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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, 2002
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
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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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $1.00 Par Value - 149,876,489 shares as of October 31, 2002.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Thousands of dollars, except per share data
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 1,426,266 $ 1,366,768 $ 4,028,642 $ 3,932,652
Cost of goods sold 780,974 765,729 2,239,435 2,234,053
Gross profit 645,292 601,039 1,789,207 1,698,599
Percent to net sales 45.2% 44.0% 44.4% 43.2%
Selling, general and administrative expenses 456,101 443,173 1,343,804 1,309,209
Percent to net sales 32.0% 32.4% 33.4% 33.3%
Interest expense 9,001 12,681 29,820 43,358
Interest and net investment income (1,151) (1,013) (2,891) (3,501)
Other expense - net 1,772 2,831 9,372 3,938
----------- ----------- ----------- -----------
Income before income taxes and cumulative
effect of change in accounting principle 179,569 143,367 409,102 345,595
Income taxes 68,236 53,046 155,459 127,870
----------- ----------- ----------- -----------
Income before cumulative effect
of change in accounting principle 111,333 90,321 253,643 217,725
Cumulative effect of change in accounting
principle - net of income taxes of $64,476 (183,136)
----------- ----------- ----------- -----------
Net income $ 111,333 $ 90,321 $ 70,507 $ 217,725
=========== =========== =========== ===========
Income per share:
Basic:
Before cumulative effect of
change in accounting principle $ 0.74 $ 0.58 $ 1.68 $ 1.39
Cumulative effect of change in accounting
principle - net of income taxes (1.21)
----------- ----------- ----------- -----------
Net income $ 0.74 $ 0.58 $ 0.47 $ 1.39
=========== =========== =========== ===========
Diluted:
Before cumulative effect of
change in accounting principle $ 0.73 $ 0.58 $ 1.66 $ 1.38
Cumulative effect of change in accounting
principle - net of income taxes (1.20)
----------- ----------- ----------- -----------
Net income $ 0.73 $ 0.58 $ 0.46 $ 1.38
=========== =========== =========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-2-
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars
SEPTEMBER 30, December 31, September 30,
2002 2001 2001
----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 49,856 $ 118,814 $ 2,514
Accounts receivable, less allowance 637,289 523,278 673,602
Inventories:
Finished goods 517,799 530,916 517,220
Work in process and raw materials 77,997 101,847 83,616
----------- ----------- -----------
595,796 632,763 600,836
Deferred income taxes 107,747 104,672 104,862
Other current assets 121,570 127,418 144,243
----------- ----------- -----------
Total current assets 1,512,258 1,506,945 1,526,057
Goodwill 554,740 672,397 672,275
Intangible assets 195,872 304,506 304,258
Deferred pension assets 413,278 393,587 386,315
Other assets 103,200 77,802 113,439
Property, plant and equipment 1,572,793 1,564,636 1,553,443
Less allowances for depreciation 916,004 891,948 863,654
----------- ----------- -----------
656,789 672,688 689,789
----------- ----------- -----------
Total assets $ 3,436,137 $ 3,627,925 $ 3,692,133
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 83,732
Accounts payable $ 526,982 $ 454,410 443,233
Compensation and taxes withheld 121,859 141,640 118,225
Current portion of long-term debt 14,000 111,852 110,844
Other accruals 316,165 326,854 309,536
Accrued taxes 171,420 106,597 194,243
----------- ----------- -----------
Total current liabilities 1,150,426 1,141,353 1,259,813
Long-term debt 508,022 503,517 506,353
Postretirement benefits other than pensions 213,838 209,963 212,179
Other long-term liabilities 226,190 285,328 256,816
Shareholders' equity:
Preferred stock - convertible, participating, no par value:
71,476, 168,305 and 181,137 shares outstanding at
September 30, 2002, December 31, 2001 and September 30, 2001,
respectively 71,476 168,305 181,137
Unearned ESOP compensation (71,476) (168,305) (181,137)
Common stock - $1.00 par value:
150,192,140, 153,978,356 and 154,549,179 shares
outstanding at September 30, 2002, December 31, 2001
and September 30, 2001, respectively 209,606 208,031 207,424
Other capital 232,185 200,643 164,242
Retained earnings 2,122,927 2,120,927 2,097,893
Treasury stock, at cost (988,091) (837,284) (805,696)
Cumulative other comprehensive loss (238,966) (204,553) (206,891)
----------- ----------- -----------
Total shareholders' equity 1,337,661 1,487,764 1,456,972
----------- ----------- -----------
Total liabilities and shareholders' equity $ 3,436,137 $ 3,627,925 $ 3,692,133
=========== =========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-3-
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
Nine months ended September 30,
-------------------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net income $ 70,507 $ 217,725
Adjustments to reconcile net income to net operating cash:
Cumulative effect of change in accounting principle 183,136
Impairment of long-lived assets 8,996
Depreciation 76,566 80,517
Amortization of goodwill, intangibles, and other assets 9,038 29,690
Increase in deferred pension assets (19,691) (21,964)
Net increase in postretirement liability 3,875 3,506
Foreign currency related losses 7,014 2,115
Other 1,378 3,873
Change in current assets and liabilities-net 23,209 76,172
Unusual tax-related payments (65,677)
Payments for environmental - related matters (9,456) (8,655)
Payments for qualified exit costs (3,288) (2,327)
Other (13,140) (3,099)
--------- ---------
Net operating cash 338,144 311,876
INVESTING ACTIVITIES
Capital expenditures (89,876) (64,075)
Acquisitions of businesses (26,248) (1,879)
Increase in other investments (15,040) (11,584)
Proceeds from sale of assets 12,146 9,866
Other (5,405) (22,239)
--------- ---------
Net investing cash (124,423) (89,911)
FINANCING ACTIVITIES
Net decrease in short-term borrowings (23,122)
Increase in long-term debt 6,894 13,231
Payments of long-term debt (101,850) (22,550)
Payments of cash dividends (68,507) (68,585)
Proceeds from stock options exercised 32,835 6,632
Treasury stock purchased (150,807) (126,032)
Other (2,598) (603)
--------- ---------
Net financing cash (284,033) (221,029)
--------- ---------
Effect of exchange rate changes on cash 1,354 (1,318)
--------- ---------
Net decrease in cash and cash equivalents (68,958) (382)
Cash and cash equivalents at beginning of year 118,814 2,896
--------- ---------
Cash and cash equivalents at end of period $ 49,856 $ 2,514
========= =========
Income taxes paid $ 103,447 $ 83,706
Interest paid 40,294 54,665
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended September 30, 2002 and 2001
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the fiscal year ended December 31, 2001. 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 third quarter and nine months ended September 30,
2002 are not necessarily indicative of the results to be expected for the fiscal
year ending December 31, 2002.
