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, 2001 ------------- or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to ___________ Commission file number 1-4851 ------ THE SHERWIN-WILLIAMS COMPANY - --------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OHIO 34-0526850 - -------------------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 Prospect Avenue, N.W., Cleveland, Ohio 44115-1075 - -------------------------------------------- ----------------------------- (Address of principal executive offices) (Zip Code) (216) 566-2000 - --------------------------------------------------------------------------- (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $1.00 Par Value - 156,348,879 shares as of July 31, 2001.
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, ------------------------------- ------------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales $ 1,407,514 $ 1,429,267 $ 2,565,884 $ 2,651,183 Costs and expenses: Cost of goods sold 798,977 787,793 1,468,324 1,493,465 Selling, general and administrative expenses 444,377 434,846 866,036 870,767 Interest expense 15,471 16,665 30,677 31,542 Interest and net investment income (1,083) (917) (2,488) (1,956) Other expense - net 6,153 4,035 1,107 4,515 ----------- ----------- ----------- ----------- 1,263,895 1,242,422 2,363,656 2,398,333 ----------- ----------- ----------- ----------- Income before income taxes 143,619 186,845 202,228 252,850 Income taxes 53,139 71,002 74,824 96,084 ----------- ----------- ----------- ----------- Net income $ 90,480 $ 115,843 $ 127,404 $ 156,766 =========== =========== =========== =========== Net income per common share: Basic $ 0.58 $ 0.71 $ 0.81 $ 0.96 =========== =========== =========== =========== Diluted $ 0.58 $ 0.71 $ 0.80 $ 0.96 =========== =========== =========== =========== </TABLE> SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -2-
3 THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) Thousands of dollars <TABLE> <CAPTION> JUNE 30, December 31, June 30, 2001 2000 2000 ----------- ----------- ----------- <S> <C> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 13,377 $ 2,896 $ 1,726 Accounts receivable, less allowance 711,601 594,162 767,785 Inventories: Finished goods 552,278 597,472 607,335 Work in process and raw materials 94,892 106,255 112,282 ----------- ----------- ----------- 647,170 703,727 719,617 Deferred income taxes 104,958 104,662 110,669 Other current assets 155,050 146,092 211,782 ----------- ----------- ----------- Total current assets 1,632,156 1,551,539 1,811,579 Goodwill 682,777 705,547 1,060,937 Intangible assets 252,017 259,085 267,955 Deferred pension assets 378,855 364,351 348,240 Other assets 155,563 147,769 116,588 Property, plant and equipment 1,542,996 1,530,409 1,516,141 Less allowances for depreciation and amortization 841,876 808,030 779,697 ----------- ----------- ----------- 701,120 722,379 736,444 ----------- ----------- ----------- Total assets $ 3,802,488 $ 3,750,670 $ 4,341,743 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 252,331 $ 106,854 $ 292,763 Accounts payable 464,897 448,799 503,132 Compensation and taxes withheld 118,864 137,211 116,181 Current portion of long-term debt 116,015 19,376 22,611 Other accruals 288,894 328,435 315,122 Accrued taxes 145,207 74,568 128,015 ----------- ----------- ----------- Total current liabilities 1,386,208 1,115,243 1,377,824 Long-term debt 507,392 623,587 621,094 Postretirement benefits other than pensions 211,011 208,673 208,207 Other long-term liabilities 252,248 331,303 356,215 Shareholders' equity: Preferred stock - convertible, participating, no par value: 215,770 shares outstanding at June 30, 2001 215,770 Unearned ESOP compensation (215,770) Common stock - $1.00 par value: 156,339,746, 159,558,335 and 162,641,951 shares outstanding at June 30, 2001, December 31, 2000 and June 30, 2000, respectively 207,372 206,848 206,487 Other capital 163,014 158,650 153,928 Retained earnings 2,030,240 1,948,753 2,133,155 Treasury stock, at cost (764,648) (678,778) (601,424) Cumulative other comprehensive loss (190,349) (163,609) (113,743) ----------- ----------- ----------- Total shareholders' equity 1,445,629 1,471,864 1,778,403 ----------- ----------- ----------- Total liabilities and shareholders' equity $ 3,802,488 $ 3,750,670 $ 4,341,743 =========== =========== =========== </TABLE> SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -3-
4 THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) Thousands of dollars <TABLE> <CAPTION> Six months ended June 30, --------------------------- 2001 2000 --------- --------- <S> <C> <C> OPERATIONS Net income $ 127,404 $ 156,766 Adjustments to reconcile net income to net operating cash: Depreciation 53,761 53,254 Amortization of goodwill, intangibles, and other assets 19,753 26,115 Increase in deferred pension assets (14,504) (14,146) Net increase in postretirement liability 2,338 1,616 Other 3,099 6,928 Change in current assets and liabilities-net (52,955) (174,802) Unusual tax-related payments (65,677) Other (12,560) (13,638) --------- --------- Net operating cash 60,659 42,093 INVESTING Capital expenditures (45,248) (78,655) Acquisitions of businesses (43,210) Increase in other investments (10,346) (18,437) Proceeds