<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 September 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 ______
Commission file number 1-4851
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THE SHERWIN-WILLIAMS COMPANY
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(Exact name of registrant as specified in its charter)
OHIO 34-0526850
- ------------------------------- ---------------------
(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 - 165,875,849 shares as of October 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 Sept. 30, Nine months ended Sept. 30,
---------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,345,483 $ 1,341,431 $ 3,857,421 $ 3,823,363
Costs and expenses:
Cost of goods sold 735,649 753,529 2,160,111 2,181,057
Selling, general and administrative expenses 417,497 404,795 1,253,220 1,217,574
Interest expense 14,854 18,276 46,558 56,291
Interest and net investment income (1,600) (1,288) (4,594) (4,776)
Other expense (income) (727) 3,621 2,330 9,674
----------- ----------- ----------- -----------
1,165,673 1,178,933 3,457,625 3,459,820
----------- ----------- ----------- -----------
Income before income taxes 179,810 162,498 399,796 363,543
Income taxes 68,328 61,750 151,923 138,147
----------- ----------- ----------- -----------
Net income $ 111,482 $ 100,748 $ 247,873 $ 225,396
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.67 $ 0.59 $ 1.47 $ 1.31
=========== =========== =========== ===========
Diluted $ 0.66 $ 0.58 $ 1.46 $ 1.29
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE> 3
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars
<TABLE>
<CAPTION>
SEPT. 30, Dec. 31, Sept. 30,
1999 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,013 $ 19,133 $ 3,371
Accounts receivable, less allowance 735,629 604,516 705,424
Inventories:
Finished goods 542,933 568,328 553,130
Work in process and raw materials 106,158 114,195 135,493
----------- ----------- -----------
649,091 682,523 688,623
Other current assets 276,161 241,118 265,641
----------- ----------- -----------
Total current assets 1,665,894 1,547,290 1,663,059
Goodwill 1,049,205 1,123,128 1,141,565
Intangible assets 279,769 291,715 296,583
Deferred pension assets 325,393 304,006 294,086
Other assets 76,428 80,466 77,538
Property, plant and equipment 1,487,639 1,440,244 1,407,356
Less allowances for depreciation and amortization 777,633 721,387 688,673
----------- ----------- -----------
710,006 718,857 718,683
----------- ----------- -----------
Total assets $ 4,106,695 $ 4,065,462 $ 4,191,514
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 98,907 $ 148,295
Accounts payable 409,573 $ 408,144 398,395
Compensation and taxes withheld 131,746 125,698 125,213
Current portion of long-term debt 161,968 118,184 62,704
Other accruals 377,641 383,143 361,630
Accrued taxes 129,357 76,804 126,887
----------- ----------- -----------
Total current liabilities 1,309,192 1,111,973 1,223,124
Long-term debt 624,471 730,283 783,103
Postretirement benefits other than pensions 209,215 204,763 204,116
Other long-term liabilities 279,867 302,503 267,434
Shareholders' equity:
Common stock - $1.00 par value:
166,416,181, 171,033,231 and 171,998,570 shares
outstanding at Sept. 30, 1999, Dec. 31, 1998
and Sept. 30, 1998, respectively 206,212 205,701 205,634
Other capital 150,542 143,686 136,498
Retained earnings 1,984,769 1,797,945 1,769,834
Treasury stock, at cost (516,385) (386,465) (357,121)
Cumulative other comprehensive loss (141,188) (44,927) (41,108)
----------- ----------- -----------
Total shareholders' equity 1,683,950 1,715,940 1,713,737
----------- ----------- -----------
Total liabilities and shareholders' equity $ 4,106,695 $ 4,065,462 $ 4,191,514
=========== =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE> 4
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
<TABLE>
<CAPTION>
Nine months ended Sept. 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATIONS
Net income $ 247,873 $ 225,396
Adjustments to reconcile net income to net operating cash:
Depreciation 80,544 71,380
Amortization of goodwill and intangible assets 37,411 37,545
Increase in deferred pension assets (21,387) (18,000)
Net increase in postretirement liability 4,452 4,277
Other 7,361 3,628
Change in current assets and liabilities-net (82,591) (56,405)
Costs incurred for disposition of operations (15,511) (12,146)
Other (8,069) (19,781)
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Net operating cash 250,083 235,894
INVESTING
Capital expenditures (101,811) (108,273)
Acquisitions of assets (12,663)
Increase in other investments (11,090) (15,133)
Other 10,515 (4,129)
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Net investing cash (115,049) (127,535)
FINANCING
Net increase in short-term borrowings 98,907 41,382
Payments of long-term debt (62,219) (52,790)
Payments of cash dividends (61,050) (58,444)
Proceeds from stock options exercised 6,409 15,968
Treasury stock acquired (129,920) (55,703)
Other 1,058 1,069
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Net financing cash (146,815) (108,518)
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Effect of exchange rate changes on cash (2,339)
