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Sherwin-Williams Company 10-K 2008 Documents found in this filing:
Table of Contents
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended
December 31, 2007
Commission file number
1-04851
(Exact name of registrant as
specified in its charter)
OHIO
(State or other jurisdiction of
incorporation or organization)
34-0526850
(I.R.S. Employer Identification No.)
101 Prospect Avenue, N.W., Cleveland, Ohio
(Address of principal executive
offices)
44115-1075
(Zip Code)
(216) 566-2000
Registrant’s telephone number,
including area code
Securities registered pursuant to
Section 12(b) of the Act:
Securities registered pursuant to
Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes x No o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes
o
No
x
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form
10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
At January 31, 2008, 122,804,070 shares of common stock
were outstanding, net of treasury shares. The aggregate market
value of common stock held by non-affiliates of the Registrant
at June 29, 2007 was $8,657,799,790 (computed by reference
to the price at which the common stock was last sold on such
date).
Portions of our Annual Report to Shareholders for the fiscal
year ended December 31, 2007 (“2007 Annual
Report”) are incorporated by reference into Parts I,
II and IV of this report.
Portions of our Proxy Statement for the 2008 Annual Meeting of
Shareholders (“Proxy Statement”) to be filed with the
Securities and Exchange Commission within 120 days of our
fiscal year ended December 31, 2007 are incorporated by
reference into Part III of this report.
THE
SHERWIN-WILLIAMS COMPANY
Table of Contents
PART
I
ITEM
1. BUSINESS
The Sherwin-Williams Company, founded in 1866 and incorporated
in Ohio in 1884, is engaged in the development, manufacture,
distribution and sale of paint, coatings and related products to
professional, industrial, commercial and retail customers
primarily in North and South America with additional operations
in the United Kingdom, Europe, India and China. Our principal
executive offices are located at 101 Prospect Avenue, N.W.,
Cleveland, Ohio 44115-1075, telephone (216) 566-2000. As
used in this report, the terms “Sherwin-Williams,”
“Company,” “we” and “our” mean The
Sherwin-Williams Company and its consolidated subsidiaries
unless the context indicates otherwise.
We make available free of charge on or through our website our
Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, and
amendments to these reports, as soon as reasonably practicable
after we electronically file such material with, or furnish such
material to, the Securities and Exchange Commission. You may
access these documents on the “Investor Relations”
page of our website at www.sherwin.com.
We also make available free of charge on our website our
Corporate Governance Guidelines, our Director Independence
Standards, our Business Ethics Policy and the charters of our
Audit Committee, our Compensation and Management Development
Committee, and our Nominating and Corporate Governance
Committee. You may access these documents in the “Corporate
Governance” section on the “Investor Relations”
page of our website at www.sherwin.com. Any person may receive a
copy of any of these documents free of charge by writing to us
at The Sherwin-Williams Company, 101 Prospect Avenue, N.W.,
Cleveland, Ohio 44115, Attention: Investor Relations.
We report our segment information in the same way that
management internally organizes our business for assessing
performance and making decisions regarding allocation of
resources in accordance with Statement of Financial Accounting
Standards (FAS) No. 131, “Disclosures about
Segments of an Enterprise and Related Information.”
Effective January 1, 2006, we changed our reportable
operating segments based on organizational changes in our
management structure. Our reportable operating segments now are:
Paint Stores Group, Consumer Group and Global Group
(collectively, the “Reportable Operating Segments”).
The Global Group consists of certain business units with foreign
or worldwide operations that were reported in the previous Paint
Stores, Consumer, Automotive Finishes and International Coatings
segments. Amounts reported prior to January 1, 2006 have
been reclassified to conform to the current presentation.
Factors considered in determining our Reportable Operating
Segments include the nature of the business activities,
existence of managers responsible for the operating activities
and information presented to our Board of Directors. We report
all other business activities and immaterial operating segments
that are not reportable in the Administrative segment.
The Company’s chief operating decision maker
(CODM) has been identified as the Chief Executive Officer
because he has final authority over performance assessment and
resource allocation decisions. Because of the diverse operations
of the Company, the CODM regularly receives discrete financial
information about each Reportable Operating Segment as well as a
significant amount of additional financial information about
certain divisions, business units or subsidiaries of the
Company. The CODM uses all such financial information for
performance assessment and resource allocation decisions. The
CODM evaluates the performance of and allocates resources to the
Reportable Operating Segments based on profit or loss and cash
generated from operations before income taxes. The accounting
policies of the Reportable Operating Segments are the same as
those described in Note 1 of the Notes to Consolidated
Financial Statements on pages 47 through 51 of our 2007
Annual Report, which is incorporated herein by reference.
