<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended March 31, 1999
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)
<TABLE>
<CAPTION>
OHIO 34-0526850
<S> <C>
(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)
</TABLE>
(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 - 170,099,266 shares as of April 30, 1999.
<PAGE> 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
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Net sales $ 1,127,867 $ 1,104,147
Costs and expenses:
Cost of goods sold 650,781 649,208
Selling, general and administrative expenses 411,613 394,222
Interest expense 15,770 18,587
Interest and net investment income (1,692) (1,308)
Other 4,949 2,796
----------- -----------
1,081,421 1,063,505
----------- -----------
Income before income taxes 46,446 40,642
Income taxes 17,649 15,444
----------- -----------
Net income $ 28,797 $ 25,198
=========== ===========
Net income per common share:
Basic $ 0.17 $ 0.15
=========== ===========
Diluted $ 0.17 $ 0.14
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 3
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars
<TABLE>
<CAPTION>
MARCH 31, Dec. 31, March 31,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,503 $ 19,133 $ 2,734
Accounts receivable, less allowance 652,430 604,516 638,694
Inventories:
Finished goods 575,196 568,328 639,224
Work in process and raw materials 109,193 114,195 128,968
----------- ----------- -----------
684,389 682,523 768,192
Other current assets 274,802 241,118 269,672
----------- ----------- -----------
Total current assets 1,615,124 1,547,290 1,679,292
Goodwill 1,060,017 1,123,128 1,151,789
Intangible assets 286,817 291,715 305,775
Deferred pension assets 310,944 304,006 282,282
Other assets 77,471 80,466 71,866
Property, plant and equipment 1,444,533 1,440,244 1,389,736
Less allowances for depreciation and amortization 737,790 721,387 686,929
----------- ----------- -----------
706,743 718,857 702,807
----------- ----------- -----------
Total assets $ 4,057,116 $ 4,065,462 $ 4,193,811
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 160,719 $ 280,752
Accounts payable 415,353 $ 408,144 454,830
Compensation and taxes withheld 105,549 125,698 91,521
Current portion of long-term debt 160,683 118,178 53,979
Other accruals 403,657 383,149 376,183
Accrued taxes 91,210 76,804 53,778
----------- ----------- -----------
Total current liabilities 1,337,171 1,111,973 1,311,043
Long-term debt 629,124 730,283 791,673
Postretirement benefits other than pensions 206,218 204,763 201,269
Other long-term liabilities 290,662 302,503 280,599
Shareholders' equity:
Common stock - $1.00 par value:
170,052,428, 171,033,231 and 173,700,341 shares
outstanding at March 31, 1999, Dec. 31, 1998
and March 31, 1998, respectively 206,030 205,701 205,360
Other capital 146,933 143,686 131,255
Retained earnings 1,806,360 1,797,945 1,608,581
Treasury stock, at cost (419,890) (386,465) (302,311)
Cumulative other comprehensive loss (145,492) (44,927) (33,658)
----------- ----------- -----------
Total shareholders' equity 1,593,941 1,715,940 1,609,227
----------- ----------- -----------
Total liabilities and shareholders' equity $ 4,057,116 $ 4,065,462 $ 4,193,811
=========== =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 4
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATIONS
Net income $ 28,797 $ 25,198
Adjustments to reconcile net income to net operating cash:
Depreciation 24,903 23,197
Amortization of goodwill and intangible assets 12,530 12,427
Increase in deferred pension assets (6,938) (6,000)
Net increase in postretirement liability 1,455 1,430
Other 5,515 5,761
Change in current assets and liabilities-net (82,095) (121,164)
Other 5,098 (8,336)
--------- ---------
Net operating cash (10,735) (67,487)
INVESTING
Capital expenditures (38,377) (39,089)
Acquisitions of assets (8,262)
Increase in other investments (7,568) (8,541)
Other 1,041 1,149
--------- ---------
Net investing cash (53,166) (46,481)
FINANCING
Net increase in short-term borrowings 160,719 173,840
Payments of long-term debt (58,705) (52,102)
Payments of cash dividends (20,382) (19,499)
Proceeds from stock options exercised 2,864 10,739
Treasury stock acquired (33,425)
Other 321 194
--------- ---------
Net financing cash 51,392 113,172
--------- ---------
Effect of exchange rate changes on cash (3,121)
--------- ---------
Net decrease in cash and cash equivalents (15,630) (796)
Cash and cash equivalents at beginning of year 19,133 3,530
--------- ---------
Cash and cash equivalents at end of period $ 3,503 $ 2,734
========= =========
Taxes paid on income $ 16,470 $ 4,665
Interest paid on debt 27,548 30,195
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 5
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended March 31, 1999 and 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the fiscal year ended December
31, 1998. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The consolidated results for the three months ended March 31, 1999 are
not necessarily indicative of the results to be expected for the fiscal year
ending December 31, 1999.
