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, 2003
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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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 - 146,824,706 shares as of April 30, 2003.
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,
----------------------------
2003 2002
----------- ------------
Net sales $ 1,148,461 $ 1,149,178
Cost of goods sold 646,697 657,074
Gross profit 501,764 492,104
Percent to net sales 43.7% 42.8%
Selling, general and administrative expenses 440,450 422,186
Percent to net sales 38.4% 36.7%
Interest expense 10,091 10,692
Interest and net investment income (1,490) (789)
Other expense - net 4,206 3,910
----------- -----------
Income before income taxes and cumulative
effect of change in accounting principle 48,507 56,105
Income taxes 17,705 21,320
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Income before cumulative effect
of change in accounting principle 30,802 34,785
Cumulative effect of change in accounting
principle - net of income taxes of $64,476 (183,136)
----------- -----------
Net income (loss) $ 30,802 $ (148,351)
=========== ===========
Income (loss) per share:
Basic:
Before cumulative effect of
change in accounting principle $ 0.21 $ 0.23
Cumulative effect of change in accounting
principle - net of income taxes (1.21)
----------- -----------
Net income (loss) $ 0.21 $ (0.98)
=========== ===========
Diluted:
Before cumulative effect of
change in accounting principle $ 0.21 $ 0.23
Cumulative effect of change in accounting
principle - net of income taxes (1.21)
----------- -----------
Net income (loss) $ 0.21 $ (0.98)
=========== ===========
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, December 31, March 31,
2003 2002 2002
----------- ------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 12,834 $ 164,012 $ 19,333
Accounts receivable, less allowance 553,816 493,935 597,862
Inventories:
Finished goods 583,612 534,984 564,802
Work in process and raw materials 78,700 89,666 87,932
----------- ----------- -----------
662,312 624,650 652,734
Deferred income taxes 116,319 116,228 109,267
Other current assets 112,390 107,168 149,055
----------- ----------- -----------
Total current assets 1,457,671 1,505,993 1,528,251
Goodwill 551,759 552,207 562,253
Intangible assets 184,290 186,039 188,659
Deferred pension assets 414,992 414,589 400,105
Other assets 127,773 108,884 102,357
Property, plant and equipment 1,602,144 1,577,505 1,539,019
Less allowances for depreciation 930,789 912,905 886,748
----------- ----------- -----------
671,355 664,600 652,271
----------- ----------- -----------
Total assets $ 3,407,840 $ 3,432,312 $ 3,433,896
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 98,825 $ 219,844
Accounts payable 530,146 $ 522,339 469,802
Compensation and taxes withheld 87,671 146,987 91,165
Current portion of long-term debt 13,907 15,001 12,280
Other accruals 278,229 297,991 296,787
Accrued taxes 109,151 101,178 108,561
----------- ----------- -----------
Total current liabilities 1,117,929 1,083,496 1,198,439
Long-term debt 506,456 506,682 503,528
Postretirement benefits other than pensions 214,536 213,749 211,252
Other long-term liabilities 289,207 286,495 242,546
Shareholders' equity:
Preferred stock - convertible, participating, no par value:
6,193, 41,806 and 128,481 shares outstanding
at March 31, 2003, December 31, 2002 and
March 31, 2002, respectively 6,193 41,806 128,481
Unearned ESOP compensation (6,193) (41,806) (128,481)
Common stock - $1.00 par value:
146,848,643, 148,910,487 and 152,728,955 shares
outstanding at March 31, 2003, December 31, 2002
and March 31, 2002, respectively 210,326 209,836 208,544
Other capital 267,896 265,635 211,235
Retained earnings 2,165,469 2,157,485 1,949,691
Treasury stock, at cost (1,102,521) (1,029,894) (884,969)
Cumulative other comprehensive loss (261,458) (261,172) (206,370)
----------- ----------- -----------
Total shareholders' equity 1,279,712 1,341,890 1,278,131
----------- ----------- -----------
Total liabilities and shareholders' equity $ 3,407,840 $ 3,432,312 $ 3,433,896
=========== =========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
Three months ended March 31,
----------------------------
2003 2002
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OPERATING ACTIVITIES
Net income (loss) $ 30,802 $(148,351)
Adjustments to reconcile net income to net operating cash:
Cumulative effect of change in accounting principle 183,136
Impairment of long-lived assets held for use 8,997
Depreciation 25,368 25,280
Amortization of finite-lived intangible assets 2,849 2,739
Increase in deferred pension assets (403) (6,518)
Net increase in postretirement liability 787 1,289
Other 3,448 1,434
Change in current assets and liabilities-net (165,503) (180,815)
Other (9,056) 1,611
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Net operating cash (111,708) (111,198)
INVESTING ACTIVITIES
Capital expenditures (32,964) (18,365)
Acquisitions of businesses (27,405)
Increase in other investments (8,912) (12,924)
Proceeds from sale of assets 11,001
Other (2,795) (3,338)
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Net investing cash (44,671) (51,031)
