upon the responses to these surveys,
the Company intends to identify potential critical Year 2000 issues involving
key third parties and either resolve those issues or develop contingency plans
to the extent practicable.
All costs and expenses incurred to address the Year 2000 issue are charged
against income on a current basis. The total cost of the project is expected to
be approximately $35 million, of which about $11 million has been spent since
the beginning of the project through the end of the third quarter. These costs
include costs of internal employees and third party consultants involved in the
project and the costs of software and hardware. The Company does not expect
these costs and expenses to have a material adverse effect on the Company's
financial condition.
While the Company continues to focus on solutions for Year 2000 issues, and
expects to complete its Year 2000 project in a timely manner, the Company is in
the process of identifying potential major business interruptions that could
reasonably likely result from Year 2000 issues and will develop contingency
plans designed to address such potential interruptions. The Company may also
develop contingency plans designed to generally help protect the Company from
unanticipated Year 2000 business interruptions. Contingency plans are
anticipated to include, for example, the identification of alternate suppliers,
increases in safety levels of raw material and finished goods inventories, and
the development of alternate procedures. The Company's contingency plans will be
developed and modified over time as it receives better information regarding the
Year 2000 status of its systems and embedded technology and third party
readiness.
Management's estimates regarding expected completion dates and costs involved in
the Company's Year 2000 project are based upon various assumptions regarding
future events, including the availability of resources, the success of third
parties in addressing their Year 2000 issues, and other factors. While
management believes the Company is addressing the Year 2000 issue, there is no
guarantee that these estimated completion dates and costs will be achieved. In
the event that the estimated completion dates and costs differ materially from
the actual completion dates and costs, such could have a materially adverse
effect on the Company's financial condition and financial results. In addition,
the Company cannot reasonably estimate the impact of Year 2000 on the Company if
key third parties, including suppliers, customers, public utilities and
governments, are unsuccessful in completing their Year 2000 efforts.
14
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
- ----------------------------------------------------------
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this report
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are based upon management's expectations and
beliefs concerning future events and discuss, among other things, anticipated
future performance and revenues, expected growth and future business plans.
Words and phrases such as "expects", "anticipates", "believes", "will likely
result", "will continue", "plans to", "intends to" and similar expressions are
intended to identify forward-looking statements. 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. A discussion of these risks,
uncertainties and other factors is included in the Company's reports filed with
the Securities and Exchange Commission. Any forward-looking statement speaks
only as of the date on which such statement is made, and the Company undertakes
no obligation to update any forward-looking statement, whether as a result of
new information, future events or otherwise.
15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
(10) Schedule of Certain Executive Officers who are
Parties to the Severance Pay Agreements in the Forms
Attached as Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q For the Period Ended June 30,
1997 (filed herewith).
(11) Computation of Net Income Per Common Share - See Note
G to Condensed Consolidated Financial Statements
(Unaudited).
(27) Financial Data Schedule for the period ended
September 30, 1998 (filed herewith).
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated September
10, 1998 reporting in Item 5 that the Company issued a press
release regarding expected sales and earnings for the third
quarter ending September 30, 1998.
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 16, 1998 By: /s/ J.L. Ault
-----------------------------------
J.L. Ault
Vice President-Corporate Controller
November 16, 1998 By: /s/ L.E. Stellato
-----------------------------------
L.E. Stellato
Vice President, General Counsel and
Secretary
16
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. EXHIBIT
- ----------- -------
(10) Schedule of Certain Executive Officers who are Parties to the
Severance Pay Agreements in the Forms Attached as Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q For the
Period Ended June 30, 1997 (filed herewith).
(11) Computation of Net Income Per Common Share - See Note G to
Condensed Consolidated Financial Statements (Unaudited).
(27) Financial Data Schedule for the period ended September 30,
1998 (filed herewith).