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| SHW > SEC Filings for SHW > Form 10-Q on 22-Oct-2008 | All Recent SEC Filings |
22-Oct-2008
Quarterly Report
accounting policies and management estimates is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K for the year ended December 31, 2007.
FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW
Cash and cash equivalents increased $13.6 million during the first nine months
of 2008. Cash requirements of $595.9 million for capital expenditures
($91.8 million), payments of cash dividends ($124.2 million) and treasury stock
purchases ($379.9 million) were funded primarily by net operating cash of
$592.6 million.
Short-term borrowings related to the Company's domestic commercial paper program
outstanding were $168.5 million at an average rate of 3.04 percent at
September 30, 2008. The Company had unused maximum borrowing availability of
$741.5 million at September 30, 2008 under the commercial paper program that is
backed by the Company's revolving credit agreement. Short-term borrowings under
certain revolving and letter of credit agreements were $500 million at an
average rate of 2.80 percent at September 30, 2008. Short-term borrowings
outstanding under various foreign programs at September 30, 2008 were
$47.4 million with a weighted average interest rate of 9.42 percent.
Since September 30, 2007, net operating cash of $903.4 million and net increased
short-term borrowings of $57.7 million were used primarily to increase cash and
cash equivalents by $19.7 million and for investment in acquisitions of
$82.7 million, capital expenditures of $140.5 million, treasury stock purchases
of $562.8 million and payments of cash dividends of $163.3 million.
Capital expenditures during the first nine months of 2008 primarily represented
expenditures associated with improvements in manufacturing facilities in the
Consumer Group, new store openings and normal equipment replacement in the Paint
Stores Group and new branch openings in the Global Finishes Group.
During the third quarter of 2008, the Company purchased 793,135 shares of its
common stock for treasury purposes through open market purchases. The Company
acquires shares of its common stock for general corporate purposes and,
depending upon its cash position, financial flexibility requirements and market
conditions, the Company may acquire additional shares of its common stock in the
future. The Company had remaining authorization at September 30, 2008 to
purchase 20.0 million shares of its common stock.
At September 30, 2008, the Company's current ratio was .94, a decrease from the
current ratio of .97 at December 31, 2007. The reduction in the current ratio
was due primarily to increased short-term borrowings, accounts payable and
accrued taxes that more than offset an increase in accounts receivable and cash
and cash equivalents.
During the third quarter of 2008, the Company completed the acquisition of the
liquid coatings subsidiaries of Inchem Holdings International Limited (Inchem).
Inchem produces coatings applied to wood and plastic products in Asia. These
waterborne, solvent-based, and ultraviolet
curable coatings are applied to furniture, cabinets, flooring, and electronic.
The coatings are made and sold in China, Vietnam and Malaysia, and distributed
to 15 other Asian countries. During the first quarter of 2008, the Company
acquired Becker Powder Coatings, Inc., a subsidiary of Sweden-based AB Wilh.
Headquartered in Columbus, Ohio, Becker produces powder coatings applied to
appliances, metal furniture, fixtures, equipment and electronic products
manufactured throughout North America.
Contingent Liabilities
Management believes that it properly valued the Company's assets and recorded
all known liabilities that existed as of the balance sheet date for which a
value was available or an amount could be reasonably estimated in accordance
with all present U.S. generally accepted accounting principles. In addition, the
Company may be subject to potential liabilities, as described in the following,
for which a loss was not deemed probable at this time and a fair value was not
available or an amount could not be reasonably estimated due to uncertainties
involved.
Life Shield Engineered Systems, LLC (Life Shield) is a wholly owned subsidiary
of the Company. Life Shield develops and manufactures blast and fragment
mitigating systems and ballistic resistant systems. The blast and fragment
mitigating systems and ballistic resistant systems create a potentially higher
level of product liability for the Company (as an owner of and raw material
supplier to Life Shield and as the exclusive distributor of Life Shield's
systems) than is normally associated with coatings and related products
currently manufactured, distributed and sold by the Company.
Certain of Life Shield's technology has been designated as Qualified
Anti-Terrorism Technology and granted a Designation under the Support
Anti-terrorism by Fostering Effective Technologies Act of 2002 (SAFETY Act) and
the regulations adopted pursuant to the SAFETY Act. Under the SAFETY Act, the
potentially higher level of possible product liability for Life Shield relating
to the technology granted the Designation is limited to $6.0 million per
occurrence in the event any such liability arises from an Act of Terrorism (as
defined in the SAFETY Act). The limitation of liability provided for under the
SAFETY Act does not apply to any technology not granted a designation or
certification as a Qualified Anti-Terrorism Technology, nor in the event that
any such liability arises from an act or event other than an Act of Terrorism.