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The Paint Stores Group consisted of 3,325 company-operated
specialty paint stores and seven manufacturing/distribution
facilities in the United States, Canada, Jamaica, Virgin Islands
and Puerto Rico at December 31, 2007. Each store in this
segment is engaged in the related business activity of selling
paint, coatings and related products to end-use customers. The
acquisitions of M.A. Bruder & Sons, Incorporated
and Columbia Paint & Coatings Co. are included in this
segment. The Paint Stores Group markets and sells
Sherwin-Williams®
branded architectural paint and coatings, industrial and marine
products, original equipment manufacturer (“OEM”)
product finishes and related items. These products are produced
by manufacturing facilities in the Paint Stores, Consumer and
Global Groups. In addition, each store sells selected purchased
associated products. During 2007, this segment acquired 172
stores and opened 107 net new stores, consisting of 81 stores in
the United States, 18 in the Caribbean region and 8 in Canada.
In 2006, there were 117 net new stores opened (113 in the United
States). In 2005, there were 95 net new stores opened (88 in the
United States). The loss of any single customer would not have a
material adverse effect on the business of this segment.
The Consumer Group develops, manufactures and distributes a
variety of paint, coatings and related products to third party
customers and the Paint Stores Group primarily in the United
States and Canada. The acquisitions of the brand names, formulas
and patents of the
VHT®
brand paint line and Life Shield Engineered Systems, LLC in 2007
are included in this segment. Approximately 56 percent of
the total sales of the Consumer Group in 2007, including
inter-segment transfers, represented products sold through the
Paint Stores Group. Sales and marketing of certain controlled
brand and private labeled products is performed by a direct
sales staff. The products distributed through third party
customers are intended for resale to the ultimate end-user of
the product. The Consumer Group had sales to certain customers
that, individually, may be a significant portion of the sales of
the segment. However, the loss of any single customer would not
have a material adverse effect on the overall profitability of
the segment. This segment incurred most of the Company’s
capital expenditures related to ongoing environmental compliance
measures.
The Global Group develops, licenses, manufactures, distributes
and sells a variety of architectural paint and coatings,
industrial and marine products, automotive finishes and refinish
products, OEM coatings and related products in North and South
America, the United Kingdom, Europe, China and India. The
acquisitions of Nitco Paints Private Limited (India), Pinturas
Industriales S.A. (Uruguay), Napko, S.A. de C.V. (Mexico) and
Flex Recubrimientos, S.A. de C.V. (Mexico) are included in this
segment. This segment meets the demands of its customers for a
consistent worldwide product development, manufacturing and
distribution presence and approach to doing business. This
segment licenses certain technology and trade names worldwide.
Sherwin-Williams®
and other controlled brand products are distributed through the
Paint Stores Group and this segment’s network of 519
company-operated branches and by a direct sales staff and
outside sales representatives to retailers, dealers, jobbers,
licensees and other third party distributors. During 2007, this
segment added 50 net new branches consisting of 29 net new
branches in South America, 19 branches in the United States and
2 in Canada. At December 31, 2007, the Global Group
consisted of operations in the United States, subsidiaries in 15
foreign countries, 3 foreign joint ventures and income from
licensing agreements in 14 foreign countries.
The Administrative segment includes the administrative expenses
of the Company’s corporate headquarters site. Also included
in the Administrative segment was interest expense which was
unrelated to retail real estate leasing activities, interest and
investment income, certain foreign currency transaction losses
related to dollar-denominated debt and foreign currency option
and forward contracts, certain expenses related to closed
facilities and environmental-related matters, and other expenses
which were not directly associated with any Reportable Operating
Segment. The Administrative segment did not include any
significant foreign operations. Also included in the
Administrative segment was a real estate management unit that is
responsible for the ownership, management, and leasing of
non-retail properties held primarily for use by the Company,
including the Company’s
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headquarters site, and disposal of idle facilities. Sales of
this segment represented external leasing revenue of excess
headquarters space or leasing of facilities no longer used by
the Company in its operations. Gains and losses from the sale of
property were not a significant operating factor in determining
the performance of the Administrative segment.