NOTE B--DIVIDENDS
Dividends paid on common stock during each of the first three quarters of 2002
and 2001 were $.15 per common share and $.145 per common share, respectively.
NOTE C--OTHER EXPENSE - NET
Items included in Other expense - net are as follows:
Three months ended Nine months ended
(Thousands of dollars) September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Dividend and royalty income $ (825) $ (901) $(2,273) $(2,809)
Net expense from financing
and investing activities 1,321 3,387 4,982 2,914
Foreign currency related losses 1,521 820 7,014 2,696
Other income (1,397) (897) (3,269) (1,691)
Other expense 1,152 422 2,918 2,828
The net expense from financing and investing activities represents the realized
gains or losses associated with the disposal of fixed assets, the net gain or
loss associated with the investment in certain long-term asset funds, the net
pre-tax expense associated with the Company's investment in broad-based
corporate owned life insurance and other related fees.
Other income and other expense include miscellaneous items that are not related
to the primary business purpose of the Company.
-5-
NOTE D--COMPREHENSIVE INCOME
Comprehensive income is summarized as follows:
Three months ended Nine months ended
(Thousands of dollars) September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income $ 111,333 $ 90,321 $ 70,507 $ 217,725
Foreign currency translation adjustments (17,622) (16,542) (34,413) (43,282)
--------- --------- --------- ---------
Comprehensive income $ 93,711 $ 73,779 $ 36,094 $ 174,443
========= ========= ========= =========
NOTE E--RECLASSIFICATION
Certain amounts in the 2001 financial statements have been reclassified to
conform with the 2002 presentation.
NOTE F--INCOME PER COMMON SHARE
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
(Thousands of dollars, except per share data) 2002 2001 2002 2001
------------- ------------- ------------- -------------
Income before cumulative effect
of change in accounting principle $ 111,333 $ 90,321 $ 253,643 $ 217,725
Cumulative effect of change in accounting
principle - net of income taxes of $64,476 (183,136)
------------- ------------- ------------- -------------
Net income $ 111,333 $ 90,321 $ 70,507 $ 217,725
============= ============= ============= =============
Basic
Average common shares outstanding 149,771,211 154,735,820 151,085,841 156,292,366
============= ============= ============= =============
Income per common share:
Income before cumulative effect
of change in accounting principle $ 0.74 $ 0.58 $ 1.68 $ 1.39
Cumulative effect of change in accounting principle (1.21)
------------- ------------- ------------- -------------
Net income $ 0.74 $ 0.58 $ 0.47 $ 1.39
============= ============= ============= =============
Diluted
Average common shares outstanding 149,771,211 154,735,820 151,085,841 156,292,366
Non-vested restricted stock grants 318,400 300,000 317,511 325,200
Stock options - treasury stock method 1,542,589 694,711 1,658,527 1,076,233
------------- ------------- ------------- -------------
Average common shares assuming dilution 151,632,200 155,730,531 153,061,879 157,693,799
============= ============= ============= =============
Income per common share:
Income before cumulative effect
of change in accounting principle $ 0.73 $ 0.58 $ 1.66 $ 1.38
Cumulative effect of change in accounting principle (1.20)
------------- ------------- ------------- -------------
Net income $ 0.73 $ 0.58 $ 0.46 $ 1.38
============= ============= ============= =============
-6-
NOTE G--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."
Net External Sales/Operating Profit
- -----------------------------------
2002 2001
------------------------- -------------------------
(Thousands of dollars) NET SEGMENT Net Segment
EXTERNAL OPERATING External Operating
SALES PROFIT Sales Profit
---------- ---------- ---------- ----------
THREE MONTHS ENDED SEPTEMBER 30:
Paint Stores $ 938,261 $ 139,951 $ 886,092 $ 129,922
Consumer 314,292 60,213 299,684 32,825
Automotive Finishes 113,795 13,224 115,263 13,398
International Coatings 58,264 (255) 64,096 (143)
Administrative 1,654 (33,564) 1,633 (32,635)
---------- ---------- ---------- ----------
Consolidated totals $1,426,266 $ 179,569 $1,366,768 $ 143,367
========== ========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30:
Paint Stores $2,545,915 $ 303,608 $2,453,569 $ 295,740
Consumer 943,984 169,621 915,975 106,860
Automotive Finishes 348,990 42,383 355,767 39,208
International Coatings 185,074 (5,771) 202,245 5,194
Administrative 4,679 (100,739) 5,096 (101,407)
---------- ---------- ---------- ----------
Consolidated totals $4,028,642 $ 409,102 $3,932,652 $ 345,595
========== ========== ========== ==========
==============================================================================================
Intersegment Transfers
- ----------------------
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
(Thousands of dollars) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Paint Stores $ 242 $ 161 $ 953 $ 620
Consumer 281,814 261,545 768,846 723,826
Automotive Finishes 9,940 8,623 25,792 26,515
International Coatings 173 32 723 103
Administrative 1,114 2,675 3,255 7,984
---------- ---------- ---------- ----------
Segment totals $ 293,283 $ 273,036 $ 799,569 $ 759,048
========== ========== ========== ==========
==============================================================================================
Segment operating profit is total revenue, including intersegment transfers,
less operating costs and expenses. Domestic intersegment transfers are accounted
for at the approximate fully absorbed manufactured cost plus distribution costs.