FINANCING ACTIVITIES
Net increase in short-term borrowings 98,825 219,844
Increase in long-term debt 2,000
Payments of long-term debt (1,094) (100,629)
Payments of cash dividends (22,818) (22,885)
Proceeds from stock options exercised 2,000 10,432
Treasury stock purchased (72,627) (47,685)
Other (91) 147
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Net financing cash 4,195 61,224
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Effect of exchange rate changes on cash 1,006 1,524
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Net decrease in cash and cash equivalents (151,178) (99,481)
Cash and cash equivalents at beginning of year 164,012 118,814
--------- ---------
Cash and cash equivalents at end of period $ 12,834 $ 19,333
========= =========
Income taxes paid $ 6,749 $ 22,597
Interest paid 18,927 21,979
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended March 31, 2003 and 2002
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the fiscal year ended December 31, 2002. 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 first quarter ended March 31, 2003 are not
necessarily indicative of the results to be expected for the fiscal year ending
December 31, 2003.
NOTE B--DIVIDENDS
Dividends paid on common stock during the first quarters of 2003 and 2002 were
$.155 per common share and $.15 per common share, respectively.
NOTE C--OTHER EXPENSE - NET
Items included in Other expense - net are as follows:
Three months ended
(Thousands of dollars) March 31,
------------------------
2003 2002
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Dividend and royalty income $ (709) $ (958)
Net expense from financing
and investing activities 1,450 1,713
Foreign currency related losses 2,539 3,584
Other income (111) (1,101)
Other expense 1,037 672
The net expense from financing and investing activities represents the realized
gains or losses associated with the disposal of fixed assets, the net pre-tax
expense associated with the Company's investment in broad-based corporate owned
life insurance and other related fees.
Other income and other expense include miscellaneous items that are not related
to the primary business purpose of the Company.
-5-
NOTE D--DISPOSITION AND TERMINATION OF OPERATIONS
The Company is continually re-evaluating its operating facilities against its
long-term strategic goals. Prior to January 1, 2003, upon commitment to a formal
shutdown plan of an operating facility, provisions were made for all estimated
qualified exit costs in accordance with Emerging Issues Task Force No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity." Beginning January 1, 2003, the Company recognizes
liabilities associated with exit or disposal activities as incurred in
accordance with Statement of Financial Accounting Standards (SFAS) No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." Qualified
exit costs primarily include post-closure rent expenses, incremental
post-closure costs and costs of employee terminations. Adjustments may be made
to prior provisions for qualified exit costs if information becomes available
upon which more accurate amounts can be reasonably estimated. Concurrently,
property, plant and equipment is tested for impairment and, if impairment
exists, the carrying value of the related assets is reduced to estimated fair
value. Adjustments may be made for subsequent revisions in estimated fair value,
not to exceed original asset carrying value before impairment.
The following table summarizes the remaining liabilities for qualified exit
costs at March 31, 2003 and activity for the three month period then ended:
(Thousands of dollars) Actual Adjustments to
Balance at Provisions expenditures prior provisions Balance at
December 31, in Cost of charged to in Other March 31,
Exit Plan 2002 goods sold accrual expense - net 2003
------------------------------------- --------------- ------------- -------------- ----------------- ---------------
Consumer manufacturing facility:
Severance and related costs $ 133 $ (85) $ 48
Other exit costs 2,790 (226) 2,564
Paint Stores manufacturing facility:
Severance and related costs
Other exit costs 333 (46) 287
Automotive Finishes research centers:
Other exit costs 574 574
Exit costs initiated prior to 2000 12,647 (232) 12,415
-------- -------- ------ --------- --------
Totals $ 16,477 $ (589) $ 15,888
======== ======== ====== ========= +=======
For further details on the disposition and termination of operations, see Note 4
to the Consolidated Financial Statements in the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
NOTE E--PRODUCT WARRANTIES
Changes in the Company's accrual for product warranty claims during the first
quarter of 2003, including customer satisfaction settlements during the year,
were as follows:
(Thousands of dollars)
Balance at December 31, 2002 $15,510
Charges to expense 5,484
Settlements 4,538
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Balance at March 31, 2003 $16,456
=======
For further details on the Company's accrual for product warranty claims, see
Note 1 to the Consolidated Financial Statements in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002.
