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I i I N21777 __________Sherwin-Williams completed 119 years of doing business in 1905. Our core business is the rnanuftcturiri$wlting and distribution of coatings and related products. We also sell prescriptions, health and beauty aids, cosmetics and general merchandise through 443 Gray Drug and Drugfair stores in 11 states. We sell Sherwin-Wilfiams labeled architectural coatings, industrial finishes, and associated supplies through 1,627 company-operated paint and wallcovenng stores in 48 states. We also manufacture and sell coatings such as Dutch Boy, Martin-Senour, Kem-Tone. plus private label brands to independent dealers, mass merchandisers, and home improvement centers. We iroduce coatings for original equipment manufacturers n a number of industries and special purpose coatings Ior the automotive aftermarket, industrial maintenance, ind traffic paint markets. I 0007-SWP-000116887 Highlights ~"ct'.a-C3 _ :o a' >C"C; cnt share cata Tha SharwIn-WHIiams Company and Subaidfariaa ' - ars ercec Cecercer 3' Net sa es income ce`ore rccme taxes Net ncome Per common share' Net .rcome--full/ oi uted --primary Cash dividends Book va'ue Average shares outstanding*--fully diluted --primary Return on sales Return on common shareholders' equity Elective income tax rate Debt to capitalization Times interest earned Current ratio R&D expenditures Advertising expenditures Number of common shareholders of record Number of employees 1985 $2,194,925 128,638 74,638 1.60 1.61 .46 10.10 46,559,080 46,221,896 3.4% 18.5% 42.0% 23.8% 9.4x 2.0 to 1 $11,117 75,319 11,384 19,458 1984 S2 075,194 116,106 65,006 1 40 1 42 38 8.97 46,591.614 45.849,648 31% 176% 44 0% 29 5% 8 Ox 1 9 to 1 $11,077 66,949 9,777 19.437 1983 SI 973 485 101212 55.412 1 13 1 16 30 812 49.479,576 47,639,238 2.8% 16.6% 453% 32.1% 6.8x 20 to 1 SI 0136 61.358 9,641 19,359 * Ail common share arrourts and per share caia reiecl me effecl of the stock split descnoed in Note 2 to the consolidated financial statements 0007-SHP--035466 1 0007-SWP-000116888 Overview of 1985 The sales increase resulted primary from Paint Stores ana Drug Stores Segments' contributions of 10 percent and 8 percent gains, respectively The Coatings Segment's contnbution to operating income was aided by product quality improvements, con solidation of formulations, product line reduction, and other productivity improvements The Consumer Division exceeded their budget goals in both sales and operating income The Automotive Aftermarket Division exceeded operating income goals The Paint Stores Division out performed the paint industry s gams. This market share gam is an important accomplishment m strengthening and providing for the division's future per formance The Paint Stores Division added 92 stores in 1985 Adding stores in good locations at reasonable cost and shortening the length of time for these new stores to become profitable is a major priority for the division. Paint Stores Division managers conlmue to emphasize an aggressive recruiting and training program to ensure knowl edgeable customer service, a major competitive factor that differentiates us from others in our industry n 1985, our earnings per com Imon share increased to $1 61, primary, from $1.42 in 1984, and to Si 60, fully diluted, compared to $1.40. Net income increased 15 percent to $74,638,000, compared to $65,006,000 in the previous year Net sales, at S2.19 billion, were up 6 percent compared to 1984's $2.08 billion. (Adjusting 1985 and 1984 for the June 1985 Chemicals Division divestiture, net sales would have increased 9 percent.) We im proved our return on common share holders' equity by earning 18 5 percent compared to 17.6 percent for 1984. Gray Drug Fair continued to refine merchandising and operations While their performance lagged industry standards, it is a definite improvement compared to their 1984 results. In 1985, Mr. James P. Mastnan was promoted from senior vice president of marketing to president and general manager of the division Mr Robert J Monck, formerly vice president, mer chandising. became senior vice president of marketing. Mr. Carl A. Bellini, who had been serving as president and general manager, re turned to the position of group vice president, responsible for Drug Stores and Paint Stores. The marketing 0007-SWP--035467 2 0007-SWP-000116889 organization at Gray Orjg "air payed an important ro-e -n the organzat'on 3 1985 sales ard operating pro`it im provements in 1986 there wm be con tinued emphasis on merchandising and marxeting functions with special focus on strengthening field and store opera tions To improve operations for 1986 and beyond Gray Drug Fair added 140 pharmacy mini-computers to their stores and began construction of a Distribution center n Florida as well as upgrading other distribution centers The Consumer Division increased private label sales through a better fo cused. dedicated saies force In De cember. we manufactured our first batch of architectural paint at Con sumer Division s new Baltimore Emulsion plant In June we opened our new 373 000 square foot distribution service center in Hunt Vailey. Mary land In 1986 we will capitalize on Con sumer s repositioning and remerchandismg of Dutch Boy to increase Dutch Boy sales We will have a larger pres ence in mass merchandiser stores homecenter chains, ano hardware stores while actively supporting our independent dealer base We will also continue to cut costs in 1986 and to emphasize consistently higher quality products and efficient distribution both to external customers and the Paint Stores Division, whom the Consumer Div.sion also supplies The Automotive Aftermarket Division began production at our new resin facil ity in Richmond. Kentucky We also adoed 11 sales outlets to their Sherwm-Wilfcams branch network As with the Paint Stores and Drug Stores Segments, it is important for Automo tive Aftermarket to continue to expand channels of distnbution in 1906. The Chemical Coatings Division in creased sales, m large part, with great er penetration into the transportation and metal office furniture business. Once again, we were able to increase operating income through factory effi ciencies and improved working capital management In 1986, Chemical Coatings Division managers will continue to derive benefits from the re structured marketing and sales func tions which are organized into strategic business units The International Group continues to feel the effects of devaluations in the Caribbean and Latin Amenca BAPCO. our Canadian |omt venture, was strong er than in 1984 In January of 1986, the International Group signed a contract with a government agency in the People's Republic of China, establish ing our first licensee there. Tianiin Paint General Factory In other business, in June 1985, we disposed of the majority of the Chemi cals Division to PMC Specialties Group, Inc In December, we completed our new state of the art research and devel opment facility Located m the remod eled Sherwin-Williams warehouse on Canal Road in Cleveland, this corporate research and development facility is dedicated primanly for the Consumer and International technical groups Its lo cation in Cleveland should strengthen communication between the technical and marketing functions so we can deliver faster to the marketplace what is needed Sprayon, a custom aerosol filler for paint, coatings, automotive, industnal, and household products, was estab lished