--------- ---------
Net decrease in cash and cash equivalents (14,120) (159)
Cash and cash equivalents at beginning of year 19,133 3,530
--------- ---------
Cash and cash equivalents at end of period $ 5,013 $ 3,371
========= =========
Taxes paid on income $ 77,129 $ 54,116
Interest paid on debt 58,121 66,706
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE> 5
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended September 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 nine months ended September 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 each of the first three 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>
(Thousands of dollars) Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Dividend and royalty income $(1,446) $ (601) $(3,423) $(2,000)
Net expense (income) of financing
and investing activities 1,283 997 6,063 (1,754)
Settlement of environmental matters (3,500) (3,500)
Foreign currency exchange losses 2,832 5,612 3,263 11,073
</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 first quarter net gain related
to the sale of the Company's joint venture interest in American Standox, Inc.
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<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>
(Thousands of dollars) Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 111,482 $ 100,748 $ 247,873 $ 225,396
Foreign currency translation adjustments (16,545) (6,903) (96,261) (7,591)
--------- --------- --------- ---------
Comprehensive income $ 94,937 $ 93,845 $ 151,612 $ 217,805
========= ========= ========= =========
</TABLE>
NOTE E--RECLASSIFICATION
Certain amounts in the 1998 financial statements have been reclassified to
conform with the 1999 presentation.
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<PAGE> 7
NOTE F--NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended Nine months ended
Thousands of dollars, except per share data September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic
Average common shares outstanding 167,356,435 172,162,726 168,811,753 172,544,814
============ ============ ============ ============
Net income $ 111,482 $ 100,748 $ 247,873 $ 225,396
============ ============ ============ ============
Net income per common share $ 0.67 $ 0.59 $ 1.47 $ 1.31
============ ============ ============ ============
Diluted
Average common shares outstanding 167,356,435 172,162,726 168,811,753 172,544,814
Non-vested restricted stock grants 234,400 229,367 258,622 238,389
Stock options - treasury stock method 534,680 844,910 742,843 1,312,691
------------ ------------ ------------ ------------
Average common shares assuming dilution 168,125,515 173,237,003 169,813,218 174,095,894
============ ============ ============ ============
Net income $ 111,482 $ 100,748 $ 247,873 $ 225,396
============ ============ ============ ============
Net income per common share $ 0.66 $ 0.58 $ 1.46 $ 1.29
============ ============ ============ ============
</TABLE>
Net income per common share has been computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128.
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<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 / Segment Operating Profit
- ---------------------------------------------
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 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 $ 828,247 $ 95,333 $ 789,298 $ 86,977 $ 2,251,468 $ 188,271 $ 2,130,682 $ 168,527
Coatings 513,997 113,185 548,740 107,070 1,596,293 309,759 1,683,102 295,259
Other 3,239 4,187 3,393 2,847 9,660 11,686 9,579 10,005
----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------
Segment totals $ 1,345,483 212,705 $ 1,341,431 196,894 $ 3,857,421 509,716 $ 3,823,363 473,791
=========== =========== =========== ===========
Corporate expenses - net (32,895) (34,396) (109,920) (110,248)
----------- ------------ ------------ ---------
Income before income taxes $ 179,810 $ 162,498 $ 399,796 $ 363,543
=========== ============ ============ =========
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Intersegment Transfers
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
Thousands of dollars 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Coatings $319,823 $315,776 $876,969 $858,457
Other 6,102 5,966 18,215 17,714
-------- -------- -------- --------
Segment totals $325,925 $321,742 $895,184 $876,171
======== ======== ======== ========
====================================================================================================================================
</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 $125.8 million and $18.7 million, respectively, for the third
quarter of 1999, and $131.2 million and $11.2 million, respectively, for the
third quarter of 1998. Net external sales and segment operating profits of these
subsidiaries were $363.9 million and $43.7 million, respectively, for the first
nine months of 1999, and $390.8 million and $30.7 million, respectively, for the
first nine months of 1998. Long-lived assets of these subsidiaries totaled
$243.2 million and $321.8 million, respectively, at September 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.