For financial information regarding our Reportable Operating
Segments, including net external sales, segment profit,
identifiable assets and other information by segment, see
Note 18 of the Notes to Consolidated Financial Statements
on pages 76 through 78 of our 2007 Annual Report, which is
incorporated herein by reference.
Financial and other information regarding domestic and foreign
operations is set forth in Note 18 of the Notes to
Consolidated Financial Statements on page 77 of our 2007
Annual Report, which is incorporated herein by reference.
Additional information regarding risks attendant to foreign
operations is set forth on page 34 of our 2007 Annual
Report under the caption entitled “Management’s
Discussion and Analysis of Financial Condition and Results of
Operation,” which is incorporated herein by reference.
For additional information regarding our business and business
developments, see pages 6 through 14 of our 2007 Annual
Report and the “Letter to Shareholders” on
pages 2 through 5 of our 2007 Annual Report, which is
incorporated herein by reference.
Raw materials and fuel supplies are generally available from
various sources in sufficient quantities that none of the
Reportable Operating Segments anticipate any significant
sourcing problems during 2008. There are sufficient suppliers of
each product purchased for resale that none of the Reportable
Operating Segments anticipate any significant sourcing problems
during 2008.
The majority of the sales for the Paint Stores Group, Consumer
Group and Global Group traditionally occur during the second and
third quarters. There is no significant seasonality in sales for
the Administrative segment.
In order to meet increased demand during the second and third
quarters, the Company usually builds its inventories during the
first quarter. Working capital items (inventory and receivables)
are generally financed through short-term borrowings, which
include the use of lines of credit and the issuance of
commercial paper. For a description of the Company’s
liquidity and capital resources, see pages 23
through 34 of our 2007 Annual Report under the caption
entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” which is
incorporated herein by reference.
Customer recognition of our trademarks and trade names
collectively contribute significantly to our sales. The major
trademarks and trade names used by each Reportable Operating
Segment are set forth below.
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Although patents and licenses are not of material importance to
our business as a whole or any segment, the international
operations of the Global Group derive a portion of its income
from the licensing of technology, trademarks and trade names to
foreign companies.
Backlog orders are not significant in the business of any
Reportable Operating Segment since there is normally a short
period of time between the placing of an order and shipment. We
believe that sufficient productive capacity currently exists to
fulfill our needs for paint, coatings and related products
through 2008.
For information regarding our costs of research and development
included in technical expenditures, see Note 1 of the Notes
to Consolidated Financial Statements on page 50 of our 2007
Annual Report, which is incorporated herein by reference.
We experience competition from many local, regional, national
and international competitors of various sizes in the
manufacture, distribution and sale of our paint, coatings and
related products. We are a leading manufacturer and retailer of
paint, coatings and related products to professional,
industrial, commercial and retail customers, however, our
competitive position varies for our different products and
markets.
In the Paint Stores Group, competitors include other paint and
wallpaper stores, mass merchandisers, home centers, independent
hardware stores, hardware chains and manufacturer-operated
direct outlets. Product quality, product innovation, breadth of
product line, technical expertise, service and price determine
the competitive advantage for this segment.
In the Consumer Group, domestic and foreign competitors include
manufacturers and distributors of branded and private labeled
paint and coatings products. Technology, product quality,
product innovation, breadth of product line, technical
expertise, distribution, service and price are the key
competitive factors for this segment.
The Global Group has numerous competitors in its domestic and
foreign markets with broad product offerings and several others
with niche products. Key competitive factors for this segment
include technology, product quality, product innovation, breadth
of product line, technical expertise, distribution, service and
price.
The Administrative segment has many competitors consisting of
other real estate owners, developers and managers in areas in
which this segment owns property. The main competitive factors
are the availability of property and price.
Employees
We employed 31,572 persons at December 31, 2007.
For additional information regarding environmental-related
matters, see pages 25 through 27 of our 2007 Annual Report
under the caption entitled “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and Notes 1, 8 and 13 of the Notes to
Consolidated Financial Statements on pages 49, 63 and 64,
and 73, respectively, of our 2007 Annual Report, which is
incorporated herein by reference.
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Certain statements contained in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” “Business” and elsewhere in this
report constitute “forward-looking statements” within
the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are based upon
management’s current expectations, estimates, assumptions
and beliefs concerning future events and conditions and may
discuss, among other things, anticipated future performance
(including sales and earnings), expected growth, future business
plans and the costs and potential liability for
environmental-related matters and the lead pigment and
lead-based paint litigation. Any statement that is not
historical in nature is a forward-looking statement and may be
identified by the use of words and phrases such as
“expects,” “anticipates,”
“believes,” “will,” “will likely
result,” “will continue,” “plans to”
and similar expressions.