International intersegment transfers are accounted for at values comparable to
normal unaffiliated customer sales. The Administrative Segment's expenses
include interest which is unrelated to certain financing activities of the
Operating Segments, certain foreign currency transaction losses related to
dollar-denominated debt and other financing activities, and other adjustments.
Net external sales and operating profits of all consolidated foreign
subsidiaries were $120.4 million and $5.9 million, respectively, for the third
quarter of 2002, and $123.8 million and $4.6 million, respectively, for the
third quarter of 2001. Net external sales and operating profits of these
subsidiaries were $372.7 million and $13.6 million, respectively, for the first
nine months of 2002, and $382.3 million and $13.0 million, respectively, for the
first nine months of 2001. Long-lived assets of these subsidiaries totaled
$100.1 million and $211.2 million at September 30, 2002 and 2001, 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-
NOTE H--CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002. Goodwill and intangible assets deemed to have
indefinite lives are no longer being amortized but are subject to impairment
tests in accordance with SFAS No. 142. Excluding such after tax amortization
expense of $5,977 and $18,250 from third quarter and the first nine months of
2001 respectively, to be comparable with 2002, net income would have been
$96,298 or $.62 per diluted common share in the third quarter 2001, and net
income would have been $235,975 or $1.50 per diluted common share for the first
nine months of 2001.
During the first quarter 2002, the Company recognized a transitional impairment
charge of $247,612 ($183,136 after tax or $1.21 per share) as the cumulative
effect of a change in accounting principle to reduce the carrying values of
certain indefinite lived intangible assets and goodwill to estimated fair values
as required by SFAS No. 142. Impairment of indefinite lived intangible assets
amounted to $118,220 ($77,422 after tax or $.51 per share) and impairment of
goodwill amounted to $129,392 ($105,714 after tax or $.70 per share). The
impairment of indefinite lived intangible assets was due primarily to a
shortfall in sales from levels anticipated at the time of acquisition and
related principally to trademarks in the Consumer Segment associated with the
acquisition of Thompson Minwax Holding Corp. In addition, certain trademarks in
the International Coatings Segment were impaired. The impairment of goodwill
relates primarily to international operations in the International Coatings and
Automotive Finishes Segments. Weakening foreign currency exchange rates and
economic conditions, particularly in South America, have negatively impacted
profit and cash flow in U.S. dollars. Fair values of indefinite lived intangible
assets and goodwill were estimated using a discounted cash flow valuation model,
incorporating a discount rate commensurate with the risks involved for each
group of assets.
SFAS No. 142 requires a review at least annually of the carrying value of
indefinite lived assets and goodwill. In addition to the transitional impairment
test completed in the first quarter, another impairment test will be completed
in the fourth quarter 2002 and at least annually thereafter.
A summary of changes in the Company's goodwill during the first nine months by
reportable operating segment is as follows:
Goodwill
-----------------------------------------------------------------------
January 1, Other September 30,
(Thousands of dollars) 2002 Acquisitions Impairments Adjustments 2002
---------- ------------ ----------- ----------- -------------
Paint Stores $ 81,886 $ 12,487 $ (5,387) $ 88,986
Consumer 450,054 (16,571) $ 745 434,228
Automotive Finishes 49,631 1,417 (19,009) (2,914) 29,125
International Coatings 90,826 (88,425) 2,401
--------- --------- --------- --------- ---------
Consolidated totals $ 672,397 $ 13,904 $(129,392) $ (2,169) $ 554,740
========= ========= ========= ========= =========
-8-
NOTE H--CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
The Company's intangible assets and related accumulated amortization are as
follows:
Intangible assets subject to amortization Trademarks Total
----------------------------------------- with indefinite Intangible
Software All other Subtotal lives assets
--------- --------- --------- --------------- ----------
September 30, 2001
- ------------------------
Gross $ 65,103 $ 118,731 $ 183,834
Accumulated amortization (10,403) (100,766) (111,169)
--------- --------- --------- --------- ---------
Net value $ 54,700 $ 17,965 $ 72,665 $ 231,593 $ 304,258
========= ========= ========= ========= =========
December 31, 2001
- ------------------------
Gross $ 68,917 $ 67,162 $ 136,079
Accumulated amortization (11,900) (49,454) (61,354)
--------- --------- --------- --------- ---------
Net value $ 57,017 $ 17,708 $ 74,725 $ 229,781 $ 304,506
========= ========= ========= ========= =========
September 30, 2002
- ------------------------
Gross $ 81,549 $ 70,139 $ 151,687
Accumulated amortization (17,132) (52,842) (69,973)
--------- --------- --------- --------- ---------
Net value $ 64,417 $ 17,297 $ 81,714 $ 114,158 $ 195,872
========= ========= ========= ========= =========
Certain fully amortized intangible assets were written-off during the quarter
ended December 31, 2001. Based on the current amount of intangible assets
subject to amortization, the estimated amortization expense for each of the five
succeeding years is expected to approximate $12.0 million in 2002, $11.9 million
in 2003, $11.8 million in 2004, $10.1 million in 2005 and $8.5 million in 2006.