-8-
<PAGE> 9
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Consolidated net sales increased 0.3 percent in the third quarter and 0.9
percent in the first nine months of 1999 over the comparable 1998 periods. Net
sales in the Paint Stores Segment increased 4.9 percent in the third quarter and
5.7 percent in the first nine months primarily due to increased paint gallons
sold to both retail and wholesale customers, combined with sales gains in each
of the remaining product lines (wallcoverings, floorcoverings, spray equipment
and associated products). Architectural paint sales gains continued to outpace
sales gains in industrial maintenance products and product finishes.
Comparable-store sales were up 3.2 percent in the quarter and 3.9 percent in the
first nine months. Net sales in the Coatings Segment decreased 6.3 percent in
the third quarter and 5.2 percent year-to-date, primarily due to slow
do-it-yourself coatings sales at certain customers, a soft domestic automotive
refinish market, the bankruptcy and recent liquidation of a large retail
customer, 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 decreased 4.5 percent in the quarter primarily due to the sale of
certain properties in the second quarter of 1999. Other Segment revenues
increased 0.9 percent in the first nine months due to increased rates and higher
occupancy, partially offset by the sale of certain properties in the second
quarter of 1999.
Consolidated gross profit as a percent of sales improved to 45.3 and 44.0
percent for the third quarter and first nine months, respectively, from 43.8 and
43.0 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 of manufactured paint
products. Gross profit margins in the Coatings Segment were higher than last
year for the third quarter and first nine months primarily due to increased
factory efficiencies and cost reductions associated with the closing of certain
manufacturing locations.
Consolidated selling, general and administrative expenses as a percent of sales
were 0.8 percentage points unfavorable as compared to last year for the third
quarter and were 0.7 percentage points unfavorable to last year for the first
nine months, primarily due to the low sales increases and increased spending for
the Company's Year 2000 project. The Paint Stores Segment's third 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 were unfavorable for the third
quarter primarily due to lower sales volume and increased spending for the Year
2000 project, but were favorable for the first nine months of 1999 primarily 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.
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<PAGE> 10
Interest expense in the third quarter and first nine 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 third quarter
and first nine months of 1999 than the comparable periods in the prior year.
Other expense (income) for the third quarter represented income for 1999,
compared to expense for 1998, primarily due to decreased foreign currency
exchange losses and increased dividend and royalty income in 1999. For the first
nine months of 1999, other expense was lower than last year primarily due to
decreased foreign currency exchange losses and increased dividend and royalty
income. Partially offsetting these improvements were 1999 financing and
investing activities expense versus 1998 financing and investing activities
income and a third quarter 1998 environmental insurance settlement gain.
Net income for the third quarter of 1999 increased 10.7 percent over last year
to $111,482,000, or $.66 per common share - diluted, from $100,748,000, or $.58
per common share - diluted, in 1998. Year-to-date net income through September
30, 1999 increased 10.0 percent to $247,873,000, or $1.46 per common share -
diluted, from $225,396,000, or $1.29 per common share - diluted, in 1998.
FINANCIAL CONDITION
- -------------------
During the first nine months of 1999, cash and cash equivalents decreased $14.1
million, net long-term debt decreased $62.0 million and short-term borrowings
increased $98.9 million. Short-term borrowings incurred during the nine months
relate to the Company's commercial paper program, which had unused borrowing
availability of $661.1 million at September 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 $101.8 million, cash dividends of $61.1
million, treasury shares acquisition of $129.9 million, and normal operating
needs for seasonally higher accounts receivable. The Company's current ratio
declined to 1.27 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 September 30, 1998, cash and cash equivalents increased $1.6 million,
short-term borrowings decreased $49.4 million and net long-term debt decreased
$59.5 million. Cash generated by operations during this period of $496.9 million
was used for capital expenditures of $139.7 million, treasury shares acquired of
$159.3 million, payments of cash dividends of $80.4 million, total debt
reduction of $108.9 million, and normal working capital needs. The Company
expects to remain in a borrowing position throughout 1999.
