<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 June 30, 1999
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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
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Commission file number 1-4851
THE SHERWIN-WILLIAMS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-0526850
- ------------------------------------ -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Prospect Avenue, N.W., Cleveland, Ohio 44115-1075
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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
--- ---
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 - 169,256,377 shares as of July 31, 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 June 30, Six months ended June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,384,071 $ 1,377,785 $ 2,511,938 $ 2,481,932
Costs and expenses:
Cost of goods sold 773,681 778,320 1,424,462 1,427,528
Selling, general and administrative expenses 424,110 418,557 835,723 812,779
Interest expense 15,934 19,428 31,704 38,015
Interest and net investment income (1,302) (2,180) (2,994) (3,488)
Other expense (income) (1,892) 3,257 3,057 6,053
----------- ----------- ----------- -----------
1,210,531 1,217,382 2,291,952 2,280,887
----------- ----------- ----------- -----------
Income before income taxes 173,540 160,403 219,986 201,045
Income taxes 65,946 60,953 83,595 76,397
----------- ----------- ----------- -----------
Net income $ 107,594 $ 99,450 $ 136,391 $ 124,648
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.64 $ 0.58 $ 0.80 $ 0.72
=========== =========== =========== ===========
Diluted $ 0.63 $ 0.57 $ 0.80 $ 0.71
=========== =========== =========== ===========
</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>
June 30, Dec. 31, June 30,
1999 1998 1998
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,416 $ 19,133 $ 20,754
Accounts receivable, less allowance 744,608 604,516 725,850
Inventories:
Finished goods 554,486 568,328 596,668
Work in process and raw materials 121,679 114,195 126,780
---------- ---------- ----------
676,165 682,523 723,448
Other current assets 272,324 241,118 269,945
---------- ---------- ----------
Total current assets 1,700,513 1,547,290 1,739,997
Goodwill 1,065,244 1,123,128 1,142,546
Intangible assets 283,414 291,715 301,075
Deferred pension assets 318,167 304,006 288,086
Other assets 78,515 80,466 73,845
Property, plant and equipment 1,475,633 1,440,244 1,419,805
Less allowances for depreciation and amortization 760,086 721,387 704,974
---------- ---------- ----------
715,547 718,857 714,831
---------- ---------- ----------
Total assets $4,161,400 $4,065,462 $4,260,380
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 75,972 $ 268,656
Accounts payable 475,888 $ 408,144 452,402
Compensation and taxes withheld 105,252 125,698 97,375
Current portion of long-term debt 160,150 118,178 62,540
Other accruals 393,968 383,149 352,087
Accrued taxes 138,699 76,804 108,065
---------- ---------- ----------
Total current liabilities 1,349,929 1,111,973 1,341,125
Long-term debt 626,806 730,283 783,132
Postretirement benefits other than pensions 207,731 204,763 202,692
Other long-term liabilities 290,840 302,503 275,919
Shareholders' equity:
Common stock - $1.00 par value:
169,501,425, 171,033,231 and 172,805,155 shares
outstanding at June 30, 1999, Dec. 31, 1998
and June 30, 1998, respectively 206,172 205,701 205,477
Other capital 149,232 143,686 133,481
Retained earnings 1,893,540 1,797,945 1,688,529
Treasury stock, at cost (438,207) (386,465) (335,770)
Cumulative other comprehensive loss (124,643) (44,927) (34,205)
---------- ---------- ----------
Total shareholders' equity 1,686,094 1,715,940 1,657,512
---------- ---------- ----------
Total liabilities and shareholders' equity $4,161,400 $4,065,462 $4,260,380
========== ========== ==========
</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>
Six months ended June 30,
-------------------------
1999 1998
--------- ---------
OPERATIONS
<S> <C> <C>
Net income $ 136,391 $ 124,648
Adjustments to reconcile net income to net operating cash:
Depreciation 50,879 47,062
Amortization of goodwill and intangible assets 24,994 24,881
Increase in deferred pension assets (14,161) (12,000)
Net increase in postretirement liability 2,968 2,853
Other 3,598 10,043
Change in current assets and liabilities-net (49,629) (128,440)
Costs incurred for disposition of operations (9,570) (5,450)
Other (2,403) (13,459)
--------- ---------
Net operating cash 143,067 50,138
INVESTING
Capital expenditures (67,841) (77,920)
Acquisitions of assets (12,651)
Increase in other investments (8,627) (6,993)
Other 7,055 1,730
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Net investing cash (82,064) (83,183)
FINANCING
Net increase in short-term borrowings 75,972 161,743
Payments of long-term debt (61,581) (52,913)
Payments of cash dividends (40,796) (39,001)
Proceeds from stock options exercised 5,499 13,544
Treasury stock acquired (51,742) (34,352)
Other 648 1,248
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Net financing cash (72,000) 50,269
--------- ---------
Effect of exchange rate changes on cash (720)
--------- ---------
Net (decrease) increase in cash and cash equivalents (11,717) 17,224
Cash and cash equivalents at beginning of year 19,133 3,530
--------- ---------
Cash and cash equivalents at end of period $ 7,416 $ 20,754
========= =========
Taxes paid on income $ 18,667 $ 10,319
Interest paid on debt 32,290 38,136
</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 June 30, 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 six months ended June 30, 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 two quarters of 1999 and 1998
were $.12 per share and $.1125 per share, respectively.