NOTE B--DIVIDENDS
Dividends paid on common stock during the first quarter of 1999 and 1998 were
$.12 per share and $.1125 per share, respectively.
NOTE C--OTHER COSTS AND EXPENSES
Significant items included in other costs and expenses are as follows:
<TABLE>
<CAPTION>
Three months ended
---------------------------
(Thousands of dollars) MARCH 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Dividend and royalty income $ 1,233 $ 916
Net (expense) income from financing and
investing activities (3,014) 1,430
Foreign currency exchange losses (3,332) (2,034)
</TABLE>
The net (expense) income 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 1998, the net gain related to the sale of
the Company's joint venture interest in American Standox, Inc.
<PAGE> 6
NOTE D--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 rules for the reporting and display of comprehensive income and its
components, which include net income, foreign currency translation adjustments,
and minimum pension liabilities. In accordance with SFAS No. 109, "Accounting
for Income Taxes," the Company does not provide for U.S. income taxes on
earnings of foreign subsidiaries that are not expected to be remitted in the
foreseeable future. Accordingly, the Company does not provide for income taxes
on foreign currency translation adjustments.
Comprehensive income is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Three months ended March 31,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 28,797 $ 25,198
Foreign currency translation adjustments (100,565) (141)
--------- --------
Comprehensive (loss) income $ (71,768) $ 25,057
========= ========
</TABLE>
NOTE E--RECLASSIFICATION
Certain amounts in the 1998 financial statements have been reclassified to
conform with the 1999 presentation.
<PAGE> 7
NOTE F--NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended
----------------------------------
Thousands of dollars, except per share data MARCH 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Basic
Average common shares outstanding 169,647,136 172,903,717
============ ============
Net income $ 28,797 $ 25,198
============ ============
Net income per common share $ 0.17 $ 0.15
============ ============
Diluted
Average common shares outstanding 169,647,136 172,903,717
Non-vested restricted stock grants 293,067 242,900
Stock options - treasury stock method 576,660 1,406,889
------------ ------------
Average common shares assuming dilution 170,516,863 174,553,506
============ ============
Net income $ 28,797 $ 25,198
============ ============
Net income per common share $ 0.17 $ 0.14
============ ============
</TABLE>
Net income per common share has been computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128.
<PAGE> 8
NOTE G--REPORTABLE SEGMENT INFORMATION
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information", was adopted by the Company
effective December 31, 1998. SFAS No. 131 requires an enterprise to report
segment information utilizing an approach referred to as the "management
approach" which is based on reporting segment information in the same way that
management internally organizes its business for assessing performance and
making decisions regarding allocation of resources. The adoption of SFAS No. 131
did not change the composition of the reportable segments of the Company.
Therefore, no restatements of comparative information for earlier periods is
required to reflect the current presentation.