as a separate division this year. Sprayon had been part of the Consum er Division's operations. We were sad dened by the death of Mr Michael Salvaggio. Sprayon's president and gen eral manager Mr Joseph M. Scaminace, who had been vice president of opera tions for the division, is now president and general manager In the first quar ter of 1986, we transferred our DupliColor operations, the manufacture and distnbution of automotive touchup coat ings. to the Sprayon Division. On October 18, the board of di rectors elected Mr. Leigh Carter, vice chairman and chief operating officer of the BFGoodrich Company, to our board of directors 1986 and beyond We continue to believe the balance of the 1980's will be marked by eco nomic uncertainty, and we do not ex pect 1986 to be a strong year eco nomically for the country as a whole Consumers, manufacturers, retailers, and others question the outcome of tax law reform and federal deficit resolu tions, international debt and its impact on our nation's economy, and balance ot trade issues as they affect American businesses' ability to compete Sherwin-Williams has restructured itself during the past six years to be pre pared for a variety of contingencies, and we believe we are positioned to do well in a sluggish economic environment. In 1986, our people will again find plenty of opportunity to test their skills and abilities We remain interested in acquisitions that have the potential to contribute to return on equity, are businesses fam iliar to management, strengthen an existing business position, provide tech nology. or are in distribution-related businesses. Acquisitions will preferably be working capital intensive. In conclusion, our 1985 performance was a respectable one although it fell short of internal expectations, espe cially in sales gains To meet our inter nal objectives, Sherwin-Williams' mana gers are strengthening their resolve to raise standards of performance We are confident that we will continue our progress in 1986. * / John Q Breen, Chairman. ' President, Chiel Executive Officer March 10.1986 0007-SWP-035468 3 0007-SWP-000116890 Sherwi n-WiIHam at a glance by segment Paint Stores Drug Stores Coatings Stcres Divis-cn Gray Drug Fa* Principal Products Sherwin-Williams labeled architectural coatings and industrial `mishes, wallcoverings, floorcovenngs, window treatments, paint sundries, spray equipment. Prescriptions, health and beauty aids, cosmetics, general merchandise. Major Markets Professional painters, contractors, industrial maintenance, home builders, property managers, do-ityourselfers. small-to-medium-sized manufacturers of products requiring factory finish General public Consumer Division Automotive Aftermarket Division Chemical Coatings Division Sorayon Division international Group Sherwin-Williams Canada Sherwm- Williams Mexico" Sherwin-Williams West Indies Sherwin-Williams Brazil' ('unconsolidated) Architectural finishes (under the Sherwin-Williams, Dutch Boy. MartinSenour. Kern-Tone, and pnvate brand labels), special purpose coatings, brushes, rollers, adhesives, labels color cards. Do-it-yourselfers, industrial and commercial maintenance accounts, painting contractors. Automotive refinish products under Sherwin-Williams. Mart'm-Senour. Acme, Rogers, Aclose (factorypacked colors tor Japanese cars) labels Automotive body shops, fleets, body builders, truck onginal equipment Sherwin-Williams labeled industrial finishes for original equipment manufacturers. Business machines, general products, forest products, transportation equipment, coil products, metal furniture, farm and off-road equipment manufacturers/finishers. Custom aerosol filling under pnvate label, Dupli-Color and Sprayon brands for paint and coatings, automotive and industrial, insecticides and household products. Coatings, automotive, industrial, institutional and insecticides markets Architectural coatings, industrial and automotive repaint finishes, paint sundries and a variety of home decorative items Independent pairt3^(Mini^ contractors, automotive body shops, commercial and industrial maintenance accounts, onginal equipment manufacturers and do-ityourselfers Canaral bualnaaa dvlopmn--E'lecwe Patents and lloanaaa are not of material Lead--On June 1 1985 the State of Maryland June 30 '985. the corroany disposed of the mponance in Ihe business of the company in ihe Drcuit Court for Baltimore City. Maryland. majority o` Is Chemicals D'/'sion operations The However, a substantial part of the income of ihe Med a complaint agarist the company alleging Foras New Jersey'ac My a part of the Chemicals Intemalional Group is derived from the license of improper discharge of hazardous substances The Divisor, has neei solo sus.iect to clearance by echnology. trademarks and trade names to other State is seeking vanous forms of relief under the the New Jersey Env^onmental Protector Agency loreign companies Maryland Environmental Protection Acl The Raw materials and fuel auppliea for all segments are generally available n sufficient Financial laauHa of these segments are in cluded on pages 8-9 of this report company has answered the complaint and the suit is in the initial stages of discovery cuantrt es ano from a var ety of sources Number ef emple)race is included on page 1 The company is one of the named defendants Environmental sttslrs--The company has of this report in a civil suit filed in the Twelfth District Court started a corporate-wde program to test under ground storage tanks ana to remove and replace tanks when necessary The company is conducting several clean-ups associated with ciosed-dowr operations The cost of these and PacllWae are listed on page 31 of this report The majority ol the plants are owned by the company The company believes that the various production facilities of the Coatings Segment are adequate to operate at a significantly higher by the Stale of Illinois involving a recycling operation, Cross Brothers. Pembroke, Illinois The stale is seeking various forms of relief under the Illinois Envronmenial Protection Act The suit is in the initial stages of discovery captal expenditures for other environmental volume than m 1985 controls mil not be significant m t 986 Research and dcwlepmant expenditures are Customers and baeklop--The loss of any single described on page 20 Virtually all such activities i customer would not have a materially adverse were sponsored by Ihe company rather than by effect on the business of the company or any customers segmenl Backlog of orders is not significant m me business of any segment of Ihe company I j _____-- ------------------------- 0007-SWP-035469 -- i 4 0007-SWP-000116891 Distribution Through i 627 compan/-operated stores m 48 states Competition Paint and wailpaper stores, mass marketers home centers, independent hardware stores, hardware chains Market s fragmented and highly price, quality and service competitive 443 retail stores -r. Deia//are Ftonda. Indiana Maryland New York. North Carolina Ohio Pennsylvania, Virginia. West Virgtna. and the District of Columoia The Stores Division, independent dealers, mass merchandisers, home centers Drug chains, food stores and mass marketers Customers respond to merchandising, pneing and service More than 1.000 coatings manufacturers at regional and national level Duality, service and pnee are main competitive factors The Sherwin-Williams Company and Subsidiaries Sanonality Seasonal with the ma|or portion of sales occurring in the