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The Sherwin-Williams Company 1979 Annual Report ! i 0007-SWP-035256 *; ) Annual Masting The annual meeting of diareholdaia mil fa* held at MfcOO a.m. April 23. 1980 M the Cleveland Plaza Hotel, Euclid Avenue at Eaet 12th Street, Cleveland. Ohio. Annual Report on Form 10-K The annual report on Form 10-K. Hied with the Sacunoee and Exchare* Communion. a available without charge from: Corporate Secretary The Shererin-Willtame Company101 Pmapect Avenue, N.W Cleveland. Ohm -MllS Transfer Agent & Registrar AmerilVust Company Cleveland. Ohio TVuiteea St Debenture*; 9.48* DobantUJt* AmenThist Company Cleveland. Ohio 6.299 Convertible Subordinated Debentures Central National Bank of Cleveland Cleveland. Ohm Headquarters The Shenvin-WUliama Cempany 101 Proapeet Avenue. N.W. Cleveland, Ohio 44116 0007-SWP-035257 0007-SWP-000116678 Highlights Dollar aneumn m ihautmdt. 1973 Nat sales Metinoome 1496,343 18,028 Par common share Net income Cash dividends Book value Average shame outstanding Return on salm 3.21 .15 51.56 5L2A0JS75 ....... i.% Return cm oommon ihonholdprrfequity 6.78* Effective income tax rate 47.6* Dibt Co Timas intarast earned Currant ratio 4614* 2j 8 a 3.01 to 1 1678 51,132450 5,192 Iaeteom 6% 247% .78 -- 4641 5486,445 .40% 1.79% 47.7% 474% 1.5* 3.99 to 1 322% 11% I Sherwin-William* Today aterwin-Williams i* organised ia five business segments: Coadaga. The Stores Division opwstss a chain of 1,400 wholesale and retail dsootating enters aailing paint, painting tools, wallcoveringsand window treat ments. Certain cantata alao cany carpeting and viaylBoomoforing. The Oonaumar Divuioc manufactures coatinga and markets them to painting eontractan and a variety of mail outlets, the Automotive Atamarkat DtvMoa manufectuma and market* costings and related products hr auto repair aad fleet maintenance. The Cbcaueal oiviikn pndyM iBd ftributit to pndncti distaff pfOcHictio&e RmiRfa fff fttwnpUiwntiMdrf atceptrmlreeeeJchendterhnireloeptem.ee well ae at lahoretariee in each of ita plants. Cbnkolo tht CImb &q Us Dk v Uo a pndncoo intnwiiili ptodU ucte far use in e wide range ofagricultural rheminah, foods at>d beveiegee, wriyi|f1 ^ifM| othv o^pttntioMe Parkagjng Producta. The Container Diviaicasuppliae cane to manufacturer! of paint, household products end industrial products. The dfriricn ie a leading supplitr ofaanaol cans. Abo partofthe Packaging Products unit is the Graphic Aria Divirion, which prints kbais, ookr samples and other materials Specialty Products. The Specialty PraducteDiviriea operates iafeur principal product areae: paint brahae and roUem.em'Qael products fereonaimar end indus trial use, adhaaime and pamtspnorfeg equipment. hOniiiouL M^oo 6nifi fluboidiftriot tn in Coudsp Mosiook Jiitnin fH BtaaiL Hmnieeo are located in 8* cowiitiloo cf Europe. Latin America aad dm Pr East Product monufcrtwad in the U. 3. ace eaported to diatrihutata ia o*r 20 oountriae. Contents Highlights 1 Shsrwij>-Williams Today 1 To Sharaholdan 2 Future foapeetive 4 Review of Opatstion* 6 Financial Summary IS Financial Review 17 Statements of Consolidated Income 21 fiiifiJMritaJ Shuti 22 Stafemaoti of Chaaqm in Consolidated Financial Position 23 Statements ofConsolidated Shareholders'Equity 24 Notes to ConaolidoUd Flnendal Statemente 25 Dircctcm, Oflfatos 32 Sulaidlwioo, Ucmanee 33 Plante 33 0007-SWP-035258 ! 0007-SWP-000116679 To Shareholders: f ! The pa* year wraocra ofcritical change brSherarm-Williains. The financial con dition of tha taupe? waa greatly improved. Progrses m mad* in insreasiiv tha poor profitability ofcoaling* line*. Many changsa war* mada to upgrade tha man agement fan. Audi strategic planning prowaowaiaitiaUd.lt waa a yoar of inianrive adlbrt throughout tha company to Matty and aohw our mart immediate problems and to ariaHfah tha otjocthw that will gute the cooopany toward cwittwd ramingi growth. Liquidity. At tha baginning nftfaa poor, tha moat urpant taakwai to build liquidity, primarily through bate managwnant ofworking capital, particularly inventory. V Inventory turnover waa improved through various actions. Mora dfidant manufacturing managementnow anablaa hatorrsaponae to maricat demand. Simplification ofprodtellnrahraradute the number ofslow-movlngitemi while ensuring adaquata supplies ftboaa in greater damand. Division general mane- gras art now ataountabtofiir invantory levalt.'nriy direct purchasing and other former corporata ftanriaona that anabla themto coonilnata inventory with market- mg Plana. Tha improved liquidity enabled ua to avoid ihort-terro borrowing, taduca long- tana dabt and purdhaae a block ofcommon afaaraa. Profitability. A aaoond important goal far tha year waa to improve profitability. Although tha company's mica ham riaan ataadfiy in meant years, higher coata of raw materials. labor, (importation and bteiat baua dramatically deteriorated profit margina. Together with each general manager, wa identified atepa noraoany to ram a ratiafartory return an eaaate employed in hia division, and we eat (pacific goal* for tha year. All T'*`+ oftha hiainam -- raw material purchasing, product formulation and ianrwaing. dietribution and many otben -- warn analyzed for potential coat ravings and greater productivity. Prices am incraaaed to reflect incraarad coats. lira relative profit margin cfvarious product aflhringe war* Studied to determine which ehould ba promoted moat heavily. Aa a reault oftham efforts wa boosted profitability significantly during tha year and also laid tha foundatico for further gaina in tha ftiture. Nat income aa a percentage of sate am* than tripled in 1979. Earnings par riiare, rose to 1131, up from A78 in 1978. And quarterly dividends ware resumed with a payment of.lB par dura in December. A payment of.30 will be made in MaiGh.lliadivfdandanflaettfaaimpravadparietmaneaortetyaarandthaconfi- dran of te board of directorate continued improvement Bxamtivo Appointments. We balisva tha prime fetor in a company's success is tha quality of its people, thus, much ofoor lima during tha year waa spent on evaluating and aateting key managers dedicated to improving results. A number ofmanagement changes ware made at operate and diviaion teals. Tha positions ofaaaior vies prraidant of finance and visa praaidaot ofplanning and develop ment ware filled from outaida tha conyeay. Naw group vies preexlente ware ppoteted for the Coating and International groups. Ihepoaitiotia ofvice paoaident. ooeporata controller, traaamar and oorperata aacratary wore raaaaigivid. New gonacal managers Item outaida the company war* appointed fbr tha Storao Division. Canaumar Diviaion, Cbamkal Coatings Dtvkdon, Spatially Products Diviaion and awrarin-WilliaiM Canada. A agntflrant number ofadditional changes ware made at various levala within tha diviaiona. 0007--SWP-035259 0007-SWP-000116680 Technology Leadership. Sherwin-Williams has leaf been s leader in costings technology and continues to be reeponsibla fir mu of tbs industry's most signifi cant product innovations. Wa have assigned a high priority to maintaining our leadenhip, particularly with the increasing challangss of rising anargy carta fir industrial coating* use and grastar nvircnmsntel regulations. To stinmlsta our research and development organisation sad to mafca sun ha sffirts are faeusad on srass of groatsst advantage, wa conductsd an extensive audit of tochnical prtjecta and stalling. As a result, soe projects wen eliminated, end RAO espendituias were increased on those programs that will benefit ftiture results. Ptaanhig. A strategic planning prncem, initiated eeriy in the yeer, required sech division general manager to analym the strengths end weslnieseis ofhis bustnam and to fimuilata dstailtd goals and strategies. The praam was highly productivs in helping managan to undsntsnd the ftill range of thair rosponsibilitiss and to sot the objectives by which thair pcrfirmance will be evaluated. With tha transiir of various eosporata ftraetiona to tha divisions, managsn now hava tha tools to run thair bueinsssm fir optimum profitability, both in tarns of day-today oparations and for tha longer term. Thus, 1979 was tha first ytar in aatting a naw managsmant direction fir Sherwin-Williams. While much was aosompliahed in meeting immediate ctudlengm and strengthening the oompeny fir die Future, much remains to be done. The following section of this report outlines our approach to the Ibtnm. Wa believe the company is now better roordmatsd and rtafibd fir program in the economic and political environment wv (bimos. W believe there is e stronger sense ofconfidence among all Shsrwin-Williams tmployeos that they can influ ence the company's future. And wa believe the leadership and determination that sparked the beginning of a turnaround will continue to produce improved results. ( Qh i~>6 John G Brvea President S ChiefExecutive Officer William C. Fine February 22. MSO John G. Bme William C. Pirn 0007--SWP--035260 1 0007-SWP-000116681 1 I 4 Future Perspective f* To incroaao tho vatao ofSharwin-Williams, wa will:. L Build a strong managamant toaa. 2. Baiao profitability. 3. Sacura tha Icog-tarm fatare ofour n--il burin-- 4. Divanift' the company bite growing markats. To gain pmpacttvat thaw flhjactivis ahould ba viswad in relation to acorn* phahmanta of tha past yaar. Tha major roquirwnaata wars to achiava flnanrial kafaUi^r and to bagto r*turning the company to highor profitability. W hava nvda good progroao in teaching thaaa foala. Nowata muat accelerate ourefforts to deaalcp the SbctwfaWUliatne Company ofthe (bture. . Incrsaitag Profitability. Q it appanat that many afour acacia an aofe taming an adequate rata ofreturn. In the pact year Shorwto-WUiiame earned 1.9% on its calm of 112 billion and 6.8% on rtanhoUoro' equity. Our lint yoar of ctratagic planning, which included analyoac afour coapriitofa. ahowad that wa hava a great potential far profit improvement, avae If we only attain tha average profitahility tar tha crating inrtnriiy and otfaar epacialty ratailr to tha do-iit-youreatf market Several ctepa have bean takaa to achim tide potential: a Wa hava begun to omemHt a management team with the skills and initiative to opkrit opportunities wa now taoognisa and thaaa wa aspect to identify in tha Ihtmai Changes hava baan mada to over half of the tap 100 managomavit posi tions, Wa hava aatabllahad goal# and Incentives to guida and stimulatemanagers, and wa hava developed* npetttog oyatarn to truck raaulta againat tha goals. Wa art convtocad that tha lar|a mod growing do-it-yourself market is on* in wh&onruniqu* of technology, wnwirf>f*irteg capnfaility nul nuur* bating network ghraa ua tha tools far sueoaaa. With a mnatrad concentration an paint, wallcovering and aiaodatad products, tha 1,400 ShorwtoWilliatai dacorat* tog mntam will continue to oflbr a combination ofhighly dapandabla quality, to gatWwhhiimftaaiwialawvica. Waara intapaiflring tha training of our itorapar- oannal to support thia approach, and wears beginning to analyze tha design and location ofour daeomting ronton to maks an thay aca attractive and onvaniant to addition to the Shsrsin-WiUiaine chanting canton, our distribution to haidwara declare, home-improvement eontara and othar outlets, plus our pnvatelabai huamaro with roast marrharriiaan afiot additional maana of advancing our portion to tha dodfcyomaalfmarket. to tha pari yttrwamadt major changro in tha Canadian subsidiary, primarily to redact coato and achiavt battar margtoa.lhe raaulta hava baan encouraging, and wa oapact tiB farther benefits fan thaaa movaa. But, aa to 05. operations, tha major oflbrt will now rttt to innaaring aalaa, and wa hava davrtoptd naw macThenriiringpnyma hr that purpose. We art confident that ShtrwinWilliams Canada will ooctinua to show itaady pogrom in tha Arturo. 