from sale of assets 9,866 7,670 Other (3,593) (6,956) --------- --------- Net investing cash (49,321) (139,588) FINANCING Net increase in short-term borrowings 145,477 292,763 Increase in long-term debt 1,568 6,533 Payments of long-term debt (20,659) (109,491) Payments of cash dividends (45,917) (44,462) Proceeds from stock options exercised 5,727 2,195 Treasury stock purchased (84,984) (67,533) Other (835) 479 --------- --------- Net financing cash 377 80,484 --------- --------- Effect of exchange rate changes on cash (1,234) 114 --------- --------- Net increase (decrease) in cash and cash equivalents 10,481 (16,897) Cash and cash equivalents at beginning of year 2,896 18,623 --------- --------- Cash and cash equivalents at end of period $ 13,377 $ 1,726 ========= ========= Taxes paid on income $ 80,606 $ 57,709 Interest paid on debt 31,467 34,111 </TABLE> SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -4-
5 THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Periods ended June 30, 2001 and 2000 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, 2000. 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, 2001 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2001. NOTE B--DIVIDENDS Dividends paid on common stock during each of the first two quarters of 2001 and 2000 were $.145 per common share and $.135 per common share, respectively. NOTE C--OTHER EXPENSE - NET Significant items included in Other expense - net are as follows: <TABLE> <CAPTION> (Thousands of dollars) Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 2001 2000 2001 2000 ------- ------- ------- ------- <S> <C> <C> <C> <C> Dividend and royalty income $ (653) $ (749) $(1,908) $(2,157) Net expense (income) from financing and investing activities 4,628 2,548 (473) 8,180 Foreign currency exchange losses 1,289 1,671 1,876 386 </TABLE> The net expense (income) from financing and investing activities represents the realized gains or losses associated with disposing of fixed assets, the net pre-tax expense associated with the Company's investment in broad-based corporate owned life insurance and other related fees. NOTE D--COMPREHENSIVE INCOME Comprehensive income is summarized as follows: <TABLE> <CAPTION> (Thousands of dollars) Three months ended June 30, Six months ended June 30, --------------------------- ---------------------------- 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net income $ 90,480 $ 115,843 $ 127,404 $ 156,766 Foreign currency translation adjustments (23,567) 19,206 (26,740) 31,881 --------- --------- --------- --------- Comprehensive income $ 66,913 $ 135,049 $ 100,664 $ 188,647 ========= ========= ========= ========= </TABLE> -5-
6 NOTE E--NET INCOME PER COMMON SHARE <TABLE> <CAPTION> Three months ended June 30, Six months ended June 30, -------------------------------- -------------------------------- (Thousands of dollars, except per share data) 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Basic Average common shares outstanding 155,718,543 162,624,909 157,070,639 163,464,785 ============ ============ ============ ============ Net income $ 90,480 $ 115,843 $ 127,404 $ 156,766 ============ ============ ============ ============ Net income per common share $ 0.58 $ 0.71 $ 0.81 $ 0.96 ============ ============ ============ ============ Diluted Average common shares outstanding 155,718,543 162,624,909 157,070,639 163,464,785 Non-vested restricted stock grants 300,000 278,400 337,800 278,400 Stock options - treasury stock method 459,870 970,984 1,184,254 383,636 ------------ ------------ ------------ ------------ Average common shares assuming dilution 156,478,413 163,874,293 158,592,693 164,126,821 ============ ============ ============ ============ Net income $ 90,480 $ 115,843 $ 127,404 $ 156,766 ============ ============ ============ ============ Net income per common share $ 0.58 $ 0.71 $ 0.80 $ 0.96 ============ ============ ============ ============ </TABLE> -6-
7 NOTE F--REPORTABLE SEGMENT INFORMATION The Company reports segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources in accordance with Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." <TABLE> <CAPTION> Net External Sales/Operating Profit - ----------------------------------- 2001 2000 ---------------------------- ---------------------------- (Thousands of dollars) NET SEGMENT Net Segment EXTERNAL OPERATING External Operating SALES PROFIT Sales Profit ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> THREE MONTHS ENDED JUNE 30: - --------------------------- Paint Stores $ 884,238 $ 119,959 $ 868,016 $ 123,017 Consumer 326,300 48,013 354,870 72,500 Automotive Finishes 124,678 14,253 129,021 20,102 International Coatings 70,601 600 75,523 2,741 Administrative 1,697 (39,206) 1,837 (31,515) ---------- ---------- ---------- ---------- Consolidated totals $1,407,514 $ 143,619 $1,429,267 $ 186,845 ========== ========== ========== ========== SIX MONTHS ENDED JUNE 30: - ------------------------ Paint Stores $1,578,341 $ 166,961 $1,568,072 $ 166,621 Consumer 599,701 73,027 680,257 109,572 Automotive Finishes 240,504 25,810 249,973 34,548 International Coatings 143,875 5,202 148,965 9,648 Administrative 3,463 (68,772) 3,916 (67,539) ---------- ---------- ---------- ---------- Consolidated