Net External Sales/Operating Profit
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------------------------------------
Thousands of dollars 1999 1998
------------------------- --------------------------
NET Net
EXTERNAL OPERATING External Operating
SALES PROFIT Sales Profit
----- ------ ----- ------
<S> <C> <C> <C> <C>
Paint Stores $ 623,426 $ 14,934 $ 581,265 $ 11,247
Coatings 501,193 70,162 519,835 66,998
Other 3,248 3,634 3,047 3,156
----------- --------- ----------- ---------
Segment totals $1,127,867 88,730 $1,104,147 81,401
=========== ===========
Corporate expenses - net (42,284) (40,759)
--------- ---------
Income before income taxes $ 46,446 $ 40,642
========= =========
</TABLE>
Intersegment Transfers
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
Thousands of dollars 1999 1998
---- ----
<S> <C> <C>
Coatings $243,826 $226,548
Other 6,034 5,608
--------- ---------
Segment totals $249,860 $232,156
========= =========
</TABLE>
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 $117.9 million and $11.4 million, respectively, for the first quarter of
1999, and $126.9 million and $9.3 million, respectively, for the first quarter
of 1998. Long-lived assets of these subsidiaries totaled $254.7 million and
$317.8 million, respectively, at March 31, 1999 and 1998.
<PAGE> 9
Domestic operations account for the remaining net external sales, operating
profits and long-lived assets. Corporate 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.
Intersegment transfers are accounted for at values comparable to normal
unaffiliated customer sales.
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated net sales increased 2.1 percent during the first quarter of 1999,
to $1,127,867,000, over the comparable period in 1998. First quarter sales in
the Paint Stores Segment increased 7.3 percent from last year, to
$623,426,000, due to increased paint gallons sold to both retail and wholesale
customers combined with sales gains in its remaining product lines
(wallcovering, floorcovering, spray equipment and associated products).
Wholesale customers include professional painters, contractors and industrial
and commercial maintenance accounts. Comparable-store sales were 5.3 percent
higher than last year for the quarter. The Coatings Segment's first quarter
sales decreased 3.6 percent from 1998, to $501,193,000, due primarily to the
Brazilian real devaluation, a soft domestic vehicle refinish market and the
closing of certain store locations by a major retail customer. Revenue generated
by real estate operations in the Other Segment increased 6.6 percent in the
first quarter due to higher occupancy rates.
Consolidated gross profit as a percent of sales for the first quarter increased
to 42.3 percent from 41.2 percent in 1998. First quarter margins in the Paint
Stores Segment were higher than last year primarily due to increased gallons
sold to its retail customers combined with sales gains in its paint and
paint-related product lines. The Coatings Segment's margins were higher than
last year due primarily to shifts to higher-margin products and other cost
reductions associated with increased factory efficiencies and the closing of
certain locations.
Consolidated selling, general and administrative expenses as a percent of sales
were unfavorable to last year for the first quarter, primarily due to increased
spending to comply with Year 2000 criteria. In the Paint Stores Segment, SG&A
expenses as a percent of sales were essentially even with last year. The
Coatings Segment's SG&A ratio was favorable to last year in the first quarter
due primarily to the consolidation of four divisions in 1998 resulting in a
lower overall SG&A cost structure.
The decrease in interest expense from the first quarter of 1998 occurred due to
lower average borrowings outstanding throughout the quarter. Average short-term
borrowing rates were lower than last year.
Other costs and expenses were higher than last year for the first quarter due to
increased foreign currency exchange losses combined with increased expenses of
financing and investing activities. In the first quarter of 1998, financing and
investing activities included a gain on the sale of the Company's joint venture
interest in American Standox, Inc.
Net income for the first quarter of 1999 increased 14.3 percent, to $28,797,000,
while diluted net income per common share increased to $.17 per share from $.14
per share in the first quarter of 1998.
<PAGE> 11
FINANCIAL CONDITION
During the first three months of 1999, cash and cash equivalents decreased $15.6
million, net long-term debt decreased $58.7 million and short-term borrowings
increased $160.7 million. Short-term borrowings outstanding primarily relate to
the Company's commercial paper program, which had unused borrowing availability
of $599.0 million at March 31, 1999. This program is backed by the Company's
revolving credit agreements. The decrease in long-term debt is primarily related
to the payment of a $50.0 million floating rate note during the first quarter.
The proceeds from the issuance of short-term borrowings were used for normal
operating needs for seasonally higher accounts receivable and inventories and
capital expenditures of $38.4 million, treasury shares acquisition of $33.4
million, and cash dividends of $20.4 million. The Company's current ratio
declined to 1.21 from 1.39 at December 31, 1998. The decrease in this ratio
occurred primarily due to the increased short-term borrowings.