Note C--OTHER EXPENSE (INCOME)
Significant items included in other expense (income) are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
(Thousands of dollars) June 30, June 30,
------------------- ----------------------
1999 1998 1999 1998
-------- --------- -------- -----------
<S> <C> <C> <C> <C>
Dividend and royalty income $ (744) $ (483) $(1,977) $(1,399)
Net expense (income) of financing
and investing activities 1,766 (1,321) 4,780 (2,751)
Foreign exchange losses (gains) (2,901) 3,427 431 5,461
</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>
Three months ended June 30, Six months ended June 30,
(Thousands of dollars) ----------------------------- -------------------------------
1999 1998 1999 1998
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 107,594 $ 99,450 $ 136,391 $ 124,648
Foreign currency translation adjustments 20,849 (547) (79,716) (688)
---------- ----------- ------------ ------------
Comprehensive income $ 128,443 $ 98,903 $ 56,675 $ 123,960
========== =========== ============ =============
</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 Six months ended
Thousands of dollars, except per share data June 30, June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- ---------------- ------------- ---------------
Basic
<S> <C> <C> <C> <C>
Average common shares outstanding 169,431,686 172,567,999 169,539,412 172,735,858
=============== ============== ============= ===============
Net income $ 107,594 $ 99,450 $ 136,391 $ 124,648
=============== ============== ============= ===============
Net income per common share $ 0.64 $ 0.58 $ 0.80 $ 0.72
=============== ============== ============= ===============
Diluted
Average common shares outstanding 169,431,686 172,567,999 169,539,412 172,735,858
Non-vested restricted stock grants 248,400 242,900 270,733 242,900
Stock options - treasury stock method 1,117,189 1,686,275 846,924 1,546,582
--------------- -------------- ------------- ---------------
Average common shares assuming dilution 170,797,275 174,497,174 170,657,069 174,525,340
=============== ============== ============= ===============
Net income $ 107,594 $ 99,450 $ 136,391 $ 124,648
=============== ============== ============= ===============
Net income per common share $ 0.63 $ 0.57 $ 0.80 $ 0.71
=============== ============== ============= ===============
</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 June 30, Six months ended June 30,
---------------------------------------------------- -----------------------------------------------------
Thousands of dollars 1999 1998 1999 1998
-------------------------- ------------------------ -------------------------- --------------------------
NET SEGMENT Net Segment NET SEGMENT Net Segment
EXTERNAL OPERATING External Operating EXTERNAL OPERATING External Operating
SALES PROFIT Sales Profit SALES PROFIT Sales Profit
----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paint Stores $ 799,795 $ 78,004 $ 760,119 $ 70,303 $ 1,423,221 $ 92,938 $ 1,341,384 $ 81,550
Coatings 581,103 126,412 614,527 121,191 1,082,296 196,574 1,134,362 188,189
Other 3,173 3,865 3,139 4,002 6,421 7,499 6,186 7,158
----------- ------------ ----------- ------------ ----------- ----------- ----------- -----------
Segment totals $ 1,384,071 208,281 $ 1,377,785 195,496 $ 2,511,938 297,011 $ 2,481,932 276,897
=========== ============ =========== ===========
Corporate expenses - net (34,741) (35,093) (77,025) (75,852)
------------ ------------ ------------ ------------
Income before income taxes $ 173,540 $ 160,403 $ 219,986 $ 201,045
============ ============ ============ ============
====================================================================================================================================
</TABLE>
Intersegment Transfers
- ----------------------
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C>
Thousands of dollars 1999 1998 1999 1998
------------ ------------- --------------- ------------
Coatings $ 313,320 $ 316,133 $ 557,146 $ 542,681
Other 6,079 6,140 12,113 11,748
------------ -------------- --------------- ------------
Segment totals $ 319,399 $ 322,273 $ 569,259 $ 554,429
============ ============== =============== ============
===================================================================================================================================
</TABLE>
Segment operating profit is total revenue, including realized profit on
intersegment transfers, less operating costs and expenses.