Readers are cautioned not to place undue reliance on any
forward-looking statements. Forward-looking statements are
necessarily subject to risks, uncertainties and other factors,
many of which are outside our control, that could cause actual
results to differ materially from such statements and from our
historical results and experience. These risks, uncertainties
and other factors include such things as:
Readers are cautioned that it is not possible to predict or
identify all of the risks, uncertainties and other factors that
may affect future results and that the above list should not be
considered to be a complete list. Any forward-looking statement
speaks only as of the date on which such statement is made, and
we undertake no obligation to update or revise any
forward-looking statement, whether as a result of new
information, future events or otherwise.
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ITEM
1A. RISK FACTORS
Described below and elsewhere in this report and other documents
that we file from time to time with the Securities and Exchange
Commission are risks, uncertainties and other factors that can
adversely affect our business, results of operation and
financial condition. The following are some of the more
important of these risks, uncertainties and other factors.
Additional risks, uncertainties and other factors that are
currently not known to us or we believe are not currently
material may also adversely affect our business, results of
operation and financial condition.
Adverse changes in general business conditions in the United
States and worldwide may reduce the demand for some of our
products and adversely affect our results of operations and
financial condition. Higher inflation rates, interest rates, tax
rates and unemployment rates, higher labor and healthcare costs,
recessions, changing governmental policies, laws and
regulations, and other economic factors that adversely affect
the demand for our paint, coatings and related products could
adversely affect our results of operations and financial
condition.
Portions of our business involve the sale of paint, coatings and
related products to segments of the economy that are cyclical in
nature, particularly segments relating to construction, housing
and manufacturing. Our sales to these segments are affected by
the levels of discretionary consumer and business spending in
these segments. During economic downturns in these segments, the
levels of consumer and business discretionary spending may
decrease. This decrease in spending will likely reduce the
demand for some of our products and adversely affect our sales
and earnings.
We purchase raw materials and energy for use in the
manufacturing, distribution and sale of our products. Factors
such as adverse weather conditions, including hurricanes, and
other disasters can disrupt raw material and fuel supplies and
increase our costs. Although raw materials and energy supplies
are generally available from various sources in sufficient
quantities, unexpected shortages and increases in the cost of
raw materials and energy may have an adverse effect on our
earnings in the event we are unable to offset these costs by
sufficiently decreasing our operating costs or raising the
prices of our products. Many of our paint and coatings products
utilize titanium dioxide, which is widely used as a white
pigment for paint.
We have a large and varied customer base due to our extensive
distribution network. During 2007, no individual customer
accounted for sales totaling more than ten percent of our sales.
However, we have some customers that, individually, purchase a
large amount of products from us. Although our broad
distribution channels would help to minimize the impact of the
loss of any one customer, the loss of any of these large
customers could have an adverse effect on our sales and earnings.
From time to time, adverse weather conditions in certain parts
of the United States have had an adverse effect on our sales of
paint, coatings and related products. For example, unusually
cold and rainy weather, especially during the exterior painting
season, could have an adverse effect on sales of our exterior
paint products.
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We face substantial competition from many international,
national, regional and local competitors of various sizes in the
manufacture, distribution and sale of our paint, coatings and
related products. Some of our competitors are larger than us and
have greater financial resources to compete. Other competitors
are smaller and may be able to offer more specialized products.
Technology, product quality, product innovation, breadth of
product line, technical expertise, distribution, service and
price are the key competitive factors for our business.
Competition in any of these areas may reduce our sales and
adversely affect our earnings by resulting in decreased sales
volumes, reduced prices and increased costs of manufacturing,
distributing and selling our products.
We have historically made strategic acquisitions of businesses
in the paint and coatings industry and will likely acquire
additional businesses in the future as part of our long term
growth strategy. These acquisitions involve challenges and
risks. In the event that we do not successfully integrate these
acquisitions into our existing operations so as to realize the
expected return on our investment, our operating results and
financial condition could be adversely affected.