Since March 31, 1998, cash and cash equivalents increased $0.8 million primarily
due to cash generated by operations of $535.3 million offset by capital
expenditures of $145.4 million, reductions in short-term borrowings and net
long-term debt of $176.8 million, treasury shares acquired of $118.5 million,
payments of cash dividends of $78.7 million and normal working capital needs.
The Company expects to remain in a short-term borrowing position throughout most
of 1999.
Capital expenditures during the first quarter of 1999 represented primarily the
costs of upgrading information systems equipment and costs associated with new
store openings. We do not anticipate the need for any specific external
financing to support our capital programs during the remainder of 1999.
During the first quarter of 1999, the Company acquired 1,310,000 shares 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 5,690,000 shares of its common stock.
Other Comprehensive Income was significantly impacted in the first quarter by
foreign currency translation adjustments, primarily related to the Brazilian
real devaluation which occurred in January, 1999.
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. The various existing lawsuits seek damages for personal injuries and
property damages, 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 results of operations, liquidity, or financial
condition.
The operations of the Company, like those of other companies in its industry,
are subject to various federal, state and local environmental laws and
regulations. These laws and regulations not only govern its current operations
and products, but also impose liability on the Company for past
<PAGE> 12
operations which were conducted utilizing practices and procedures 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 its 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.
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 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 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 is a defendant in a lawsuit brought by PMC, Inc. regarding the
Company's former Chemical Division's manufacturing facility in Chicago, Illinois
which was sold to PMC, Inc. in 1985. PMC, Inc. is seeking an undisclosed amount
for environmental remediation costs and other damages based upon contractual and
tort theories and under various environmental laws. The United States District
Court for the Northern District of Illinois conducted a trial on the
environmental law and state law theories and generally held, in part, that the
Company was responsible for all future remediation costs at the facility
pursuant to Section 113(f) of CERCLA. The above determination was affirmed on
appeal in July, 1998 by the United States Court of Appeals for the Seventh
Circuit. The Company continues to vigorously defend the remaining contractual
and tort theories in this lawsuit. In February, 1999, the People of the State of
Illinois filed an amended complaint in a state court action against PMC, Inc.
joining the Company and alleging, in part, that the Company has caused certain
soil and groundwater contamination at the facility and seeking, in part, that
the Company investigate and remediate, as necessary, any such soil and
groundwater contamination. The Company has entered into discussions with the
State of Illinois to address these allegations. The Company has evaluated its
potential liability regarding this facility and, based upon its preliminary
evaluation, has accrued an appropriate amount. However, due to the uncertainties
surrounding this facility, 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.
<PAGE> 13
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, or,
except as set forth in the preceding paragraph, net income.
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 (i) identifying and
taking appropriate corrective action to remedy the Company's software, hardware
and embedded technology, (ii) working with certain key financial institutions,
customers, suppliers and service providers, with which the Company does business
electronically, to help protect such business from being adversely affected by
the Year 2000, and (iii) contacting key vendors and service providers 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 beyond the impact analysis
phase for approximately 96 percent of its mission critical software and hardware
systems, with approximately 82 percent of its mission critical software and
hardware systems having been remediated and 14 percent currently being
remediated. With regard to embedded technology, the Company has completed the
remediation and testing phases for 68 percent of its facilities. 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.
The Company is in contact with certain key financial institutions, customers,
suppliers and service providers, 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 sent surveys to key vendors and service providers
requesting information regarding the status of their Year 2000 readiness and has
begun to conduct telephone interviews and onsite visits with selected key
vendors and service providers. The Company is also in the process of reviewing
the public Year 2000 disclosures of key customers. Based upon this information,
the Company is in the process of identifying potential critical Year 2000 issues
involving key third parties, if any, and either resolving those issues or
developing 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 $21 million has been spent since
the beginning of the project through March 31, 1999. These costs include costs
of internal employees and third-party consultants involved in the project and
the costs of software
<PAGE> 14
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
or service providers, 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.