Net external sales and segment operating profits of consolidated foreign
subsidiaries were $120.2 million and $13.5 million, respectively, for the second
quarter of 1999, and $132.7 million and $10.2 million, respectively, for the
second quarter of 1998. Net external sales and segment operating profits of
these subsidiaries were $238.1 million and $25.0 million, respectively, for the
first six months of 1999, and $259.6 million and $19.5 million, respectively,
for the first six months of 1998. Long-lived assets of these subsidiaries
totaled $254.0 million and $316.3 million, respectively, at June 30, 1999 and
1998. Domestic operations account for the remaining net external sales, segment
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> 9
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Consolidated net sales increased 0.5 percent in the second quarter and increased
1.2 percent in the first six months of 1999 over the comparable 1998 periods.
Net sales in the Paint Stores Segment increased 5.2 percent in the second
quarter and 6.1 percent in the first six months primarily due to increased paint
gallons sold to both retail and wholesale customers, combined with sales gains
in each of the remaining product lines (wallcoverings, floorcoverings, spray
equipment and associated products). Wholesale customers include professional
painters, contractors and industrial and commercial maintenance accounts.
Comparable-store sales were up 3.5 percent in the quarter and 4.3 percent in the
first six months. Net sales in the Coatings Segment decreased 5.4 percent in the
second quarter and 4.6 percent year-to-date, primarily due to a soft domestic
automotive refinish market, the further closing of certain store locations by a
major retail customer, inventory adjustments early in the quarter by some retail
customers, and the anticipated sales losses due to closing the Fort Worth, Texas
cleaning solutions plant in the fourth quarter of 1998. Internationally, the
dollar effects of the devaluation of the Brazilian real, as well as poor
economic conditions in other South American countries, also contributed to the
Segment's sales shortfall. Revenue generated by real estate operations in the
Other Segment increased 1.1 percent in the quarter and 3.8 percent in the first
six months due to higher occupancy and increased rates.
Consolidated gross profit as a percent of sales improved to 44.1 and 43.3
percent for the second quarter and first six months, respectively, from 43.5 and
42.5 percent for the comparable periods in 1998. The Paint Stores Segment's
gross profit margins were higher than last year for the quarter and
year-to-date, primarily due to increased gallons sold to its retail customers.
Gross profit margins in the Coatings Segment were slightly higher than last year
for the second quarter and first six months primarily due to cost reductions
associated with increased factory efficiencies and the closing of certain
manufacturing locations.
Consolidated selling, general and administrative expenses as a percent of sales
were 0.2 percentage points unfavorable as compared to last year for the second
quarter and were 0.6 percentage points unfavorable to last year for the first
six months, primarily due to increased spending for the Company's Year 2000
project. The Paint Stores Segment's second quarter and year-to-date SG&A ratios
were slightly higher than last year. SG&A expenses in the Coatings Segment as a
percent of sales for the second quarter and first six months of 1999 were
favorable due to the consolidation of administrative functions of four divisions
during the last half of 1998 resulting in a lower overall SG&A cost structure.
Interest expense in the second quarter and first six months was lower than the
comparable periods of last year due to lower average borrowings outstanding.
Additionally, average short-term borrowing rates were lower in the second
quarter and first six months of 1999 than the comparable periods in the prior
year.
