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| SHW > SEC Filings for SHW > Form 10-Q on 27-Oct-2009 | All Recent SEC Filings |
27-Oct-2009
Quarterly Report
Short-term borrowings decreased $105.4 million from December 31, 2008, due to the control over working capital, and all other current liabilities increased $54.8 million. Since September 30, 2008, Accounts receivable and Inventories were down $308.7 million and the remaining current assets decreased $45.4 million. Accounts Receivable and Inventories decreased $6.5 million from December 31, 2008 to September 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 1.02 at September 30, 2009 from .94 at September 30, 2008 and compared to .99 at December 31, 2008. Total debt at September 30, 2009 decreased $315.8 million to $711.0 million from $1,026.8 million at September 30, 2008 and decreased as a percentage of total capitalization to 29.5 percent from 37.1 percent at the end of the third quarter last year. Total debt decreased $122.8 million and decreased from 34.2% of total capitalization at December 31, 2008. At September 30, 2009, the Company had remaining borrowing ability of $1.215 billion. Net operating cash increased $23.1 million in nine months of 2009 to $615.6 million from $592.6 million in 2008 primarily due to a net decrease in cash used to fund working capital requirements of $46.8 million that was partially offset by an increase in costs incurred for environmental matters of $14.1 million and a reduction in net income adjusted for non-cash items of $8.2 million. In the twelve month period from October 1, 2008 through September 30, 2009, the Company generated net operating cash of $899.3 million and invested $34.3 million in acquisitions, $89.0 million in capital additions and improvements, reduced its total debt $313.3 million, purchased $289.8 million in treasury stock and paid $165.6 million in cash dividends to its shareholders of common stock. Results of operations for the Company in the third quarter and first nine 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 12.0 percent in the third quarter to $1.997 billion from $2.269 billion in the third quarter of 2008 and decreased 12.5 percent in the first nine months to $5.495 billion from $6.280 billion in the first nine 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 13.5 percent in the quarter to $1.221 billion and decreased 13.4 percent to $3.289 billion in the first nine months due primarily to continuing weak residential and commercial architectural paint sales volume and lower sales in industrial coatings and non-paint categories partially offset by improving DIY customer sales. Net sales in the Paint Stores Group from stores open more than twelve calendar months decreased 13.5 percent in the quarter and 13.3 percent in the first nine months of 2009. Net sales in the Consumer Group decreased 7.1 percent to $330.5 million in the quarter and 4.0 percent to $985.1 million in the first nine months due primarily to lower volume sales to most of the Group's retail customers. Net sales in the Global Finishes Group stated in U.S. dollars declined 11.3 percent in the quarter to $444.1 million and 16.2 percent to $1.216 billion in the first nine 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 third quarter to 46.5 percent from 42.3 percent in 2008 and increased to 45.6 percent from 43.2 percent in the first nine months due primarily to lower freight and other distribution costs, reduced expenses related to cost control initiatives and
favorable product sales mix partially offset by higher costs related to lower
manufactured volume and unfavorable currency translation rates. Third quarter
gross profit margins approached a more normal level in 2009 versus last year's
depressed gross profit margins caused by rapidly escalating raw material costs.
Selling, general and administrative expenses (SG&A) increased as a percent of
consolidated net sales to 32.8 percent from 30.0 percent in the third quarter of
2008 and increased to 34.9 percent from 32.0 percent in nine months due
primarily to the sales decline as good expense control across all Reportable
Operating Segments resulted in total SG&A spending that was $27.1 million lower
than in the third quarter of 2008 and $93.9 million lower than in the first nine
months last year. Other general expense - net increased in the third quarter and
first nine months of 2009 due primarily to increased accruals for
environmental-related matters and exit costs related to closed properties.
Interest expense decreased $6.7 million in the third quarter and $20.0 million
in the first nine months of 2009 due to lower short-term borrowings and
borrowing rates. The effective income tax rate for third quarter 2009 was
32.3 percent compared to 33.5 percent in 2008 and the rate for the first nine
months of 2009 was 31.6 percent compared to 32.8 percent in 2008. Diluted net
income per common share increased to $1.51 per share for the third quarter 2009
from $1.50 per share a year ago and decreased to $3.17 per share from $3.57 per
share in the first nine 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 sources of
economic information when developing the basis 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 44 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 nine 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 $170.6 million at September 30, 2009 compared to the end of the
third quarter of 2008 due primarily to a larger proportional decrease in current
liabilities than current assets. Short-term borrowings decreased $305.0 million
from September 30, 2008 and all other current liabilities decreased
$219.8 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 $105.4 million from
December 31, 2008 and all other current liabilities increased $54.8 million.
Since September 30, 2008, Accounts receivable and Inventories were down
$308.7 million and the remaining current assets decreased $45.4 million.