The most reasonably likely worst case scenario which could result from the
failure of the Company or its customers, vendors or other key third parties to
adequately address Year 2000 issues would include a temporary interruption or
curtailment in the Company's manufacturing or distribution operations at one or
more of its facilities. Such failures could also cause a delay or curtailment in
the processing of orders and invoices and the collection of revenues, as well as
the inability to maintain accurate accounting records, and lead to increased
costs and loss of sales. If these failures would occur, depending upon their
duration and severity, they could have a material adverse effect on the
Company's business, results of operations and financial condition.
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 results of operations. In
addition, the Company cannot reasonably estimate the impact of Year 2000 on the
Company if key third parties, including financial institutions, suppliers,
customers, service providers, public utilities and governments, are unsuccessful
in completing their Year 2000 efforts.
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", 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
<PAGE> 15
statements. These uncertainties and other factors include such things as:
general business conditions, strengths of retail economies and the growth in the
coatings industry; competitive factors, including pricing pressures and product
innovation and quality; raw material availability and pricing; changes in the
Company's relationships with customers and suppliers; the ability of the Company
to successfully integrate recent and future acquisitions into its existing
operations; changes in general domestic economic conditions such as inflation
rates, interest rates and tax rates; risk and uncertainties associated with the
Company's expansion into foreign markets, including inflation rates, recessions,
foreign currency exchange rates, foreign investment and repatriation
restrictions and other external economic and political factors; increasingly
stringent domestic and foreign governmental regulations including those
affecting the environment; inherent uncertainties involved in assessing the
Company's potential liability for environmental remediation-related activities;
the impact of Year 2000; the outcome of pending and future litigation and other
claims; and unusual weather conditions. 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.
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk through various financial instruments,
including fixed rate debt instruments and interest rate swaps. The Company does
not believe that any potential loss related to these financial instruments will
have a material adverse effect on the Company's financial condition or results
of operations. There were no material changes in the Company's exposure to
market risk from December 31, 1998.
<PAGE> 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10)(a) 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).
(10)(b) The Sherwin-Williams Company Management
Compensation Program, as amended (filed
herewith).
(11) Computation of Net Income Per Common Share
- See Note F to Condensed Consolidated
Financial Statements (Unaudited).
(27) Financial Data Schedule for the period
ended March 31, 1999 (filed herewith).
(b) Reports on Form 8-K - none.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SHERWIN-WILLIAMS COMPANY
May 17, 1999 By: /s/ J.L. Ault
---------------------------------------
J.L. Ault
Vice President-Corporate Controller
May 17, 1999 By: /s/ L.E. Stellato
---------------------------------------
L.E. Stellato
Vice President, General Counsel and
Secretary
<PAGE> 18
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT
(10)(a) 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).
(10)(b) The Sherwin-Williams Company Management Compensation
Program, as amended (filed herewith).
(11) Computation of Net Income Per Common Share - See Note
F to Condensed Consolidated Financial Statements
(Unaudited).
(27) Financial Data Schedule for the period ended March
31, 1999 (filed herewith).
<PAGE> 1
EXHIBIT 10(a)
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
----------------------------
FORM A OF SEVERANCE PAY AGREEMENT
John G. Breen
FORM B OF SEVERANCE PAY AGREEMENT
John L. Ault
Christopher M. Connor
Michael A. Galasso
Thomas E. Hopkins
Conway G. Ivy
Larry J. Pitorak
Joseph M. Scaminace
Louis E. Stellato
<PAGE> 1
EXHIBIT 10(b)
SHERWIN-WILLIAMS MANAGEMENT COMPENSATION PROGRAM
------------------------------------------------
PURPOSE
- -------
The purpose of the Sherwin-Williams Management Compensation Program is to
establish and maintain a performance and achievement oriented management
environment throughout the Company that results in improved profits and/or
creativity. The primary emphasis is to develop Sherwin-Williams as a superior
company that can achieve and sustain above average earnings growth and a company
dedicated to excellence in management, products, services and product
development.
With this in mind, the Program is designed so that participating managers will
earn higher than average total compensation for doing an above average job and
have the opportunity to accumulate a significant estate if the Company's
long-range earnings goals are achieved.