second and third quarters Seasonal with approximately 28 percent of sales occurring in the fourth qjarter Seasonal with the ma|or portion of sales occurring in the second and third quarters 84 Sherwin-Williams automotive branches, distributors and icobers Division ranks among four ma|or market leaders Quality and service competitive Moderately seasonal The Stores Division and direct sales. Four ma|or competitors with broad product offering and several small companies with niche products. Product technology, quality and service key competitive factors Mass merchandisers, grocery and drug store chains, national and regional food and sanitary supply marketers, electrical construction and general maintenance distribution channels Seven pnmary competitors Volume, technical know-how. facility location, quality/service and control of distribution are key competitive factors Direct sales force, distributors and jobbers Company-operated stores as follows Mexico 75. Jamaica 13, Trinidad 6, Barbados 2, Puerto Rico 13 Many competitors in each foreign market Sherwin-Williams' competitive position is significant only in Mexico and the West indies Price, service and quality sensitive. No significant seasonality No significant seasonality No significant seasonality Everything You Expect From Your Drugstore Gray Drug Fair s adved'S ng theme. 'Everything You Expect From Your Drugstore.' is more than a slogan M is a promise emphasizing our commitment to consistently meet and exceed consumer aerrarcs This commitment is rejectee n what Gray Drjg Fair stores offer selection represented by a variety of merchandise ir a wide range of product categories, value with our pnvate label product line of over 600 items, choice, with our new PIC*3 photofinishing service, quality and service, as reflected by our pharmacy which offers competilively priced prescriptions and generic drugs !or less, and savings, provided by our competitive everyday low prices and weekly specials 'Everything You Expect From Your Drugstore' for almost 450 Gray Drug and Drugfav stores, it's a way of doing business Ask Sherwin-Williams The 'Ask Sherwin-Williams'' advertising and promotion program for our paint stores is targeted at homeowners do-t-yourselfers. and the professional trade -- including painting contractors, builders, plant owners, and architects This comprehensive campaign emphasizes that Sherwin-Williams stores otfer a product selection and knowledgeable service that both the professional and retail customer cannot find anywhere except Sherwin-Williams He Works HardFor YourMoney The new Dutch Boy advertising theme ' He works hard for your money,' clearly po$.tions me orand as one that offers high consumer value Increasingly, product value impacts consumer purchase decisions This new theme line builds on the uniqueness of the Dutch Boy character trademark Over the years consumers have recognized this trademark as a symbol of high quality __ 0007-SWP--035470 5 0007-SWP-000116892 1 985 Operating Review by Segment Operating Highlights for 1 >85 Paint Sloras Stores Division * Sales rose 10 percent and operating profits 15 percent * Gained market share in gallons shipped * Continued focused wholesale marketing programs directed at painting contractors, home builders, property managers, industrial maintenance accounts, and chemical coatings accounts. * Emphasized aggressive training programs to keep pace with new store growth * Remodeled 100 stores, opened 97. relocateo 50. closed 5 Drug Stores Gray Drug Fair * Sales increased 8 percent due to aggressive promotion and improved merchandise mix * Stabilized margin erosion of past two years. I * Completed key management assignments I * Placed in-store pharmacy mini-computers in 140 stores * Remodeled 19 stores, opened 26. relocated 1. closed 6 Coatings Consumer Division * Surpassed budget for both sales and operating income Private label gained the largest sales percent increase. Dutch Boy sales Hat compared to 1984, in part because of repositioning and remerchandising of product line * Engaged in extensive consolidating and reviewing of all product lines for market relevance and for operating and manufacturing efficiencies. Reformulated also for quality upgrade and efficiencies Automotive Aftermarket Division Expanded channels of distribution, including 11 additional Sherwin-Williams branches. Introduced acrylic enamel basecoat/clearcoat system, two-component surfacer [ and two-component sealer for passenger cars. Began production at new resin facility in Richmond, Kentucky. Chemical Coatings Division * External sales increased due to further penetration of transportation and metal office furniture business. * Operating income up 10 percent, in large part because of operating efficiencies. PRODUCTS Left, top to bottom ii ProMar 200 Inferior Latex Flat WaR Paint Is snanrin-WRIama' ffnast quality architectural i product designed tor the protessferiSI painter. lUk ^ TK SBeRnmor TKhrooav PERMACLAD proi&iete'krivsto teMpraducte otter our eustomera.'on average, 2S percent aavtnga over comparabte national brands. Dutch Bey's now MbsHnn system, featuring too original Duteh Boy eharaeter, ends the contusion of point aotectfan tor consumers by communlcetlng the leveleol quality. The Dutch Boy SUPER label te black and goto and seys highest queMy. Our aerytlc anamel baaacomfctoarcoal system mpraeents the moat advanced automotive reflntaMng technology In Pm Indueby. Permacted enables Industrial finisher* to comply with emission standards and cut costs In the process. 6 0007--SWP-035471 0007-SWP-000116893 PYlopmntt for 1986 Paint Stores Sices Di i sic- -^rease ss grcg'am "<-,.jr -igner z'zz-cx .it, sales 'orge a^o iew store opening 'sep `ecus cn srsre'rg eao ;~e >cr sa es /cLrne growth in new siores and rrfzrz ;e ireir p,o' taoli(/ Co-- "ue agg'ess ve 'eo'-i? ng a^c t'a'-mg programs to ensure a consistent source ot q,,al'- ed personnel *or stcre network expansion 3en-coei tCC stores ooen HO ''cca:e 50 close '0 Drug Stores Gray Dr^g Fair Grew sales through refinement of everyday pricing in general merchandise and pra Tracy ana through rew store pregram Continue 'o staD iize gross margins Strengthen *ieid operations human resources structure Gar ostnDut cn efficiencies with opening of 150 CCO square-foot warehouse in Flonca Add pharmacy mini-computers to rest of stores introduce point-of-sale computers n 25 to 50 stores 'or greater customer service ard operating efficiencies Remodel 49 stores open 37 relocate 8 close 4 Coatings Consumer O-vsion Grow private laoel sales through cecca'eo sales staff Capitalize on remercharaised Dutcn Bey line and structuring ot dedicated sales force to increase market share Maintain commitment to formulation ard marufactunog quality control standards Gam aactticmal cost evidenc es .n manufacturing and distribution through product I ne and facility changes Autcmctive Ahermarket Division Coo rue empnasis on expanding incepenoent and branch distribution ExDand lruc< original equipment position Exoand Iranng crgamzation and facilities i Chemical Coatings D vis.on Build sales with continued emphasis on business unit sales structure focusing on niche markets Continue empnasis cn automotive original equipment manufacture coatings for plastics Remain resoens ve to Paint Stores Division's product quality and service needs PRODUCTS Right, top to bottom SuperPaint Interior Flat Latex Wall Paint, our lop-of-tho-Hno consumer paint product, often one coat hiding