SFAS No. 142 also requires a complete review of useful life and classification
of all intangible and other assets. As a result, certain assets were
reclassified from Other assets to Intangible assets on all balance sheets
presented in the accompanying financial statements.
Categories and useful lives of intangible assets of the Company at September 30,
2002, following the adoption of SFAS No. 142 effective January 1, 2002, were as
follows:
Category Useful Life
-------- -----------
Trademarks Indefinite
Non-Compete Covenants 2 - 10 years
Certain Intangible Property Rights (including software) 3 - 15 years
NOTE I--SUBSEQUENT EVENT
At October 31, 2002, the Company had $399.3 million of short-term borrowings
related to the commercial paper program for general corporate purposes.
Additionally, the Company had $497.3 million of short-term investments
outstanding at October 31, 2002.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of interim consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires that
management use various assumptions to make estimates that affect certain amounts
reported in the interim consolidated financial statements and accompanying
notes. Management uses assumptions based on historical results and other
assumptions they believe are reasonable to form the basis for determining
appropriate carrying values of assets and liabilities that are not readily
available from other sources. Actual results could differ from those estimates.
Also, materially different amounts may result under materially different
conditions or from using materially different assumptions. However, management
currently believes that any materially different amount resulting from
materially different conditions or material changes in facts or circumstances is
unlikely.
All of the Company's significant accounting policies have been disclosed in Note
1 to the Notes to Consolidated Financial Statements in the Company's 2001 Annual
Report. Management believes the following critical accounting policies affect
the more significant assumptions used to make estimates that affect the amounts
reported in the interim consolidated financial statements.
Management records an allowance for doubtful accounts receivable based on
historical experience and expected trends to reduce certain accounts receivable
to their net realizable value. Inventories are stated at the lower of cost or
market with cost determined principally on the last-in, first-out (LIFO) method.
Management records reductions to inventory cost based on historical experience
and expected trends for obsolete and discontinued inventories. Property, plant
and equipment is stated on the basis of cost and depreciated principally on a
straight-line method using industry standards and historical experience to
estimate useful lives.
SFAS No. 142 states that goodwill and intangible assets deemed to have
indefinite lives should not be amortized but rather tested for impairment at
least annually. Management's judgement was used in determining which intangible
assets had indefinite lives as well as determining the useful lives of remaining
intangible assets. During the first quarter of 2002, in accordance with SFAS No.
142 transitional impairment tests, fair values of indefinite lived intangible
assets and goodwill were estimated by management using a discounted cash flow
valuation model, incorporating a discount rate commensurate with the risks
involved for each group of assets. Growth models were developed using both
historical results and industry forecasts. Effective January 1, 2002, a
transitional charge for the cumulative effect of change in accounting principle
was recorded for the impairment of goodwill and intangible assets with
indefinite lives.
Defined benefit pension plans and other postretirement benefits require
estimating the future cost of benefits and attributing that cost to the time
period during which each covered employee
-10-
works. To record the related net assets and obligations of such benefit plans,
management uses assumptions related to inflation, investment returns, mortality,
employee turnover, rate of compensation increases, medical costs and discount
rates. Management, along with third-party actuaries, reviews all of these
assumptions on an ongoing basis to ensure that the most reasonable information
available is being considered. Management is currently reviewing the pension
assumptions for 2003. Based on the current state of the financial markets and
the market performance of the Company's pension portfolio in 2002, management is
evaluating whether a change in its assumptions regarding the 8.50% return on
plan assets and 6.75% discount rate is appropriate. If such assumptions are
changed, the net periodic pension benefit credit may be reduced in 2003.
The Company is self-insured for certain liabilities relating to worker's
compensation, employee benefits and property and general liability claims.
Claims filed but unsettled and estimated claims incurred but not reported are
accrued based upon management's estimates of the aggregate liability for claims
incurred using historical experience and actuarial assumptions followed in the
insurance industry.
The Company is involved with environmental compliance, investigation and
remediation activities at some of its current and former sites and at a number
of third-party sites. The Company accrues for certain environmental
remediation-related activities for which commitments or clean-up plans have been
developed and for which costs can be reasonably estimated based on industry
standards and historical experience. All accrued amounts are recorded on an
undiscounted basis. Accrued environmental remediation-related expenses include
direct costs of remediation and indirect costs related to the remediation
effort, such as compensation and benefits for employees directly involved in the
remediation activities and fees paid to outside engineering, consulting and law
firms.
The Company is continually re-evaluating its operating facilities against its
long-term strategic goals. Upon commitment to a formal shutdown plan of an
operating facility, provisions are made for all estimated qualified exit costs
in accordance with EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity" and other related
accounting guidance. Qualified exit costs include primarily post-closure rent
expenses, incremental post-closure costs and costs of employee terminations.
Estimates of such costs are determined by contractual agreement or estimated by
management based on historical experience. Concurrently, property, plant and
equipment and other long-lived assets are tested for impairment in accordance
with SFAS No. 144. If an impairment exists, the carrying value is reduced to an
estimated net fair value using a cash flow valuation model, incorporating a
discount rate commensurate with the risks involved for each group of assets.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs from Exit or Disposal Activities". SFAS No. 146 requires,
among other things, that a liability for costs associated with an exit or
disposal activity be recognized when the liability is incurred rather than at
the time of commitment to a formal shutdown plan. The adoption of SFAS No. 146
is effective for all exit or disposal activities initiated subsequent to
December 31,
-11-
2002. The Company is currently evaluating SFAS No. 146 and its impact on future
consolidated financial statements.
