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| SHW > SEC Filings for SHW > Form 10-Q on 24-Apr-2009 | All Recent SEC Filings |
24-Apr-2009
Quarterly Report
increase in need for working capital, and all other current liabilities decreased $223.3 million. Since March 31, 2008, Accounts receivable and Inventories were down $260.5 million and the remaining current assets decreased $26.5 million. Accounts Receivable and Inventories increased only $9.7 million from December 31, 2008 to March 31, 2009 when normal seasonal trends typically require significant growth in these categories. The use of a portion of Net operating cash to reduce Total current liabilities more than Total current assets improved the Company's current ratio to .97 at March 31, 2009 from .89 at March 31, 2008 and compared to .99 at December 31, 2008. Total debt at March 31, 2009 decreased $270.3 million to $1,077.9 million from $1,348.2 million at March 31, 2008 and decreased as a percentage of total capitalization to 40.5 percent from 45.4 percent at the end of the first quarter last year. Total debt increased $244.1 million and increased from 34.2% of total capitalization versus December 31, 2008. At March 31, 2009, the Company had remaining borrowing ability of $1.26 billion. Net operating cash declined $51.7 million to a cash usage in the first quarter of 2009 of $112.2 million from a usage of $60.5 million in 2008 primarily due to decrease of $40.7 million in net income and a seasonal net increase in cash used of $29.0 million to fund working capital requirements. In the twelve month period from April 1, 2008 through March 31, 2009, the Company invested $66.3 million in acquisitions and $99.8 million in capital additions and improvements, reduced its total debt $260.9 million, purchased $195.7 million in treasury stock, and paid $164.7 million in cash dividends to its shareholders of common stock. Results of operations for the Company in the first quarter of 2009 continued to suffer from a decrease in end-market demand for coatings and other building materials caused by the effects of the expanding global economic downturn and a lingering soft U.S. housing market. Consolidated net sales decreased 13.0 percent in the first quarter to $1.551 billion from $1.782 billion in the first quarter of 2008 due primarily to paint sales volume declines resulting from contracted demand in the domestic market for more than two years that expanded into the global markets beginning in the second half of 2008. Net sales in the Paint Stores Group decreased 12.9 percent in the quarter to $898.4 million due primarily to weak paint sales volume that was partially offset by selling price increases initiated during the second half of 2008. Net sales in the Paint Stores Group from stores open more than twelve calendar months decreased 12.7 percent. Net sales in the Consumer Group increased 0.4 percent to $288.2 million due primarily to additional sales to existing discount customers related to new products. Net sales in the Global Finishes Group declined 21.5 percent in the quarter to $362.5 million when stated in U.S. dollars due primarily to decreased paint volume sales and unfavorable currency translation rates partially offset by acquisitions and selling price increases. Gross profit as a percent of consolidated net sales increased to 43.9 percent from 43.8 percent in 2008 due primarily to stabilizing raw material costs and higher selling prices since last year's first quarter primarily offset by higher conversion costs and lower fixed cost absorption relating to lower manufacturing volume. Selling, general and administrative expenses (SG&A) increased as a percent of consolidated net sales to 39.3 percent from 36.6 percent in the first quarter of 2008. The SG&A percentage increase was due primarily to the sales decline as good expense control across all Reportable Operating Segments resulted in total SG&A spending that was $42.9 million lower than in the first quarter of 2008. Other general expense - net increased $10.3 million due primarily to increased accruals for environmental-related matters and exit costs related to closed properties. Interest expense decreased $5.5 million in 2009 due to lower short-term borrowings and borrowing rates. The effective income tax rate for first quarter 2009 was 26.7 percent compared to 31.0 percent in
2008. Diluted net income per common share decreased 50.0 percent to $.32 per
share for first quarter 2009 from $.64 per share a year ago.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation and fair presentation of the consolidated unaudited interim
financial statements and accompanying notes included in this report are the
responsibility of management. The financial statements and footnotes have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial statements and contain certain amounts that were based upon
management's best estimates, judgments and assumptions that were believed to be
reasonable under the circumstances. Management considered the impact of the
current global economic recession and utilized certain outside economic sources
of information when developing the bases for their estimates and assumptions.