totals $2,565,884 $ 202,228 $2,651,183 $ 252,850 ========== ========== ========== ========== </TABLE> <TABLE> <CAPTION> ==================================================================================================== Intersegment Transfers - ---------------------- Three months ended June 30, Six months ended June 30, ---------------------------- ---------------------------- (Thousands of dollars) 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Paint Stores $ 1,736 $ 2,235 $ 4,423 $ 4,453 Consumer 246,083 247,050 428,283 436,375 Automotive Finishes 9,896 9,317 17,892 18,064 International Coatings 34 134 71 211 Administrative 2,657 2,710 5,309 5,553 ---------- ---------- ---------- ---------- Segment totals $ 260,406 $ 261,446 $ 455,978 $ 464,656 ========== ========== ========== ========== ==================================================================================================== </TABLE> Segment operating profit is total revenue, including intersegment transfers, less operating costs and expenses. Domestic intersegment transfers are accounted for at the approximate fully absorbed manufactured cost plus distribution costs. International intersegment transfers are accounted for at values comparable to normal unaffiliated customer sales. The Administrative Segment's expenses include interest which is unrelated to certain financing activities of the Operating Segments, certain foreign currency transaction losses related to dollar-denominated debt and other financing activities, certain provisions for disposition and termination of operations and environmental remediation which are not directly associated with any Operating Segment, and other adjustments. Net external sales and operating profits of all consolidated foreign subsidiaries were $129.9 million and $1.0 million, respectively, for the second quarter of 2001, and $138.1 million and $9.0 million, respectively, for the second quarter of 2000. Net external sales and operating profits of theses subsidiaries were $258.5 million and $8.4 million, respectively, for the first six months of 2001, and $268.8 million and $16.9 million, respectively, for the first six months of 2000. Long-lived assets of these subsidiaries totaled $220.7 million and $252.4 million, at June 30, 2001 and 2000, respectively. Domestic operations account for the remaining net external sales, operating profits and long-lived assets. The Administrative Segment's expenses do not include any significant foreign operations. No single geographic area outside the United States was significant relative to consolidated net external sales or consolidated long-lived assets. Export sales and sales to any individual customer were each less than 10% of consolidated sales to unaffiliated customers during all periods presented. -7-
8 Note G--PREFERRED STOCK On April 18, 2001, the Company issued 250,000 shares of convertible participating serial preferred stock (preferred stock), no par value with cumulative quarterly dividends of $10.00 per share, for $250.0 million to The Sherwin-Williams Company Employee Stock Purchase and Savings Plan (ESOP). The ESOP financed the acquisition of the preferred stock by borrowing $250.0 million from the Company at the rate of 8% per annum. This borrowing is payable over ten years in equal quarterly installments. Each share of preferred stock is entitled to one vote upon all matters presented to the Company's shareholders and generally vote with the common stock together as one class. The preferred stock will be held in an unallocated suspense account by the ESOP until compensation expense related to the Company's contributions is earned at which time contributions will be credited to the members' accounts. The value of the preferred stock is redeemable and convertible into the Company's common stock at the option of the ESOP based on the relative fair value of the preferred and common stock at time of conversion. The ESOP redeemed 34,230 preferred stock shares for cash during the second quarter of 2001. Note H--IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," which supersedes Accounting Principles Board Opinion (APB) No. 16. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and changes the criteria to recognize intangible assets apart from goodwill. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. The Company has adopted this statement for all future business combinations. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which supersedes APB No. 17, "Intangible Assets." Goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to impairment tests in accordance with SFAS No. 142. Other intangible assets will continue to be amortized over their useful lives. This statement is effective for fiscal years beginning after December 15, 2001 for goodwill and intangible assets acquired before June 30, 2001. However, this statement is effective immediately for all goodwill and intangible assets acquired after June 30, 2001. The Company will adopt SFAS No. 142 in the required periods and has not yet determined the effect of this statement on the Company's results of operations and financial position. Note I--RECLASSIFICATION Certain amounts in the 2000 financial statements have been reclassified to conform with the 2001 presentation. -8-
