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| SHW > SEC Filings for SHW > Form 10-Q on 31-Jul-2009 | All Recent SEC Filings |
31-Jul-2009
Quarterly Report
borrowings decreased $17.2 million from December 31, 2008, due to the control over working capital, and all other current liabilities decreased $15.8 million. Since June 30, 2008, Accounts receivable and Inventories were down $334.3 million and the remaining current assets decreased $55.6 million. Accounts Receivable and Inventories increased only $44.5 million from December 31, 2008 to June 30, 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 1.04 at June 30, 2009 from .92 at June 30, 2008 and compared to .99 at December 31, 2008. Total debt at June 30, 2009 decreased $438.8 million to $800.7 million from $1,239.5 million at June 30, 2008 and decreased as a percentage of total capitalization to 31.6 percent from 42.7 percent at the end of the second quarter last year. Total debt decreased $33.0 million and decreased to 31.6 percent of total capitalization versus December 31, 2008. At June 30, 2009, the Company had remaining borrowing ability of $1.64 billion. Net operating cash increased $3.6 million in six months of 2009 to $266.4 million from $262.8 million in 2008 primarily due to a net decrease in cash used to fund working capital requirements of $57.3 million that was partially offset by a reduction in net income of $54.3 million. In the twelve month period from July 1, 2008 through June 30, 2009, the Company generated net operating cash of $879.9 million and invested $68.1 million in acquisitions, $87.2 million in capital additions and improvements, reduced its total debt $431.1 million, purchased $104.9 million in treasury stock and paid $165.1 million in cash dividends to its shareholders of common stock. Results of operations for the Company in the second quarter and first six months 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 depressed U.S. housing market. Consolidated net sales decreased 12.6 percent in the second quarter to $1.948 billion from $2.230 billion in the second quarter of 2008 and decreased 12.8 percent in the first six months to $3.499 billion from $4.011 billion in the first six months 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 13.7 percent in the quarter to $1.170 billion and decreased 13.3 percent to $2.068 billion in the first six months 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 13.5 percent in the quarter and 13.1 percent in the first six months of 2009. Net sales in the Consumer Group decreased 4.5 percent to $366.4 million in the quarter and 2.4 percent to $654.6 million in the first six months due primarily to lower volume sales to most of the Group's retail customers partially offset by additional sales to existing discount customers related to new products. Net sales in the Global Finishes Group stated in U.S. dollars declined 16.2 percent in the quarter to $409.7 million and 18.8 percent to $772.2 million in the first six months 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 in the second quarter to 46.0 percent from 43.6 percent in 2008 and increased to 45.0 percent from 43.7 percent in the first six months due primarily to lower freight and other distribution costs, reduced expenses related to cost control initiatives started eighteen months ago and favorable product sales mix partially offset by higher costs related to lower manufactured volume and unfavorable currency translation rates. Selling,
general and administrative expenses (SG&A) increased as a percent of
consolidated net sales to 33.5 percent from 30.4 percent in the second quarter
of 2008 and increased to 36.1 percent from 33.1 percent due primarily to the
sales decline as good expense control across all Reportable Operating Segments
resulted in total SG&A spending that was $24.0 million lower than in the second
quarter of 2008 and $66.8 million lower than in the first six months last year.
Other general expense - net increased in the second quarter and first six months
of 2009 due primarily to increased accruals for environmental-related matters
and exit costs related to closed properties. Interest expense decreased
$7.8 million in the first quarter and $13.2 million in the first six months of
2009 due to lower short-term borrowings and borrowing rates. The effective
income tax rate for second quarter 2009 was 31.9 percent compared to
33.0 percent in 2008 and the rate for the first six months of 3009 was
31.0 percent compared to 32.4 percent in 2008. Diluted net income per common
share decreased to $1.35 per share for second quarter 2009 from $1.45 per share
a year ago and decreased to $1.66 per share from $2.07 per share in the first
six months.