Life Shield maintains insurance for liabilities up to the $6.0 million per
occurrence limitation caused by failure of its products in the event of an Act
of Terrorism. This commercial insurance is also expected to cover product
liability claims asserted against the Company as the distributor of Life
Shield's systems. The Company expects to seek Designation and Certification
under the SAFETY Act for certain products supplied by the Company to Life
Shield.
Management of the Company has reviewed the potential increased liabilities
associated with Life Shield's systems and determined that potential liabilities
arising from an Act of Terrorism that could ultimately affect the Company will
be appropriately insured or limited by current regulations. However, due to the
uncertainties involved in the future development, usage and application of Life
Shield's systems, the number or nature of possible future claims and legal
proceedings, or the affect that any change in legislation and/or administrative
regulations may have on the limitations of potential liabilities, management
cannot reasonably determine the
scope or amount of any potential costs and liabilities for the Company related
to Life Shield or to Life Shield's systems. Any potential liability for the
Company that may result from Life Shield or Life Shield's systems cannot
reasonably be estimated. However, based upon, among other things, the limitation
of liability under the SAFETY Act in the event of an Act of Terrorism,
management does not currently believe that the costs or potential liability
ultimately determined to be attributable to the Company through its ownership of
Life Shield, as a supplier to Life Shield or as a distributor of Life Shield's
systems arising from the use of Life Shield's systems will have a material
adverse effect on the Company's results of operations, liquidity or financial
conditions.
Litigation
In the course of its business, the Company is subject to a variety of claims and
lawsuits, including litigation relating to product liability and warranty,
personal injury, environmental, intellectual property, commercial, contractual
and antitrust claims that are inherently subject to many uncertainties regarding
the possibility of a loss to the Company. These uncertainties will ultimately be
resolved when one or more future events occur or fail to occur confirming the
incurrence of a liability or the reduction of a liability. In accordance with
Statement of Financial Accounting Standards (FAS) No. 5, "Accounting for
Contingencies," the Company accrues for these contingencies by a charge to
income when it is both probable that one or more future events will occur
confirming the fact of a loss and the amount of the loss can be reasonably
estimated. In the event that the Company's loss contingency is ultimately
determined to be significantly higher than currently accrued, the recording of
the additional liability may result in a material impact on the Company's
results of operations, liquidity or financial condition for the annual or
interim period during which such additional liability is accrued. In those cases
where no accrual is recorded because it is not probable that a liability has
been incurred and cannot be reasonably estimated, any potential liability
ultimately determined to be attributable to the Company may result in a material
impact on the Company's results of operations, liquidity or financial condition
for the annual or interim period during which such liability is accrued. In
those cases where no accrual is recorded or exposure to loss exists in excess of
the amount accrued, FAS No. 5 requires disclosure of the contingency when there
is a reasonable possibility that a loss or additional loss may have been
incurred if even the possibility may be remote.
Lead pigment and lead-based paint litigation. 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 individual personal injury actions, purported class
actions, actions brought by the State of Ohio, 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 practice and consumer protection
laws, enterprise liability, market share liability, public 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 is also a defendant in legal proceedings arising from the manufacture
and sale of non-lead-based paints which seek recovery based upon various legal
theories, including the failure to adequately warn of potential exposure to lead
during surface preparation when using non-lead-based paint on surfaces
previously painted with lead-based paint. The Company believes that the
litigation brought to date is without merit or subject to meritorious defenses
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.
Notwithstanding the Company's views on the merits, litigation is inherently
subject to many uncertainties and the Company ultimately may not prevail.
Adverse court rulings, such as the jury verdict against the Company and other
defendants in the State of Rhode Island action and the Wisconsin State Supreme
Court's July 2005 determination that Wisconsin's risk contribution theory may
apply in the lead pigment litigation (both discussed in more detail below), or
determinations of liability, among other factors, could affect the lead pigment
and lead-based paint litigation against the Company and encourage an increase in
the number and nature of future claims and proceedings. (The jury verdict in the
State of Rhode Island action was subsequently reversed by the Rhode Island
Supreme Court. See Rhode Island lead pigment litigation below.) In addition,
from time to time, various legislation and administrative regulations have been
enacted, promulgated 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 or to overturn the effect of 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 the lead pigment and lead-based paint litigation, the number or nature of
possible future claims and proceedings, or the effect 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 potential costs and liabilities related to such litigation, or resulting
from any 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.