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- Consolidated net sales decreased 1.5 percent for the quarter to $1.41 billion from $1.43 billion in the same quarter last year and decreased 3.2 percent for six months to $2.57 billion from $2.65 billion in the first six months of 2000. The largest impacts on sales came from the continuing poor U. S. and South American economic conditions, which adversely affected all Operating Segments, weakening foreign currency exchange rates and previously announced discontinued paint programs at certain customers. Net sales in the Paint Stores Segment increased 1.9 percent to $884.2 million in the quarter and 0.7 percent to $1.58 billion for six months due primarily to higher architectural paint sales which more than offset sales shortfalls in product finishes and associated product categories. Comparable-store sales, which declined 3.5 percent in the first quarter, were essentially flat in the second quarter resulting in a decline of 1.6 percent for six months. Net sales of the Consumer Segment, which were impacted by previously announced discontinued paint programs at certain customers, decreased 8.1 percent to $326.3 million in the quarter and 11.8 percent to $599.7 million in six months compared to last year. Excluding the previously announced discontinued paint programs, net sales for this Segment would have decreased 1.7 percent in the quarter and 4.9 percent in six months. Increased sales to certain customers in the quarter and first six months of 2001 could not offset the overall weak order rates, as retailers of DIY coatings were slow to replenish their inventory in view of the uncertain U. S. economy. The Automotive Finishes Segment's net sales decreased 3.4 percent to $124.7 million in the quarter and 3.8 percent to $240.5 million in six months. The negative impact of the soft domestic economy continued to adversely impact this Segment's OEM sales that were partially offset by stronger collision repair sales. Net sales in the International Coatings Segment were down 6.5 percent to $70.6 million in the quarter and down 3.4 percent to $143.9 million in six months compared to a year ago. The sales decreases in U.S. dollars were due primarily to unfavorable currency exchange rates. Excluding the effect of currency exchange fluctuations relative to last year, net sales for the Segment increased 7.1 percent and 6.9 percent for the quarter and six months, respectively. Consolidated gross profit as a percent of sales declined to 43.2 and 42.8 percent for the second quarter and first six months, respectively, from 44.9 and 43.7 percent for the comparable periods in 2000. Margins in the Paint Stores Segment were flat for the second quarter and slightly higher than last year for the first six months due primarily to selective selling price increases and favorable paint product sales mix, partially offset by slightly lower volume for the first six months. The Consumer and Automotive Finishes Segments' margins were below last year for the second quarter and first six months. The Consumer Segment's margins were impacted by the sales shortfall, competitive pricing pressures and higher year-over-year raw material, distribution and energy costs. The Automotive Finishes Segment's margins declined due primarily to lower production volume. Margins in the International Coatings Segment were lower for the second quarter and first six months, due primarily to currency rate fluctuations, raw material cost -9-
10 increases, price competition and an unfavorable product sales mix to lower margin products throughout South America. Consolidated selling, general and administrative expenses as a percent of sales were 1.1 and 0.9 percentage points unfavorable to last year for the second quarter and first six months, respectively. In the Paint Stores Segment, SG&A expenses as a percent of sales were unfavorable to last year for the second quarter and first six months due primarily to incremental increases in expenses associated with the increased number of new stores opened since last June. The Consumer and Automotive Finishes Segments' SG&A ratios were unfavorable to last year in the second quarter and first six months. The Consumer Segment's second quarter unfavorable SG&A ratio was due primarily to decreased sales, partially offset by continued SG&A expense reductions. In the Automotive Finishes Segment, the SG&A ratio was unfavorable, due primarily to lower sales. The International Coatings Segment's SG&A ratio was favorable for the second quarter and first six months due primarily to lower discretionary SG&A spending in Brazil and the United Kingdom, partially offset by decreased sales. Interest expense decreased in the second quarter and first six months compared to 2000 due to lower average short-term borrowing rates and long-term debt balances, partially offset by higher average short-term debt balances. Other expense - net was higher for the second quarter compared to 2000, due primarily to higher net investing and financing related expenses. Other expense - - net for the first six months was lower versus 2000 due primarily to gains realized on the sale of certain fixed assets during the first quarter of 