-6-
NOTE F--COMPREHENSIVE INCOME
Comprehensive income is summarized as follows:
Three months ended
(Thousands of dollars) March 31,
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2003 2002
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Net income (loss) $ 30,802 $(148,351)
Foreign currency translation adjustments (286) (1,817)
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Comprehensive income (loss) $ 30,516 $(150,168)
========= =========
NOTE G--STOCK-BASED COMPENSATION
At March 31, 2003, the Company had stock-based compensation plans accounted for
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, as more fully described in the consolidated financial
statements and footnotes included in the Company's Form 10-K for the year
ended December 31, 2002. Pro-forma information regarding the impact of
stock-based compensation on net income and earnings per share is required by
SFAS No. 123, "Accounting for Stock-Based Compensation." Such pro-forma
information, determined as if the Company had accounted for its employee stock
options under the fair value method of that statement, is illustrated in the
following table:
Three months ended
(Thousands of dollars except per share data) March 31,
----------------------------
2003 2002
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Net income (loss), as reported $30,802 $(148,351)
Add: Total stock-based compensation expense
included in the determination of net income
as reported, net of related tax effects 488 488
Less: Total stock-based compensation expense
determined under fair value based method for
all awards, net of related tax effects (3,381) (2,635)
-------- ---------
Pro forma net income (loss) $27,909 $(150,498)
======== =========
Net income (loss) per share:
Basic - as reported $.21 $(.98)
Basic - pro-forma $.19 $(.99)
Diluted - as reported $.21 $(.98)
Diluted - pro-forma $.19 $(.99)
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NOTE H--INCOME (LOSS) PER COMMON SHARE
Three months ended March 31,
-----------------------------------
(Thousands of dollars except per share data) 2003 2002
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Income before cumulative effect
of change in accounting principle $ 30,802 $ 34,785
Cumulative effect of change in accounting
principle - net of income taxes of $64,476 (183,136)
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Net income (loss) $ 30,802 $ (148,351)
============= =============
Basic
Average common shares outstanding 145,841,044 151,693,590
============= =============
Income (loss) per common share:
Income before cumulative effect
of change in accounting principle $ 0.21 $ 0.23
Cumulative effect of change in accounting principle (1.21)
------------- -------------
Net income (loss) $ 0.21 $ (0.98)
============= =============
Diluted
Average common shares outstanding 145,841,044 151,693,590
Non-vested restricted stock grants 528,667
Stock options - treasury stock method 1,590,647
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Average common shares assuming dilution 147,960,358 151,693,590
============= =============
Income (loss) per common share:
Income before cumulative effect
of change in accounting principle $ 0.21 $ 0.23
Cumulative effect of change in accounting principle (1.21)
------------- -------------
Net income (loss) $ 0.21 $ (0.98)
============= =============
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NOTE I--REPORTABLE SEGMENT INFORMATION
The Company reports segment information in the same way that management
internally organizes its business for assessing performance and making decisions
regarding allocation of resources in accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
Net External Sales/Operating Profit
------------------------------------
2003 2002
---------------------------- ----------------------------
(Thousands of dollars) NET SEGMENT Net Segment
EXTERNAL OPERATING External Operating
SALES PROFIT Sales Profit
---------- ---------- ---------- ----------
THREE MONTHS ENDED MARCH 31:
Paint Stores $ 716,271 $ 29,941 $ 695,898 $ 40,068
Consumer 266,167 39,080 278,779 43,156
Automotive Finishes 106,446 10,083 111,559 11,427
International Coatings 57,803 (259) 61,416 (8,533)
Administrative 1,774 (30,338) 1,526 (30,013)
---------- ---------- ---------- ----------
Consolidated totals $1,148,461 $ 48,507 $1,149,178 $ 56,105
========== ========== ========== ==========
Intersegment Transfers
----------------------
Three months ended March 31,
----------------------------
(Thousands of dollars) 2003 2002
-------- --------
Paint Stores $ 110 $ 413
Consumer 212,832 209,918
Automotive Finishes 8,148 5,456
International Coatings 182 291
Administrative 1,079 1,045
-------- --------
Segment totals $222,351 $217,123
======== ========
Segment operating profit is total revenue, including intersegment transfers,
less operating costs and expenses. Domestic intersegment transfers are accounted
for at the approximate fully absorbed manufactured cost plus distribution costs.