<PAGE> 10
Other expense (income) for the second quarter represented income for 1999 and
expense for 1998 primarily due to current year foreign currency exchange gains
versus foreign currency exchange losses in the prior year comparable period. For
the first six months of 1999, other expense was lower than last year primarily
due to decreased foreign currency exchange losses, partially offset by 1999
financing and investing activities expense versus 1998 financing and investing
activities income. The first quarter of 1998 financing and investing activities
included a net gain on the sale of the Company's joint venture interest in
American Standox, Inc.
Net income for the second quarter of 1999 increased 8.2 percent over last year
to $107,594,000, or $.63 per common share - diluted, from $99,450,000, or $.57
per common share - diluted, in 1998. Year-to-date net income through June 30,
1999 increased 9.4 percent to $136,391,000, or $.80 per common share - diluted,
from $124,648,000, or $.71 per common share - diluted, in 1998.
FINANCIAL CONDITION
- -------------------
During the first six months of 1999, cash and cash equivalents decreased $11.7
million, net long-term debt decreased $61.5 million and short-term borrowings
increased $76.0 million. Short-term borrowings incurred during the six months
relate to the Company's commercial paper program, which had unused borrowing
availability of $684.0 million at June 30, 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 increase in short-term borrowings since the end of last
year relates to capital expenditures of $67.8 million, cash dividends of $40.8
million, treasury shares acquisition of $51.7 million, and normal operating
needs for seasonally higher accounts receivable. The Company's current ratio
declined to 1.26 from 1.39 at December 31, 1998. The decrease in this ratio
occurred primarily due to the increase in short-term borrowings and current
portion of long-term debt.
Since June 30, 1998, cash and cash equivalents decreased $13.3 million,
short-term borrowings decreased $192.7 million and net long-term debt decreased
$58.8 million. Cash generated by operations during this period of $571.4 million
was used for capital expenditures of $136.1 million, treasury shares acquired of
$102.4 million, payments of cash dividends of $79.6 million, total debt
reduction of $251.5 million, and normal working capital needs. The Company
expects to remain in a borrowing position throughout 1999.
Capital expenditures during the first six months of 1999 represented primarily
the costs of upgrading information systems equipment, costs associated with new
store openings, and capacity expansions and efficiency improvements in domestic
and international production facilities. We do not anticipate the need for any
specific external financing to support our capital programs.
During the second quarter and first six months of 1999, the Company acquired
640,000 and 1,950,000 shares, respectively, of its common stock through open
market purchases for treasury purposes. The Company acquires shares of its
common stock for general corporate purposes and, depending upon its cash
position and market conditions, the Company may acquire additional shares of its
common stock in the future. In July, 1999, the Board of Directors authorized the
Company to purchase, in aggregate, 10,000,000 shares of its common stock and
rescinded the prior share purchase authorization. During the first six months of
1999, the Company received 8,392 shares of its common stock in exchange from the
exercise of stock options. Other Comprehensive Income was significantly impacted
in the first quarter by foreign currency
<PAGE> 11
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,
including purported class actions, arising from the manufacture and sale of lead
pigments and lead paints. 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.
It is also possible that additional lawsuits may be filed against the Company
based upon similar or different legal theories and seeking similar or different
types of damages.
Litigation is inherently subject to many uncertainties. Adverse rulings or
determinations of liability, as well as changes in laws, could affect the lead
pigment and lead paint-related lawsuits against the Company and encourage an
increase in the number and nature of future claims and proceedings. Due to the
uncertainties involved, management is unable to predict the outcome of such
lawsuits or the number or nature of possible future claims and proceedings. In
addition, management cannot determine the scope or amount of the potential costs
and liabilities related to such lawsuits, claims or proceedings. However, based
upon the outcome of previous similar lawsuits, management does not currently
believe that the costs or potential liability ultimately 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 our industry,
are subject to various federal, state and local environmental laws and
regulations. These laws and regulations not only govern our current operations
and products, but also impose potential liability on the Company for past
operations which were conducted utilizing practices and procedures that were
considered acceptable under the laws and regulations existing at that time. The
Company expects the environmental laws and regulations to impose increasingly
stringent requirements upon the Company and our industry in the future. The
Company believes it conducts its operations in compliance with applicable
environmental laws and regulations and has implemented various programs designed
to protect the environment and promote continued compliance.