RESULTS OF OPERATIONS
Consolidated net sales for the quarter increased 4.4 percent to $1.43 billion
from $1.37 billion in the third quarter last year and increased 2.4 percent for
the first nine months to $4.03 billion from $3.93 billion in the first nine
months of 2001. Strong domestic architectural paint sales, an increasingly
favorable do-it-yourself (DIY) market and aggressive promotion of new products
and new color palettes were the most significant factors impacting sales in the
quarter and the first nine months. Partially offsetting these sales gains were
continuing sluggish sales in the domestic commercial architectural, industrial
maintenance, product finishes and automotive product lines. Poor economic
conditions in South America and weak currency exchange rates in Argentina and
Brazil continue to negatively impact international sales in U.S. dollars. Net
sales in the Paint Stores Segment increased 5.9 percent to $938.3 million in the
quarter and 3.8 percent to $2.55 billion for the first nine months due primarily
to a significant increase in architectural paint volume sales to contractors and
DIY customers that more than offset lower sales in the domestic commercial
architectural, industrial maintenance and product finishes categories.
Comparable-store sales, which are sales from stores open for more than twelve
calendar months, increased 3.8 percent in the third quarter and 1.9 percent for
the first nine months of 2002. Net sales of the Consumer Segment increased 4.9
percent to $314.3 million in the quarter and 3.1 percent to $944.0 million in
the first nine months compared to last year. Consumer Segment sales throughout
the year have increasingly benefited from the improving DIY market and from
aggressively promoting many new and existing paint, aerosol and wood care
products, which more than offset a decrease in sales of the Cleaning Solutions
Business Unit for the first nine months. The Automotive Finishes Segment's net
sales decreased 1.3 percent to $113.8 million in the quarter and 1.9 percent to
$349.0 million for the first nine months. Improved vehicle refinish sales in the
quarter compared to the two previous quarters this year were not enough to
offset unfavorable currency exchange rates and price competition. Excluding the
effects of currency exchange fluctuations relative to last year, net sales for
the Segment increased 0.9 percent and 0.3 percent for the quarter and the first
nine months, respectively. Net sales in the International Coatings Segment were
down 9.1 percent to $58.3 million in the quarter and 8.5 percent to $185.1
million in the first nine months of 2002. The sales decreases, in U. S. dollars,
were due primarily to unfavorable currency exchange rates in the Brazilian real
and Argentine peso. Excluding the effects of currency exchange fluctuations
relative to last year, net sales for the Segment increased 10.0 percent and 6.0
percent for the third quarter and the first nine months, respectively.
Consolidated gross profit as a percent of sales increased to 45.2 percent in the
third quarter of 2002 from 44.0 percent in the third quarter of 2001 and to 44.4
percent for the first nine months of 2002 from 43.2 percent for the first nine
months of 2001. Consolidated gross profit increased $44.3 million and $90.6
million in the third quarter and the first nine months of 2002 over the same
periods last year. Higher consolidated sales levels accounted for $28.5 million
and $47.0 million of the gross profit improvement in the third quarter and the
first nine months, respectively. In addition to higher sales levels in the Paint
Stores and Consumer Segments for the third quarter and the first nine months,
gross profit in these Segments was higher than last
-12-
year primarily due to a higher-margin product sales mix and moderating raw
material costs. The Consumer Segment gross profit percent also benefited from
improved overhead absorption related to architectural paint volume gains and
manufacturing expense reductions due to plant closures. The Automotive Finishes
Segment's margins, although essentially unchanged in the third quarter,
increased during the first nine months of 2002 due to moderating raw material
costs, improved manufacturing absorption and stabilizing sales declines earlier
in the year. The International Coatings Segment's margins were lower than last
year during the third quarter due to economic and competitive pressures. This
Segment's margins were also lower for the first nine months due to a $9.0
million impairment charge during the first quarter of 2002 recorded for
property, plant and equipment in Argentina in accordance with SFAS No. 144. With
certain raw material costs beginning to rise, lower seasonal manufacturing
volume anticipated and international economic and competitive pressures
continuing, the impact of the gross profit enhancements experienced in the first
nine months is expected to be lower in the fourth quarter.
Consolidated selling, general and administrative expenses as a percent of sales
decreased to 32.0 percent in the third quarter of 2002 from 32.4 percent in the
third quarter of 2001 and increased to 33.4 percent for the first nine months of
2002 from 33.3 percent for the first nine months of 2001. Consolidated selling,
general and administrative expenses increased $12.9 million and $34.6 million
compared to last year for the third quarter and the first nine months,
respectively. Increased spending was primarily due to higher expenses associated
with additional investment in our businesses, particularly in the Paint Stores
Segment with additional investment in new and acquired stores in the third
quarter. For the first nine months, the Paint Stores Segment invested in new and
acquired stores and launched new color palettes. The Consumer Segment's SG&A
ratio was favorable to last year in the third quarter and the first nine months
primarily due to higher sales levels and continued cost control. In the
Automotive Segment, SG&A expenses as a percent of sales were slightly
unfavorable to last year for the quarter and the first nine months due to the
sales shortfall that was partially offset by tight expense control. Third
quarter and nine months SG&A expenses as a percent of sales were favorable to
last year in both periods in the International Coatings Segment primarily due to
tight expense control.
Decreased interest expense in the third quarter and the first nine months of
2002 versus 2001 was due to average short-term borrowing rates that were 1.91
and 2.92 average basis points lower for the third quarter and the first nine
months, respectively, and lower average outstanding short-term and long-term
debt.