International intersegment transfers are accounted for at values comparable to
normal unaffiliated customer sales. The Administrative Segment's expenses
include interest which is unrelated to certain financing activities of the
Operating Segments, certain foreign currency transaction losses related to
dollar-denominated debt and other financing activities, and other adjustments.
Net external sales and operating profits of all consolidated foreign
subsidiaries were $114.6 million and $1.6 million, respectively, for the first
quarter of 2003, and $120.7 million and $0.9 million, respectively, for the
first quarter of 2002. Long-lived assets of these subsidiaries totaled $96.0
million and $111.8 million at March 31, 2003 and 2002, respectively. Domestic
operations account for the remaining net external sales, operating profits and
long-lived assets. The Administrative Segment's expenses do not include any
significant foreign operations. No single geographic area outside the United
States was significant relative to consolidated net external sales or
consolidated long-lived assets.
Export sales and sales to any individual customer were each less than 10% of
consolidated sales to unaffiliated customers during all periods presented.
NOTE J--CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002. Goodwill and intangible assets deemed to have
indefinite lives are no longer being amortized but are subject to impairment
tests in accordance with SFAS No. 142. During the first quarter 2002, the
Company recognized a transitional impairment charge of $247,612 ($183,136 after
tax or $1.21 per share) as the cumulative effect of a change in accounting
principle to reduce the carrying values of certain indefinite-lived intangible
assets and goodwill to estimated fair values as required by SFAS No. 142.
Impairment of
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indefinite-lived intangible assets amounted to $118,220 ($77,422 after tax or
$.51 per share) and impairment of goodwill amounted to $129,392 ($105,714 after
tax or $.70 per share). The impairment of indefinite-lived intangible assets was
due primarily to a shortfall in sales from levels anticipated at the time of
acquisition and related principally to trademarks in the Consumer Segment
associated with the acquisition of Thompson Minwax Holding Corp. In addition,
certain trademarks in the International Coatings Segment were impaired. The
impairment of goodwill relates primarily to international operations in the
International Coatings and Automotive Finishes Segments. Weakening foreign
currency exchange rates and economic conditions, particularly in South America,
have negatively impacted profit and cash flow in U.S. dollars. Fair values of
indefinite-lived intangible assets and goodwill were estimated using a
discounted cash flow valuation model, incorporating a discount rate commensurate
with the risks involved for each group of assets.
NOTE K--IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities." Interpretation No. 46
requires unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse the risks and
rewards of ownership among their owners and other parties involved. The
provisions of Interpretation No. 46 are applicable immediately to all variable
interest entities created after January 31, 2003. For variable interest entities
created or acquired before February 1, 2003, the provisions must be applied for
the first interim or annual period beginning after June 15, 2003. The Company
has not created or entered into any variable interest entities after January 31,
2003 and is currently reviewing whether any variable interest entities were
created or entered into prior to February 1, 2003. Management does not believe
the consolidation of any variable interest entities discovered will have a
material effect on the Company's results of operations, financial condition or
liquidity.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements and accompanying footnotes included in
this report have been prepared in accordance with accounting principles
generally accepted in the United States with certain amounts based on
management's best estimates and judgments. To determine appropriate carrying
values of assets and liabilities that are not readily available from other
sources, management uses assumptions based on historical results and other
factors that they believe are reasonable. Actual results could differ from those
estimates. Also, materially different amounts may result under materially
different conditions or from using materially different assumptions. However,
management currently believes that any materially different amounts resulting
from materially different conditions or material changes in facts or
circumstances are unlikely.