The Company is involved with environmental compliance and remediation activities
at some of its current and former sites (including former sites which were
previously owned and/or operated by businesses acquired by the Company). The
Company, together with other parties, has also been designated a potentially
responsible party under federal and state environmental protection laws for the
remediation of hazardous waste at a number of third-party sites, primarily
Superfund sites. The Company may be similarly designated with respect to
additional third-party sites in the future.
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
<PAGE> 12
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 results of
operations 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, except as
set forth in the preceding paragraph, results of operations.
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
<PAGE> 13
Company's target for completing its compliance process for all of its mission
critical software and hardware systems and embedded technology was mid-1999. As
of July 31, 1999, the Company completed its compliance process for all its
mission critical systems and embedded technology. 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
conducted telephone interviews and onsite visits with selected key vendors and
service providers. The Company is also 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 $26 million has been spent since
the beginning of the project through June 30, 1999. These costs include costs of
internal employees and third-party consultants involved in the project and the
costs of software and hardware. The Company does not expect these costs and
expenses to have a material adverse effect on the Company's financial condition.
While the Company continues to focus on solutions for Year 2000 issues, and
expects to complete its Year 2000 project in a timely manner, the Company is in
the process of identifying potential major business interruptions that could
reasonably likely result from Year 2000 issues and is developing contingency
plans designed to address such potential interruptions. The Company is also
developing 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 continue to be developed and modified as necessary over
time as it receives better information regarding the Year 2000 status of its
systems and embedded technology and third party readiness. Regardless of the
contingency plans developed, these plans will not address all potential business
interruptions, and there can be no assurance that the implementation of these
plans will be successful.
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
<PAGE> 14
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 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 nature, cost,
quantity and outcome of pending and future litigation and other claims,
including the lead pigment and lead paint-related lawsuits; 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> 15
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> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
On May 3, 1999, the Michigan Department of Environmental Quality issued
a letter of violation alleging that the Company's Holland, Michigan facility
exceeded volatile organic compound (VOC) emission limitations and failed to
obtain the proper air permit and required VOC emission offsets in violation of
applicable federal and state environmental laws and regulations and a prior
consent judgement. Currently, the Company and the Department of Environmental
Quality are discussing a resolution of the matter in satisfaction of both
federal and state requirements. The Company reasonably expects the resolution to
include a civil penalty, corrective measures at the facility and a compliance
schedule for implementing the corrective measures. The Company believes the
penalty may exceed $100,000.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
A. The Company's 1999 Annual Meeting of Shareholders was held on April
28, 1999.
B. The following persons were nominated to serve, and were elected, as
directors of the Company to serve until the next annual meeting and until their
successors are elected: J.C. Boland, J.G. Breen, D.E. Collins, D.E. Evans, R.W.
Mahoney, W.G. Mitchell, A.M. Mixon, III, C.E. Moll, H.O. Petrauskas and R.K.
Smucker. The voting results of the Annual Meeting for each nominee were as
follows:
Name For Withheld
---- --- --------
J.C. Boland 149,583,264 2,083,520
J.G. Breen 149,535,687 2,131,097
D.E. Collins 149,601,034 2,065,750
D.E. Evans 149,530,466 2,136,318
R.W. Mahoney 149,634,111 2,032,673
W.G. Mitchell 149,518,802 2,147,982
A.M. Mixon, III 149,634,502 2,032,282
C.E. Moll 149,653,206 2,013,578
H.O. Petrauskas 149,633,123 2,033,661
R.K. Smucker 149,618,944 2,047,840
C. The shareholder proposal regarding executive officer severance pay
agreements was rejected with 90,896,940 shares voting against, 43,541,365 shares
voting for, 2,749,837 shares abstaining and 14,478,642 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
(11) Computation of Net Income Per Common Share - See Note
F to Condensed Consolidated Financial Statements
(Unaudited).
<PAGE> 17
(27) Financial Data Schedule for the period ended June 30,
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
August 16, 1999 By: /s/ J.L. Ault
-----------------------------------
J.L. Ault
Vice President-Corporate Controller
August 16, 1999 By: /s/ L.E. Stellato
-----------------------------------
L.E. Stellato
Vice President, General Counsel and
Secretary
<PAGE> 18
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. EXHIBIT
- ---------- -------
(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 June 30, 1999 (filed
herewith).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
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