Capital expenditures during the first nine 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.
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<PAGE> 11
During the third quarter and first nine months of 1999, the Company acquired
3,125,000 and 5,075,000 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. At September 30, 1999, the
Company had remaining authorization to purchase 6,975,000 shares. During the
first nine 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 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 two purported class actions and an action brought by the State of
Rhode Island, arising from the manufacture and sale of lead pigments and lead
paints. The plaintiffs are seeking recovery based upon various legal theories,
including negligence, strict liability, breach of warranty, negligent
misrepresentations and omissions, fraudulent misrepresentations and omissions,
concert of action, civil conspiracy, violations of unfair trade practices and
consumer protection laws, enterprise liability, market share liability,
nuisance, unjust enrichment and other theories. The lawsuits seek various
damages and relief, including personal injury and property damage, costs
involving the detection and abatement of lead paint from buildings, costs
associated with a public education campaign, medical monitoring costs and
others. 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 and relief.
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 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.
-11-
<PAGE> 12
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 entered into a settlement agreement with PMC, Inc., settling a
lawsuit brought by PMC regarding the Company's former manufacturing facility in
Chicago, Illinois which was sold to PMC in 1985. PMC sought certain
environmental remediation costs and other damages relating to environmental
contamination at the facility. Pursuant to the terms of the settlement
agreement, the Company agreed, in part, to investigate and remediate, as
necessary, certain soil and/or groundwater contamination caused by historical
disposal, discharges, releases or events occurring at the facility. In February,
1999, the People of the State of Illinois filed an amended complaint in a state
court action against PMC 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.
Effective October 25, 1999, the Company's Board of Directors elected Christopher
M. Connor as Vice-Chairman and Chief Executive Officer and Joseph M. Scaminace
as President and Chief Operating Officer. Both Mr. Connor and Mr. Scaminace were
added as members of the Board of Directors. John G. Breen, former Chief
Executive Officer and President, will remain Chairman. Mr. Connor most recently
served as President of the Paint Stores Group and will be succeeded by John G.
Morikis, former President and General Manager of the Eastern Division of the
Paint
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<PAGE> 13
Stores Group. Mr. Scaminace most recently served as President of the Consumer
Group and will be succeeded by Thomas W. Seitz, former Senior Vice President of
Operations for the Consumer Group.
YEAR 2000 READINESS
- -------------------
The Company has substantially completed its company-wide project to prepare its
business for the change in date from the year 1999 to 2000. 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 Company's compliance process to address Year 2000 issues in the Company's
software and hardware systems and embedded technology consists 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. 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, and as of September 30, 1999, 97% of the non-mission
critical systems had completed the compliance process.
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 has
identified potential Year 2000 issues involving key third parties and either is
resolving those issues or has developed 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 $30 million, of which about $27 million has been spent since
the beginning of the project through September 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 has
identified potential major business
-13-
<PAGE> 14
interruptions that could reasonably likely result from Year 2000 issues and has
developed contingency plans designed to address such potential interruptions.
The Company has also developed general contingency plans designed to help
protect the Company from unanticipated Year 2000 business interruptions.
Contingency plans include the identification of alternate suppliers or service
providers in some cases, increases in safety levels of certain 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 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
-14-
<PAGE> 15
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 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.
-15-
<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. 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.
-16-
<PAGE> 17
PART II. OTHER INFORMATION
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).
(27) Financial Data Schedule for the period ended
September 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
November 15, 1999 By: /s/ J.L. Ault
--------------------------------------
J.L. Ault
Vice President-Corporate Controller
November 15, 1999 By: /s/ L.E. Stellato
--------------------------------------
L.E. Stellato
Vice President, General Counsel and
Secretary
-17-
<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
September 30, 1999 (filed herewith).
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED SEPT. 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000089800
<NAME> THE SHERWIN-WILLIAMS COMPANY
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