There have been no significant changes in the Company's accruals for
environmental remediation-related activities or qualified exit costs since the
year ended December 31, 2002. There have been no significant changes in the
critical accounting policies or management estimates since the year ended
December 31, 2002. A discussion of the Company's critical accounting policies
and related management estimates is included in Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
FINANCIAL CONDITION
Cash and cash equivalents decreased $151.2 million and short-term borrowings
increased $98.8 million during the first three months of 2003 related primarily
to the seasonality of the coatings business. Short-term borrowings primarily
relate to the Company's commercial paper program, which had unused borrowing
availability of $619.2 million at March 31, 2003. This program is backed by the
Company's revolving credit agreements. Available cash and the proceeds from
short-term borrowings were used for normal seasonal increases in working capital
balances of $165.5 million, treasury stock purchases of $72.6 million and cash
dividends of $22.8 million. The Company's current ratio declined to 1.30 from
1.39 at December 31, 2002. The decrease in this ratio is primarily due to the
increased short-term borrowings.
Since March 31, 2002, cash generated by operations of $558.4 million was used
primarily for capital expenditures of $141.1 million, treasury stock purchases
of $215.3 million, cash dividends of $90.9 million and reductions in short-term
borrowings of $118.8 million. Due to the seasonality of the Company's business
and the need for available cash prior to the primary selling season and
subsequent collection of related accounts receivable, the Company expects to
remain in a short-term borrowing position throughout most of 2003.
Capital expenditures during the first quarter of 2003 primarily represented
expenditures associated with new store openings, normal equipment replacement in
the Paint Stores Segment
-11-
and completion of a new distribution center in the Consumer Segment. We do not
anticipate the need for any specific external financing to support our capital
programs during the remainder of 2003.
During the first quarter of 2003, the Company purchased 2,552,000 shares of its
common stock 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 had remaining authorization at March 31, 2003 to
purchase approximately 7.7 million shares of its common stock.
The Company's past operations included the manufacture and sale of lead pigments
and lead-based paints. The Company, along with other companies, is a defendant
in a number of legal proceedings, including purported class actions, separate
actions brought by the State of Rhode Island, and actions brought by various
counties, cities, school districts and other government-related entities,
arising from the manufacture and sale of lead pigments and lead-based paints.
The plaintiffs are seeking recovery based upon various legal theories, including
negligence, strict liability, breach of warranty, negligent misrepresentations
and omissions, fraudulent misrepresentations and omissions, concert of action,
civil conspiracy, violations of unfair trade practices and consumer protection
laws, enterprise liability, market share liability, nuisance, unjust enrichment
and other theories. The plaintiffs seek various damages and relief, including
personal injury and property damage, costs relating to the detection and
abatement of lead-based paint from buildings, costs associated with a public
education campaign, medical monitoring costs and others. The Company believes
that the litigation is without merit and is vigorously defending such
litigation. The Company expects that additional lead pigment and lead-based
paint litigation may be filed against the Company in the future asserting
similar or different legal theories and seeking similar or different types of
damages and relief. Legal proceedings pending in certain jurisdictions have been
scheduled for trial during 2003, and the Company believes it is possible that
additional legal proceedings could be scheduled for trial during 2003 and
subsequent years.
Litigation is inherently subject to many uncertainties. Adverse court rulings or
determinations of liability, among other factors, could affect the lead pigment
and lead-based paint litigation against the Company and encourage an increase in
the number and nature of future claims and proceedings. In addition, from time
to time, various legislation and administrative regulations have been enacted or
proposed to impose obligations on present and former manufacturers of lead
pigments and lead-based paints respecting asserted health concerns associated
with such products and to overturn court decisions in which the Company and
other manufacturers have been successful. Due to the uncertainties involved,
management is unable to predict the outcome of the lead pigment and lead-based
paint litigation, the number or nature of possible future claims and
proceedings, or the affect that any legislation and/or administrative
regulations may have on the litigation or against the Company. In addition,
management cannot reasonably determine the scope or amount of the potential
costs and liabilities related to such litigation, or any such legislation and
regulations. The Company has not accrued any amounts for such litigation. Any
costs that may be incurred or potential liabilities that may result from such
litigation or such legislation and regulations cannot reasonably be estimated.
However, based upon, among other things, the outcome of such litigation to date,
management does not currently believe that the costs or potential liabilities
ultimately determined to be attributable to the Company arising out
-12-
of such litigation will have a material adverse effect on the Company's results
of operations, liquidity or financial condition.
The operations of the Company, like those of other companies in our industry,
are subject to various federal, state and local environmental laws and
regulations. These laws and regulations not only govern our current operations
and products, but also impose potential liability on the Company for past
operations which were conducted utilizing practices and procedures that were
considered acceptable under the laws and regulations existing at that time. The
Company expects environmental laws and regulations to impose increasingly
stringent requirements upon the Company and our industry in the future. The
Company believes that it conducts its operations in compliance with applicable
environmental laws and regulations and has implemented various programs designed
to protect the environment and promote continued compliance.