Net external sales of our consolidated foreign subsidiaries
totaled approximately $965 million in 2007, or 12.1% of our
total consolidated net sales. Sales outside of the United States
make up an important part of our current business and future
strategic plans. Our sales and earnings could be adversely
affected by a variety of international factors, including
general economic conditions, inflation rates, recessions,
foreign currency exchange rates, foreign investment and
repatriation restrictions, legal and regulatory constraints,
civil unrest, difficulties in staffing and managing foreign
operations and other external economic and political factors.
Our inability to successfully manage the risks and uncertainties
relating to these factors could adversely affect our sales and
earnings.
In many foreign countries, it is acceptable to engage in certain
business practices that we are prohibited from engaging in
because of regulations that are applicable to us, such as the
Foreign Corrupt Practices Act. Although we have internal control
policies and procedures designed to ensure compliance with these
regulations, there can be no assurance that our policies and
procedures will prevent a violation of these regulations. Any
violation could cause an adverse effect on our results of
operations.
Because of our international operations, we are exposed to risk
associated with interest rates and value changes in foreign
currencies, which may adversely affect our business.
Historically, our reported net sales and net earnings have been
subjected to fluctuations in foreign exchange rates. Our primary
exchange rate exposure is with the euro, the British pound, the
Argentine peso, the Brazilian real, the Chilean peso, the
Canadian dollar and the Mexican peso against the U.S. dollar.
While we actively manage the exposure of our foreign currency
risk as part of our overall financial risk management policy, we
believe we may experience losses from foreign currency
translation, and such losses could adversely affect our sales
and earnings.
Our operations are subject to various federal, state and local
environmental laws and regulations. These laws and regulations
not only govern our current operations and products, but also
impose potential liability on us for our past operations. We
expect environmental laws and regulations to impose increasingly
stringent requirements upon our industry and us in the future.
Our costs to comply with these laws and regulations may increase
as these requirements become more stringent in the future, and
these increased costs may adversely affect our earnings.
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We are involved with environmental investigation and remediation
activities at some of our currently and formerly owned sites and
a number of third-party sites. We accrue for estimated costs of
investigation and remediation activities at these 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. We
continuously assess our potential liability for investigation
and remediation activities and adjust our environmental-related
accruals as information becomes available upon which more
accurate costs can be reasonably estimated. Due to the
uncertainties surrounding environmental investigation and
remediation activities, our liability may result in costs that
are significantly higher than currently accrued and may have an
adverse affect on our earnings.
In the course of our business, we are 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 us. 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,” we accrue 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 a 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 our
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 us may result in a material
impact on our 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.
Our past operations included the manufacture and sale of lead
pigments and lead-based paints. Along with other companies, we
are a defendant in a number of legal proceedings, including
individual personal injury actions, purported class actions,
actions brought by the State of Rhode Island and 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. We are 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. We believe that the
litigation brought to date is without merit or subject to
meritorious defenses and are vigorously defending such
litigation. We expect that additional lead pigment and
lead-based paint litigation may be filed against us in the
future asserting similar or different legal theories and seeking
similar or different types of damages and relief.
During September 2002, a jury trial commenced in the first phase
of an action brought by the State of Rhode Island against us and
the other defendants. The sole issue before the court in this
first phase was whether lead
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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) we, along with two
other defendants, caused or substantially contributed to the
creation of the public nuisance, and (iii) we 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. On February 26, 2007, the Court issued a
decision on the post-trial motions and other matters pending
before the Court. Specifically, the Court (i) denied the
defendant’s post-trial motions for judgment as a matter of
law and for a new trial, (ii) decided to enter a judgment
of abatement in favor of the State against us and two other
defendants, and (iii) decided to appoint a special master
for the purpose of assisting the Court in its consideration of a
remedial order to implement the judgment of abatement, and if
necessary, any monitoring of the implementation of that order.
On March 16, 2007, final judgment was entered against us
and two other defendants. Also on March 16, 2007, we filed
our notice of appeal to the Rhode Island Supreme Court. Oral
argument on our and the other two defendants’ appeal to the
Rhode Island Supreme Court is scheduled for May 2008.
Proceedings relating to a remedial order to implement the
judgment of abatement are continuing in the Court during the
pending appeal to the Rhode Island Supreme Court.
We cannot reasonably determine the impact that the State of
Rhode Island decision and determination of liability will have
on the number or nature of present or future claims and
proceedings against us or estimate the amount or range of
ultimate loss that we may incur.