0007-SWP--035261 0007-SWP-000116682  Growth gfthe Chemical* Oivisioo waa impeded in tha part by uncertainty aa to its tUtara in tha company. The fiat is, however, that this division ia growing faster and i* more profitable than our baric coating hiiiin-- Thus, than iaevery raaaon to build it, ratfaar than nil it Wa havo taken rtepe to capitalin on tha strengths of tha division's management by supporting increased rawarch and fay wwti^WiMny With tha built-in distribution capability ofour Stores Divined, aa wall as tha other amhaMng channels we now supply, waaaa goad potential fir our Hadley lina ofadbieivaa, caulking and other point-related products. W* era confidant that the Hadlay unit will he an jnrraaeingjy important part ofour basic hnainaae ia dvtnlftkjw niwi MKXUfigd products* Mwdhetlcfl. With this ficus an tethering our pwaont bwinewn during tha next flea yam. wa expect little dingo la sake nix among eoatingh chemicals and related lines. But we aspect a marked improvement ia profit contribution from the Coatings Group and a much higher email profitability of tbo oempany. W will etill ha, however, largely concentrated in coafoga, a isaaonel. low-growth hiiinaas, To continue yowth of aarning* and aagrovsmant in return on invaatment at that time, wa will depend non heavily on two activities, which have linger bN& initiated Rsrogpgmg that our poor margins in the martnge industry result largely from eatceae capacity and n inadequate number ofnew products, we are investing in reaaaRh and davalopenent to yield non new products with higher margins, ntd in ptocaww that will icieraaas our murfhituring afifcianty. Second, wa will begin to divmiiy the bueinen through aoquisitUina Initially, we will conoantimtooo companies whonactivitiaa will strengthen and extend our present hntineaen. TOa approach will limit riak. bacaun we already have experience in than bueinen areas. Aapnaitlons nay be made to improve our strength in the coatings hueinew Investment in the rpeaaity chemical* industry will be increand because of the higher margins and growth rates in this field. Airpiieitinp strategies fcr then anew an bring dreekgnil. A long-range strategy fir diversification ia being developed to position Sharwin-William* in the 1990!*. This evolving rtretagy includes tha conaidanfiin nf rmndidataa that may tw rniiwlatad to anr prmrt hneineee 1 it Coatings Satw -- I million* OgOTtini Into-- -- * aullloa* 1*7 BU 1M Reflecting efforts to improve margins, operating taeomo of the Coatings Group raarly doubled oo small mcmas* in mIml Moat ofth# gain cam* in the Stan* and Conaunur divisions, which togathar account for over three-fourths of the group's salaa. Aided by tha successful introduction ofa new product, the Automo tive Aflermarkat Civilian achieved good sal** grins and awn higher profit growth. Hu Chemical Coatings Divirion, howva, meoiutarad tossar demand in sensal ofits markets--flamitura, hemafauildfaif, ate.AUhaugjh the Vsmr volume was partly offost by prim inaeaesa. sharply reduced production wsuttad in high unit aoats and affected profits drsatieally. In addition to improving sffidmey in many ofits (Unction*, the group pcoiticnad itaalfwith pair products and marketing attaisgiai far inoiaaed salsa and grsatar profitability in tfaa yaan ahead. Improved Margin*. Hu Stane Division foamed its asnauaur marketing affbeta on its moat profftabla products and tha snaa it knows bast haw to aril: paint, wailcermringa, window tmatmanta, bruriur, rallata and rriatad toala and rupplias. While the division will continue to oftrflooccovscing in certain darcratmgoantars whrrethsra la a suitable market, this Mas la being phased out of many af th* units. Tha ovarail baaafft ofmdoriag th* number ofofforingo will ba a simptar, more diraeted and mare profitable operation. The Stereo Dtvisiop also mounted a highly wicosmiUl marketing campaign diiectad toward painting contractor*, traditionally a major market for Shorwin- WillilBIt. jlawntng hwH th* mArfiffrp *i pywyj ffl |lll| tO contractors, institutions, induririal firm* and buiUBng nunagara brought aubritaD- tial gains. Similarly, in tha Consumer Division, commerdal branchaa focused on larger uaan in sparifle market aagmanta. Tha spartsHrsthm enabled a reduction in in ventory itaae and bsttar management of th* salat fere*. Margins wme almhoaatad bath by pries inaeaaaa to offbat rising oaata ofraw materials and by intanriva programs to limit tha aflhoi of tha coat iarraams By oonvtitanc to bulk handling af almost all mw matariala used in the manufacture ofl*tea meting*, which mpraaant about two rhlnri ofits ratal production, the Can- sumar Divirion is able to buy tha matariala at lowu- coat, pmaam tham mom economically and avoid tha wests aameiatad with matariala ptrhagad in bags. In addition, yield programs instituted in ail tha phuits am helping to idantifir un- naoamajy ptacaaring waste. Lower product seat was a major Shjsetiva oftechnical aativitiaa during the ytar. In addition to seeking Isa expensive altanoativa materials, while retaining traditionally high quality, dawtapmant teams wviawad all fosmulas to find ways a<n|iHyt>| gffit wm<riwlWlgi| wgwtifcr^Hfhiy pBnp--. Another maan* ofdealing with inrraaring raw material coats, aa wall sa costs of pcodocti puKtihttMd Jbt miIi , w m fnpvovvd pmhiriBi pvocidhiiifc Ai part of th* daoaotrmlizatian program initiated in 1978, ooost raw matarial pus during was tranriarrad to thadiviaioiiri whan it can ba mom closely ooordhwtad wife huainam plana for marketing and production AMhciMfo a eatperatapurciuotag function eontimiss to adminiatar major contracta and eoordinata division aetiv- itiaa, oftha Amotion givaa oantral to tha dMriana, which are tally naponribia far tiu prsfttabiliW ofthair opmtiooa. Aa raw matariala am tha najorcaat item in coatings manufacturing, parson- nai ooata am the malar item in the Stone Dhririont chain of decorating emtara. L Nm Chins* p*ut [Sue |*ua aOsMoejr dnnod r*alitu* lor Konng - UquS *od dor mtmnal*. Mp o m* nnniMiical P [4 * 8 0007-SWP-035263 0007-SWP-000116684 0007-SWP-03S264 0007-SWP-000116685 T Although personnel costs were cut substantially by doting over XOO stores in Into 1978 and aariy 1979, Anther measures to limit coatt awn taken last year. A program offorecasting panonnd requirements waa developed. Together with a policy of luring more part-time people, the program will help in matching the salsa fora to aalaa volume. Inventory Reductions. Eliminating duplication! ofproducts in retail and pro- faaional linca induced inventory in the Stoma Division. Ihe move alao tondad to shift offerings far professional oontneton to highar quality' higher price products. Thedsvelopnientof standard assortments ofsssoristad products will be Wfoclive in Anther eliminating sizeable amounta of inventory. The standard aaeortments, which are based on store size, anil alao ensure that smaller stems have adequate stocks of key items without an sirsarivs investment In memifacturing-distributicu operations, a graalar respondvsnoa ofproduc tion faHUtwe to market demand has enabled a farther reduction offinished goods inventory, while maintaining -- and even improving -- cnatianar service, flatter planning and scheduling ends mom efficient method ofmanaging production has shortened the time from initial warehouse order to ultimate receipt of finished goods Not only does this greater efficiency allow a reduction of inventory, it also helps insure that the right products are in the warehouse in the right quantities. Portioning for Future Saks Together with the emphasis on Improved profit margins, divisions oftheCwtinga Group devaluated their markets and products to identify opportunities for ftitura aalaa growth. With its 1,400 decorating canton throughout the country, tha Stoma Diviaion has the broadaat network in the indusby for earring the burgeoning do-it-youxsalf market A thorough study hy tha diviahm identified tha types ofproducts and tha price and qualify ranges that have the greatest appeal With tha coueantratioa on paint and waUeomrinp that has already bean eatabliafaad, aflbrta now can ba fine-tuned to specific market* that ofier tha most benefits. To carry out plana set during the year, tha djviaicn'smarchandMBng organisa tion was realigned, with new rmponsihilitias--igned to peasant management and the addition ofpersonnel bringing specific marrhandinng ssperiroca. An important part of the marketing program will he an advertising campaign created by a newly appointed agency, which has a record of notable succaaaaa in promoting consumer products of major manuforturem. Salas guns of Martin-Saiiour Company products, distributed to indapmulent dealan such as paint mud wallcovering stone, hardware atom* and home cantata, showed that this Una haa now achieved goad acceptance, The line, whose market focus waa changed in 1974, has (batons ofquality, value, cbkarnmgA tinting, atn. that dsakro want, and it is advartiaad and fronmtad apadfiealfy fir tit* daalat'a benefit. With 1979 aalaa gains for ---- these ofthe general induatry, tha Martin-Senour line is erpsctsd to continue to outpace the market. Automotive Reflniahmg, Building on the suooaaa ofita new Sunfir**aaylie urethane aoamal, the first airdry product that outpmfcnns tha original foctey- apphad finish, the Automotivo Aftermarket Divincn will atop up product devel opment to advance its market prostration. Marketing capability, strengthened by the addition ofan asaculive to head thia Auction, will be important in achieving a pnaactodsalasandprofit inaeaaa. Growing fomignintonat in licmiaiag the divi. stan'* products has atimulaod plana for Aatharing its uvawaaa huainaaa, In addfr tioo to upmlliii ^yt*^ dMBittic uvlute Industrial Coatings Two major foctam--aosfgy conservation and pollutioa control -- aro fbrrij^ vast changes in <*wringa applisd to pmkicto during man ufacture. Baking finishes to drive