The Company is involved with environmental compliance, investigation and
remediation activities at some of its current and former sites (including sites
which were previously owned and/or operated by businesses acquired by the
Company). The Company, together with other parties, has also been designated a
potentially responsible party under federal and state environmental protection
laws for the investigation and remediation of environmental contamination and
hazardous waste at a number of third-party sites, primarily Superfund sites. The
Company may be similarly designated with respect to additional third-party sites
in the future.
The Company accrues for environmental-related activities relating to its past
operations and third-party sites, including Superfund sites, for which
commitments or clean-up plans have been developed and for which costs can be
reasonably estimated. These estimated costs are determined based on currently
available facts regarding each site. The Company continuously assesses its
potential liability for investigation and remediation-related activities and
adjusts its environmental-related accruals as information becomes available upon
which more accurate costs can be reasonably estimated and as additional
accounting guidelines are issued which require changing the estimated costs or
the procedure utilized in estimating such costs. Actual costs incurred may vary
from these estimates due to the inherent uncertainties involved including, among
others, the number and financial condition of parties involved with respect to
any given site, the volumetric contribution which may be attributed to the
Company relative to that attributed to other parties, the nature and magnitude
of the wastes involved, the various technologies that can be used for
remediation and the determination of acceptable remediation with respect to a
particular site. The Company's environmental-related contingent liabilities are
expected to be resolved over an extended period of time. There were no
significant changes in currently available facts or in the accrual for
environmental-related activities during the first quarter of 2003.
Pursuant to a Consent Decree entered into with the United States of America in
1997, on behalf of the Environmental Protection Agency, filed in the United
States District Court for the Northern District of Illinois, the Company has
agreed, in part, to (i) conduct an investigation at its southeast Chicago,
Illinois facility to determine the nature, extent and potential impact, if any,
of environmental contamination at the facility and (ii) implement remedial
action measures, if required, to address any environmental contamination
identified pursuant to the investigation.
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While the Company continues to investigate this site, certain initial remedial
actions have occurred at this site.
In 1999, the Company entered into a settlement agreement with PMC, Inc. settling
a lawsuit brought by PMC regarding the Company's former manufacturing facility
in Chicago, Illinois which was sold to PMC in 1985. Pursuant to the terms of the
settlement agreement, the Company agreed, in part, to investigate and remediate,
as necessary, certain soil and/or groundwater contamination caused by historical
disposals, discharges, releases and/or events occurring at this facility. In
2000, the Company entered into a Consent Decree with the People of the State of
Illinois settling an action brought by the State of Illinois against the Company
regarding the PMC facility. Under the Consent Decree, the Company agreed, in
part, to investigate and remediate, as necessary, certain soil and/or
groundwater contamination caused by historical disposals, discharges, releases
and/or events occurring at this facility. The Company is currently conducting
its investigation of this facility.
With respect to the Company's southeast Chicago, Illinois facility and the PMC
facility, the Company has evaluated its potential liability and, based upon its
investigations to date, has accrued appropriate amounts. The Company expects the
contingent liabilities related to these facilities to be resolved over an
extended period of time.
Due to the uncertainties surrounding the investigations and remediation
activities at some of the Company's sites and third-party sites, the Company's
ultimate liability may result in costs that are significantly higher than
currently accrued. In such event, the recording of the liability may result in a
material impact on net income for the annual or interim period during which the
additional costs are accrued. The Company does not believe that any potential
liability ultimately attributed to the Company for its environmental-related
matters will have a material adverse effect on the Company's financial
condition, liquidity or cash flow.
There have been no significant changes to the Company's contractual obligations
and commercial commitments in the first quarter of 2003 as summarized in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
There have been no significant changes to the Company's accrual for product
warranty claims in the first quarter of 2003 as disclosed in Note E.
RESULTS OF OPERATIONS
Consolidated net sales for the quarter decreased 0.1 percent to $1.148 billion
from $1.15 billion in the first quarter last year. A continuing poor domestic
industrial sector, harsh weather, changes in the buying patterns of some retail
customers and weak currency exchange rates adversely impacted first quarter
sales. Excluding the effects of currency exchange fluctuations relative to last
year, consolidated net sales increased 1.3 percent for the first quarter. Net
sales in the Paint Stores Segment increased 2.9 percent in the quarter to $716.3
million from $695.9 million last year, due to strong architectural paint sales,
partially offset by weak industrial maintenance and product finishes sales.