In the event any significant liability is determined to be attributable to the
Company relating to such litigation, the recording of the liability may result
in a material impact on net income for the annual or interim period during which
such liability is accrued. Additionally, due to the uncertainties associated
with the amount of any such liability and/or the nature of any other remedy
which may be imposed in such litigation, any potential liability determined to
be attributable to the Company arising out of such litigation may have a
material adverse effect on the Company's results of operations, liquidity or
financial condition. An estimate of the potential impact on the Company's
results of operations, liquidity or financial condition cannot be made due to
the aforementioned uncertainties.
Rhode Island lead pigment litigation. During September 2002, a jury trial
commenced in the first phase of an 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. 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.
The State of Rhode Island retried the case and on February 22, 2006, the jury
returned a verdict, finding that (i) the cumulative presence of lead pigment in
paints and coatings on buildings in the State of Rhode Island constitutes a
public nuisance, (ii) the Company, along with two other defendants, caused or
substantially contributed to the creation of the public nuisance, and (iii) the
Company and two other defendants should be ordered to abate the public nuisance.
On February 28, 2006, the Court granted the defendants' motion to dismiss the
punitive damages claim, finding insufficient evidence to support the State's
request for punitive damages. Final judgment was entered against the Company and
two other defendants on March 16, 2007. The Company and two other defendants
appealed the final judgment to the Rhode Island Supreme Court and, on July 1,
2008, the Rhode Island Supreme Court, among other determinations, reversed the
judgment of abatement with respect to the Company and two other defendants. This
decision reverses the public nuisance liability judgment against the Company on
the basis that the complaint failed to state a public nuisance claim as a matter
of law and concludes the case in favor of the Company and the other defendants.
Other public nuisance claim litigation. The Company and other companies are or
were defendants in other legal proceedings seeking recovery based on public
nuisance liability theories including claims brought by the County of Santa
Clara, California and other public entities in the State of California, the City
of St. Louis, Missouri, the City of Milwaukee, Wisconsin, various cities and
counties in the State of New Jersey, various cities in the State of Ohio and the
State of Ohio.
The Santa Clara County, California proceeding was initiated in March 2000. The
named plaintiffs are the County of Santa Clara, County of Santa Cruz, County of
Solano, County of Alameda, County of Kern, City and County of San Francisco, San
Francisco Housing Authority, San Francisco Unified School District, City of
Oakland, Oakland Housing Authority, Oakland Redevelopment Agency and the Oakland
Unified School District. The proceeding purports to be a class action on behalf
of all public entities in the State of California except the State and its
agencies. The plaintiffs' second amended complaint asserted claims for fraud and
concealment, strict product liability/failure to warn, strict product
liability/design defect, negligence, negligent breach of a special duty, public
nuisance, private nuisance and violations of California's Business and
Professions Code, and the third amended complaint alleges similar claims
including a claim for public nuisance. Various asserted claims were resolved in
favor of the defendants through pre-trial demurrers and motions to strike. In
October 2003, the trial court granted the defendants' motion for summary
judgment against the remaining counts on statute of limitation grounds. The
plaintiffs appealed the trial court's decision and on March 3, 2006, the Court
of Appeal, Sixth Appellate District, reversed in part the demurrers and summary
judgment entered in favor of the Company and the other defendants. The Court of
Appeal reversed the dismissal of the public nuisance claim for abatement brought
by the cities of Santa Clara and Oakland and the City and
County of San Francisco, and reversed summary judgment on all of the plaintiffs'
fraud claim to the extent that the plaintiffs alleged that the defendants had
made fraudulent statements or omissions minimizing the risks of low-level
exposure to lead. The Court of Appeal further vacated the summary judgment
holding that the statute of limitations barred the plaintiffs' strict liability
and negligence claims, and held that those claims had not yet accrued because
physical injury to the plaintiffs' property had not been alleged. The Court of
Appeal affirmed the dismissal of the public nuisance claim for damages to the
plaintiffs' properties, most aspects of the fraud claim, the trespass claim and
the unfair business practice claim. The plaintiffs have filed a motion for leave
to file a fourth amended complaint. On April 4, 2007, the trial court entered an
order granting the defendants' motion to bar payment of contingent fees to
private attorneys. The plaintiffs appealed the trial court's order and on
April 8, 2008 the California Court of Appeal reversed the trial court's order.
The defendants filed a petition for review with the California Supreme Court
requesting the Supreme Court to review the decision of the Court of Appeal.