2001, partially offset by higher foreign currency exchange losses. Net income in the quarter declined to $90.5 million from $115.8 million in 2000 and in six months declined to $127.4 million from $156.8 million last year. Diluted net income per common share for the quarter decreased to $.58 per share from $.71 per share in 2000 and for six months decreased to $.80 per share from $.96 per share a year ago. FINANCIAL CONDITION - ------------------- Cash and cash equivalents increased $10.5 million during the first six months of 2001. Cash provided by operating activities of $60.7 million was impacted by an unusual tax-related payment that was made to the U.S. Internal Revenue Service for contested tax issues plus accrued interest. This payment was made to prevent the imposition of above-market interest charges while the contested issues are being resolved. Net short-term borrowings increased $145.5 million while long-term debt decreased $19.6 million. Short-term borrowings outstanding primarily relate to the Company's commercial paper program, which had unused borrowing availability of $516.7 million at June 30, 2001. This program is backed by the Company's revolving credit agreements. Cash flow from operations and proceeds from the issuance of short-term borrowings were used for repayment of long-term debt, capital expenditures of $45.2 million, treasury stock purchases of $85.0 million, and cash dividends of $45.9 million. The Company's current ratio declined to 1.18 from 1.39 at -10-
11 December 31, 2000. The decrease in this ratio occurred due primarily to the increased short-term borrowings and current maturities of long-term debt, partially offset by seasonably higher accounts receivable balances. Since June 30, 2000, cash and cash equivalents increased $11.7 million due primarily to cash generated by operations of $479.7 million, which was used for treasury stock purchases of $164.3 million, capital expenditures of $99.4 million, payments of cash dividends of $89.6 million, and net reductions to long-term debt and short-term borrowings of $60.0 million. The Company expects to remain in a short-term borrowing position throughout most of 2001. Capital expenditures during the second quarter and first six months of 2001 represented primarily the costs associated with new store openings and normal equipment replacement in the Paint Stores Segment, plant and facility upgrades in the Consumer Segment, and improvements and upgrades to the automotive technology center for the Automotive Finishes Segment. We do not anticipate the need for any specific external financing to support our capital programs during the remainder of 2001. During the second quarter of 2001, the Company acquired 2.2 million shares of its common stock through open market purchases for treasury purposes, which brings the total number of shares purchased in 2001 to 3.7 million shares. 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 2001, the Company's Board of Directors rescinded the previous authorization limit and issued a new authorization for the Company to purchase, in the aggregate, 20.0 million shares of its common stock. The Company's past operations included the manufacture and sale of lead pigments and lead-based paints. The Company, along with other companies, is a defendant in a number of legal proceedings, including purported class actions, separate actions brought by the State of Rhode Island, and actions brought by other governmental entities, arising from the manufacture and sale of lead pigments and lead-based paints. The plaintiffs are seeking recovery based upon various legal theories, including negligence, strict liability, breach of warranty, negligent misrepresentations and omissions, fraudulent misrepresentations and omissions, concert of action, civil conspiracy, violations of unfair trade practices and consumer protection laws, enterprise liability, market share liability, nuisance, unjust enrichment and other theories. The plaintiffs seek various damages and relief, including personal injury and property damage, costs relating to the detection and abatement of lead-based paint from buildings, costs associated with a public education campaign, medical monitoring costs and others. The Company believes that the litigation is without merit and is vigorously defending such litigation. Considering the Company's past operations relating to lead pigments and lead-based paints, it is possible that additional lead pigment and lead-based paint litigation 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 court rulings or determinations of liability could affect the lead pigment and lead-based paint litigation against the Company and -11-