and hat a ten year warranty. i Customers expect a wide variety of nemo brand product* at Gray Drug and Orugfair stores. We carry the brands customers want the moat and at competitive prices. ! Dutch Boy DIRT FIGHTER features the new silver and blue label and aaya dependable high quality. Marlln-Senotir acrylic enamel basaccal/daarcoat provides a finlah mat exhibits a beautiful wat gloss with improved durability. A significant breakthrough, It virtually eliminates the problems associated with a clear topcoat finish. Unicure offers VOC compliance and cost-effectiveness. For metal coalers desiring a textured finish, Unlcure permits texturing without first baking Hie baeacdaL I 7 j I 0007-SWP-000116894 Business Segments Years ended Dscerr-cer 31 __________ 1985 i 984 19831982198'19801 979`973 Net External Sales Par*S-ores . ... D^gStores..................................... Coalings ................................. Omer.............................................. $ 931,302 672,577 555,749 35,298 3 850.051 623 317 513134 88 692 S 724,374 577.926 484,503 186.682 S 621 032 540.648 490894 199.202 $ 615.434 137860 554.378 229,135 S 582.292 465.740 215.689 S 585.312 414.300 196731 Segment totals . . . . $2,194,925 $2075.194 Sl.973,485 $1,851,776 $1,536,807 $1.263 721 $1.196343 S 575 385 932 170339 SI'32.350 Operating Incoma Paint Stores...................................$ Drugstores ................................... Coatmgs ........................................ Otner.................................................. 64,266 $ 55.866 $ 6,683 82 93,660 76.571 3,509 10,964 2B.767 S 5.853 89067 10,479 13.842 S 13,864 77.728 11,354 16.176 $ 6,895 56,597 7,822 7805 $ 5 779 S (14076> 45 059 23562 39.066 16,247 40.046 21 B79 Segment totals............................... Corporate expenses-net ........ Interest expense ........................... 168,118 (24,250) (15,230) 143.483 (10.843) ri 6.534) 134,166 (15.569) tl 7,385) 116.788 (21.403) (18.954) 87.490 (11,437) (18.332) 76.426 (9523) (1B.552) 61.092 (8290) (19.366) 47849 (16942) 121.318) income before income taxes.... $ 128,638 $ 116.106 $ 101212 S 76.431 $ 57,721 $ 48.351 $ 33.436 S 9.589 Identifiable Aaaeta Paint Stores ................................... Drugstores..................................... Coatings ........................................ Other............................ Segment totals ............................. Corporate ....................................... Consolidated totals....................... $ 257,973 S 228.186 $ 177.905 $ 143.665 $ 166.711 $ 159.342 S 165.694 232,249 208.354 203,347 175,859 172,734 331,104 304,986 299.715 276,564 304.534 306.480 289.137 2,947 43041 53,426 136.001 144,942 142,465 135.507 924,273 231,540 784.567 219,829 734.393 205.450 732.089 156178 788,921 75,517 603.287 160.305 590.338 121,396 $1,055,813 Si .004.396 $ 939.843 S 888,267 $ 664,438 $ 768.592 $ 711,734 $ 179.390 3'0637 123286 613.313 40 486 $ 653.799 Capital Expenditures Pamt Stores ................................... Drugstores..................................... Coatings ......................................... Other................................................ $ Segment totals............................... Corporate ...................................... Consolidatea totals....................... $ 15,870 10,904 24.111 147 S 51,032 7,705 58,737 $ 16.401 13,140 14.828 661 $ 45.030 2 348 47,378 $ 7.163 8 864 11.742 1.487 S 29.256 2.652 31.908 S 5.766 S 9.889 S 5.814 $ 5.366 742 B.947 9,949 6.194 6,413 19,781 10.107 26,492 4.153 40.361 2,711 22.115 1,589 30.645 $ 43.072 $ 23.704 $ 1388 $ 2671 3.267 5 959 9 804 3,764 10.614 16.239 1,2531.035 11.867 $ 17.274 Depreciation Paml Stores ................................... Drugstores..................................... Coatmgs ......................................... Other................................... Segment totals............................... Corporate ....................................... Consolidated totals....................... $ $ 8,012 4,081 10,930 1,13* $ 24.137 2,190 26,327 3 6,927 S 3.348 9.081 3,432 22,788 2,131 24,919 $ 5,716 $ 1.625 8.204 6.699 22.244 1,976 24,220 $ 5,518 $ 888 8,093 6,589 21.088 1,307 22.395 $ 5,853 $ 96 8.331 6,099 5.260 $ 8,463 5,483 5,226 $ 8,171 5,230 20.379 ''TSW*18127 1,289773831512 21*68' $ "1STJft"T*"irer4SB '$ 4,775 8.268 4,883 17.926 18.436 Operating Margin* Paint Stores ................................... Drugstores..................................... Coatings ......................................... Other........................................................ Segment totals............................... 6.9% 1.0% 10.8% 9.9% 6.7% 6 6% 96% 12.3% 6.1% 4 0% 10% 118% 4.9% 59% 22% 2.6% 107% 5.0% 5.5% 2.6% 50% 69% 3.0% 4.8% 1.3% 65% 9.4% 5.0% 10% 62% 7.1% 42% (2 4%) 66% 110% 35% Intersegment transfers are accounted for at values comparable to normal unaffiliated customer sales. ......... ....................... - _ 0007--SWP-035473 ___ 8 0007-SWP-000116895 1985 Comparative Data k | 1 | 1 [ The 9lirwln-Wllllams Company and Subsldiariaa Net external Sales iCS! Operating Ineome 33 2*. 537% IdantHlabla Assets 24 4% 22 0*4 314'a 3> 21 Vi Notes lo Sagmanl Tablaa The Drug Stores Segment consists of the assets and operations of Gray Orug Stores, Inc., which was acquired during October 1981, as well as additional drug stores purchased since that date The Other Segment consists of the Chemicals Division operations, the majority of which were disposed of in June 1985. and Sherwin-Williams Container Corporation, which was disposed of during November 1983 Operanng income is total revenue, including realized profit on intersegment transfers, less operating costs and expenses During 19B4, a change in intersegment transfer values resulted in in creased operating income for the Paint Stores Segment while the Coatings Segment operating income declined due to the effects of the reduced transfer values. Corporate expenses include significant provisions for disposition and termination of operations Identifiable assets by segment include both assets directly identified with those operations and an allocable share of jointly used assets Corporate assets consist pnmarily of cash, investments, Headquarters property, plant and equipment, and certain property under capital leases. Export sales, sales of foreign subsidiaries and sales to any in dividual customer were each less than 10 percent of consoli dated sales to unafniiated customers dunng all years presented Mtftont kMn Voorof Mspttn Paul Stores Drugstores Costings Offal tgao int 1980 Wt Ssgmenl lottos 1988 I4 46 10 - $ 80 Effect of UFO Decree* ItacressS Opening Inewa 19M 1583 1952 1851 '980 1979 II14J 46 46 (5) 51 92 (i) (25) i 17 42 15 134) ' 551.. .. 5 87 * - U-- - 125 121 -- 15 54 82 S 85 5 23 5 45 S235 8282 r 82 Capital expenditures 270% 13 6"i 4104fe 3% 131^9 Intorwgmwt Transfer* Hkn olffolhn 7tnenMDgantxr31. 1188 W 1911 1982 1981 1110 1975 Cottmgi 13142 52973 12712 52325 52807 ms 52148 AHottwr MQINfltl 1 i 255 251 --359 350 318 , ..... SsWMKllDWi 93143 pm 52857 52115 ' 52553 52464 1579 52101 279 $2460 Psprselatlsn Pani Sons 305*4 Druo Stores %415 4 3% Coatngs Other 83% Corporate Our business segments offer customers quality prod ucts such as those baaring the registered trademarks Dutch Boy*, Martin-Senour*. Kern-Tone*. Acme* Rogers*. Glas-Clad*. Perma-Clad*. Dupk-Cotor*. ProMai* 200, Dutch Boy SUPER*. Dutch Soy OlRT FIGHTER* and others Other quality paint products are offered under the trademark SuperPantTM. 