Notwithstanding our views on the merits, litigation is
inherently subject to many uncertainties and we ultimately may
not prevail. Adverse court rulings, such as the judgment against
us 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, or determinations of liability, among
other factors, could affect the lead pigment and lead-based
paint litigation against us and encourage an increase in the
number and nature of future claims and proceedings. 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 we 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
us. In addition, management cannot reasonably determine the
scope or amount of the potential costs and liabilities related
to such litigation, or any such legislation and regulations. In
accordance with FAS No. 5, we have 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 us 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 us arising out of such litigation may have a
material adverse effect on our results of operations, liquidity
or financial condition. An estimate of the potential impact on
our results of operations, liquidity or financial condition
cannot be made due to the aforementioned uncertainties.
We discuss the risks and uncertainties related to litigation,
including the lead pigment and lead-based paint litigation, in
more detail on pages 21 and 22 of our 2007 Annual Report under
the caption “Litigation and Other Contingent
Liabilities,” and pages 29 through 33 of our 2007
Annual Report under the caption “Litigation” of
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and in Note 9 of
the Notes to Consolidated Financial Statements on pages 64
through 68 of our 2007 Annual Report.
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We own Life Shield Engineered Systems, LLC. 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 us than is normally
associated with coatings and related products we manufacture,
distribute and sell. Depending upon the extent of any potential
liability ultimately determined to be attributable to us
relating to Life Shield, such liability could have an adverse
effect on our results of operations, liquidity and financial
condition. We discuss these risks and uncertainties in more
detail on page 29 of our 2007 Annual Report under the
caption entitled “Contingent Liabilities” of
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
We own our world headquarters located in Cleveland, Ohio, which
includes the world headquarters for the Paint Stores Group,
Consumer Group and Global Group. Our principal manufacturing and
distribution facilities are located as set forth below. We
believe our manufacturing and distribution facilities are
well-maintained and are suitable and adequate, and have
sufficient productive capacity, to meet our current needs.
Manufacturing Facilities
Distribution Facilities
Manufacturing Facilities
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Distribution Facilities
Manufacturing Facilities
Distribution Facilities
The operations of the Paint Stores Group included 3,325
company-operated specialty paint stores, of which 227 were
owned, in the United States, Canada, Virgin Islands, Puerto Rico
and Jamaica at December 31, 2007. These paint stores are
divided into four separate operating divisions that are
responsible for the sale of predominantly architectural,
industrial maintenance and related products through the paint
stores located within their geographical region. At the end of
2007:
In 2007, the Paint Stores Group acquired 172 stores and opened
107 net new paint stores.
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The Global Group operated 256 branches in the United
States, of which one was owned, at December 31, 2007. The
Global Group also operated 263 branches outside of the United
States, of which 15 were owned and 248 were leased in Mexico
(109), Brazil (69), Chile (47), Canada (25),
Uruguay (8), Argentina (4) and Peru (1) at
December 31, 2007.
All real property within the Administrative segment is owned by
us. For additional information regarding real property within
the Administrative segment, see the information set forth in
Item 1 of this report, which is incorporated herein by
reference.
For additional information regarding real property leases, see
Note 17 of the Notes to Consolidated Financial Statements
on page 76 of our 2007 Annual Report, which is incorporated
herein by reference.
ITEM
3. LEGAL PROCEEDINGS
For information regarding environmental-related matters and
other legal proceedings, see pages 25 through 27, and 29
through 33, of our 2007 Annual Report under the caption entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Notes 1, 8, 9
and 13 of the Notes to Consolidated Financial Statements on
pages 49, 63 and 64, 64 through 68, and 73, respectively,
of our 2007 Annual Report, which is incorporated herein by
reference.
No matters were submitted to a vote of our security holders
during the fourth quarter of 2007.
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The following is the name, age and present position of each of
our executive officers at February 20, 2008, as well as all
prior positions held by each during the last five years and the
date when each was first elected or appointed as an executive
officer. Executive officers are generally elected annually by
the Board of Directors and hold office until their successors
are elected and qualified or until their earlier death,
resignation or removal.
Mr. Connor has served as Chairman since April 2000 and Chief
Executive Officer since October 1999. Mr. Connor served as
President from July 2005 to October 2006. Mr. Connor has
served as a Director since October 1999 and has been employed
with the Company since January 1983.
Mr. Morikis has served as President and Chief Operating Officer
since October 2006. Mr. Morikis served as President, Paint
Stores Group from October 1999 to October 2006. Mr. Morikis
has been employed with the Company since December 1984.