offsolvents can require larga amounts ofenergy, so coatings that allow a lower temperature or duration of baking (or even the summation cfbakfeg akogathto) will ha inaa^agfy in dnand. Puithrnmarot many aatveut-baasd coatings used today will not comply with pollutim eoutrol rafuiotJcno achaduM to bNamt iActfoo in 190S. Fcatawtafy, tha Chmtiead Coatings Divirion began a rrumfaar ofyearn age to itovelnp waiai lwaa anil high ailirta proiluua that both raduc* energy rsquiromanla 1. KawnCarp., mww cuwomer ofch* Con* swear Dtvtosa, towns is much 20,000 sq A ie ill Www hr home-tnicyov,men! and hekVesetophr peduda, indwdins paint. Z &Wffri&-WiHlMawcmicayawufcwbcBaaifwilkeowuiiSHoWi upunup*iiuin| tflflll MA MWMtMA 8 0007-SWP-0352ti5 l 0007-SWP-000116686 and meet pollution control standards. Consequently. Sherwio-William* now tqjoyt a uniqut portion ia tha industry, with both a highly sophisticated raesmh capa bility and an emanato marketing network. Permaclad* 3200. the high-aolid* coating that meete all pollution control mgulationa -- even etringent new one* in Califcraa -- i gaining aemaaed ac ceptance. The product, which was designed aa a ana-coat finish for aluminum extrusions and cold-rolled steel, is opening new markets for tha Chemical Coatings Division, particularly in the appliance industry. As a leader in water-bee* coatings for industrial use, the diviairm haa eaveral important praducta. Kem Aqua*, with a wide range of usee, give* smaller manu&ctunn the tarns qualities and compliance previously available only in special application!. Sher-Wood* Letax 2400, a water-baas primer sealer for high-epaad application, m spariSad during tha yeer by two mayor forest products manufac turers who art using it to coat preeeirl-board siding. 3 Shtnen-WSHiamt a a laser nippiier of isStonals for soloownve leftnuhnw otCwiam) mmpuur in Clsvslsnd duly polls pemt-of-ialn lenninsla in 1,400 nsm to (sfher salat data. d'Twn rfocuuktmuon tanks. asdi hokhne SS.OOO rsitona of Sherwin-Wiliisnu fa*antsd*. sent m preduoxio at Dsnrn & Co 5. Nnwly txpwxM tmiurii ctntrr of thn A tsneuvs Aftarmsdut Division leachas NAPA pansanal how to uie Msran-Suur products. 0007-SWP-035266 9 0007-SWP-000116687 Chemicals Sal** -- f million! Operating Income -- I .miluni BHHHH 1031 so --| it ' *4 The Chemicals Division achieved excellent performancn with highar sales and ilnproved margins. Operating moon*, however. was reduced 12.9 million by change to UFO accounting. Tha division banaAtad from intraaaad aalaa of its aatablished products, as well aa growing acceptance ofnewer ones. Major con tributors to tha progress ware saoohaim, pan seed and the triazolas group. Salsa ofsaccharin wen strong, and tha price area increased Cor tbs first tima in two years to ofiaet rising cows. Tha moratorium fumd by Congteu in 1977 to any a ban on tha sweetener by tha Food It Drug Administration expired in May with no noticeable afibet on demand Congress is currently considering Amber legislation. With tha lack ofevidence that saodharin isharmfiil, and its strung public support, it is expected to remain the major artificial ewaatanar m the U. S. Strategic Flan. The long-range strategy of tha Chemicals Division is to exploit its technology and its unique production pmcsssoa by developing new products that perform specific functions and are identified by trade name rather than generic type. An example ofthis thrust is Cofaratac*. a corrosion inhibitor used increasingly in antifrsam. cedants, hydraulic fluids, packaging material* and many other applications. Demand for tha product remained strong last year, and an expanaion ofproduction facilities, to be coroplatad in I960, will double capacity. Similarly, the amnxidation plant in Chicago, largmt ofits kind in tha world, it now producing banaonibrile. as wall as tha original product, iaophthakxiitrila. Production of othtr nitrilas is under study. In 1979 the Chemicals Division add a significant amount of a newly de veloped derivative ofpara tread for use in tha production ofpdyriyrane. Thia was another amp m die division's trend to products for plastics, rubber, and dashxnerics, which are already major markets. Production of this para oread deriva tive is also an atanrion of the division's oentmuous pmesming tochndogy. As a result ofths success with this product and the potential for others from this pteeearths feasibility ofa second plant is being oooridtrad. The Chemicals Divirion was active during the year in introducing other mw products that era expected to contribute substantially to ftuure salsa and profits. A group ofproducts for use in od-weU drilling ia uasfiil in rsmoving suite Aom sour cnidae-Suite corrodes drilling squipmmit, end in the form ofhydrogen sulfide it highly tone. The new line ofproducts opana ths way for penetration of the energy exploration market. Another example ofthe divisions program offorward integration to produce unique spatially products for sdaelad markets is a line of eorrosian inhibitors for calluloss insulation. Sold under the name, SharOuard, the products oountmet ths corrosive characteristics offire-retardants used In ths insulation and thusprotact metal pipes and dueta paasmg through it An aggressive maritabng effort ia plaruiad for Sher-Guard* product*. In preparation for such efforts, as well as a more sfficimit overall marketing program, now managers of marketing and product davetopment were appointed during the year. Working tioaaly, thorn manager* will concentrate on Author itrengthewngcunent market positions and on product snd burins** development Aiding this effort will be a greater efiactivansaa in tschrucal development re sulting from eensolidatwn of chrameal Tseesrch focOstiaa. 10 t 0007-SWP-035267 0007-SWP-000116688 0Q07-SWP-035268 w 0007-SWP-000116689 Packaging Products Seles -- S millions 7* '7* Opwttui| Imn -- 1 mill,,-. '79 '70 98 0 071 1 Os* ISO nllisB taMs si* pndiaiKl as unity by ths Grtphic Ant Dinswn. both (or tiusmsi us* sari hr ether rauiahcnutn 2. New pmSusBan lim hr nudsot rnail euMniblM (hr Coauwar Div u mh uoSbra hill nnf of ana 95 13.7 Although sales ofthe Packaging Products unit increased, operating income declined because ofa change to UFO accounting and problems which slowed can production during the early part of the year. The accounting change reduced income by 13.3 million. Lower production resulted in higher unit coata, aa well aa loat salsa. Output was adversely affected by raw material supply problems brought os by the severe winter and trucking strikes. Whan the weather abated and the trucks began to roll, backlogs at the staal nulls eontmued to limit shipments for several months. Delays m convening lithographing operations to ultraviolet curing and the development ofnew ink systems alsocmproduction. Thsss problems havesinesbeat overcome, and the Container Division now has the moet advanced capability in the industry for printing on metal cans. In addition to the high quality remits achieved with the new ultraviolet curing equipment, the proerne requirtt Wee energy end reduce* air pollution. A largerthan expected increase inWaal primecutintomargins. Became of the competitive market, the additional cost could not be fully passed on. On the plus nda. demand for raatal cans has baen strong, and the diviaian has also slapped up us sales efforts, particularly in the foeteetgrowing areas ofthe U. S. Although themarket forcharcoal lightercans,inwhhh theContainerDivisionhasa major share, was weak at the beginning of the year because of a shortaga of raw material forth* lighter fluid, by year-end shipments wet* up more than expected. Furthermore, sale* ofaeroaol eanawareaxeaptional, particularly aaeffidanorat the new equipment for making imd-aite cam increased during the year. With tba ability to offer a Aill range ofsix**, the division boomed its sales twice ss much as overall growth in th* industry. The attlity to supply mid-six* cans baa epsnsd new markets for the division, mainly in the important personal products segment whare superior quality andtame* are importantfactore.Amaisr manufacturerinthisSaid was added aaa customer, and several large mantiforturew ofhornsproducts placed more of their orders with th* division baesna* of ka hill line. In a cost-reduction move, Chlcago-area production of obiong cans was farther consolidated in the largs plant in Elginwhareanew production lineforquartetna is now operating. In another step to improve productivity, manufacturing capacityfar gallon oblongcanaat San Leandrowaadoubladbyreplacin*equipment andredesign ing the lint. Productivity u continually under review. Large cost savings in taw materials have been achieved in thepast, and thedivisionis now focusing on improvements in facilities and more efficient operations. Graphic Alia. During 1979 thedivision conoantratad onimprovingefficiancyand reducingcost*. As a result, profluspurted. Thadivision isnowshiftingits attentionCo developing external business, in addition to supplying labels and color cards to Shsrwm.Williams' coatings divisions. A promising development during tha year to expand such business was th* acquisition m a process for making plane printing plates. Tha process, which simplifies the production ofletterpress plats*, has market potential in printing on metal, boxboaid and other materials. Another advance which opens new markau for tha division, is eomputaeired shadingforcolorsamplsa. Th*system comparesthecustomar'a scandaid with *rang* ofcolors in computermemoryand produeaaafomulaforpreparing thecolorsample. ; \ 12 t 0007-SWP-035269 0007-SWP-000116690 w 0007-SWP-000116691 Specialty Products SalM -- t tmlliom If T* Operating lacem -- S million* 1* 13 IS Operating income of the Specialty Product* Division wu reduced by a charge of S3.3 million for obiolett inventory. Sal* of tha Sprayon unit, which dou eunom filling of aerocol .products and mamifartuna a variety ofindustrial maintananca producta undo' tha Spnyon labal, improved significantly. In part, tha salss advance reflected price incraaaaa to oflfbat higher onata of propellant and aoWant-baaad costings, both ofwhich ara mads from petrochemical fsadWnrln, but unit volume also increased. Gnatar manufacturing aftlciendas raaultad from procaduraa to gain highar yialda from raw matariala Tha uaa of altanativa matariala m aome caaaa haa nablad aconotniaa *hik maintaining quality. New Products. Savaral aaa producta alio eontributad to tha group's pragma. Tha Pro Val* (pro&eaional valuai brush wu introducad during tha yaar with aacaliant auccara. Designed to bridge tha gap batwaao tha top of tha oonaumar line Tbruihae and the bottom aftha profratiooalline.it is being told in both markets. It hu a plaatic handle, and in bristles are a blend ofnylon and polyaatar. ruitabla for both oO-faaat and latex eoatlngL Alio mtmducad wu tha Handcraft* line of highan quality proftaaional bruahaa. A naw Una ofthrowaway roller oorara for proftraional paintara ia tha raault of a marina itudy that indicated tha attractivenan ofrueh a low-price product. A new roller covarwu alao introduced at tha high and ofthe line. It iamada from a wool-polyaatar bland and raptacm lambririn rollers with tha advantage ofbong ratable for latex paint Since 1078. tha divirion haa developed a growing hininau in tipa for airtua spray equipment. Initially eori through Sbwwin-lffilliama stores, which distribute W equipment, tha tipa warn auceaaritiQy introduced to othar daalan during the peat yaar and an being nvpBad te manu&ctumacf spray equipment u acetesorue for thair products. Performance ofthe Hadley unit, which manu&ctuneadheaivaa. caulking and othar products both for ratail and indurialmariuts,btnefitsd from manufac turing coat control raaasum and a graaUreonemnticn on adhaiiva product! for induatrial application. SigniVant managamant changw duimg the yaar have brought badly needed axparwnca to thia bnainau In tha Canadian operations, an additional pnn wu inatailad to incraaw production ofplaatic brush bandits, whkfa ara gaining popularity. Sake ofoutom wood products are alao advancing significantly. 