The City of St. Louis proceeding was initiated in January 2000. The City
initially alleged claims for strict liability, negligence, fraudulent
misrepresentation, negligent misrepresentation, concert of action, conspiracy,
public nuisance, restitution and indemnity. Following various pre-trial
proceedings during which many of the asserted claims were dismissed by the trial
court or voluntarily dismissed by the City, on June 10, 2003, the City filed its
fourth amended petition alleging a single count of public nuisance. Following
further pre-trial proceedings, on January 18, 2006, the trial court granted the
defendants' motion for summary judgment based on the City's lack of product
identification evidence. The City has appealed the trial court's January 18,
2006 decision and a prior trial court decision. On June 12, 2007, the Missouri
Supreme Court affirmed summary judgment for the Company and other defendants.
This decision concludes the case in favor of the Company and the other
defendants.
The City of Milwaukee proceeding was initiated in April 2001 against Mautz Paint
Co. and NL Industries, Inc. On November 7, 2001, the Company acquired certain
assets of Mautz Paint Co. and agreed (under terms and conditions set forth in
the purchase agreement) to defend and indemnify Mautz Paint Co. for its
liability, if any, to the City of Milwaukee in this action. The City's complaint
included claims for continuing public nuisance, restitution, conspiracy,
negligence, strict liability, failure to warn and violation of Wisconsin's trade
practices statute. Following various pre-trial proceedings during which several
of the City's claims were dismissed by the court or voluntarily dismissed by the
City, on August 13, 2003, the trial court granted defendants' motion for summary
judgment on the remaining claims. The City appealed and, on November 9, 2004,
the Wisconsin Court of Appeals reversed the trial court's decision and remanded
the claims for public nuisance, conspiracy and restitution to the trial court.
On February 13, 2007, the trial court entered an order severing and staying the
claims against Mautz Paint Co. The action against NL Industries proceeded to
trial and the jury found that the presence of lead paint in Milwaukee is a
public nuisance, but that NL Industries was not at fault for the public
nuisance. The City of Milwaukee is appealing the jury verdict finding that NL
Industries did not intentionally cause a public nuisance and the trial court's
denial of the City's post-trial motions.
In December 2001 and early 2002, a number of cities and counties in New Jersey
individually initiated proceedings in the Superior Court of New Jersey against
the Company and other companies asserting claims for fraud, public nuisance,
civil conspiracy, unjust enrichment and indemnity. The New Jersey Supreme Court
consolidated all of the cases and assigned them to the Superior Court in
Middlesex County. By order dated November 4, 2002, the Superior Court granted
the defendants' motion to dismiss all complaints. The plaintiffs appealed and,
on August 17, 2005, the Appellate Division affirmed the dismissal of all claims
except public nuisance. The Appellate Division reinstated the public nuisance
claim in each case. On November 17, 2005, the New Jersey Supreme Court granted
defendants' petition for certification to review the reinstatement of the public
nuisance claims. On June 15, 2007, the New Jersey Supreme Court reversed the
Appellate Division's decision and reinstated the dismissal of the public
nuisance claims. This decision concludes the case in favor of the Company and
the other defendants.
In 2006 and 2007, a number of cities in Ohio individually initiated proceedings
in state court against the Company and other companies asserting claims for
public nuisance, concert of action, unjust enrichment, indemnity and punitive
damages. Also in September 2006, the Company initiated proceedings in the United
States District Court, Southern District of Ohio, against certain of the Ohio
cities which initiated the state court proceedings referred to in the preceding
sentence and John Doe cities and public officials. The Company's proceeding
sought declaratory and injunctive relief to prevent the violation of the
Company's federal constitutional rights in relation to such state court
proceedings. All of these Ohio cities' actions have been voluntarily dismissed
by the plaintiff cities. Accordingly, on August 28, 2008, the Court granted,
with prejudice, the Company's motion to dismiss the remaining proceedings in the
United States District Court, Southern District of Ohio.
In April 2007, the State of Ohio filed an action against the Company and other
companies asserting a claim for public nuisance. The State of Ohio seeks
compensatory and punitive damages. Simultaneously, the State of Ohio filed a
motion to consolidate this action with the action previously filed by the City
of Columbus (one of the Ohio cities referred to in the preceding paragraph) and
a motion to stay this action pending the Ohio Supreme Court's resolution of the
mandamus action in State ex rel. The Ohio General Assembly v. Brunner, Case
No. 2007-0209. In September 2007, the trial court entered an order to reinstate
these actions due to the Ohio Supreme Court's decision on the mandamus action in
State ex rel. The Ohio General Assembly v. Brunner.
. . .
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