Other expense - net was $1.1 million lower for the third quarter of 2002
compared to 2001 primarily due to lower financing expenses of $2.1 million
related to lower long-term debt outstanding in 2002 partially offset by $.7
million of higher foreign currency related losses in the quarter. For the first
nine months, Other expense - net increased $5.4 million. This increase was due
primarily to higher foreign currency related losses of $4.3 million and
increased expenses from financing and investing activities of $2.1 million in
2002. Increases in expenses from financing and investing activities were due
primarily to non-recurring gains realized from the sale of certain fixed assets
of $8.0 million in 2001 that were partially offset by lower financing expenses
related to lower long-term debt outstanding in 2002.
-13-
Net income increased $21.0 million, or 23.3 percent, to $111.3 million in the
third quarter of 2002. Income before the cumulative effect of change in
accounting principle for the first nine months increased $35.9 million, or 16.5
percent, to $253.6 million. Diluted net income per common share increased to
$.73 per share in the third quarter compared to $.58 per share in 2001. Diluted
net income per common share before the cumulative effect of change in accounting
principle for the first nine months, increased to $1.66 per share from $1.38 per
share in 2001. Excluding amortization expense of intangible assets and goodwill
in 2001 to be comparable with 2002, net income would have been $96.3 million or
$.62 per diluted common share in the third quarter of 2001 and $236.0 million or
$1.50 per diluted common share for the first nine months of 2001.
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with the requirements of that pronouncement,
indefinite lived intangible assets and goodwill were reviewed for possible
impairment. Due to the reduction in fair value of certain acquired trademarks
and businesses, related principally to international acquisitions and the
acquisition of Thompson Minwax Holding Corp., the Company recorded an after-tax
transitional impairment charge of $183.1 million, or $1.21 per share, in the
first quarter. The transitional impairment charge was recorded as a cumulative
effect of change in accounting principle in accordance with SFAS No. 142. Net
income after the cumulative effect of change in accounting principle was $70.5
million, or $.46 per common share, for the first nine months of 2002.
FINANCIAL CONDITION
Cash and cash equivalents decreased $68.9 million during the first nine months
of 2002, primarily due to a payment of $100.0 million for maturing long-term
debt. There were no short-term borrowings related to the Company's commercial
paper program outstanding at September 30, 2002. The Company had unused maximum
borrowing capacity of $750.6 million at September 30, 2002 under the commercial
paper program. This program is backed by the Company's revolving credit
agreements. At October 31, 2002, the Company had $399.3 million of short-term
borrowings outstanding as disclosed in Note I. During the first nine months, net
operating cash of $338.1 million was used primarily for the acquisition of
businesses of $26.2 million, capital expenditures of $89.9 million, treasury
stock purchases of $150.8 million, and cash dividends of $68.5 million. At
September 30, 2002, the Company's current ratio was 1.31, compared to 1.32 at
December 31, 2001.
Since September 30, 2001, cash generated by operations of $587.9 million was
used primarily for capital expenditures of $108.4 million, treasury stock
purchases of $181.9 million, cash dividends of $90.9 million, acquisition of
businesses of $39.5 million, reductions of long-term debt by $101.8 million and
reductions in short-term borrowings. At September 30, 2002, the Company's
current ratio increased to 1.31 from 1.21 at September 30, 2001. The increase in
this ratio occurred primarily due to a payment of $100.0 million for maturing
long-term debt.
Capital expenditures during the third quarter and the first nine months of 2002
represented primarily expenditures associated with new store openings and normal
equipment replacement in the Paint Stores Segment and operational improvements
and new or upgraded information
-14-
systems hardware in the Administrative and other Segments. We do not anticipate
the need for any specific external financing to support our capital programs
during the remainder of 2002.
During the third quarter of 2002, the Company purchased 1,950,000 shares of its
common stock for treasury, which brought the total number of shares purchased in
2002 to 5,192,200. The Company acquires shares of its common stock for general
corporate purposes and, depending upon its cash position and market conditions,
the Company may acquire additional shares of its common stock in the future. The
Company had remaining authorization at September 30, 2002 to purchase
approximately 11.8 million shares of its common stock.
The Company's past operations included the manufacture and sale of lead pigments
and lead-based paints. The Company, along with other companies, is a defendant
in a number of legal proceedings, including purported class actions, separate
actions brought by the State of Rhode Island, and actions brought by various
counties, cities, school districts and other government-related entities,
arising from the manufacture and sale of lead pigments and lead-based paints.
The plaintiffs are seeking recovery based upon various legal theories, including
negligence, strict liability, breach of warranty, negligent misrepresentations
and omissions, fraudulent misrepresentations and omissions, concert of action,
civil conspiracy, violations of unfair trade practices and consumer protection
laws, enterprise liability, market share liability, nuisance, unjust enrichment
and other theories. The plaintiffs seek various damages and relief, including
personal injury and property damage, costs relating to the detection and
abatement of lead-based paint from buildings, costs associated with a public
education campaign, medical monitoring costs and others. The Company believes
that the litigation is without merit and is vigorously defending such
litigation. The Company expects that additional lead pigment and lead-based
paint litigation may be filed against the Company in the future asserting
similar or different legal theories and seeking similar or different types of
damages and relief.
During September 2002, a jury trial commenced in the first phase of the action
brought by the State of Rhode Island against the Company and the other
defendants. The sole issue before the court in this first phase was whether lead
pigment in paint constitutes a public nuisance under Rhode Island law. This
first phase did not consider the issues of liability or damages, if any, related
to the public nuisance claim. In October 2002, the court declared a mistrial as
the jury, which was split four to two in favor of the defendants, was unable to
reach a unanimous decision. This was the first legal proceeding against the
Company to go to trial relating to the Company's lead pigment and lead-based
paint litigation. Additional legal proceedings pending in other jurisdictions
have been scheduled for trial during 2003, and the Company believes it is
possible that additional legal proceedings could be scheduled for trial during
2003 and subsequent years.