Mr. Hennessy has served as Senior Vice President —
Finance and Chief Financial Officer since August 2001.
Mr. Hennessy has been employed with the Company since
September 1984.
Mr. Hopkins has served as Senior Vice President —
Human Resources since February 2002. Mr. Hopkins has been
employed with the Company since September 1981.
Mr. Knight has served as Senior Vice President —
Corporate Planning and Development since February 2007.
Mr. Knight served as President, Global Group from August
2005 to February 2007 and President & General Manager,
Diversified Brands Division from February 2002 to August 2005.
Mr. Knight has been employed with the Company since
December 1994.
Mr. Seitz has served as Senior Vice President —
Strategic Excellence Initiatives since February 2007.
Mr. Seitz served as President, Consumer Group from August
2005 to February 2007 and President & General Manager,
Consumer Division from January 2001 to August 2005. Mr. Seitz
has been employed with the Company since June 1970.
Mr. Ault has served as Vice President — Corporate
Controller since January 1987. Mr. Ault has been
employed with the Company since June 1976.
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Mr. Oberfeld has served as President, Paint Stores Group since
October 2006. Mr. Oberfeld served as President &
General Manager, South Western Division, Paint Stores Group from
September 1992 to October 2006. Mr. Oberfeld has been employed
with the Company since October 1984.
Mr. Stellato has served as Vice President, General Counsel
and Secretary since July 1991. Mr. Stellato has been
employed with the Company since July 1981.
Mr. Wells has served as Vice President —
Corporate Communications & Public Affairs since January
2006. Mr. Wells served as Vice President —
Corporate Planning and Communication from July 2002 to January
2006. Mr. Wells has been employed with the Company since
May 1998.
Our common stock is listed on the New York Stock Exchange and
traded under the symbol SHW. The number of shareholders of
record at January 31, 2008 was 9,779.
Information regarding market prices and dividend information
with respect to our common stock is set forth on page 79 of
our 2007 Annual Report, which is incorporated herein by
reference.
The following table sets forth a summary of the Company’s
purchases of common stock during the fourth quarter of 2007.
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ITEM
6. SELECTED FINANCIAL DATA
(millions of dollars, except
per common share data)
The information required by this item is set forth on
pages 18 through 38 of our 2007 Annual Report under the
caption entitled “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” which is
incorporated herein by reference.
We are exposed to market risk associated with interest rates,
foreign currency and commodity fluctuations. We occasionally
utilize derivative instruments as part of our overall financial
risk management policy, but do not use derivative instruments
for speculative or trading purposes. The Company had foreign
currency option and forward contracts and commodity swaps
outstanding at December 31, 2007 to hedge against value
changes in foreign currency and commodities. Foreign currency
option and forward contracts are described in detail in
Note 13 of the Notes to Consolidated Financial Statements
on page 73 of our 2007 Annual Report. Commodity swaps are
described in detail in Note 1 of the Notes to Consolidated
Financial Statements on page 48 of our 2007 Annual Report.
We believe we may experience continuing losses from foreign
currency translation and commodity price fluctuations. However,
we do not expect currency translation, transaction, commodity
price fluctuations or hedging contract losses to have a material
adverse effect on our financial condition, results of operations
or cash flows.
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Information required by this item is set forth on page 39
and pages 42 through 78 of our 2007 Annual Report under the
captions entitled “Report of Management on the Consolidated
Financial Statements,” “Report of the Independent
Registered Public Accounting Firm on the Consolidated Financial
Statements,” “Statements of Consolidated Income,”
“Consolidated Balance Sheets,” “Statements of
Consolidated Cash Flows,” “Statements of Consolidated
Shareholders’ Equity and Comprehensive Income,” and
“Notes to Consolidated Financial Statements,” which is
incorporated herein by reference. Unaudited quarterly data is
set forth in Note 16 of the Notes to Consolidated Financial
Statements on pages 75 and 76 of our 2007 Annual Report,
which is incorporated herein by reference.
None.
As of the end of the period covered by this report, we carried
out an evaluation, under the supervision and with the
participation of our Chairman and Chief Executive Officer and
our Senior Vice President — Finance and Chief
Financial Officer, of the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-15 and
Rule 15d-15 of the Securities Exchange Act of 1934, as
amended (“Exchange Act”). Based upon that evaluation,
our Chairman and Chief Executive Officer and our Senior Vice
President — Finance and Chief Financial Officer
concluded that as of the end of the period covered by this
report our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in
reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms,
and accumulated and communicated to our management including our
Chairman and Chief Executive Officer and our Senior Vice
President — Finance and Chief Financial Officer, to
allow timely decisions regarding required disclosure.