The impact of the deteriorating global economic conditions on the estimates and
assumptions used by management was believed to be reasonable under the
circumstances. Management used assumptions based on historical results,
considering the current economic trends, and other assumptions to form the basis
for determining appropriate carrying values of assets and liabilities that were
not readily available from other sources. Actual results could differ from those
estimates. Also, materially different amounts may result under materially
different conditions, materially different economic trends or from using
materially different assumptions. However, management believes that any
materially different amounts resulting from materially different conditions or
material changes in facts or circumstances are unlikely to significantly impact
the current valuation of assets and liabilities that were not readily available
from other sources.
A comprehensive discussion of the Company's critical accounting policies and
management estimates and significant accounting policies followed in the
preparation of the financial statements is included in Management's Discussion
and Analysis of Financial Condition and Results of Operations and in Note 1, on
pages 45 through 49, in the Company's Annual Report on Form 10-K for the year
ended December 31, 2008. There have been no significant changes in critical
accounting policies, management estimates or accounting policies followed since
the year ended December 31, 2008.
FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW
Overview
The Company's financial condition, liquidity and cash flow remained strong
through the seasonally weak first quarter in spite of increasingly challenging
global economic conditions that included significant reductions in demand,
increased manufacturing costs related to lower volume throughput, tight credit
markets and severe fluctuations in foreign currency rates. Net working capital
improved $214.8 million at March 31, 2009 compared to the end of the first
quarter of 2008 due primarily to a larger proportional decrease in current
liabilities than current assets. Short-term borrowings decreased $274.2 million
from March 31, 2008 and all other current liabilities decreased $227.6 million.
The Company was able to arrange sufficient short-term borrowing capacity at
reasonable rates even as credit markets remained tight and the
Company has sufficient total available borrowing capacity to fund its current
operating needs. Short-term borrowings increased $248.7 million from
December 31, 2008, due to the seasonal increase in need for working capital, and
all other current liabilities decreased $223.3 million. Since March 31, 2008,
Accounts receivable and Inventories were down $260.5 million and the remaining
current assets decreased $26.5 million. Accounts Receivable and Inventories
increased only $9.7 million from December 31, 2008 to March 31, 2009 when normal
seasonal trends typically require significant growth in these categories. The
use of a portion of Net operating cash to reduce Total current liabilities more
than Total current assets improved the Company's current ratio to .97 at
March 31, 2009 from .89 at March 31, 2008 and compared to .99 at December 31,
2008. Total debt at March 31, 2009 decreased $270.3 million to $1,077.9 million
from $1,348.2 million at March 31, 2008 and decreased as a percentage of total
capitalization to 40.5 percent from 45.4 percent at the end of the first quarter
last year. Total debt increased $244.1 million and increased from 34.2% of total
capitalization versus December 31, 2008. At March 31, 2009, the Company had
remaining borrowing ability of $1.26 billion. Net operating cash declined
$51.7 million to a cash usage in the first quarter of 2009 of $112.2 million
from a usage of $60.5 million in 2008 primarily due to decrease of $40.7 million
in net income and a seasonal net increase in cash used of $29.0 million to fund
working capital requirements. In the twelve month period from April 1, 2008
through March 31, 2009, the Company invested $66.3 million in acquisitions and
$99.8 million in capital additions and improvements, reduced its total debt
$260.9 million, purchased $195.7 million in treasury stock, and paid
$164.7 million in cash dividends to its shareholders of common stock.
Net Working Capital, Debt and Other Long-Term Assets and Liabilities
Cash and cash equivalents increased $16.0 million during the first three months
of 2009. Cash requirements for normal seasonal increases in working capital,
capital expenditures of $22.4 million, payments of cash dividends of
$41.6 million and treasury stock purchases of $22.3 million were funded
primarily by net cash from operations and net increase in short-term borrowings
of $248.7 million. At March 31, 2009, the Company's current ratio was .97, a
decrease from the current ratio of .99 at December 31, 2008 and an increase from
.89 a year ago. The decrease in the current ratio was primarily due to the
increase in short-term borrowings since year-end and the improvement over a year
ago was due primarily to the year-over-year reduction in short-term borrowings.