12 encourage an increase in the number and nature of future claims and proceedings. In addition, from time to time, various legislation and administrative regulations have been enacted or proposed to impose obligations on present and former manufacturers of lead pigments and lead-based paints respecting asserted health concerns associated with such products and to overturn court decisions in which the Company and other manufacturers have been successful. Due to the uncertainties involved, management is unable to predict the outcome of such litigation or the number or nature of possible future claims and proceedings, or the affect of any such legislation and administrative regulations. In addition, management cannot reasonably determine the scope or amount of the potential costs and liabilities related to such litigation, or such legislation and regulations. The Company has not accrued any amounts for such litigation. Any potential liability that may result from such litigation or such legislation and regulations cannot reasonably be estimated. However, based upon, among other things, the outcome of such litigation to date, management does not currently believe that the costs or potential liability ultimately determined to be attributable to the Company arising out of such litigation will have a material adverse effect on the Company's results of operations, liquidity or financial condition. The operations of the Company, like those of other companies in our industry, are subject to various federal, state and local environmental laws and regulations. These laws and regulations not only govern our current operations and products, but also impose potential liability on the Company for past operations which were conducted utilizing practices and procedures that were considered acceptable under the laws and regulations existing at that time. The Company expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and our industry in the future. The Company believes that it conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance. The Company is involved with environmental compliance, investigation and remediation activities at some of its current and former sites (including 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 investigation and remediation of environmental contamination and hazardous waste at a number of third-party sites, primarily Superfund sites. The Company may be similarly designated with respect to additional third-party sites in the future. The Company accrues for environmental-related activities relating to its past operations and third-party sites, including Superfund sites, for which commitments or clean-up plans have been developed and for which costs can be reasonably estimated. These estimated costs are determined based on currently available facts regarding each site. The Company continuously assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued which require changing the estimated costs or the procedure utilized in estimating such costs. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to -12-
13 any given site, the volumetric contribution which may be attributed to the Company relative to that attributed to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site. The Company's environmental-related contingencies are expected to be resolved over an extended period of time. Pursuant to a Consent Decree entered into with the United States of America in 1997, on behalf of the Environmental Protection Agency, filed in the United States District Court for the Northern District of Illinois, the Company has agreed, in part, to (i) conduct an investigation at its southeast Chicago, Illinois facility to determine the nature, extent and potential impact, if any, of environmental contamination at the facility and (ii) implement remedial action measures, if required, to address any environmental contamination identified pursuant to the investigation. While the Company continues to investigate this site, certain initial remedial actions have occurred at this site. In 1999, the Company entered into a settlement agreement with PMC, Inc. settling a lawsuit brought by PMC regarding the Company's former manufacturing facility in Chicago, Illinois which was sold to PMC in 1985. Pursuant to the terms of the settlement agreement, the Company agreed, in part, to investigate and remediate, as necessary, certain soil and/or groundwater contamination caused by historical disposal, discharges, releases or events occurring at this facility. In 2000, the Company entered into a Consent Decree with the People of the State of Illinois, settling an action brought by the state of Illinois against the Company regarding the PMC facility. Under the Consent Decree, the Company agreed, in part, to investigate and remediate, as necessary, certain soil and/or groundwater contamination caused by historical disposals, discharges, releases and/or events occurring at this facility. The Company is currently conducting its investigation of this facility. With respect to the Company's southeast Chicago, Illinois facility and the PMC facility, the Company has evaluated its potential liability and, based upon its investigations to date, has accrued appropriate amounts. However, due to the uncertainties surrounding these facilities, the Company's ultimate liability may result in costs that are significantly higher than currently accrued. In such event, the recording of any additional liability may result in a material impact on net income for the annual or interim period during which the additional costs are accrued. The Company expects the contingent liabilities related to these facilities to be resolved over an extended period of time. 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, cash flow or, except as set forth in the preceding paragraph, net income. 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" -13-