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 first six months of 2009 in spite of continued challenging global
economic conditions that included significant reductions in demand, increased
manufacturing costs related to lower volume throughput, tight credit markets and
significant fluctuations in foreign currency translation rates. Net working
capital improved $276.5 million at June 30, 2009 compared to the end of the
second quarter of 2008 due primarily to a larger proportional decrease in
current liabilities than current assets. Short-term borrowings decreased
$434.4 million from June 30, 2008 and all other current liabilities decreased
$232.0 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 decreased $17.2 million from December 31,
2008 and all other current liabilities decreased $15.8 million. Since June 30,
2008, Accounts receivable and Inventories were down $334.3 million and the
remaining current assets decreased $55.6 million. Accounts Receivable and
Inventories increased only $44.5 million from December 31, 2008 to June 30, 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 1.04 at June 30, 2009 from .92 at June 30, 2008 and compared to .99 at
December 31, 2008. Total debt at June 30, 2009 decreased $438.8 million to
$800.7 million from $1,239.5 million at June 30, 2008 and decreased as a
percentage of total capitalization to 31.6 percent from 42.7 percent at the end
of the second quarter last year. Total debt decreased $33.0 million and
decreased from 34.2% of total capitalization at December 31, 2008. At June 30,
2009, the Company had remaining borrowing ability of $1.64 billion. Net
operating cash increased $3.6 million in the second quarter of 2009 to $266.4
million from $262.8 million in 2008 primarily due to a net decrease in cash used
to fund working capital requirements of $57.3 million that was partially offset
by a reduction in net income of $54.3 million. In the twelve month period from
July 1, 2008 through June 30, 2009, the Company generated net operating cash of
$879.9 million and invested $68.1 million in acquisitions, $87.2 million in
capital additions and improvements, reduced its total debt $431.1 million,
purchased $104.9 million in treasury stock and paid $165.1 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 $23.0 million during the first six months of
2009. Cash used for capital expenditures of $40.9 million, payments of cash
dividends of $83.2 million, treasury stock purchases of $49.4 million and
reduction of $17.2 million in short-term borrowings were funded primarily by net
cash from operations. At June 30, 2009, the Company's current ratio was 1.04, an
improvement from the current ratio of .99 at December 31, 2008 and from .92 a
year ago. The improvements in the current ratio were primarily due to the
reduction in short-term borrowings and control over Accounts receivable and
Inventories.
Goodwill and intangible assets increased $5.0 million from December 31, 2008 and
decreased $18.3 million from June 30, 2008. The net increase during the six
months of 2009 was due to acquisitions and capitalization of software costs of
$11.7 million partially offset by amortization
and currency translation rate changes of $6.7 million. The net decrease over the
twelve-month period from June 30, 2008 resulted from acquisitions and
capitalization of software costs of $52.4 million and other adjustments,
primarily currency translation rate changes of $5.2 million that were more than
offset by impairments of $30.7 million and amortization of $45.2 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 remained relatively unchanged during the first six
months of 2009 and decreased $193.2 million from June 30, 2008. The decrease in
the last twelve months was 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 $17.8 million in the first six
months of 2009 and decreased $62.5 million in the twelve months since June 30,
2008. The reduction in the first half of 2009 was primarily due to capital
expenditures of $40.9 million, acquired assets of $6.5 million and changes in
currency translation rates that were more than offset by depreciation expense of
$73.2 million and the disposition of assets with remaining book value. Since
June 30, 2008, capital expenditures of $87.2 million and acquired assets of
$20.0 million were more than offset by depreciation expense of $145.2 million
and dispositions of assets with remaining net book value and changes in currency
translation rates. Capital expenditures during the first six months of 2009
primarily represented expenditures associated with improvements and normal
equipment replacement in manufacturing and distribution facilities in the
Consumer Group and normal equipment replacement in the Paint Stores and Global
Finishes Groups.
Short-term borrowings related to the Company's domestic commercial paper program
outstanding were $194.0 million at an average rate of .6 percent at June 30,
2009. Short-term borrowings under certain revolving and letter of credit
agreements were $275 million at an average rate of .6 percent at June 30, 2009.
Short-term borrowings outstanding under various foreign programs at June 30,
2009 were $30.2 million with a weighted average interest rate of 6.9 percent.
The Company had unused maximum borrowing availability of $1,635 million at
June 30, 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 second quarter or first six months of 2009 or in the twelve months
since June 30, 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
$14.2 million from June 30, 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 June 30, 2009 decreased $48.1 million from a year
ago due primarily to a decrease at the end of 2008 in non-current and deferred
tax liabilities of $31.0 million and a reduction in long-term accruals for
extended environmental-related liabilities of $5.0 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 six 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
June 30, 2009 and 2008, the Company had accruals for environmental-related
activities of $176.3 million and $189.2 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 $112.7 million higher than the accruals at June 30, 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 June 30, 2009. At
June 30, 2009, $133.6 million, or 75.8 percent, related directly to these five
sites. Of the aggregate unaccrued exposure at June 30, 2009, $75.2 million, or
66.7 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 decreased $17.2 million to $499.2 million at June 30, 2009
from $516.4 million at December 31, 2008. Total long-term debt decreased
$15.8 million to $301.5 at June 30, 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 second
quarter or first six months 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
. . .
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