TOTAL COMPENSATION
- ------------------
Sherwin-Williams' base salary structure is so designed that a participant may
receive a level of salary compensation which approximates the average of that
paid an equivalent position in the same or similar industries, as reported by
several outside executive compensation services. Those who participate in the
Incentive Plan may be awarded additional compensation in the form of cash and
deferred compensation for performance results that meet or exceed specified
pre-determined goals. Total compensation, therefore, may exceed that of
comparable executive positions in the outside marketplace.
I. BASE SALARY
-----------
Sherwin-Williams' overall salary structure is reviewed annually to
insure that it remains competitive. Positions are classified within the
salary structure on the basis of assigned responsibilities.
The mid-point salary of a grade assigned to a position is the salary
level which approximates the average salary paid an equivalent position
in the same or similar industries. Data are obtained from the latest
survey information available from various executive compensation data
sources. Where salary information is not available for a particular
position, the salary grade assigned is consistent with other positions
having similar responsibilities in the Company and in similar
industries.
Individual salaries are reviewed at least annually, but it must be
understood that salaries may
1
<PAGE> 2
not increase each year. Decisions relating to salary increases are
based on guidelines provided by management.
II. S-W MANAGEMENT INCENTIVE PLAN (SWMIP)
------------------------------------
The second element of the compensation program is the Sherwin-Williams
Management Incentive Plan. This incentive plan is designed to permit
the total compensation of a key manager to reflect:
A. The performance of a particular unit (profit center or
department), and
B. The results of individual efforts as related to established
goals. Goals must require well above average performance and
results should be difficult to attain and have a significant
impact on the improvement of the organizational unit and/or
the Company.
ELIGIBILITY TO PARTICIPATE
- --------------------------
Eligibility to participate in the Plan is limited to Corporate, Group and
Division key managers who are responsible for profit decisions and major policy
direction. To remain a participant, one must remain an active employee in a
participating job through the end of the plan year. Individuals employed in a
participating job by October 1 of the plan year may become eligible to
participate in that plan year upon approval of the Chief Executive Officer
and/or the Compensation Committee of the Board of Directors.
Division participants are selected and recommended by the Division President,
Group President and Chief Operating Officer on an individual basis after careful
consideration and evaluation and must be approved by the Chief Executive
Officer. The potential of the position to contribute to the achievement of
overall company goals is the major criterion for being approved as a plan
participant.
Participation at the Corporate level is limited to Officers and Major Department
Heads.
Certain limits are placed on the number of managers from any one Division that
may be included in the plan as shown below. The numbers shown in parentheses
represent additional participants who may be included in the plan if warranted
by the responsibilities of the position.
<TABLE>
<CAPTION>
Division Sales Number Eligible Rec. Positions
-------------- --------------- --------------
<S> <C> <C>
Below $25MM 1 + (1) General Manager
$25MM to $50MM 3 + (1) General Manager
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C> <C>
Marketing Manager
Mfg. Manager
$50MM to $150MM 4 + (2) General Manager
Marketing Manager
Mfg. Manager
Controller
Tech. Director
$150MM to $300MM 5 + (2) ) General Manager
) Marketing Manager
) Mfg. Manager
) Controller
$300MM to $600MM 6 + (3) ) Tech. Director
) Product Manager
) Human Res. Dir.
) Merch. Manager
$600MM & over 7 + (4) ) Region Director
</TABLE>
INCENTIVE AWARDS
- ----------------
The plan is designed to provide an award for IMPROVEMENT over prior year
results. To be eligible for any award under the plan, a participant, Division or
Department must attain at least 75% of the improvement portion of the major
profit or program goal. For example,
Prior Year Actual PBT: $13.0MM
Plan Year PBT: $14.0MM
Planned Improvement: $ 1.0MM
The threshold for earning an award is an improvement of $0.750MM (75%
of $1MM) or an actual PBT for the Plan Year of $13.75MM.