Comparable-store sales, which are sales from stores open for more than twelve
calendar months, were flat with last year's first quarter. Net sales of
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the Consumer Segment decreased 4.5 percent in the first quarter to $266.2
million from $278.8 million last year. The sales shortfall was due primarily to
changes by some of the Segment's largest retail customers in their ordering or
promotional patterns, the readjustment of store count by a major retailer, the
impact of harsh weather and stringent inventory control relating to the slow
domestic economy. The Automotive Finishes Segment's first quarter net sales
decreased 4.6 percent to $106.4 million from $111.6 million last year. Excluding
the effects of currency exchange fluctuations relative to last year, net sales
for this Segment were up slightly for the quarter, primarily due to improved
foreign sales offset by a decline in the collision repair market in the U.S. Net
sales in the International Coatings Segment were down 5.9 percent to $57.8
million in the quarter. The sales decrease in U. S. dollars was due primarily to
unfavorable currency exchange rates in South America. Excluding the effects of
currency exchange fluctuations relative to last year, net sales for the Segment
increased 9.5 percent for the first quarter.
Consolidated gross profit as a percent of sales increased to 43.7 percent, or
$9.7 million, in the first quarter of 2003 from 42.8 percent in the first
quarter of 2002. Excluding a charge of $6.5 million included in cost of goods
sold in the first quarter of 2002 related to the charge for impairment of
long-lived assets in accordance with SFAS No. 144, gross profit for the first
quarter 2003 increased $3.2 million as compared with last year. The Paint Stores
Segment's gross profit for the first quarter was higher than last year by $10.7
million due primarily to higher do-it-yourself (DIY) architectural paint sales.
The Consumer Segment's first quarter gross profit decreased $4.7 million from
last year due to lower volume sales and related lower manufacturing absorption.
The Automotive Finishes Segment's margins, in light of decreased sales, remained
essentially flat during the first quarter of 2003 due to continued manufacturing
efficiencies. Excluding the impairment charge during the first quarter of 2002,
the International Coatings Segment's first quarter gross profit was $2.7 million
lower than last year due to economic and competitive pressures.
Consolidated selling, general and administrative expenses as a percent of sales
increased to 38.4 percent, or $18.3 million, in the first quarter of 2003 from
36.7 percent in the first quarter of 2002. In the Paint Stores Segment,
increased spending of $18.2 million was due primarily to investments incurred to
maintain superior customer service, incremental expenses associated with new and
acquired stores, increased pension expense and increased utility costs. The
Consumer Segment's SG&A percent of sales ratio was favorable to last year in the
first quarter primarily due to continued cost control. The Automotive Segment's
SG&A expenses as a percent of sales was unfavorable to last year in the first
quarter primarily due to lower sales levels and increased pension expense. First
quarter SG&A expense as a percent of sales was favorable to last year in the
International Coatings Segment primarily due to tight expense control that was
partially offset by a $2.5 million long-lived asset impairment charge recorded
in the first quarter of 2002.
Decreased interest expense in the first quarter of 2003 versus 2002 was due to
lower average outstanding short-term and long-term debt.
Other expense - net was $.3 million higher for the first quarter of 2003
compared to 2002. See Note C for discussion of items included in Other expense -
net.
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Income for the quarter decreased $4.0 million, or 11.5 percent, to $30.8 million
from $34.8 million in 2002 before cumulative effect of change in accounting
principle. The decline in after-tax income was due in part to an increase in
pre-tax pension expense of $6.4 million and selling, general and administrative
expense increases that were only partially offset by increased gross profit and
a reduced effective tax rate. Diluted income per common share was $.21 per share
compared to $.23 per share before cumulative effect of change in accounting
principle in 2002 (see Note H for the basic and diluted income per common share
calculation). In the first quarter of 2002, the Company recorded an after-tax
transitional impairment charge of $183.1 million, or $1.21 per share, as a
cumulative effect of change in accounting principle for indefinite-lived
intangible assets and goodwill (see Note J for discussion of the cumulative
effect of change in accounting principle).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this report
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are based upon management's current
expectations, estimates, assumptions and beliefs concerning future events and
conditions and may discuss, among other things, anticipated future performance
(including sales and earnings), expected growth, future business plans and the
costs and potential liability for environmental-related matters and the lead
pigment and lead-based paint litigation. Any statement that is not historical in
nature is a forward-looking statement and may be identified by the use of words
and phrases such as "expects," "anticipates," "believes," "will," "will likely
result," "will continue," "plans to" and similar expressions. Readers are
cautioned not to place undue reliance on any forward-looking statements.