Goodwill and intangible assets increased $2.0 million from December 31, 2008 and
decreased $45.8 million from March 31, 2008. The net increase during the first
quarter of 2009 was due to acquisitions of $8.6 million partially offset by
amortization and currency translation rate changes of $6.6 million. The net
decrease over the twelve-month period from March 31, 2008 resulted from
acquisitions and capitalization of software costs of $55 million that were more
than offset by impairments of $54.6 million, amortization of $23.2 million and
other adjustments, primarily disposition and currency translation rate changes
of $22.3 million. See Note 3, on pages 50 to 52, in the Company's Annual Report
on Form 10-K for the year ended December 31, 2008, for more information
concerning goodwill and intangible assets.
Deferred pension assets decreased $0.8 million during the first quarter of 2009
and $190.3 million from March 31, 2008. The decreases were due primarily to a
decline in the fair market
value of equity securities held by the Company's defined benefit pension plans.
See Note 6, on pages 55 to 60, in the Company's Annual Report on Form 10-K for
the year ended December 31, 2008 for more information concerning the Company's
benefit plan assets.
Net property, plant and equipment decreased $11.7 million in the first quarter
2009 and decreased $59.3 million in the twelve months since March 31, 2008. The
reduction in the first quarter of 2009 was primarily due to capital expenditures
of $22.4 million and acquired assets of $4.4 million that were more than offset
by depreciation expense of $35.9 million and the disposition of assets with
remaining book value. Since March 31, 2008, capital expenditures of
$99.8 million and acquired assets of $18.6 million were more than offset by
depreciation expense of $143.3 million and dispositions of assets with remaining
net book value. Capital expenditures during the first three months of 2009
primarily represented expenditures associated with improvements and normal
equipment replacement in manufacturing and distribution facilities in the
Consumer Group, new store openings and normal equipment replacement in the Paint
Stores Group and normal equipment replacement in the Global Finishes Group.
Short-term borrowings related to the Company's domestic commercial paper program
outstanding were $79.9 million at an average rate of .9 percent at March 31,
2009. Short-term borrowings under certain revolving and letter of credit
agreements were $650 million at an average rate of 1.3 percent at March 31,
2009. Short-term borrowings outstanding under various foreign programs at
March 31, 2009 were $35.2 million with a weighted average interest rate of
9.8 percent. The Company had unused maximum borrowing availability of
$1,260 million at March 31, 2009 under the commercial paper program that is
backed by the Company's revolving credit agreement. There were no significant
changes in long-term debt during the first quarter 2009 or in the twelve months
since March 31, 2008. See Note 7, on page 60, in the Company's Annual Report on
Form 10-K for the year ended December 31, 2008, for more information concerning
the Company's debt.
Long-term liabilities for defined benefit pension and other postretirement
benefit plans increased slightly over December 31, 2008 and decreased
$14.0 million from March 31, 2008. The changes in the liability resulted
primarily from the reduction in the actuarially determined postretirement
benefit obligation resulting from changes in actuarial assumptions. See Note 6,
on pages 55 to 60, in the Company's Annual Report on Form 10-K for the year
ended December 31, 2008 for more information concerning the Company's benefit
plan obligations.
Other long-term liabilities at March 31, 2009 decreased $49.2 million from a
year ago due primarily to a decrease at the end of 2008 in non-current and
deferred tax liabilities of $34.9 million and a reduction in accruals for
extended environmental-related liabilities of $3.2 million.
Environmental-Related Liabilities
The operations of the Company, like those of other companies in the same
industry, are subject to various federal, state and local environmental laws and
regulations. These laws and regulations not only govern current operations and
products, but also impose potential liability on the Company for past
operations. Management expects environmental laws and regulations to impose
increasingly stringent requirements upon the Company and the industry in the
future.
Management believes that the Company 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.
Depreciation of capital expenditures and other expenses related to ongoing
environmental compliance measures were included in the normal operating expenses
of conducting business. The Company's capital expenditures, depreciation and
other expenses related to ongoing environmental compliance measures were not
material to the Company's financial condition, liquidity, cash flow or results
of operations during the first three months of 2009. Management does not expect
that such capital expenditures, depreciation and other expenses will be material
to the Company's financial condition, liquidity, cash flow or results of
operations in 2009.
The Company is involved with environmental investigation and remediation
activities at some of its currently and formerly owned sites (including sites
which were previously owned and/or operated by businesses acquired by the
Company). In addition, the Company, together with other parties, has 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 estimated costs of investigation and remediation
activities at its currently and formerly owned sites and third party sites for
which commitments or clean-up plans have been developed and when such costs can
be reasonably estimated based on industry standards and professional judgment.