1 N'w product miraductioM mcludo Pro Vl? brush 'block handle Handcraft? bnahaa. wnol-polpMar reliar eovar >laft' and threwawai- mllar ogvtr 2 HsdUy lino of adhwvaa. caulkiny and otharpredm haa bam repadiaad foru* j i ShannWilliaiM turn and othar outlau 14 0007-SWP--035271 0007-SWP-000116692 International Sain -- t million* Operadnc Imo m S27 '8 9 5t The excellent increase w operating income ofthe International Group, on a small increase in sales, u the mult ofnnprovad performance in the Canadian. Mexican and West Indies operatuoa. Performance also benefited from the abamet of expected devahiations ofthe Mexican peaoand Jamaican dollar. Gains ware made m royalties from licensing, which now covers 34 countries. In Canada, wham a number of steps were taken during the year to improve margins, lossas were cut substantially end bank debt was reduced. Canada. Moor management changes were mads m the Canadian aubaidiaty, with the installation of a new general manager and other key officers, aa well as significant staffchanges. New programs for financial planning and operating rotrol warn implemented, and the Jnvaatmam m working capital was optimised. To improve manufacturing efficiency, the oheoUte Winnapag plant, which could not produce a frill range ofproducts or handle high-volume rune, was dosed. The Montreal plant u being upgraded to moot all production requirement*. A consolidation ofthe Kern* brand, sold through independent dealer*, and tha Sherwin-Williams Una, carried by the company's atama, was completed during tho year. Tho combined trad* name has greater recognition and acceptance than either name alone. Furthermore, with only a tingle brand, advertising and promo tion can bo more concentrated. In another brand-rmoonalrretinn program. Canadian private label Bna* were shortened drastically with aa overall reduction ofover half tha number of items offered. In addition to cutting inventory, tha program is encouraging dealer* in carry tho Kem-Sherwin-Williams lino, as well aa their private-label products, to provide the wider selection that customers want Thaae mouse reduced warehouao roquiraments, and die Toronto and Van couver warehouse* wort sold. Furthermore, sonnet to independent dsalan was improved, baeauaa with both company storm and dealers carrying the same brand, sterae can fill dealers'amall orders, thus avoiding inaffidant shipments from warehouses, Margin* were maintained by price increase!, which reflected higher manufoctunrig and sailing coats. With clcaier control of inventory and purchasing, man agement is new batter able to anticipate high* mm and plan price meraaaaa accordingly Mexico. The Mexican subsidiary achieved record performance m 1979. largely because ofadvanm in sake through the ecmpany'o atone, which account foe over 8CR ofthebunnaea. Sake ofautecnodve and industrial products were up leea. The automotive increase was penaiizad fay the lata introduction of a modified acrylic enamel, which is expected to contribute to 1980 remits. Growth of Mexican operations ha* bean limited by a government requirement thet new store* be mqjonty owned fay Mexican citizens. Stveral alternative plana to increase the number of Morse are now under consideration. West Indies. Performance of tha Wear Indies operations. based in Kingston, Jamaica, benefited from an aggressive marketing campaign in TVmidad. Efforts were directed toward the automotive tsfinislung market, which already rtprssirua a large share of sales, as wall as tho architectural coatings market. 1. Sake of the Meocn aukeduuy ur msie larfelr thnush a rmeori of 75 Horn Expuawa of the sen tfoaui is ptanraS 1_____ 0007--SWP-035272 IS 0007-SWP-000116693 Financial Summary Dollar amount* tn thoutanda mpt par ahara Operation* Net tales Coat of product* *old Sailing, general and adminutrative ezpenaa* Interest expense Provision for disposition and termination of operation* Gain on aala of Ashtabula operations Income does) before income taxes Income taxes (credit) Net income (loss) Ywi itdad Dwabif II, 1979 1978(D) 1977 1976(A) (Vsesditei) Sl.194.343 $1,132,350 *1,035,989 $969,205 829.183 795337 732,049 659323 Y<w wind Aufmt 31, 1975 1975 $951,984 *866.853 644.725 576.122 322315 19,368 311,175 21.31B 283379 17,965 269.808 13,154 261.786 12326 244.518 11.980 34.427 16,399 18,028 9.928 4,736 5,192 16,434 <11.6901 (3.6831 (8397) 24.144 11,463 12.681 33.784 15.349 15.435 12.728 50333 21.645 28.586 Financial Position Inventories Accounts receivable -- net Working capital Property, plant and equipment -- net Total assets Long-term debt Common shareholders' equity Total shareholders' equity $242384 125,669 324,67$ 203,851 704,380 234,285 251,062 275,767 243,506 135.047 316,652 206360 649,169 242,362 249.963 274,908 1256314 126380 277,252 201,112 613360 186,621 246360 270316 $273,557 108,727 304303 177,054 563,396 182,273 283,634 238327 $244,845 138,956 276,456 171,769 567326 132,416 277.037 302.066 $228,189 119.240 287.711 148.343 553.127 132.657 271376 296.424 Per Common Share Data Average number of sharee of common stock outstanding Common shareholders' equity per share (book value) Net income (loeai per common share Cash dividends paid par common share 5,290,875 5,396,445 5,396,746 8,392,988 6,391.347 5.377.695 5 61.66 3.21 .15 9 46.31 .75 45.51 (1.72) 2.20 8 48.87 2.12 2.20 51.39 332 2.20 $ 50.44 5.11 2.20 General Income (lose) as a percentage of soloo Return on common shareholders' equity <B) Current ratio Time* interest earned <C) Working capital as e percentage of sales Capital expenditures Provision for depredation and amortisation Number of shareholders: Preferred Common Number of employees Salts par employs* Sales per dollar of suets 1.51% .49% (.79%) 1.31% 1.94% 3.30% 6.78% 3.01 to 1 2.8 x 1.79% 3.99 to 1 1.5 x (3.52%) 4.28% 3.29 to 1 4.16 to 1 3 x 23 x 6.40% 3.13 to 1 33 x 10.79% 3.89 to 1 5.2 x 27.14% 2B.14% 26.79% 31.39% 29.04% 33.19% 611367 817,274 31.888 843,412 642,844 $27,902 19,458 961 9,798 16,872 870307 1.70 16,436 * 991 10,611 16,016 862366 1.74 16324 1,010 10327 19369 953,796 1.69 13,469 996 10,603 19310 648,679 1.63 12339 986 10,762 20,464 646343 1.62 12.750 995 10.405 20,892 $41,492 137 (At `Bn yiiririrSnestirM. tSWIlirine#ii(misled<e*m(la*els*aw*hiielii44loth*fom) fmM Aunm 31. lTt <*> Bart wamMdianluUiis'maty *tb*nsnuv *)"*- .UtST*IIHSnim 16 0007-SWP-035273 0007-SWP-000116694 Financial Review I Sale* Conaolidatad not labs mcnaMdS63.993.000 (6.7%) to 91.196.343,000 during 1979. Tit* Coating* and Chemical* ngmenta ineraaaad Mbs by 130,064,000 (3.6%) and $16,112,000 (21.6*') raspactivaly, primarily dua to pne* increases. SalM ib all other lagmauta showed improvement ovar 1978, resulting from a com, bination ofvolume and print inertata Prawnlad below an tha approximate percentages oftotal not tala* by class of similar product* which contributed 10% or man to total not mlet dining tha period* indicatad- Paint, vamiahaa, iaoqusnand allied matariala Yan M Dm taro at* an Ytan indarf Augua 31. at* uro 1075 1% 60% 61% 63% (33% 62% Faint application and decoration producta purchased far raaaia 22% 25% 24% 22% 23% 20% Gnu Profit Groat profit ineraaaad S30.047.000 ovar tha pravioue yaar. Ovanll groaa profit matgini tnewaiad frma 29.6% to 30.7%. despite tha aflbet oftha cfaangt in tha method ofdetermining tha ooat of eataba invantaciaa from tha Annin, Em-out and average eoat methods to tha laat-in, flm-out mathad aa described is Now A to tfaaWnanrial atafnant*. The margin improvements iwiltad from ag'cata tn reduce prfwhirti^H fwtf tnpiiMii on thf nil of h%hr niifiii products throughout all tagmrota. Tha Gating* and International aagmmta wan anwnaaafiil in mcnaaing groaa profita contidmHy aa a modanta inenaaa in aalaa. Althoutfi aalaa tfthe Packag ing Producta aagnant tnoaaasd, gron profit decHnad, primarily beemiM of mat* rial aupply proUana aad tha dunga to UFO. Maintenance and rapair eoata iaaaaaad 64,156.000 (1&3%) over prior yaar coals. Inowmd rapain aad hifibar eoata within tha Chamieal* aagnunt accounted Sr approorimataly 80% of tho meraaaa. BtUag, Gawal and Administrative Espoo*** Sailing, gaoaral and adntiniatrativa ropawaa irmaaid 111,040.000 (15*1 ovar 1976 atpanaaa; however, aapauaa aa a pamartaga of aalaa improved to 26.9% in 1979 from 27.5% in 1978. aighidt aa tha roduetjon of nomrsmrial aupport arvicas helped aflbat tha effect ofhigher amployaa eoata. Advancing aapandituras wan raduoad 17.9% or appmairnataly 94.622,000 compered to 1976 lavala aa a roault ofraduead advectiring in the Coatings segment Tana, other than income and payroll, won raduoad 11,170,000 (15.1%) dua to tha cbeing of war 100 atone and attain diangaa in tax rates. Intarwst Expense Interest expanse dsriinsri 11,952,000 (9.2%) from 1978 amounts dua to the significant reduction in ahort-tann bomwingt efiot to a certain extant hy inaoaied intaroat on tha additianal dabt irouad to tha Swth quarter of 1978. All domaatic ahoat-termbafiowinp have bean albninatad and teaipdiort-tarm debts, primar ily have been raduead to 94A40J00 from tha 1978 bval af910.720.000. 