WHERE AN APPROVED PROFIT GOAL SHOWS NO IMPROVEMENT, OR IS CONSIDERED TO SHOW
INSUFFICIENT IMPROVEMENT, THE PARTICIPANT, DIVISION OR DEPARTMENT MUST ATTAIN
THE GOAL TO EARN ANY AWARD. THE ACHIEVEMENT OF THIS GOAL MAY RESULT IN AN
INCENTIVE AWARD AT THE MINIMUM PAYOUT LEVEL FOR THE APPROPRIATE INCENTIVE GROUP,
PROVIDED THAT THE COMPANY ACHIEVES ITS OVERALL GOALS. GENERALLY, NO ADDITIONAL
INCENTIVE WILL BE AWARDED UNLESS THE RESULTS EXCEED THE PRIOR YEAR'S ACTUAL
RESULTS.
3
<PAGE> 4
As an example,
Prior Year Actual PBT: $13.0MM
Plan Year Goal PBT: $12.7MM
Incentive payouts MAY be as follows, assuming the Company achieves its
overall goals:
Plan Year Actual PBT Incentive Award
-------------------- ---------------
Less than $12.7MM 0
$12.7MM Minimum Payout Per Incentive Gp.
$12.8MM "
$12.9MM "
$13.0MM "
Less than $13.0MM Management Discretion
Participants are assigned to an Incentive Group (Exhibit A) which determines the
potential percentage of base salary that may be awarded. Assignment to an
Incentive Group is made by the Chief Executive Officer. Individual awards are
based on the overall percentage of goal achievement as described in the
Performance Results Evaluation section which follows and as approved by the
Chief Executive Officer and/or the Compensation Committee of the Board of
Directors.
PERFORMANCE RESULTS EVALUATION
- ------------------------------
Assuming the overall Company earnings performance is at least 75% of the planned
improvement goal, individual performance is evaluated at the end of the year in
terms of achievement of goals set by the participant and approved by management
at the beginning of the year. If the Company does not meet the minimum earnings
improvement, funds may not be available for awards, although special awards may
be made under exceptional circumstances.
The process for individual goal achievement evaluation is outlined in the
following steps. In all cases, recommended awards must be approved by the Chief
Executive Officer and/or the Compensation Committee of the Board of Directors.
4
<PAGE> 5
EXHIBIT A
---------
INCENTIVE AWARDS AS A PERCENTAGE OF BASE SALARY
-----------------------------------------------
<TABLE>
<CAPTION>
OVERALL GROUP GROUP GROUP GROUP
EVAL. I II III IV
------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
125% (Max) 60 70 95 110
120% 55 65 88 103
115% 50 60 81 96
110% 45 55 74 89
105% 40 50 67 82
100% (Target) 35 45 60 75
95% 32 40 54 68
90% 29 35 48 61
85% 26 30 42 54
80% 23 25 36 47
75% (Min) 20 20 30 40
</TABLE>
5
<PAGE> 6
PROCEDURES FOR EVALUATING GOAL ACHIEVEMENT
------------------------------------------
1. The goals are pre-determined and agreed upon by the participant and immediate
supervisor, reviewed by the Division President, Group President and/or Chief
Operating Officer or Corporate Department Head and submitted to the Chief
Executive Officer for approval. Strong emphasis is placed on IMPROVEMENT over
the previous fiscal year; particularly where the goals relate to profits, profit
margins and return on assets employed.
2. At the close of each fiscal year, participants review their own performance
by recording achievements as related to pre-determined goals.
3. The supervisor then determines a performance rating percentage for each
quantitative goal by comparing the goal against supervisory appraisal of the
achievement of that goal. For all Division participants, a performance rating
percentage for each special goal and each strategic goal will be determined by
the Division President, Group President and Chief Operating Officer. For
Corporate participants, these performance rating percentages will be determined
by the Chief Executive Officer. A percentage achievement rating is scaled as
follows:
--- 125% --- Outstanding Performance ---
--- ---
--- ---
--- ---
--- ---
--- 100% --- Planned Results ---
--- ---
--- ---
--- ---
--- ---
--- 75% --- Minimum Acceptable ---
--- Performance ---
--- ---
--- ---
--- 0% -----------------------------------------------
a. A "100% Objective Achieved" rating for any particular goal
indicates that the participant met that goal right on target.