These estimated costs are based on currently available facts regarding each
site. The Company accrues a specific estimated amount when such an amount and a
time frame in which the costs will be incurred can be reasonably determined. If
the best estimate of costs can only be identified as a range and no specific
amount within that range can be determined more likely than any other amount
within the range, the minimum of the range is accrued by the Company in
accordance with applicable accounting rules and interpretations. The Company
continuously assesses its potential liability for investigation and remediation
activities and adjusts its environmental-related accruals as information becomes
available upon which more accurate costs can be reasonably estimated. At
March 31, 2009 and 2008, the Company had accruals for environmental-related
activities of $180.9 million and $191.9 million, respectively.
Due to the uncertainties of the scope and magnitude of contamination and the
degree of investigation and remediation activities that may be necessary at
certain currently or formerly owned sites and third party sites, it is
reasonably likely that further extensive investigations may be required and that
extensive remedial actions may be necessary not only on such sites but on
adjacent properties. Depending on the extent of the additional investigations
and remedial actions necessary, the Company's ultimate liability may result in
costs that are significantly higher than currently accrued. If the Company's
future loss contingency is ultimately determined to be at the maximum of the
range of possible outcomes for every site for which costs can be reasonably
estimated, the Company's aggregate accruals for environmental-related activities
would be $114.0 million higher than the accruals at March 31, 2009.
Five of the Company's currently and formerly owned sites accounted for the
majority of the accruals for environmental-related activities and the unaccrued
maximum of the estimated range of possible outcomes at March 31, 2009. At
March 31, 2009, $137.9 million, or 76.2 percent, related directly to these five
sites. Of the aggregate unaccrued exposure at March 31, 2009, $76.2 million, or
66.9 percent, related to the five sites. While environmental investigations and
remedial actions are in different stages at these sites, additional
investigations, remedial actions and/or monitoring will likely be required at
each site. A comprehensive description of the five currently and formerly owned
sites that account for the majority of the accruals for environmental-related
activities 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, 2008. There have been no significant changes in
the investigative or remedial status of these five sites since the year ended
December 31, 2008.
Management cannot presently estimate the ultimate potential loss contingencies
related to these five sites or other less significant sites until such time as a
substantial portion of the investigative activities at each site is completed
and remedial action plans are developed.
In accordance with FIN No. 47, "Accounting for Conditional Asset Retirement
Obligations - an interpretation of FASB Statement No. 143", the Company has
identified certain conditional asset retirement obligations at various current
manufacturing, distribution and store facilities. These obligations relate
primarily to asbestos abatement and closures of hazardous waste containment
devices. Using investigative, remediation and disposal methods that are
currently available to the Company, the estimated cost of these obligations is
not significant.
In the event any future loss contingency significantly exceeds the current
amount accrued, the recording of the ultimate liability may result in a material
impact on net income for the annual or interim period during which the
additional costs are accrued. Management does not believe that any potential
liability ultimately attributed to the Company for its environmental-related
matters or conditional asset retirement obligations will have a material adverse
effect on the Company's financial condition, liquidity, or cash flow due to the
extended period of time during which environmental investigation and remediation
takes place. An estimate of the potential impact on the Company's operations
cannot be made due to the aforementioned uncertainties.
Management expects these contingent environmental-related liabilities and
conditional asset retirement obligations to be resolved over an extended period
of time. Management is unable to provide a more specific time frame due to the
indefinite amount of time to conduct investigation activities at any site, the
indefinite amount of time to obtain governmental agency approval, as necessary,
with respect to investigation and remediation activities, and the indefinite
amount of time necessary to conduct remediation activities.
Contractual Obligations, Commercial Commitments and Warranties
Short-term borrowings increased $248.7 million to $765.1 million at March 31,
2009 from $516.4 million at December 31, 2008. Total long-term debt decreased
$4.6 million to $312.7 at March 31, 2009 from $317.3 million at December 31,
2008. See the Financial Condition, Liquidity and Cash Flow section of this
report for more information. There have been no other significant changes to the
Company's contractual obligations and commercial commitments in
the first quarter of 2009 as summarized 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, 2008.
Changes to the Company's accrual for product warranty claims in the first three
months of 2009 are disclosed in Note E.
Contingent Liabilities
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
. . .
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