0007-SNP-035274 0007-SWP-000116695 1 Interest Income Increased investment is short-term securities during 1979 generated in increase in interest incam* of $6,418,000. Other -- Net llw gain on the purchase cf debentures increased $1,107,000 to 11.656.000 m 1979. However, this increase was e&et fegr a net change of $2,134,000 related to the disposition and tanaiastiae prorinons described man hilly in Note L to the ftninrial statements, tad a $1,141,000 decrease related to foreign currency translotion. Income Turns Iacom* tax axpanaa inaaaaad by 111,663,000, dua primarily to tha higher 1979 income. Net Income Nat income naa to $18,038,000183.21 par common share) from $6,192,000 $ 76 par common ahan) for 197$, an menace of 247*. This ehaaga raaultad from im provements in tha Coatings asgmant, prizaarily in tha Consumer and Stares Divisiona Tha fa--natiohal sagmant aim paribnnad wall with loans cfCanadian opmrntiona eat eiharantisHy from tha prior year and reeord talas m tha Maxican wihrirfiary. Income of the Packaging Products and Chemicals aagmanu was re duced aa a result of ths accounting ehaaga to UFO. Tha ate ro 1979 incomapremnnm riiare ofa reducadnumbtr ofoutstand ing share* which raouhod from tha punhaas oftreasury stock, is minimal bacaus* tha punhaaa oeeurrad iata in 1979. If tb* purefaasa had bats coaplatad aa of January 1.1979, repertsd aamingi par share would hevs bssn appnnriinataly $633 hr tha year andsd Oseambsr 31,1979. Years ended December 31,1978/Decamber 31,1977 ConaoHdatsd nat salre m $1.132360,000. rapraamting a $96,361,00019.3* tin- gasm onr calendar 1977. The Coatings segment recorded a sales gain of $78,144300 (103%) resulting from increased veluma in atore aalas of paint and laanriatad producta and, to a laaaar extent, prica inmaass (hr cartam automotive prasm* The Packaging Products and Specialty Products segments poated nlea m- cnaaaa of114316300 (19.5%) and $4,786,000 (113%), respectively, primarily due to inures--! volume. Salsa oftha Chemicals sagmset iaenoisd by 81.640,000 (2.0%) dua to pries increaeas, aa unit salsa remainad relativtly constant. Salas of Ae IatintliflDal imn( a mM--ily, Gross prodt (hr 1976 increased 833,173300 (10.9%) ovsr ths previous year, with the Coatings asgmant aoeouatiag (hr 126,172.000 cf tha increase. Ihe m- aae m pom prodt cfthe Coetinp aagmant is primarily attnbutabla to aalas gaiaa. Tha Chsmicals segment posted a $8337,000 (1123%) inaiaae in gross 0007-SWP-035275 0007-SWP-000116696 profit, which was due aimed exclusively to aggressive pricing efforts during the year. Packaging Products and Specialty Products also recorded groat profit inmemse over the previous year. Great profit in the Packaging Products segment had bean advttiely affected in 1977 by a strike at the Hubbard, Ohio container plant The increases in these segments were oifist to some intent by s 12,933,000 decrcsst in greet profit for the International segment, due in part to lower sales in Canada and increased new material costa in other divisjena of the segment The Company's overall grass profit margin innsteod slightly to 29.8% hum 29.3* in 1977. However, the extent of improvement in graee profit margins was tampered somewhat due to lower production volume in the fourth quarter of 1978. which was inaufllritnt to ftsUy absorb find costs and thus penalized tamings. Production was airtailori in that period in order to reduce inventories end improve liquidity. Depreciation tnd amortization expense increased $1,514.00018.9* >, which can be attributed to increased amortization sxpansa on capital leases and depreciation an tha naw emulrion plant in Chicago. Maintenance and repair costs increased $2,369,000 (11.6%) over 1977 coats, primarily dus to higher axpemsoo m the flf tht ftwi ChiOttcik NgEMOtf. Sailing; general and administrative mpanam incraasad $27,296,000 >9.6* over tha prior year. Theaa expenaas in the Coatings vsgment increaaed $27,714,000 (12.2*I primarily due to higher employee ooeto and increaied advert tiring axpsnsm. The Chemicals aagmsntredueed its asUing.genaral and administrative ivpsnsas by 32*. due to an intautive effort to cut support expenses and reduce the cost ofdoing business Tbs ssiling, general and adminiatrstive expenses of tha other segments all improved as a percentage of sales. Interest sxpansa was $21,313,000 hr tha year, rapssasnting an increase of $3,353,000 (18.7*). The sherprieein intereet ooet was caused by the higher levels of tiiort-tarm borrowings outstanding during the year, which were needed to sup port the level ofsalsa activity, and sscslsting intanst ratal. Other -- net inoseaad $1,456,000 to $3,506^00, due principally to the credit to income of$1,258,000resulting from an adjustment to the 1977 provision for disposition and termination of apswxiono, dsecribsd mors ftilly in Note L to the financial statements. Tha protista sstahliihad In 1977 fir dm disposition and termination of oartain operations amounted to $16,434,000 (110,641.000 after tax or $1.97 par ccmmosi shivs) and is shown is a separata component of income in 1977. The oompany iacumd a net operating loas for tax purposes in 1978, primarily remitting from timing diffhienem between financial and tax accounting relating to depredation and the tax effect of the provision for disposition of operations. Re- fimdabie income taxes of $4,710,000 fir 1978 rtsuhad from tha carryback of that lom to prior years. Nat income Or 1978 was $6,192,000, or 1.76 par common sham, compared to a net loss of $8^07,000, or $1.72 par common share fir 1977. Included in the 1977 lam art operating leas-- and other chafie associated with discontinued operations which tattled $15,080,000, or $2.79 par eommon sham. 0007-SHP-035276 19 0007-SWP-000116697 t 20 Report of Management ShanboMm The Sharwtn-WUliama Company Wt have prepared the accompanying consolidated financial statement! and related information included harem forth# year* andad December 31,1979 and 197B.The opinion ofEmatA Whinney,thaCompany'*indapasdtnt auditor*,on thaw financial atatamanta ia indudad. The primary raaponaiHHty for tha integrity of the financial infomaticninriwied in thisannual repcetTeamwithmanagement. Thiemfermapon i* prepared in accordance with generally accepted accountingprioaplm. baaed upon our beat aatimataa and judgment* and giving dua ocnaidaration to materiality. Tha Company maintain* accounting and control eyatame which aredaaigiiedto provide raaeonableamungico that amata ate aalbguardodfromlomorunauthanad uaa and which produce neorda adaquau fcrpreparation of financial information. Thar* ara limit* inherent in all ayatsmaafinternal control baaed on tha recognition that tha coet of auch ayetena ahould not amead <be benefice to be denvad. We balieve our eyttem provide* thia appropriate balance. The BoardofIXracton pureuea ita reopaoaibility fortheaa financiiil etaumenu through tha Audit Committee, cranpnaari aaduaivaly ofoutaida director*. The Committee meetc periodically with managanam, internal auditor* and our independent auditon to diecuac tha adequacy offinancial controle, the quality of financial reporting, and the nature, actant and reauhe ofthe audit effort. Both tha infernal auditon and independent audjteea have private and confidential aceaae to the Audit Committee it all thnee ' 'f^ -w ' \tiHilUu, T J. G. Braan Awtnl a Ckufgwniwur Officer T. A. CaonM J Z. Wallace Stmter Via frmidm, ftnanct Vk Pmidtiu. Carpenter CoH'nilt* CkmfrmvtotlOmc* ChufAccewunv Ofltctr Report of Ernst A Whinney, Independent Auditors Shareholder* and Board of Dinctore The SfoorwiivWUUame Company Cletaland, Ohio W* haw* aaaminad the eoneolklatad haianna elwafe ofTiw Sharwin-William* Company and aufaeidiariaaaa of Deoaaber 31.1979 and 1978, and the related oowolidated eafenrnife of income. dtawheMart' equity and cfaangao in financial poaetiao for the yuan thm andad. Our examination* war* mad* in accordance with gmunlty aoaaptad auditing atandarda and, aeeerdtagly, indudad auch testa af the accounting taeotdi and outfe other auditing proeaduraa u wa eomidered naoawmy in tha dreumounoaa. In our opinion, the financial atafemmti raterod to above praaant foirly the oanaoHdatort financial portion eflhaShacwin-WiUiaaai Company and aubwdiana* at December 81.1979and 197B. and the canaoiidafed moult*ofthair operation* and changaa in financial peotien fortha yaan due andad, in conformity with generally aoaaptad aeeounting principl** oonaiitantly appliad during tha panod imeapt for the change, with which we concur, in dm method af datarmiiung invantdiy coat aa daaoibad in Nota A to the financial atatamanta. ClmtaeA Oiue Mem* 1. 18*0 0007-SHP-035277 0007-SWP-000116698 Statements of Consolidated Income Th* Sunrw-WUluuM Conpanj od SubaidianM TtauMads of doUart Nat lalti Coat* and npowi: Coat of product! void Soiling, gononl and adnuniitrativ* aipanaaa Intaraat aapraaa Intaraat incoma Other -- net Incoma bafora iaeeaa taxea Income tasae Nat incoma Van Ommbar M 1978 1978 11,196,343 81.132.350 629.183 322.215 19,366 (8,131) <717) 1,161.916 34,427 16,399 795,237 311.175 21,318 11.713i <3.595) 1.122.422 9.928 4,736 18,028 8 5.192 Nat Incoma par common shara: Primary $ 3.21 8 76 Fully diluted 8 2.95 8 76 0007--SWP--03S278 21 0007-SWP-000116699 Aiiott Ui UIWn and Shareholders' Equity 22 Consolidated Balance Sheets The Stwrwm-Willianu Company and Submduiu* 1 Thovtonai of dollar* Currant iwti Caih Short-term investments Accounts receivable, loss allowances of >2,000 Inventories: Finished products Work in procsM snd rsw msurisls Other curront sssots Total curront asset* Dinb*r31 1*79 19*8 8 7.563 101.839 125,669 5 32.682 40 135.047 177,748 64,516 242.264 8,662 486.987 185.974 57,534 243.508 14.040 425.317 Other asaata Property, plant and equipment Land BuiUinp Machinery and aquipmont Construction in progress Less allowances for depreciation and amortization 14,642 5.612 112,646 240.506 10,879 369.643 165.792 203.851 1704,380 14.272 5.822 113.719 233.084 9.606 362.231 152.651 209.580 8649.169 Currant liabilities Short-term borrowings Accounts payable Compensation and amounts withheld Pension, interest and othsr accruals fafflfflt tlftt Total current liabilities Long-term debt Deferred income taxes Other long-term liabilities Minority interest in subsidiary Shareholder*' equity Capital stock: Serial profaned Common Other capital Retained earnings Less treasury stock, at cost Total sharaboldsnT equity Sm non* to naoolidai*d financial totoswnta. S 4.649 78.865 20.746 43.344 13,685 161.309 234.285 24,873 5,326 2,830 5 10.720 36.854 16.921 34.435 7.735 106.665 242.362 18.111 3.607 3.516 8,854 33,884 5.171 243.884 291,7*3 18.036 275,757 1704,350 8.854 33.881 5.240 227.823 275.598 690 274.906 8649.169 0007-SWP-035279 0007-SWP-000116700 Statements of Changes in Consolidated Financial Position Th* Stantm-Williami Company and Subndianaa Source of Funds Thoumndo of doilaro From operation*'. Net income Add beck charges (credits) to operations not requiring (providing) funds: Provision for depreciation and amortization Increase in noncurrent deferred income tease Provision for disposition of noncurrent assets Funds provided from operations Increase in long-term debt Obligations under capital leases Sale of treasury stock Net book value of noncurrent assets sold Other -- nst Ytan idtd Dcmb*r 11. 