b. A rating of 125% is the maximum rating for any particular
goal, indicating outstanding achievement of that goal.
c. A rating below 75% indicates less than acceptable performance,
and since no credit
6
<PAGE> 7
is given for that particular goal, the performance rating
is 0%.
d. Because certain factors cannot be accurately measured in terms
of a percentage, a direct arithmetic relationship may not
necessarily exist between the established goal, the appraisal
of results and the performance rating percentage of that goal.
e. Incumbents in covered positions for less than the plan year
being measured may be awarded incentive compensation on a
pro-rata basis (i.e., participant for 6 months out of 12
months would result in 50% of the normal award.)
4. The participant's appraisal and the supervisor's rating of each goal,
together with any additional comments by the supervisor, form the basis for
overall performance. The overall performance rating is then reviewed for
approval by subsequent levels of management. The overall evaluation may not
exceed 125%.
5. The Chief Executive Officer reviews the recommended incentive awards in terms
of individual performance, the performance of the Division or Department and the
overall performance of the Company, and, as appropriate, reviews his
recommendations with the Compensation Committee of the Board of Directors.
6. After the recommendations and approvals are final, a review session is held
with each participant, at which time the supervisor is to review the incentive
award with the participant.
7. Fair, impartial judgement is in reality the major factor in the final
determination, and not arithmetic results.
8. The incentive award is determined as follows:
a. The overall performance percentage is related to the
applicable Incentive Group to determine the incentive award
percentage.
b. The participant's salary base is multiplied by the incentive
award percentage to determine the total dollar incentive
award. Incentive Plan award computations are based upon the
total salary of the individual for the previous twelve months
or for the time in the approved position if less than a full
year.
For example: 100% Performance of Goals
Group II = 45%
Salary = $140,000
Incentive Award = $140,000 X 0.45 = $63,000
7
<PAGE> 8
GENERAL
- -------
Each employee should understand that the employment relationship with
Sherwin-Williams, or any of its subsidiaries or affiliates, is an AT-WILL
relationship and, as such, may be terminated at any time by either party.
Nothing in any application form, employee handbook, summary, booklet, policy
manual or other communication is intended to be an express or implied contract
of employment, or guarantee of employment for a specific period of time between
an employee and the Company, a subsidiary or affiliate, unless clearly so stated
and signed by both parties.
INCOME DEFERRAL
- ---------------
The Company has a deferred compensation plan to provide greater flexibility in
the method of payment of incentive awards. The payment of an incentive award may
be deferred, in whole or in part, under the Company's Key Management Deferred
Compensation Plan if that is an employee's election prior to the start of the
Plan year. Otherwise, payment will be made in cash.
February 4, 1999
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000089800
<NAME> THE SHERWIN-WILLIAMS COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,503
<SECURITIES> 0
<RECEIVABLES> 679,764
<ALLOWANCES> 27,334
<INVENTORY> 684,389
<CURRENT-ASSETS> 1,615,124
<PP&E> 1,444,533
<DEPRECIATION> 737,790
<TOTAL-ASSETS> 4,057,116
<CURRENT-LIABILITIES> 1,337,171
<BONDS> 629,124
0
0
<COMMON> 206,030
<OTHER-SE> 1,387,911
<TOTAL-LIABILITY-AND-EQUITY> 4,057,116
<SALES> 1,127,867
<TOTAL-REVENUES> 1,127,867
<CGS> 650,781
<TOTAL-COSTS> 650,781
<OTHER-EXPENSES> 4,949
<LOSS-PROVISION> 4,518
<INTEREST-EXPENSE> 15,770
<INCOME-PRETAX> 46,446
<INCOME-TAX> 17,649
<INCOME-CONTINUING> 28,797
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,797
<EPS-PRIMARY> 0.17<F1>
<EPS-DILUTED> 0.17<F2>
<FN>
<F1>Represents net income per common share - basic in accordance with SFAS No. 128.
<F2>Represents net income per common share - diluted in accordance with SFAS No.
128.
</FN>
</TABLE>