14 within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon management's current expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth and future business plans. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as "expects," "anticipates," "believes," "will likely result," "will continue," "plans to," and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the Company, that could cause actual results to differ materially from such statements. These risks, 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; changes in raw material availability and pricing; changes in the Company's relationships with customers and suppliers; the ability of the Company to successfully integrate past and future acquisitions into its existing operations, as well as the performance of the businesses acquired; the ability of the Company to successfully complete planned divestitures; 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; the achievement of growth in developing markets, such as Mexico and South America; 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 nature, cost, quantity and outcome of pending and future litigation and other claims, including the lead pigment and lead-based paint litigation and the affect of any legislation and administrative regulations relating thereto; and 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. -14-
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. 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, results of operations or liquidity. There were no material changes in the Company's exposure to market risk since December 31, 2000. -15-
16 PART II. OTHER INFORMATION Item 2. Changes in Securities. ---------------------- On April 18, 2001, the Company issued 250,000 shares of convertible participating serial preferred stock, no par value with cumulative quarterly dividends of $10.00 per share, for $250 million to The Sherwin-Williams Company Employee Stock Purchase and Savings Plan ("Plan"). The Plan financed the acquisition of the preferred stock by borrowing $250 million from the Company at the rate of 8% per annum. This borrowing is payable over ten years in equal quarterly installments. The issuance of the preferred stock qualified as a private placement under Section 4(2) of the Securities Act of 1933, as amended. Each share of preferred stock is entitled to one vote upon all matters presented to the Company's shareholders and generally vote with the common stock together as one class. The preferred stock will be held in an unallocated suspense account by the Plan until compensation expense related to the Company's contributions is earned at which time contributions will be credited to the members' accounts. The preferred stock is redeemable and convertible into the Company's common stock at any time at the option of the Plan based on the relative fair value of the preferred and common stock at the time of conversion. Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- A. The Company's 2001 Annual Meeting of Shareholders was held on April 25, 2001. B. The following persons were nominated to serve, and were elected, as directors of the Company to serve until the next annual meeting of shareholders and until their successors are elected: J.C. Boland, J.G. Breen, D.E. Collins, C.M. Connor, D.E. Evans, R.W. Mahoney, A.M. Mixon, III, C.E. Moll, H.O. Petrauskas, J. M. Scaminace and R.K. Smucker. H.O. Petrauskas subsequently retired as a director of the Company on July 20, 2001 for personal reasons. The voting results of the Annual Meeting for each nominee were as follows: Name For Withheld ---- --- -------- J.C. Boland 138,370,161 2,264,641 J.G. Breen 138,264,248 2,370,554 D.E. Collins 138,305,211 2,329,591 C.M. Connor 138,284,193 2,350,609 D.E. Evans 138,243,836 2,390,966 R.W. Mahoney 138,407,813 2,226,989 A.M. Mixon, III 136,989,894 3,644,908 C.E. Moll 138,411,387 2,223,415 H.O. Petrauskas 138,372,123 2,262,679 J.M. Scaminace 138,089,749 2,545,053 R.K. Smucker 138,324,400 2,310,402 -16-
17 Item 5. Other Information. ------------------ On August 8, 2001, the Company issued a press release announcing that Larry J. Pitorak, Senior Vice President - Finance, Treasurer and Chief Financial Officer, has left the Company to pursue other business interests. The Company also announced the appointment of Sean P. Hennessy to the position of Senior Vice President - Finance, Treasurer and Chief Financial Officer. The press release is attached hereto as Exhibit 99 and is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits (99) Press Release dated August 8, 2001. (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K, dated June 21, 2001, reporting under Item 5 that the Company had announced its earnings expectations for the second quarter of 2001 and the year 2001. 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 14, 2001 By: /s/ J.L. Ault ------------- J.L. Ault Vice President-Corporate Controller August 14, 2001 By: /s/ L.E. Stellato ----------------- L.E. Stellato Vice President, General Counsel and Secretary -17-
18 EXHIBIT INDEX ------------- EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 99 Press Release dated August 8, 2001. 18