The Report of Management on Internal Control over Financial
Reporting is set forth on page 40 of our 2007 Annual
Report, which is incorporated herein by reference.
The Report of the Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting is set forth on
page 41 of our 2007 Annual Report, which is incorporated
herein by reference.
There were no changes in our internal control over financial
reporting identified in connection with the evaluation that
occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B. OTHER
INFORMATION
None.
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PART
III
The information regarding our directors is set forth under the
caption entitled “Election of Directors
(Proposal 1)” in our Proxy Statement, which is
incorporated herein by reference.
There were no material changes to the procedures by which
security holders may recommend nominees to our Board of
Directors during 2007. Please refer to the information set forth
under the caption “Board Meetings and Committee
Membership — Nominating and Corporate Governance
Committee” in our Proxy Statement, which is incorporated
herein by reference.
The information regarding our executive officers is set forth
under the caption entitled “Executive Officers of the
Registrant” in Part I of this report, which is incorporated
herein by reference.
The information regarding compliance with Section 16 of the
Securities Exchange Act of 1934 is set forth under the caption
entitled “Section 16(a) Beneficial Ownership Reporting
Compliance” in our Proxy Statement, which is incorporated
herein by reference.
The information regarding the Audit Committee of our Board of
Directors and the information regarding “audit committee
financial experts” are set forth under the caption entitled
“Board Meetings and Committee Membership” in our Proxy
Statement, which is incorporated herein by reference.
We have adopted a Business Ethics Policy, which applies to all
of our directors, officers and employees. Our Business Ethics
Policy includes additional ethical obligations for our senior
financial management (which includes our chief executive
officer, our chief financial officer, and the controller,
treasurer and principal financial and accounting personnel in
our operating groups and corporate departments). Please refer to
the information set forth under the caption “Corporate
Governance — Business Ethics Policy” in our Proxy
Statement, which is incorporated herein by reference. Our
Business Ethics Policy is available in the “Corporate
Governance” section on the “Investor Relations”
page of our website at www.sherwin.com. Any person may receive a
copy without charge by writing to us at: The Sherwin-Williams
Company, 101 Prospect Avenue, N.W., Cleveland, Ohio, 44115,
Attention: Investor Relations.
We intend to disclose on our website any amendment to, or waiver
from, a provision of our Business Ethics Policy that applies to
our directors and executive officers, including our principal
executive officer, principal financial officer, principal
accounting officer or controller, or any persons performing
similar functions, and that is required to be publicly disclosed
pursuant to the rules of the Securities and Exchange Commission.
The information required by this item is set forth on
pages 29 through 43 of our Proxy Statement and under the
captions entitled “Compensation Committee Report,”
“Compensation Discussion and Analysis,” “2007
Director Compensation Table” and “Director
Compensation Program” in our Proxy Statement, which is
incorporated herein by reference.
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The information regarding security ownership of certain
beneficial owners and management is set forth under the captions
entitled “Security Ownership of Management” and
“Security Ownership of Certain Beneficial Owners” in
our Proxy Statement, which is incorporated herein by reference.
The information regarding securities authorized for issuance
under the Company’s equity compensation plans is set forth
under the caption entitled “Equity Compensation Plan
Information” in our Proxy Statement, which is incorporated
herein by reference.
The information required by this item is set forth under the
captions entitled “Certain Relationships and Transactions
with Related Persons,” and “Independence of
Directors” in our Proxy Statement, which is incorporated
herein by reference.
The information required by this item is set forth under the
caption entitled “Matters Relating to the Independent
Registered Public Accounting Firm” in our Proxy Statement,
which is incorporated herein by reference.
During the quarter ended December 31, 2007, the Audit
Committee of our Board of Directors did not approve any
additional audit or non-audit services to be performed by Ernst
& Young LLP, our independent registered public
accounting firm.
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(Schedule II)
Changes in the allowance for doubtful accounts were as follows:
Bad debt expense and uncollectible accounts written off
increased in 2007 primarily due to accounts of acquired
businesses and increased activity in accounts doubtful of
collection.
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Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on February 28, 2008.
THE SHERWIN-WILLIAMS COMPANY
L. E. Stellato, Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on
February 28, 2008.
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EXHIBIT
INDEX
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