Accounts Receivable and Inventories decreased $6.5 million from December 31,
2008 to September 30, 2009 when normal seasonal trends typically require 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 1.02 at September 30, 2009 from .94 at September 30, 2008 and
compared to .99 at December 31, 2008. Total debt at September 30, 2009 decreased
$315.8 million to $711.0 million from $1,026.8 million at September 30, 2008 and
decreased as a percentage of total capitalization to 29.5 percent from
37.1 percent at the end of the third quarter last year. Total debt decreased
$122.8 million and decreased from 34.2% of total capitalization at December 31,
2008. At September 30, 2009, the Company had remaining borrowing ability of
$1.215 billion. Net operating cash increased $23.1 million in the third quarter
of 2009 to $615.6 million from $592.6 million in 2008 primarily due to a net
decrease in cash used to fund working capital requirements of $46.8 million that
was partially offset by an increase in costs incurred for environmental matters
of $14.1 million and a reduction in net income adjusted for non-cash items of
$8.2 million. In the twelve month period from October 1, 2008 through
September 30, 2009, the Company generated net operating cash of $899.3 million
and invested $34.3 million in acquisitions, $89.0 million in capital additions
and improvements, reduced its total debt $313.7 million, purchased
$289.8 million in treasury stock and paid $165.6 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 $6.6 million during the first nine months of
2009. Cash used for capital expenditures of $63.6 million, payments of cash
dividends of $124.6 million, treasury stock purchases of $276.2 million and
reduction of $105.4 million in short-term borrowings were funded primarily by
net cash from operations. At September 30, 2009, the Company's current ratio was
1.02, an improvement from the current ratio of .99 at December 31, 2008 and from
.94 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 $2.8 million from December 31, 2008 and
decreased $30.7 million from September 30, 2008. The net increase during the
nine months of 2009 was due to acquisitions and capitalization of software costs
of $14.5 million partially offset by amortization and currency translation rate
changes of $11.8 million. The net decrease over the twelve-month period from
September 30, 2008 resulted from acquisitions and capitalization of software
costs of $24.5 million and other adjustments, primarily currency translation
rate changes of $56.0 million that were more than offset by impairments of
$53.9 million and amortization of $57.3 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 remained relatively unchanged during the first nine
months of 2009 and decreased $197.0 million from September 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 $27.5 million in the first nine
months of 2009 and decreased $52.3 million in the twelve months since
September 30, 2008. The reduction in the nine months of 2009 was primarily due
to capital expenditures of $63.6 million and changes in currency translation
rates that were more than offset by depreciation expense of $109.6 million and
the disposition of assets with remaining book value. Since September 30, 2008,
capital expenditures of $89.0 million and acquired assets of $34.3 million were
more than offset by depreciation expense of $145.5 million and dispositions of
assets with remaining net book value and changes in currency translation rates.
Capital expenditures during the first nine 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 $179.7 million at an average rate of .3 percent at
September 30, 2009. Short-term borrowings under certain revolving and letter of
credit agreements were $200 million at an average rate of .3 percent at
September 30, 2009. Short-term borrowings outstanding under various foreign
programs at September 30, 2009 were $31.4 million with a weighted average
interest rate of 6.1 percent. The Company had unused maximum borrowing
availability of $665.0 million at September 30, 2009 under the commercial paper
program that is backed by the Company's revolving credit agreement. There was an
additional $550.0 million available under other committed credit facilities.
There were no significant changes in long-term debt during the third quarter or
first nine months of 2009 or in the twelve months since September 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
$14.4 million from September 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 September 30, 2009 decreased $37.1 million from a
year ago due primarily to a decrease at the end of 2008 in non-current deferred
tax liabilities of $20.5 million and a reduction in long-term accruals for
extended environmental-related liabilities of $2.4 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 nine 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 September 30,
2009 and 2008, the Company had accruals for environmental-related activities of
$174.4 million and $184.5 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 $108.3 million higher than the accruals at September 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 September 30, 2009. At
September 30, 2009, $132.0 million, or 75.7 percent, related directly to these
five sites. Of the aggregate unaccrued exposure at September 30, 2009, $70.9
million, or 65.4 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. At one of the
two formerly owned facilities in New Jersey, a partial remediation plan has been
agreed too and some remedial measures have been taken. The full extent of the
remedial action has not been determined or agreed to by the appropriate
governmental agency. There have been no significant changes in the investigative
or remedial status of the other four 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 the Asset Retirement Obligations Topic of FASB ASC, 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 $105.4 million to $411.0 million at
September 30, 2009 from $516.4 million at December 31, 2008. Total long-term
debt decreased $17.3 million to $300.0 at September 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 third quarter or first nine 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 nine
. . .
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