Forward-looking statements are necessarily subject to risks, uncertainties and
other factors, many of which are outside the control of the Company, that could
cause actual results to differ materially from such statements and from the
Company's historical results and experience.
These risks, uncertainties and other factors include such things as: (a) general
business conditions, strengths of retail and manufacturing economies and the
growth in the coatings industry; (b) competitive factors, including pricing
pressures and product innovation and quality; (c) changes in raw material
availability and pricing; (d) changes in the Company's relationships with
customers and suppliers; (e) the ability of the Company to attain cost savings
from productivity initiatives; (f) the ability of the Company to successfully
integrate past and future acquisitions into its existing operations, as well as
the performance of the businesses acquired; (g) changes in general domestic
economic conditions such as inflation rates, interest rates and tax rates; (h)
risks and uncertainties associated with the Company's expansion into and its
operations in China, South America and other foreign markets, including
inflation rates, recessions, foreign currency exchange rates, foreign investment
and repatriation restrictions, unrest and other external economic and political
factors; (i) the achievement of growth in developing markets, such as China,
Mexico and South America; (j) increasingly stringent domestic and foreign
governmental regulations including those affecting the environment; (k) inherent
uncertainties involved in assessing the Company's potential liability for
environmental remediation-related activities; (l) other changes in governmental
policies, laws and regulations, including changes in accounting policies and
standards and taxation requirements (such as new tax laws and new or
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revised tax law interpretations); (m) the nature, cost, quantity and outcome of
pending and future litigation and other claims, including the lead pigment and
lead-based paint litigation and the affect of any legislation and administrative
regulations relating thereto; and (n) unusual weather conditions.
Readers are cautioned that it is not possible to predict or identify all of the
risks, uncertainties and other factors that may affect future results and that
the above list should not be considered to be a complete list. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk associated with interest rates and value
changes in foreign currencies. The Company utilizes derivative instruments as
part of its overall financial risk management policy, but does not use
derivative instruments for speculative or trading purposes. The Company does not
believe that any potential loss related to interest rate exposure would have a
material adverse effect on the Company's financial condition, results of
operations or cash flows. The Company enters into foreign currency option and
forward contracts to hedge against value changes in foreign currency. The
Company believes it may experience continuing losses from foreign currency
translation. However, the Company does not expect currency translation,
transaction or hedging contract losses to have a material adverse effect on the
Company's financial condition, results of operations or cash flows. There were
no material changes in the Company's exposure to market risk since the
disclosure included in Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Company's Annual Report on Form 10-K
for the year ended December 31, 2002.
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ITEM 4. CONTROLS AND PROCEDURES
Within the 90 day period prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's Chairman and Chief Executive Officer and the Company's Senior Vice
President - Finance and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, the
Company's Chairman and Chief Executive Officer and Senior Vice President -
Finance and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
disclosed by the Company in its periodic SEC reports. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(99)(a) Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
(99)(b) Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
(b) Reports on Form 8-K.
(i) The Company filed a Current Report on Form 8-K, dated March 10,
2003, reporting under Item 5 that the Company had issued a press
release regarding its sales and earnings expectations for the
first quarter of 2003 and the full year 2003.
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
May 13, 2003 By: /s/ J.L. Ault
------------------------------------
J.L. Ault
Vice President-Corporate Controller
May 13, 2003 By: /s/ L.E. Stellato
------------------------------------
L.E. Stellato
Vice President, General Counsel and
Secretary
CERTIFICATIONS
I, Christopher M. Connor, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Sherwin-Williams
Company;
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2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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Date: May 13, 2003 /s/ Christopher M. Connor
----------------------------------------
Christopher M. Connor
Chairman and Chief Executive Officer
I, Sean P. Hennessy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Sherwin-Williams
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
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b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 /s/ Sean P. Hennessy
----------------------------------------
Sean P. Hennessy
Senior Vice President - Finance and
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT
(99)(a) Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
(99)(b) Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
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