Litigation is inherently subject to many uncertainties. Adverse court rulings or
determinations of liability, among other factors, could affect the lead pigment
and lead-based paint litigation against the Company and will likely increase in
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
-15-
of the lead pigment and lead-based paint litigation, the number or nature of
possible future claims and proceedings, or the affect that any legislation
and/or administrative regulations may have on the litigation or against the
Company. In addition, management cannot reasonably determine the scope or amount
of the costs and potential liabilities related to such litigation, or any such
legislation and regulations. The Company has not accrued any amounts for such
litigation. Any costs that may be incurred or potential liabilities that may
result from such litigation or such legislation and regulations cannot
reasonably be estimated. However, based upon, among other things, the outcome of
such litigation to date, management does not currently believe that the costs or
potential liabilities ultimately determined to be attributable to the Company
arising out of such litigation will have a material adverse effect on the
Company's results of operations, liquidity or financial condition.
The operations of the Company, like those of other companies in our industry,
are subject to various federal, state and local environmental laws and
regulations. These laws and regulations not only govern our current operations
and products, but also impose potential liability on the Company for past
operations which were conducted utilizing practices and procedures that were
considered acceptable under the laws and regulations existing at that time. The
Company expects environmental laws and regulations to impose increasingly
stringent requirements upon the Company and our industry in the future. The
Company believes that it conducts its operations in compliance with applicable
environmental laws and regulations and has implemented various programs designed
to protect the environment and promote continued compliance.
The Company is involved with environmental compliance, investigation and
remediation activities at some of its current and former sites (including sites
which were previously owned and/or operated by businesses acquired by the
Company). The Company, together with other parties, has also been designated a
potentially responsible party under federal and state environmental protection
laws for the investigation and remediation of environmental contamination and
hazardous waste at a number of third-party sites, primarily Superfund sites. The
Company may be similarly designated with respect to additional third-party sites
in the future.
The Company accrues for environmental-related activities relating to its past
operations and third-party sites, including Superfund sites, for which
commitments or clean-up plans have been developed and for which costs can be
reasonably estimated. These estimated costs are determined based on currently
available facts regarding each site. The Company continuously assesses its
potential liability for investigation and remediation-related activities and
adjusts its environmental-related accruals as information becomes available upon
which more accurate costs can be reasonably estimated and as additional
accounting guidelines are issued which require changing the estimated costs or
the procedure utilized in estimating such costs. Actual costs incurred may vary
from these estimates due to the inherent uncertainties involved including, among
others, the number and financial condition of parties involved with respect to
any given site, the volumetric contribution which may be attributed to the
Company relative to that attributed to other parties, the nature and magnitude
of the wastes involved, the various technologies that can be used for
remediation and the determination of acceptable remediation
-16-
with respect to a particular site. The Company's environmental-related
contingent liabilities 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
disposals, discharges, releases and/or events occurring at this facility. In
2000, the Company entered into a Consent Decree with the People of the State of
Illinois settling an action brought by the State of Illinois against the Company
regarding the PMC facility. Under the Consent Decree, the Company agreed, in
part, to investigate and remediate, as necessary, certain soil and/or
groundwater contamination caused by historical disposals, discharges, releases
and/or events occurring at this facility. The Company is currently conducting
its investigation of this facility.
With respect to the Company's southeast Chicago, Illinois facility and the PMC
facility, the Company has evaluated its potential liability and, based upon its
investigations to date, has accrued appropriate amounts. 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 the liability may result in a material impact on net
income for the annual or interim period during which the additional costs are
accrued. The Company 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" 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
-17-
and conditions and may discuss, among other things, anticipated future
performance (including sales and earnings), expected growth, future business
plans and the costs and potential liability for environmental-related matters
and the lead pigment and lead-based paint litigation. Any statement that is not
historical in nature is a forward-looking statement and may be identified by the
use of words and phrases such as "expects," "anticipates," "believes," "will,"
"will likely result," "will continue," "plans to," and similar expressions.
Readers are cautioned not to place undue reliance on any forward-looking
statements. Forward-looking statements are necessarily subject to risks,
uncertainties and other factors, many of which are outside the control of the
Company, that could cause actual results to differ materially from such
statements and from the Company's historical results and experience.
These risks, uncertainties and other factors include such things as: (a) general
business conditions, strengths of retail and manufacturing economies and the
growth in the coatings industry; (b) competitive factors, including pricing
pressures and product innovation and quality; (c) changes in raw material
availability and pricing; (d) changes in the Company's relationships with
customers and suppliers; (e) the ability of the Company to attain cost savings
from productivity initiatives; (f) the ability of the Company to successfully
integrate past and future acquisitions into its existing operations, as well as
the performance of the businesses acquired; (g) changes in general domestic
economic conditions such as inflation rates, interest rates and tax rates; (h)
risks and uncertainties associated with the Company's expansion into and its
operations in South America and other foreign markets, including inflation
rates, recessions, foreign currency exchange rates, foreign investment and
repatriation restrictions, unrest and other external economic and political
factors; (i) the achievement of growth in developing markets, such as Mexico and
South America; (j) increasingly stringent domestic and foreign governmental
regulations including those affecting the environment; (k) inherent
uncertainties involved in assessing the Company's potential liability for
environmental remediation-related activities; (l) other changes in governmental
policies, laws and regulations, including changes in accounting policies and
standards and taxation requirements (such as new tax laws and new or revised tax
law interpretations); (m) the nature, cost, quantity and outcome of pending and
future litigation and other claims, including the lead pigment and lead-based
paint litigation and the affect of any legislation and administrative
regulations relating thereto; and (n) unusual weather conditions.