0007-SWP-035474 0007-SWP-000116896 Management's Discussion and Analysis of Financial Condition and Rosults of Operations Capftnlzatlori Cottars in Minions 730 Working Capital as a X of Sates Percart Th Shwwln.WIIIInw Company and Subeldlartea 471 435 430 300 32 1 295 239 __ Short-Tarn Debt B Long-Term Oebt Parcenl DataWo- Ca0tokz M SharehoWeraT Equ*y Our Financial Objectives For Tbc Future Maintain a strong balance shaet for financial flexibility with a debt to total rupKaUiatlon ratio (Including capital laaaea) of 30 percent Utniza Inlamally ganarated hinds at our primary sourca of liquidity. Achieve a return on common shareholders' equity of 20 percent Maintain a dividend payout ratio of 30 percent of trailing annual earnInga. 1985* Cash Flow a Net cash flow provided by operations has enabled the company to fund its capital needs without external financing. The company uses external financing In Sherwin-Williams Development Corporation ("SWDC"), an unconsolidated real estate subsidiary, to purchase and develop properties to be leased to the Paint Stores Segment and others. Working Capital No Domestic Short-Term HHH Borrowings Since 1979. a The 1985 current ratio of 2.0, versus 1.9 at the end of 1984, is evidence of effective management of working capital levels. This ratio has been relatively stable since 1979. a The LIFO method ol inventory valuation results in a lower reported current ratio. The current ratio on a RFO basis would have been 22 in 1985,2.1 in 1984 and 2.2 in 1983. a The increase in working capital during 1985 was primarily due to higher inventory levels to support sales gains. Our current cash position and anticipated future cash flow from operations should be sufficient to finance working capital needs. Capital Eapandlturea/Acqutaitlona/DtapoiHlom a Capital expenditures were $58.7 million in 1985 compared to $47.4 mHfion in 1984. excluding fixed assets acquired through acquisitions of $12 million in 1985 and $9.6 million in 1984. a The increase in capital expenditures is primarily attributable to the remodeling or adding to the number of paint and drug stores as well as construction and renovation of certain manufacturing, distribution and research facilities. The disposal of the majority of the operations of the Chemicals Division reduced net fixed assets. Reported capital expenditures do not include SWDC expenditures of $16.0 million. External financing Is not anticipated for 1986 except tor SWDC's real estate activities which are financed with borrowings that are not guaranteed by the parent company. 0007-SWP-035475 ~ 10 Hatum on tales, Assets and Equity Saks Aasan snaienouan Equity Acquations' Sale* OtvasMuraa'Salat Intern* Sales Unas of Credit We have a $1 SO million unused line of credit with a groupofeleven banks This credit agreement was entered into as of August 31, 1983. and expires August 31,1988 No borrowings were outstanding under this line of credit during 1985 or 1984. e SWDC has a $75 million line of credit with a group of four banks. The agreement was entered into as of December 15.1965, and expires December 15.1995 Under a commercial paper program, which is backed by a letter of credit. SWOC may borrow up to $50 million unti December 15.1987. Amounts borrowed by SWDC were $43 million and $35 rmlion at December 31,1985 and 1984, respectively Capital Struetara The Ratio Of Debt (Including Capital Leases) To Total Capitalization Was 23.8% At The End Of 1985 Compared To 29.5% At The End Of 1984. This Ratio Has Steadily Improved Since 1978. The improvement in this ratio since 1978 resulted from improved profitability, debt repurchases, conversions of 6.25 percent convertible subordinated debentures into common stock, and other reductions in long-term debt, offset to same extent by repurchases of our common stock. Total debt (including capital leases) was $145.4 million at December 31.1985, and $168.9 millon at December 31,1984. At December 31.1978, Iota! debt amounted to $253.1 million. The decrease in total debt during 1985 is primarily attributable to planned reductions of long-term debt outstanding. Intweat/FIxed Charge Coverage e We have Improved ourinterest coverage to 9.4 limes m 1965, from 8.0 times in 1984, and 6.8 times in 1983. Fixed charge coverage (coverage of total rent expense and interest) of 2.3 times in 19B5,2.4 times m 1984, and 2.3 times in 1983 has remained relatively stable as improved profitability has kept pace with the rent expense increases related to the paint and drug store expansion programs. Dividends This Is The Seventh Consecutive Year We Have Increased The Dividend As A Result Of The Company's Improved Performance. The Divi dend Has Increased At A Com pounded Rate Of 31% Since 1979. The company's improved financial condition since 1978 allowed for the reinstatement of the dividend in 1979 at a quarterly rate of $.01875 per share and subsequent increases to a quarterly rate of $.115 per share during 1985. The board of directors, at a meeting held February 18,1986, declared a quarterly dividend of $.125 per share and a two-forone stock split (see Note 2). Our dividend payout ratio in 1965 was 32.9 percent of trailing annual earnings. 0007--SWP-035476 11 0007-SWP-000116898 Pre-Tax Ineama/ Attar-Tax Ineama D^ars m Millions *c <29 a-- Kamlnga par Common Mara Oofor* <Fully DOted) __ ' 75 Pre-Tax I After-'bx D Dvtdends I Rmw mk I EamniQs Rasults of Operations 1985 vs. 1984 NatSalaa Net Sales Increased 5.8% In 1985. Excluding The Divested Chemicals Division's Net Sales, The Increase Was 8.7%. a The Paint Stores and Drug Stores Segments, with sales gams of 9.6 percent and 7 9 percent respectively, compared to 1964, contributed most significantly to the sales increase. a The Paint Stores and Drug Stores Segments' sales gains resulted primanly from aggressive promotional activity and an increased number of stores. a The Coatings Segments sales increased 6.3 percent. Sales gams in this segment were led by the Automotive Aftermarket Division. The Coatings Segment's sales during 1985 were favorably impacted by the acquisition of the Dupli-Cotor operations. a Sales gams in the three core business segments were partially offset by a decline in sales of the Other Segment. This decline is due to the disposition of the maiorily of the Chemicals Division operations during June 1985. Gross Profit s Gross profit margins increased to 36.1 percent in 1965 from 34.8 percent in 1964 Consolidated gross profit was $793.3 million in 1985 compared to $722.4 million in 1984, an increase of 9.8 percent a The improved gross profit is largely attnbutable to the Paint Stores and Coatings Segments. The Paint Stores Segment contnbuted through sales gains and price increases: the Coatings Segment, through higher production levels and related cost reductions. These gross profit gains were partially offset by declines in gross margin levels m the Drug Stores Segment resulting from the price effects of heavy promotions used to generate higher volume. Setting, General and Administrative Expense* a SQ&A expenses increased as a percentage of sales to 29.7 percent from 28.9 percent in 1984. Increased SG&A expenses relate pnmanly to the Paint Stores and Drug Stores Segments which continue to achieve sales gains through increased promotional activities and the addition ol new stores. a General and administrative costs have increased only modestly as a result of planned cost containment strategies. The