1979 1978 *18.028 S 5,192 19,458 6,762 1.050 46,298 1.462 5,675 -- ____707 *53.142 18.438 1.857 (664) 24.823 40.299 7.566 -- 3.215 *75.905 Application of Fuads Cash dividend* Additions to property, plant and equipment, net of normal retirement* Additions to property under capital leasee, net of normal retirements Purchase of treasury stock Increase in working capital Purchase of debentures Other -- net t 1.767 10,181 4.598 21,096 6,026 9,474 *53,142 801 14.946 10.475 45.771 2.126 1,786 (75,905 Changes la Working Capital-- Increase (Decrease) Cash Short-term investments Accounts receivable Inventories Other current asset* Short-term borrowings Accounts payable Compensation end amounts withheld Pension, interest and other accruals Income tease Increase in working capital *(25.119) 101,799 (9,378) (1,244) <5,388) 6,071 (42,031) (3,825) (8,909) (5,9501 S 6.026 *30.497 (10) 9.667 (7.690) (1.337) 19.145 (3.831) 1.520 2.855 15.045) *45.771 Saa aalaa to tontalidnad financial aUlamaata. 0007-SWP-035280 0007-SWP-000116701 1 Statements of Consolidated Shareholders' Equity The Sbrmn-Wllbmi Company and Sifcoidianee f Thomandt ofdollars Balance at December 31.1977 Common stock issued: 222 shares upon conversion ofpreferred stock Nat income Cash dividends dacUrad: Sanaa A preferred stock -- S3.00 par share Series B preferred stock -- *3.30 per share Balance at December 31,1978 Treasury stock acquired: 530,000 sharae of common stock -- net of 200.000 sharae sold 2,200 sharae of Series B preferred stock Common stock issued: 400 shares upon exercise of stock option* Nat income Cash dividends declared: Series A preferred stock-- 54.00 per share Series B preferred stock -- 54.40 per share Common stock -- 5.15 par share Balance at December 31,1979 Serial Preferred Stock 5 8.859 Common Stock 533,880 Other Capital 8 5.237 Retained Earnings 5223.232 Treasury Stock 1 1690) (5) 1 ---- 3-- -- 5.192 -- -- -- -- 8 8.884 -- -- 533,881 -- -- 5 5,240 t211l (590) -- -- 5227.823 * i690> -- _ l75> H5.237> -- -- -- -- 109> --3 6---- -- -- -- 18.028 -- - -- -- 8,884 -- -- -- 533,884 -- -- -- 5 5,171 (282) (785) (7001 243,884 -- -- -- 5H8.036) 24 0007--SWP--035281 0007-SWP-000116702 Notes to Consolidated Financial Statements Th Sharan-Wilhams Campanv and Suhsdianes Yean ended December 31.19?9 Vtf 1979 Note A -- Summary of Significant Accounting Policies The consolidated financial statements include all sig nificant subsidiaries Intercompany accounts and transactions havs been eliminated. Tha effect of translating the account* of foreign subsidiaries into C.S- dollars is inchidsd in costa and expenses, other -- net and amounted to a loss of 3267.000 and a gain of 1674,000 in 1979 and 197B. respectively. Short-term investments an stated at coat, which approximates market. Inventories are stated at the lower of coat or mar ket. At December 31. 1979 and effective January 1, 1979. tha company changed its method of determining inventory coot from the FIFO method and the average coat method to the LIFO method for certain domestic inventories. These inventones account for approxi mately 20* of total inventories. Tha company behevae tha LIFO method will more fairly present it* leoulto of operations by reducing the effeix of inflationary coat increases in those inventories and thus match current coots with current revenues. If the FIFO and average cow methods had been used, inventories would have boon 36,221,000 higher at Decsmbwr 31,1979. The ef fect of the change in 1979 was to raduca not incorot by approximately 13.399.000 (1.63 par tiwnmnn share). Property, plant and equipment ia stated on the basis of cook Provisions for depredation are based on annual rates calculated to amertao the cost ofdepreci able suets over their estimated sranorruc live*, com puted principally by the straight-line method. Raaaareh and development coots charged to opera tions wart approximately 17,100.000 and 16,712,000 for 1979 and 1978, reflectively. Certain amount* in tha 1978 financial statements have boon radaaaifiod to conform to the 1979 praaantaQon. Note B -- Pension Plans Substantially all employees rf the company who meet certain requirements aa to ago and service porticipoto in noncontributary psnaien plana. The company's pol icy is to fond pennon coat accrued, ropraateiting nor. mal com and amortizaticn of unftmdad prior aarvico coat over 30 years. The unfunded portion ofprior aarvtoo ousts under the company's penman piano so of the latest valuation was astimattd to be 966,778.000. Pen sion exponas was 115,568,000 and S1S.353.000 for 1979 and 1979, respectively. Certain 1978 plan amendments for incriaaad benefits became effective January 1,1979 and inooasad pennon axpanso by a|> proximately 11.700.000. Actuarial sumptions wore reviewed in 1979, and eflbctive January 1. 1979 cer tain change* were made which decreased unfunded prior some* cost and reducad pension expense by ap proximately *1.500.000. For certain plans at December 31. 1979. tha aetuanally computed value of vested benefits so of the mote meant actuarial determination exreeded tho value of pension fiind assets and related balance sheet accruals by appradmately 316.528.000. The vahte ofpanaion fond aateta wai determined using markst valuss at December 31.1979. Not* C -- Lmi m The company Isearn Kona, warehouses, office space and equipment. Renews! options am available on the majority of Is o ms , and, under certain conditions, op tions exist to purchase properties. In some instances, atom Inna require tha payment of contingent rentals based on solos in excess of ^edited minimum*. Cer tain propartioa an niblssssd with venous expiration date*. Property, plant and equipment include* the follow ing amounts for capital leases which ere amortized by the rtraighMine method ovor ths lease term: Dmnr&rj' ?/ Thoumndtttdottan 1979 1978 Machinery and aquipmart 319,065 320.424 12.612 6.010 Lees allowance for amortixatian 31.697 11.324 28.434 9.139 320J73 119,245 Rental expense for all operating losses was 330,726,000 and 332539.000 for 1979 and 1978. re- apeetivtiy. ContingMtt rental* and aublaaaa income for all laaaoa ewe not significant Following is a schedule, by year and in the aggre gate, offtttur* minimum loess payments under capital laaaea and noncanoelahle operating leasee having ini- dal or remaining terms in c x c milofoneyearat Decambar3L 1979: Thmmndt cfdcOen Cspiisl Opemmo Uesw Lmms 1960 1981 1982 1983 1984 Lataryaam 1 5.546 5.243 4.976 4.542 4.053 10.948 $22,465 17.996 12.855 8.346 5139 3.822 Total minimum laaao paymtnn 35,308 375.623 Amount mpmaanting intomte Esacutocy eoata 110,106> l 3.022)i Present value ofnot minimum lease payments 322.180 25 0007-SWP-0352B2 s 0007-SWP-000116703 Note D -- Long-Term Debt ThoumotU of4oiku% DontarSL 1*71 UTS 5.49% Debenture* Due 1992 texclusive of 93,664 in treasury in 1979 end 34.611 in 1978) Annual sinking fend payment* of $2,000 | 32,336 < 33189 6.29% Convertible Subordinated Debentures Du* 1996 (eseluriv* of 32.350 in tr*MUi7 in 1979) Annual sinking fend payment* of32,000 commence in 1981 Convertible into common stock at 346 a share 37,690 40200 9.49% Debenture* Du* 1999 1exclusive of 38271 in treasury in 1979) Annual sinking fend payments cf $2200 commence in 1960 43729 83000 92/8% Promkeory Note* Duo 1996 Annuel prepayments of33,325 ecmmenm in 1983 90,000 50,000 10% Promiseery Note* Dus 1966 Annual prepayments cf32,997 commence in 1964 43000 45,000 5.29% to 330% Industrial Revenue Bonds Mature in varying amounts through 1992 ObljfUiaM wdvcipitAl Imm^ 3366 3490 km current portion of33279 in 1979 and 12,410 hi 1979 See NoteC 19206 17,743 1234286 243392 Certain covenant* under th# note agreement* re quire the company to maintain epecifled iaval* of waking capital, limit th* ineumeca ofdebt, loom ob> ligation* and inveetmente and raetrict the payment of dividend* and other distribution* ea th* eeaepen/e stock. Th* company may, at eny tiae, iaeu* Mock divi dends or pay dividend* on presently outstanding hare* of preferred aleck under th* teraa of th* hate agreement*. At Deceeebee 31. 1979, approximately 113.900.000 wo* available fat ceeh dividend* on com mon Mock. Intereet expense on long-tom dehe amounted to 319.060.000 and 914,449,000 for 1979 and 1978. re spectively. Hi* oeapony hen sufficient ddhantune in treasury to eatbfr moat sinking fund nguireaoata thragh 1991. Matuiitia* of long-lam debt, mehtfivu of capital lease obligation* end after th* abovemmtamed reduction hr linking (tad requirement* to 28 be **tufted from debenture* on depoeit with the trustee, ere a* follows fee th* next five ya*n: 1960 1061 1962 1963 1964 8 63000 401.000 7.040.000 3119200 13367,000 Under a credit agreement with a group of ten banka, tha company may borrow up to 390,000.000 until December 1, 1963. Amounts outstanding under tha ograomant may ba cessvartad into four-year term lonna at any time. The credit agreement includes certain restrictive covenants regarding working capital level* and th* miking capital rtuo, with u eomnutment ft* of 1/2% pair annum on the unused portion until Docomher 1963. No borrowing* were outstanding under this agreement at December 31,1979. Not* E -- Stock PurchftM and Stock Option Plana Approximately 5200 salaried employees currently are partidpating through regular payroll deductions in th* company'* Employee 9tock Purrtuee and Saving* Phut which bacama dbetive April 1,1969. In this employee fend orSecember 31.1979, th*e were 929,341 ihern of common stock, lepreeenting approximately 19% of the total number of common thane outstanding. the company's contribution charged to operations during 1979 amounted to appranmataly 11,830,000. Share* of fe*9paay jtock cnditid to mc H mombtr'f Account $19 voted by th* trustee under confidential inetructioos from each individual plan member. Stedt option* have been granted to certain officers and key ampler*** under the company'* stock option plan, at price* not km than feir market value of the ehoie* at dot* of gran* end become exasedaebk to th* extent of one-Bfth of th* optioned shone for each foil year cf empioymaat following tha date of grant, expir ing tan years alter date of giant During 1979, the board of directors granted 73.000 tods opticus to certain officers at the fair market value an th* date of grant with an aggregate pnea of $1213000: them option* an part of related employ ment conteecte end carry substantially th* h u m term* as opticas granted under tbs company's nock option plan. A stock appreciation rights plan was approved by th* ehenheUen in 1979; however, no right* have boon granted under tha plan. 0007-SWP-035283 Note E -- Stock Purchase and Stock Option Plans (continued) 1979 Shan* Aggregate ftia Option* outstanding -- beginning of year Granted Exercised Canceled 216,034 15,000 (400) <43,342) 96,704,000 326400 <8,0001 fl.515.OO0> Options outstanding--and of year 187.292 ' 65,607.000 Exercisable 116.292 Reserved for future grants 379,535 Shane 156,609 74.000 -- (14,5761 216.034 133.634 51,193 1978 Aggregate Price 15.739 000 1,526.000 -- <561,0001 56.704.000 Note F -- Summary of Quarterly Results of Operations (Unaudited) Thauaaada af dotlon. map! par abort Match 31. ism Thre momht tmdad June 30. 