Readers are cautioned that it is not possible to predict or identify all of the
risks, uncertainties and other factors that may affect future results and that
the above list should not be considered to be a complete list. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
-18-
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk associated with interest rates and value
changes in foreign currencies. The Company utilizes derivative instruments as
part of its overall financial risk management policy, but does not use
derivative instruments for speculative or trading purposes. During the third
quarter of 2002, the Company terminated the interest rate swap contracts related
to the 6.85% notes. These interest rate swap contracts were described in detail
in Note 7 of the Notes to Consolidated Financial Statements of the Company's
2001 Annual Report. The Company does not believe that any potential loss related
to interest rate exposure would have a material adverse effect on the Company's
financial condition, results of operations or cash flows. The Company also
entered into foreign currency option and forward contracts to hedge against
value changes in foreign currency. The Company believes it may experience
continuing losses from foreign currency translation. However, the Company does
not expect currency translation, transaction or hedging contract losses to have
a material adverse effect on the Company's financial condition, results of
operations or cash flows. There were no material changes in the Company's
exposure to market risk since the disclosure in the 2001 Annual Report on Form
10-K.
-19-
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 day period prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's Chairman and Chief Executive Officer and the Company's Senior Vice
President - Finance and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, the
Company's Chairman and Chief Executive Officer and Senior Vice President -
Finance and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be disclosed by the Company in its periodic Exchange Act reports.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
-20-
PART II. OTHER INFORMATION
Item 5. Other Information
Subsequent to the fiscal quarter ended September 30, 2002, the Audit Committee
of the Board of Directors of the Company approved certain non-audit services to
be performed by Ernst & Young LLP, the Company's independent auditors. These
non-audit services are for domestic and foreign tax-related compliance and
advisory services and other foreign accounting and advisory services.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(10)(a) Schedule of Certain Executive Officers who
are Parties to the Severance Pay Agreements
in the Forms Attached as Exhibit 10(b) to
the Company's Quarterly Report on Form 10-Q
For the Period Ended June 30, 1997 (filed
herewith).
(10)(b) The Sherwin-Williams Company Deferred
Compensation Savings and Pension
Equalization Plan, dated July 24, 2002
(filed herewith).
(10)(c) 2002-2 Amendment to The Sherwin-Williams
Company Deferred Compensation Savings Plan
(1997/1999 Amendment and Restatement), dated
August 31, 2002 (filed herewith).
(10)(d) The Sherwin-Williams Company Revised Key
Management Deferred Compensation Plan, dated
July 24, 2002 (filed herewith).
(10)(e) 2002-2 Amendment to The Sherwin-Williams
Company Key Management Deferred Compensation
Savings Plan (1997/1999 Amendment and
Restatement), dated August 31, 2002 (filed
herewith).
(99)(a) Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
(99)(b) Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
(b) Reports on Form 8-K.
(i) The Company filed a Current Report on Form 8-K, dated
July 11, 2002,
-21-
reporting under Item 5 that the Company had issued a
press release regarding its sales and earnings
expectations for the second quarter of 2002 and the
full year 2002.
(ii) The Company filed a Current Report on Form 8-K, dated
August 12, 2002, reporting under Item 9 that
Christopher M. Connor, Chairman and Chief Executive
Officer, and Sean P. Hennessy, Senior Vice President
- Finance and Chief Financial Officer, each filed
with the Securities and Exchange Commission a
Statement Under Oath of Principal Executive Officer
and Principal Financial Officer Regarding Facts and
Circumstances Relating to Exchange Act Filings as
required by SEC Order 4-460 issued on June 27, 2002.
(iii) The Company filed a Current Report on Form 8-K, dated
September 27, 2002, reporting under Item 5 that the
Company had issued a press release regarding its
sales and earnings expectations for the third quarter
of 2002 and the full year 2002.
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 12, 2002 By: /s/ J.L. Ault
------------------------------------
J.L. Ault
Vice President-Corporate Controller
November 12, 2002 By: /s/ L.E. Stellato
------------------------------------
L.E. Stellato
Vice President, General Counsel and
Secretary
CERTIFICATIONS
I, Christopher M. Connor, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The
Sherwin-Williams Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in
-22-
light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Christopher M. Connor
-------------------------------------
Christopher M. Connor
Chairman and Chief Executive
Officer
-23-
I, Sean P. Hennessy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The
Sherwin-Williams Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
-24-
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Sean P. Hennessy
-------------------------------------
Sean P. Hennessy
Senior Vice President - Finance and
Chief Financial Officer
-25-
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT
- ----------- -------
(10)(a) Schedule of Certain Executive Officers who are
Parties to the Severance Pay Agreements in the Forms
Attached as Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q For the Period Ended June 30,
1997 (filed herewith).
(10)(b) The Sherwin-Williams Company Deferred Compensation
Savings and Pension Equalization Plan, dated July 24,
2002 (filed herewith).
(10)(c) 2002-2 Amendment to The Sherwin-Williams Company
Deferred Compensation Savings Plan (1997/1999
Amendment and Restatement), dated August 31, 2002
(filed herewith).
(10)(d) The Sherwin-Williams Company Revised Key Management
Deferred Compensation Plan, dated July 24, 2002
(filed herewith).
(10)(e) 2002-2 Amendment to The Sherwin-Williams Company Key
Management Deferred Compensation Savings Plan
(1997/1999 Amendment and Restatement), dated August
31, 2002 (filed herewith).
(99)(a) Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
(99)(b) Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
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