1878 Sapt 30, tan Dee. 31. Match 31. 1S7S 1*71 Three nenthe ended Ju s m 30, 1PTS Sept 30. 197 Nat aalai 1267,144 Grata profit 77.342 Nat income >losai 13 Per common aharo: Primary (OH Fully diluted i.OSl Cash dmdands paid: Common warn Profaned: Sent* A too Santa B 1.10 Markat pnca par iharc Common High 26-1/4 Low 19-6/8 Sonoo B Proforrod High 61 Low 44 333.633 102478 8.979 <324.664 96.280 6,184 1.61 1.40 1.10 96 * * 1.00 * 1.10 aaae 1.00 1.10 22-7/8 20-1/8 49 44-1/8 28-3/9 20-3/4 53-12 46-3/4 <280,712 90.880 2,852 52 60 .16 1.00 1.10 28-7/a 22-3/S 62-1/2 46 <231.928 89.483 11.753) 6316,660 100.114 8.138 1.361 i.36 1.46 1.27 1.00 1.10 26-3/8 19-3/4 58-1/2 49 1.00 1.10 31-7'8 22-3/4 68 49-1/8 1366.789 93.016 5.40T 96 86 1.00 1.10 28-12 2414 57 52-U Doc 11. 197 5273.073 74.496 6.600> 1 28 1 26> 100 1 10 25-14 19-58 54-14 44 ll Pintquanarineomaincludes t gam iHWJWillimm.llpar comma han> on cho repurtheee at dabeatem to ntiafr Anuta sinking Ihad requiramtaia. Second quarter incea* wet nduaad by a yasvn<as af 11.72.000 after tas *29 par cemaaaa ihaiei tar aaueaaled c o m mlalad to iQTontooy rtioliitinoo, Third quarter laeeiaa woo rndaead by a pmvuioa of tl.9W.000 after us <1.30 pm naans ihani broom aaaacuudeuhdesuB coruin manufactunn* qonmt Fourth quaittr sdiuatatats laereaasd aftar-tas pasta by appaesimately I2.H7.000 <1.41 por coauaoa aharei. limn adjuatmente included *6.131.000 after-tax mcroooo m profits 11.97 percamnoa than, niated to hitfcet-chan-eannuued pool matfuu. etat by ehanyte in estimates rolttod primarily ta uwentaay obooloo eoaco and eonaia habdiaoa Not inooaao fcr oada of tho fim tinea quanan am imatad by appraumiahr tMOjOOO >S1< pwaaauaaaSbmi Aw n dH aOepoea of UFO la tha bath mam of IIH Nat rame hr 1979 wax lednaad bjr lUSSm IMS par oaouBoa aharai as * itaufe of iho UFO adm wn Fourth quarter adjuauamw imaaaadl after-tax prolix b* approximufy SUSSJDOO <830 par aoawa ohaiai Tharo a4iaounama inchaW a >3.416 IW) aftaMaa mtnaro m profits i* 84 por common Siam iclmad te bebar-thai Umaitd peas marfuu and afttiatmmta ta tha pmnroai Sr dapaanaa and umuiaDm of opwaticm. ctat by aapaaam related m tha curtailment of produnoo to raduco .... --utaumromhqwdtty. lS/l8amdISI8 Tho floaoufi Common Suxk and 1449 CumuUnvo Convonibia Piofanod Steak. Sanaa S, an eradad oa tho Nino York Stock Cxthanqe. Tho 1400 Cuoaahane Camrorahlo lhaftnad Slack. Sonoo A. w ate aaavaiy tndod and no hmcnaal markat pneoo an anilHo. 0007-SWP-03S284 0007-SWP-000116705 Note G -- Capital Stock InusdSians Stuns Strife! Pfifarad Slock-- without par rluB 14 00 CumuUtivt ConwrabU IWtrrtd Stock. Sanat A frt 40 CumuUtivt Cemarufil* PNfcmd Block. Sh im B `inchjdmg 2-300 thartt m 1979 htM ta tmuun' Common Part-- SUSparvahia undudne S62J0S ihsm in 1878 sad 2U04 hum m 1971 Md umusmyi : 300000 15.000.000 ten 70.498 178,748 1421.418 197* 70AM 178.748 S.4ZUIM Theshares of Scrim A and Swift B preferred Mock tie convertible at beat conversion prices of 187.93 and 162.50 par share of common stock, raapactivaly. baaad on a value of $100 par ahara of preferred atoek for thia purpoaa. 1h* holder* of tha preferred atock am antitlsd to one vote for each ahara. Tha company may redeem the Sanaa A preferred atodt at 3100.50 par ahara until Match I960 and at 3100 par Wan thereafter, and the Sanaa B preferred atock at 3101.10 par ahara until December 1900 and at declining amouata to 3100 per ahara in 1601 and thereafter. The aggregate preference of tha preferred atock in involuntary liquidation waa approximately 324.706.000 and 324*28,000 at December 31, 1979 and 1978. raapactivaly. The eateaae of the aggregate price in involuntary liquidation over tha aggregate atated value doae not create any reenricrione on the dietribution of rationed earnings. In October, 1979 the company purchaaed tha 730.000 aharae ilS.W-i of ita cowmen atock hold by Gulf ft Wettern Induetriee, Inc, at a coat of 320,937,800. In December, 1979 the Sfoarwin-William* Pension Plane purchaaed 200,000 Wane of common atock ftvtn the company fcr 36.675,000 at the dosing market price on the data ofsals. An aggregatt of 1.862.477 and 1,844,434 ataarea of common dock, at Decanfear 31,1973 and 1378, raepaelively, were reeerved for coovanion of preferred etodt, convertible subordinated debentures and axareiae of etock optima. Note H -- Net Income par Common Share Primmy cat income per common chare was computed baaad on tha avenge number of ehane outstanding after edjuating net incooM for dividend requirement* of the preferred atock. Fully diluted net income per common shin ino di lution in 1978) wee computed baaed on the average number of aharae outstanding for the year anded Decamber 31.1979 end assumed the convernon of the 6.20$ Convertible Subordinated Debentures 'after adding to net income interest on the debentures net of income taxes', preferred stock, and the exercise of dilutive mode options. Note I -- Income Taxes ThaundufMan1979 Current Reftmdable Deferred Income taxes 1S78 311.899 S 4.130 -- i4.7l0> 4,500 5,316 316399 3 4.736 The company has recognised the deferred income tax liabilitioe and faeneflto reeulting from timing differaneee between finanrinl and tax accounting relating to depredation and other valuation allowances. It is the company's intention to reinvest undistributed earnings of foreign subaidianea; accordingly, no de ferred mean* taxes have been provided thereon At December 31. 1979, such undistributed earnings amounted to appradmatoly 411340.000. The company incurred a net operating lose for tax purpooto in 1978, primarily resulting from tuning dif ferences between financial and tax accounting relating to depredation and die tax afibci of the provision for duporitibn and termination of operations. Refundable income taxes of 34,710300 for 1978 included m other current assets, reeulting from the carryback of that leas to prior yean, were received during 1979. Investment tax endita laccountad for by the flow through method) aggregated 31,483.000 and 33,060,000 for 1979 and 1978. respectively. A raeendUatien of the statutory federal income tax ret* and the effective tax rmte fellows: Statutory tax into Effect of atnA locftl tttflf Invermanr tax audit Foreign tax aredit Foreign operations subject to varying imtMrift ttt HIM Other --net Effective tax ret* 1979 46.0*1 23. 13.91 il3> 1978 48 O'* 1.1 '297i -- 3.0 1.5 47.6*4 239 44 47 70 28 g 0007-SWP-035285 0007-SWP-000116706 Note J -- Business Segments Yarn ended Dtcambar 31.______________________ Veen anded Amvut n. ThouModt of doilor* 1*7* OparW ating ^j iw Income 1*78 OparNat atinf Jain. Income 1977 Oper* Nat au of Salta Income 1975 InsuinM OparNat aunt Salaa Incama ,, 1978 Opar* Nat atinf Sake Tneome 19T3 Oper Nit iitng Paie* Income Coeting* Menufactured product* Non'inanu/kctum! product* 3 39*128 266 754 1334.789 281.027 8 508.3*9 251.273 8483.786 213.389 8479.782 202.433 *432.101 169.401 Coaunia lotali Chemical! Packafuif Praducte Specialty Prodacu Intarnaaanal Ocher 865.180 938.301 102. U3 7.387 93.007 9.324 30.383 1.318 82.739 5.884 ---- 838.818 819.882 84.020 8.427 87107 13.718 40.498 78.909 --a 3 888 2.338 -- 737.872 113.832 6*7.137 822.832 82.380 98* 73.298 1.70* 72.892 41,713 81032 -- 10.228 1.9M m *8 39.440 33.303 38.898 4.021 15.843 3.973 2.804 512 882.1*7 71047 83.922 37.384 88.882 3.732 827 002 3.273 17.388 35*4 3.314 330 397 302 69 301 59 93d 33570 78 010 28.1u6 i#-i)ii > Tii 2 376 3 733 7 812 Safmant total! 81196043 6L08O *1.132550 4704981039086 29533 998*508 47.173 rnmmmmm 1881JM 36,121 3886533 319UJ Prevision for diopootxion and termination of sparationa Catn on aolo of Ashtabula aparation* Maaican ptaa dacaluatwa Cerparata aapanaaa Initiate aspanaa [nesma `kuai bafora income taxes 19-3881 934.427 '18.4341 18.803> '210181 3 8028 7.0481 17.8831 8U1.8MI *3.2521 8.3281 13.1581 824.144 3J52* 5.339> ` 12.226' *33.784 11 7^3 .U'.j 11 >) 8WJ33 naumdi at iallan 1*98 Yaan aadad Dactmbar 31, 1*7* 1*77 1978 i;***> Coacinga *387.771 8398,147 1395.082 8388018 Chamieala 61.658 33538 38009 61034 PatkMiatFmduct* 77*81 79.403 68,133 83084 Spacuity Prcducu 30.787 32028 MdH 28,443 Intaruciauul 4557* 44.731 48020 MOW Olhar -- -- 708 4.8M SacmaM latala 383,323 803.348 884001 874.687 Corporata 120.SU 48.801 1*088 18.72* CoBaalidmadtaula 8704580 8040.100 H13500 88880*8 __ _____ SsenLlasatai* Yaan aadad Dactmbar 31, 1*9* 1*7* 1*77 1*76 I'aMtoal. 83.472 111.043 919081 134003 8.9*0 1,162 ..."2028 7,380 30*9 2,898 7072 0*1 4*7 887 381 3*8 39* 761 1007 108* -- -- -- 42 10014 18088 30082 43,007 IOM 10U 1.338 406 911.9*7 831.888 843.412 ______________Baaass" Yaan andad Dactmbar 11 187* 1076 1977 L976 1 i*Jd' 811.303 2.934 2031 801 1.078 -- *10.787 2.784 2017 ?45 1.323 -- 810.025 2.861 2.023 640 1.038 -- * 7 262 2.369 1 693 647 988 86 18.827 ` 17.928 1S.389 13.048 U) 312 338 424 119.438 111431 113 469 II Ihmnpnnraafihaaa indmaympmaai^prai^KlU^t Thtjmt antal rumli Si. 1976mdnitat a|ta imahtrfir--q-- duck an aim inHtntad in tin ftaarijaar mhd Amuat 31.1*78. Tha adcnin/tjrOitductd 1979 cptnmiaaan cftht Chaaiaiala ml Pabajn* hduai npm by ^rwwifly 77J81XCQ dad 83,340000 unarm aly Dunn* 1*79, Than a j ib a3 inoaandlOT umooo.ii tuned irae U>elmamtt>cr.ala^mratand the irfcrmatun faryeanprvn te 1*79 radaaadad ta aanfm a ilui pnmcnaaaa. Haiaamuaal n d Othar mpmam am Ita Otan Mpnnfcmirm* Company. Tat Otaam Munbmnat famnmdaial Company and Sdnaa aai Ludwif GmbH. 'BapmwSwfcrSeanwaOiiamaniaiaCmiaaiMiiafcrUaTaai* 190*. 1*7* tad1*78 hH taaa tactutad tha t*arat| oaoaa adthe apiaoifwala npairaa ft' natpnenmlaadnaH ha nnhtdire*> larlawQ tha pniiniai oo imu nptnairi maoiaa tar 1*77 Opaaatav moon* tml imna tarn apmna* mata and mptran. ----* --|-- **** " T MemhaUa mmmt. by fmma aaiadt boah aamdandy idaoidad nth Uaaaopamuana and an iBoeaUa Sam ofJou*ly uaa* aaan. Carpwaar ataata (mam primarily ot caak. mnarmtrm. haatauawam propane. piano and amapnamapdmflaiapwpany andarmpiaMaaaai Eapaw ataa. nlttcf hme> adndumt and mlaaio any individual ciiaramm aam aaah iom than 10* ofaaaolutaiad aiaa a unafthaad amomaa Aina* a* yaan maanrad. Opaaaaam iitnbutablt <o tha nunenty manat in tha aaaaaMatad Canadian wbndoan and tha avaqr ta aai oaaaaam lam ataStthaad eampanwa am not ngniScant Intanapaaattnoahra. whahinaaeauntad Aral valutacampaiabhte nonnal. analillitttd namrnar atUa, an an ftithm the foUawim table TSaaavaktfiaUan W iwtarMm TronSia Taut ended Deetmbtr It. 1*78 1*77 1*78 8 MM bW 17.770 1.1*8 8 3080 33518 31107 818 II 1.417 29022 2*783 1203 $ 1.708 32.013 30733 Ml MUM 174819 383J09 <873*3 0007-SWP-035286 >9 0007-SWP-000116707 17 Note K -- Inflation Accounting and Replacement Coat Data (Unaudited) As required by FiiundjJ Accounting Standards Board iFASB) SUtemtnt No. 33. "Financial Reporting sad Changing Pncss", th* company must provide supple mental information of th* afllcts of dunging pries* on our financial atatamante. Tha** disclosure* an in tended to illustrate (ii th# afiacto of changes in ths purchasing powsr of tha dollar; and (3) the aOhet* of ehangaa la apactfte pries* of oomnany raaoureaa. Becausa no conaanaus axists a* to do* maasuramanr of inflation, this experiment require* both aglets to la dioclaead Wa havt alaetad to postpone disclosure ofth* Act of ehangaa in spscifie prices, as parmittad by th* Stataraant, until 1900, dua to th* complatey of tha calculationa. It is eeiential that uaora of financial statacoanta undacstand inhafoot of inflation-adpiatad dau and adjuat thair aaaaasmant of th* data aeootdingly. Conatani Dolan Tha eoniunt dollar dau represents th* historical amounts of cartain revenues and oapanau atatad in dollar* af tha asm* purchasing powsr. Undar this nwaauramant method. historical amnunta of dapracia- tion tzpansa, coat of goods sold and tha ralatad aaasu an adjusted to reflect th* inornate in th* eonaumor pain indox <CPD ainoa tha acqiuaitian data of tha ra- latad smart. DaU paovidad in tha frowyaar summary has ate barn raautad to dollart of avenge 1979 pur chasing powor. Tha FASB nils governing tha presentation of this mfr^rnifriri prohibits i^juitiivthiiBBoiMtttiipnM for tha daooaaa in incoma datarminad under tha eon* tout dollar computation, ptoaomably because th* incnaaas in coats are not deductible fir income tax pur* poets. As a result, tha efihetivo ta* rata fir 1979 riaaa from 47.6 parcant on a historical coat basis to 1,460 percent on a constant dollar basia. Pnrrhaaing Hoar flah A separate disclosure, gain from dsdin* in purchaa- ing power of net amounts owed, ia ate pnmntod. Du* ing pguxii of inflitte, liitaQitiw p^yibli dollar amount (monetary BabiHHm) wifi ha repaid in dollars haring laaa punharing power than whan bor* rowed or incurred. This gain in purcharing power ha* bean calculated baaad on tha company's oat monetary liabilitias during tha yaar, adjusted fir the change in the CPI fir the yaar. Although this amount too not roprtoont actual find* available fir distribution to sudtholdon, it can ho oonridaud tsrapnaant th* bon* fit th* company racoivod in tonne af purchasing power by maintaining tha net UataHty poniticn. Management doa* not use this infinaation to aamm the affict of inflation on th* financial position or net profits of the eompany and malm no uptaeonta boo tha* the inflation adjusted mfirmatian sot firth io Supplemental Sutamant of Consolidated Operations Adjusted for General Inflation (Unaudited) For tin jam ooriod Doombnrll. 1W9 <b tng IPfifiBanl Thmmndt ofdoltaa, mart Sr o*oi Nat ineoma befit* tons. th* income ilatamant Adjustments to raaUli ocau fir th* afileti of ganaml inflation Coat of produets told Sailing, ganmel and administrative oxpanma Nat ineoma befit* tosas adjusted tar general inflation Ineoma to* expanse as reported Nat income (teat) adjusted for gnartl Nat incoma (loaa) adjusted for gonoral inflation, per common there 634.427 29.029 3.473 33.304 1.123 116.399i 1S276> Effective tax rau Gain from doelin* in purchasing powar of not amounta owed Nat Quota at yaar.and adjustad for gonoral inflation Common ehareheidan' equity adjusted forgeneral inflation, par common shara Increase in common sharohoMare" equity after adjustmentforganaral inflation, par common share 3 73.11 S 23.55 Toni h*owmnni md umesaom oapoHt atwood hr sonant i* Sanaa namnood to 12*344000 m I*!* nsSpnonudaaw uuooa aapnoo hoa boon oUocnad harawn am of pndtmo told and nlliat, amoral oat odromonniiio oqwa, o o mu mm with tho pmonuoMam dw potnonr Saandal oostonwnon. Con ofproduno told baa boon ofiumd Sr ehsfifts is ummoiy eoou in odhuoa la ihoronwuw and amotmannoi oxtanoa SaDuir. taiwrai and wlonmonaiiDa wpatwaa hart boon ofimood anly hr Japrocianon 30 L 0007--SWP--035287 0007-SWP-000116708 Five-Year Comparison of Selected Supplementary Financial Data Adjusted for the Effects of General Inflation (Unaudited) metpt pir Ya <add Onwalw 31._______________ 1979 1978 1977 1976 ib tnwecelrib dolkai Ywn wide* Amua 31. 1976 1975 Net sales Cash dividends par common share Market price per common share t year-end Average consumer price index $1,196443 91460,841 91440,903 91439408 .19 -- 263 280 25.16 217.4 21.43 196.4 3247 1814 91.13 170.5 91434.117 11.197492 285 3.04 5047 167:7 31.07 157.4 TheyareaMOmabrSI. WSiik Mm aehnaamiarf upwtewie whld> tme etae leririri w foe fowl jeer endri AimeSl 1978. The company's annual leport on Form 10-K con coat of inventories and costa of products sold being tains specific information with inspect to December 31, 1979 and 1978 replacsment coat of inventories and somewhat gnatar than that reported for financial statement purposes. Replacement ofexatmg plant and productive capacity, and the approximate effect which equipment has bean aflbctad hy the cumulative impact replacement coat would have had on the amputation of inflation over the years. Brower. such inflationary ofcoat ofproducts sold and depredation expanse for the years than ended. The impact of inflation an raw ma terials and other ooats soil result in tha replacement incnaaaa have been pertially oflbet by technological improvements and operating (Adelines, which often remit in tun steed jwoductivity end reduced produotvpb fiQ^fl. Note L -- Diaposition and Tnrmination of Operationa In 1979 the company provided 93.703,000 191.766.000 after tax or 9-33 per common share) for costs related to thaclosing ofcsrtain plants and addi tional txpsnses for antidpatad costa uaoeiatad with previous provisions, this provision reduced inven tory and property, plant and equipment to their net realizable values,while other related costsinerseaad current liabilities. Approximately 92,540,000 of tha provision is indudsd in cost of products sold; 9287.000 in selling, general and administrative expenses; and 9876,000 in costs and expenses, other -- net. Net coats inclined during 1979 totalled 91,770,000. An accrual of 96,113,000 for tha disposi tion of operations remains as of Daeambar 31,1979. During 1978 a provision of81,581,000 for the clos ing of appradmetely 100 campaapawnad stores was offtsc by a 324B9.000 adjustment to the l977 provision for tha diqparitian ofportions of the Coatings, Chemi cals and International isgmsnts. Tha nat iifiact of this oedit and dia prevision for more dosings increased 1978 earnings by 91459,000 (9913.000 sifter tax, or 9.09 per common share), and is Indudsd An costs and itpswssa, othmHOat. Costs incurred during 1978 total led 99,151,000. At December 31, 1979 the remaining esrimsitad liability amounted to 94,180400. The company expects to complete the during and sale of the fodlftiesat various dates through 1981. 0007-SW-035288 ji 0007-SWP-000116709 1 Board of Directors William C. Fine Chmrwt* James A. Attwood Ennnir Via frwdat 4 ChutIniotmnt Offka EquiiabW Lila tann Soaety ofiha Cnnat Sam Keith S. Benson Camera Vaa Mm, .4Wuauraaae 4 Fiona OfMav Natan Company John G. Breen Pmtdtm 4 QuMFmnm-n O/Scw Th* Sbtrwm-WiDiaina Company Robert D. Buzxall PeOnw. Ondinm Sriml afBiwina Mmnnnaen HarvaM Vnivemty WlUaaa J. De Lancey Chatrnm 4 CWfaunae Olffcer RapUkbc Sml Corpontwn AUen C. Hobnae MaamngPotor Janan Day. Rama A hfut. Anaraayi J. Robert Unpack Pmdmu 4 CkafAdmtiuwara Offlar Vatmui City Bank -Claattand) Wffliam G. Mitebd AnSM Central Talaplime A Uutana Corpaanon Patrick & Parker CAamaatfiAeSaaWACftafCpaaaaaOIlfar faifctfHaapafa Cnrpwrvm OfBcera WQUamC. Ptaa Chommn John G. Braen ftwdmr A CVOaUtt Ofikn Tboanae A. Conanaa Saw Vw .PwtiiAw. Warn WUHaa Moooaa SmfpVmAmdau Gaoflbqr L. IMd mt VW Piaaniaii. Spank} ftap Wendell D. GQhmd VW Nuba. CaWapa flwp Christopher Lawtor Vw Pimiinr. Him wfajim/flnp Arthur D. Maine Vw Aaaitair. Jfanet Rmotirrm AlaaRCUUa Vn Prmximd 4 Omani Co o kW CtelwM jRrtfvv CoowayG.Iey Vw Piatiilnti Capon Wanmat Q Omfapmtnt Tbomae R MBdteh Wanner Robert A. Techanaen VitaUndae tntap a AAmiuWan* Saturn Jamas R WaOaoe Va Fnadmt, Gwpanae Cotnlln WIRtam R Bdredga vw Pnaimn. PuMk AgMn CarlBattot ftwOa 0 Owaat Same. Warn ttomaa AmiiN. BM AwdM 0 Omani Manga, Spanty Pndncm Oiwaaat Joseph M. PeVhtoeto MOa 4 Omani Manga. Omni Coatngt Daunt Xdeaard D. Hophkia Ante A Omani Manga. Cowan Daman Andat 4 Oanwt Manga. ChannM* Duma Joaaph P. Maladra FrmAm 4 Qnorwl Manga, CmnrSrian Lsooacd A. Ward AndaM A Omani Manga, Aimmettn AJtemeWW Ouwaa Maqr G. BmUa Vietftmikn A rartnwl Aw. Coaanp Cne f 32 0007-SWP-035289 0007-SWP-000116710 Subsidiaries Brazil -- Sherwin-Williams do Brasil Induatria e Comenao Lida., Sao Paulo* Canada -- The Sherwin-Williams Company of Canada Limited, Montreal -- Rubbsnet Company 'Canada) Limitad, Oravanhuret, Ontario Jamaica -- Sherwin-Williams >Weat Iiidisai Limited. Kingston Mexico -- Compares Sherwin-Williams, SA. di C.V., Mexico City 'Cwuohdamd Joint Ventures Ireland -- FSW Coating Limited. Dublin Japan -- Nippon Sherwin-Williams Chemicals Co, Ltd., Osaka Panama -- Sherwin-Williams da Puiairei, SA, Panama City Licensee* Argentina -- Sherwin-Williams Argentina Industrial y Comatcial. SA. Australia -- Taubmans Proprietary Limitad Bolivia -- Fibrica National da Pinturma "EspintboL* SA. Chile -- Pmtum Andina, SA. Colombia -- Fibrin National da Pintuzaa Shenrin-WxUiama de Colombia, SA. Costa Rica -- Shsrwin-Williams de Costa Rica, SA. Denmark, Norway -- Sadobn ft Hoknblad A/S Dominican Republic -- Acabadot Autoraob-ix Ecuador -- Sherwin-Williams dal Ecuador Fibrica Nadqnal da Ptaturas, SA. B Salvador -- Sherwin-Williams tie Cental America, SA Finland -- O. Y. Sadotin, A3. France -- Astral. SA. -- Corsain. SA. Haiti -- Peintures Ideales, SA Hong Kong-- China Paint Mfc. Co, Ud. IndoieBa -- P.T. Unimaa Chemicals ft Coatings. Ltd. Italy -- Varmlac, SPA Japan -- Nippon Paint Company, Ltd. Necherlanda -- SUtkrea Gresp, N.V. New Zeeland -- Taubmans International (NX). Ltd. Peru -- Sharwa-Williama Panama, SA. Philippu ms -- Shstwin-Wdliame PhjBppinae, Inc South Africa --Advaaga Coating* FTY, Ltd. Spain -- Industries Quimicaa Premier, SA. Switzerland -- Kurt Vogelsang. A.G. L'nitad Kingdom -- Donald Macphmm Gnup, Ltd. Venaruola -- CA. Quimica Intagrada -- CA. Vanacolana da Flgumtoa -- CA. Venootana da natures Warn Germany -- Dsulsche Akzo Coatings Plant* Domestic Anaheim. Californio Bedford Heights. Ohio Chicago, Illinois i6> Cincinnati, Ohio Cleveland, Ohio Cofrbyvillo, Kansas CrisAeld, Maryland Daahhr, Ohio Fulton, Kentucky Qttriinda Tnu Greensboro, North Carolina Hubbard. Ohio Morrow, Georgia Newark. New Jersey North Olmsted. Ohio Oakland. California Richmond. Kentucky San Leandro, California Foreign Gmvanhurst, Canada Kington, Jamaica Mexico City, Mexico Montreal, Canada Panama City, Panama Sfro Paulo, Brazil Virginia. Ireland P'lmd h tKt Graphic Ant Damon 4 Tht Shtrvw-WilUamt Co/npam 0007-SWP-035290 0007-SWP-000116711 ' 0007--SWP-035291 ... . 0007-SWP-000116712