Increase in SG&A expenses as a percentage of sales over 1984 also reflects the effects of the disposition of the majority of the Chemicals Division operations whose setting, general and administrative expenses were a significantly lower percentage of sales as compared to consolidated totals. Investment Income/Interest Expense Investment income decreased to $112 million in 1985 from $13.4 million in 1984, primarily due to lower average investment levels and lower income yields. However, after-tax investment income was approximately equal to the 1984 level due lo increased use of tax advantaged investments in 1965. Interest expense declined from $16.5 million in 1984 to $152 million in 1985, reflecting continued conversions of 6.25 percent convertible subordinated debentures into common stock and other planned reductions in long-term debt 0007--SWP-035477 12 0007-SWP-000116899 Quarterly Comman Stock Meaa and Ohrtdanda Menrio-WlMame Sleek Performances Vs. SAP SOO erceot 5*9 933 '>i- *985 N! Income HHNet Income Increased i 14.8% From 1984. c Net income for 19B5 and 1984 includes provisions established for the disposition and termination of certain operations a improved operating income levels in the Coatings Segment contributed significantly to higher net income levels due primarily to improved gross margins in both the Consumer and Automotive Aftermarket Divisions The Coatings Segment's results were also favorably affected by profils from the Dupli-Color operations. a The Paint Stores and Drug Stores Segments also contributed to the net income improvements, principally because of sales gains Operating income gams in the three core business segments were partially offset by a decline in the Other Segment's operating income resulting from the disposition of the majority of the Chemicals Division operations a A reduced effective income tax rate for 1985 compared to 1984 also had a favorable impact on consolidated net income. Effects of Inflation Supplementary information regarding the impact of inflation upon the company is presented on pages 26 and 27 of this report Results of Operations 1984 vs. 1983 * Net Salsa Consolidated net sales increased 5.2 percent primarily from the Paint Stores Segment's sales increase of 17 3 percent. The Drug Stores and Coatings Segments' sales increased 7.9 percent and 5 9 percent, respectively. The Other Segment's sales decline is primarily attributable to the disposition of Sherwin-Williams Container Corporation during November 1983 Groas Profit Gross profit margins increased to 34 8 percent in 1984 from 33.8 percent in 1983 Consolidated gross profit increased 8.3 percent a The Paint Stores Segment's gross profit gams resulted from higher sales volume, related purchasing and distribution cost efficiencies, and a reduction in the transfer value on products supplied by the Coatings Segment. The Drug Stores Segment's gross margins weakened because of the price effect of heavy promotions used to generate higher sales volume, distribution Inefficiencies and increased inventory shrinkage. a The Coatings Segment's gross margin decline resulted from costs associated with reducing inventories and the effect of the reduced transfer values on products supplied to the Paint Stores Segment Selling, General and Administrative Expenses SG&A expenses increased $41 5 million compared to 1983 and increased as a percentage of sales to 28.9 percent from 28 3 percent in 1983. a Higher operating costs and intensive advertising and promotion expenditures lo support sales gains in the Drug Stores, Paint Stores and Coatings Segments were the mam conlnbutors to the increased SG&A expenditures. e The increase in SG&Aexpense as a percentage of sales reflects the effects of the disposition of Sherwin-Williams Container Corporation, whose SG&A expenses were a significantly lower percentage of sales. Investment Income/lnterest Expense e Investment income increased from $11.1 million in 1983 to $13 4 million m 1984 due primarily to a higher average yield. Interest expense declined $851 thousand to $16 5 million in 1984, reflecting the conversions of 625 percent convertible subordinated debentures into common stock and other reductions in long-term debt Net Income e Net income increased to $65.0 million, an increase of 17.3 percent Net income for 1984 and 1983 includes provisions established for the disposition and termination of certain operations. e The Paint Stores Segment was the mam contributor to the profit increase, partialy offset by reductions in the Coatings Segment's results due to the change in transfer value. The effective tax rale decreased to 44.0 percent from 45.3 percent in 1983. 0007--SWP--035478 13 0007-SWP-000116900 Financial Summary Millions of dollars, except per share data Years ended December 31. IMS 1984 Operation* Net sales .............................................. Cost of goods sold ............................... Selling and administrative expenses .... Interest expense .................................... Income before income taxes................. Income taxes .......................................... Net income .................................................. Net cash flow provided by operations ... Flnwnelal PoaiUon $ 2,195 1,402 653 IS 129 54 rs 21 t 2.075 1.353 599 17 116 51 65 74 1,973 1.307 558 17 101 46 55 56 1,852 1,261 507 19 76 33 43 84 1.537 1.070 402 18 57 26 31 7 $ 1,264 868 344 19 48 23 25 79 $ 1.196 829 323 19 33 16 17 104 $ 1.132 795 312 21 TO 5 5 ____ (9) Inventories .............................................. Accounts receivable -- net ................... Working capital ...................................... Property, plant and equipment -- net ... Total assets............................................ Long-term debt ...................................... Common shareholders' equity ................ Total shareholders'equity ..................... Per Common Wwi Dots (A) $ 367 164 372 230 1,056 14S 466 468 l 338 157 344 221 1,004 169 404 404 332 $ 299 $ 335 $ 237 141 133 132 131 340 331 297 312 199 225 240 211 940 888 864 769 175 196 230 213 370 334 284 263 371 349 305 287 242 S 244 126 135 323 317 204 210 712 654 234 242 243 243 268 268 Average shares outstanding (thousands). Book value -- fully diluted..................... -- primary............................... Net income -- fully diluted..................... -- primary ........................... Cash dividends ...................................... Financial Botfee 46,222 $ lOtIO 10.10 1.60 1.61 46 45.850 8.88 8.97 1.40 1.42 .38 47.639 7.96 B.12 1.13 1.16 .30 41,807 $ 7.33 7.59 .89 1.01 25 39,635 $ 690 7.17 .68 77 20 39,070 $ 6.45 669 53 .61 .15 42,327 43,188 $ 6.15 ! I 5.62 6.25 5.62 .36 .09 .39 .09 01875 Return on sales...................................... Asset turnover........................................ Return on assets.................................... Return on equity -- fully diluted (B)........ -- pnmary(B)............. Dividend payout ratio ............................. Debt to capitalization............................... Current ratio --.................................... Times merest earned (C) ..................... Working capital to sales ......................... Effective income tax rale ....................... Oowerol 3.4% 2.1a 7.1% 16.3% 164% 264% 234% 2.0 to 1 9.4a 164% 42.0% 3.1% 2.1 x 6.5% 17.3% 176% 26.5% 295% 1.9 to 1 aox 16.6% 44.0% 2.8% 22* 5.9% 15.4% 16.6% 25.1% 32.1% 2.0 to 1 6.8x 172% 45.3% 23% 2.1 x 46% 13.4% 14.8% 25.0% 360% 22 to 1 5.0x 17.9% 43.8% 2.0% 1x 3.6% 102% 11.8% 26.1% 43.0% 2.0 tot 42x 19.3% 45.6% 2.0% 1.7x 32% 8.5% 9.8% 24.6% 435% 2.3 tot 3.6x 24.7% 485% 1.5% 1.8x 2.5% 6.1% 6.8% 4.3% 47.1% 2.9 to 1 2.7x 27.0% 47.7% .4% 1.8x .8% 1.8% 1.8% 48.6% 3.6 to 1 1.5x 26.0% 478% Capital expenditures............................... Research and development................... Advertising.............................................. Depredation and amortization................ Number of shareholders: Preferred ............................................ Common ............................................ Number of employees ........................... Sales per employee ........................-- Sales per dollar of assets $ 59 $ 47 $ 32 11 11 10 75 69 61 26 25 24 115*4 1MM $112603 2.08 9.777 19.437 $106,765 2.07 40 9,641 19,359 $101,941 2.10 31 9 52 22 557 8.590 21.101 $87,758 2.08 $ 43 10 43 22 750 8658 23507 $65,377 1.78 $ 24 9 29 20 855 8.688 16,808 $75,186 1.64 $ 12 7 21 19 951 9.796 16.872 $70,907 1.6 $ 17 7 26 18 991 10,611 18.015 $62,856 173 (A) A* common share amounts and per sharedata reflect thestreet ol the stock spM described in Note 2 lo the consolidated financial statements. (0) Baaed on common shareholders' equrty at beginning of yeer. (C) Ratio of pre-tax Income before interest expense lo Merest expense. This summary should be read in oor^unction wift tie linancfel statements and notes on pages 16-29 oMNa report 0007--SWP--035479 14 0007-SWP-000116901 Report of Management Shareholders The Sherwin-Williams Company We have prepared the accompanying consolidated financial statements and related information included herein for the years ended December 31,1985,1984 and 1983. The opinion of Ernst & Whinney, the company's independent auditors, on those financial statements is included. The primary responsibility for the integrity of the financial information included in this annual report rests with management. This information is prepared in accordance with generally accepted accounting principles, based upon our best estimates and judgments and giving due consideration to materiality. The company maintains accounting and control systems which are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and which produce records adequate for preparation of financial information, there are limits inherent in all systems of internal control based on the recognition that the cost of such systems should not exceed the benefits to be derived. We believe our system provides this appropnate balance. The board of directors pursues its responsibility for these financial statements through the Audit Committee, composed exclusively of outside directors. The committee meets periodically with management, internal auditors and our independent auditors to discuss the adequacy of financial controls, the quality of financial reporting and the nature, extent and results of the audit effort. Both the internal auditors and independent auditors have private and confidential access to the Audit Committee at all times. J G. Breen. Chairman, President, Chiel Executive Officer TA Commee Senior Vice President, Finance Chief Financial Officer Report of Ernst A Whinney, Independent Auditors Shareholders and Board of Directors The Sherwin-Williams Company Cleveland, Ohio We have examined the consolidated financial statements of The Sherwin-Williams Company and subsidiaries listed in Item 14(a) of the Index on page 33. Cfur eMmlriattcHiis were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary tn the circumstances. In our opinion, the consolidated financial statements listed in Item 14(a) of the Index present fairly the consolidated financial position of The Sherwin-Williams Company and subsidiaries at December 31,19&S, 1984 and 1983, and the consolidated results..of their operations and changes in financial position for each of the three years in the period ended December 31.1985, in conformity with generally accepted accounting principles applied on a consistent basis. Cleveland, Ohio January 31,1966, except for Note 2. as to vAiich the date is February 18.1966 0007-SWP-03 5480 ------- 15 0007-SWP-000116902 Statements of Consolidated Income Thousands of dollars, except per share data The Sharwin-Williams Company and SuMdlarlaa Years ended December 31. Net sales.......................................................................... 1985 1984 $2,075,194 1983 $1,973,485 Costs and expenses; Cost of goods sold....................................................................... , Selling, general and administrative expenses....................... .................. Interest expense......................................................................... Interest and net investment income ................................... Other.............................................................................................. .................. Income before income taxes............................................................. . Income taxes......................................................................................... . Net income .................. ............................................... .......................... .................... 652,851 (11,185) 7,770 2,066^87 $ 74,638 1,352,800 599,115 16,534 (13,448) 4,087 1,959,088 116,106 51,100 $ 65,006 1,306,712 557,643 17,385 (11.081) 1,614 1,872,273 101.212 45,800 $ 55,412 Net income per common share:* Fully diluted...................................................................................... Primary........................................................................................... .. $ 1.40 $ 1.13 $ 1.42 $ 1.16 * Per share data reflects the effect of the slock split described in Note 2 See notes to consolidated hnanoal statements 0007-SWP--035481 16 0007-SWP-000116903 Consolidated Balance Sheets Thousands of dollars Th* Sharwln-Willlama Company wid Subaldlariaa December 31. Assets Currenl assets Cash and short-lerm investments................................................. ..................... Accounts receivable, less allowance............................................ .................... Inventories: Finished goods........................................................................... Work in process and raw materials......................................... Other current assets................................................... ..................... 1985 $ 170,025 184,116 366,614 47,309 1984 $ 166,233 157,486 301,795 35,978 337,773 48,020 1983 $ 160.407 141.356 294,305 37,600 331,905 42.866 Total current assets.......................................................................... .. 709,512 676,534 Other assets.................................................................................... .... Property, plant and equipment Land ....................... .................................................. ........................ Buildings............................................................................................ Machinery and equipment............................................................. Construction in progress ................................................................ Less allowances for depreciation and amortization.................. .................... Total assets............................................................................... .......... Liabilities and Shareholders' Equity Current liabilities Accounts payable............................................................................. Compensation and taxes withheld .............................................. .................... Current portion of long-term debt................................................. .................... Other accruals.................................................................................. Accrued taxes................................................................ .. Total current liabilities.......................................................................... Long-term debt.................................................................................... , Deferred income taxes....................................................................... Other long-term liabilities.............................................. ...................... Shareholders' equity Capital stock: Serial preferred............................................................................. Common...................................................................................... Other capital............................................................................................................ Retained earnings.............................................................................. Cumulative foreign currency translation adjustment..................................... Treasury stock, at cost................................................................ .. .................... Total shareholders' equity..................................................................................... Total liabilities and shareholders' equity............................................................ 9,839 426,102 195,934 230,168 48,224 9,084 153,281 (12*52) 525,850 (50*63) 465,367 $1,055,613 73,739 9558 108513 309,065 11,702 438,638 217,493 221.145 $1,004,396 $ 183,938 48,726 11,760 97,098 23.737 365,259 168.878 29,489 36,630 -- 25,852 145,402 305,175 (12,530) 463,899 (59,759) 404,140 $1,004,396 64.426 9,247 112579 279,243 7,362 408,431 209,548 198,883 $ 939,843 $ 161,953 50,913 13,089 90,486 20,418 336,059 175,307 26,069 30,638 386 158,364 6,220 257,527 (11.741) 410.756 (39,786) 370.970 $ 939,843 See notes to consolidated financial statements. 0007-SWP-035482 0007-SWP-000116904 Statements of Changes in Consolidated Financial Position Thousands of dollars TIm Shwwln-Willlsmi Company and Subaidlarlaa Years ended December 31. Cash provided by (used for) operations: Net income.......................................................................................................... Non-cash charges (credits) to net income: Depreciation and amortization................................................ ................... Equity in losses of affiliates......................................................................... Deferred income taxes................................................................................. Disposition of noncurrent assets .............................................................. Amortization of intangible assets................................................................ (Increase) decrease in current items............................................................. Capital expenditures......................................................................................... Reductions in long-term debt and lease obligations ..................................................................................................... Dthar..................................................................................... .. Net cash flow provided by operations................................................................ Cash invested, dlstnbuted and other Cash dividends.................................................................................................... Increase in current items from business acquisitions..............................., Noncurrent assets from business acquisitions........................................... , Net book value of noncurrent assets associated with dispositions-------Repurchases of treasury stock.................................................................. ...... Investment in Canadian joint venture............................................................. , Other....................................................................................................................... Cash invested, distnbuted and other................................................................. Net increase in cash and short-term investments......................................... . Cash and short-term investments: Beginning of the year......................................................................................... . End of the year............. .................................................................................... .. (Increase) decrease in current items: Accounts receivable............................................................................... ......... Inventories............................................................................................................. Other current assets........................................................................................... Accounts payable................................................................................................ Compensation and taxes withheld................................................................. Current portion of long-term debt.................................................................... Other accruals..................................................................................................... Accrued taxes................................................................................................. (Increase) decrease in current items.................. ............................................ .. Sea notes to consolidated financial statements. 1985 1984 1963 $ 74,838 26,327 3,718 4,351 16,460 2,730 (22,470) (50,737) (21,355) (5,070) 20,505 $ 65,006 24,919 5,020 4,342 4,125 2,633 7,814 (47,378) (4,521) 12,366 74,326 $ 55,412 24,220 -- (3.997) 5,044 2,325 17,036 (31,908) (12,800) 356 55,688 (21,004) (1.071) (1,522) 7,433 -- (379) (90) (10,793) 3,792 160^33 $170,025 (17,211) (6,566) (16,372) -- (20,669) (14,137) 6.453 (68,502) 5,826 160.407 $166,233 (14,077) (4,557) (6,190) 17,336 (29,013) -- 1,756 (34,745) 20,943 139,464 $160,407 $ (0,030) (28,041) 711 0,082 (502) (2.878) (1.810) 8,525 $ (23,549) $(16,130) (5668) (5,154) 21,965 (2.187) (1.329) 6.612 3,319 $ 1,248 $ (8,096) (32,597) 2,730 23,510 4,567 3.072 17,031 2,262 $ 12,479 0007-SWP--035483 18 0007-SWP-000116905 Statements of Consolidated Shareholders' Equity Tnojsands ul doilais. Th* Sherwiii-ffilliams Company and Subaidiariai Balance at January 1.1983........................................ ... Two-for-one stock split .............................................. Treasury stock acquired/reltred................................ Common stock issued................................................. Net income.................................................................... Cash dividends' Series A preferred stock--$4 00 per share......... Series B preferred stock--$i 10 per share......... Common stock--$.30 per share'.......................... Current year translation adiustment.......................... Balance at December 31.1983 ................................ Treasury stock acquired/retired................................ Common stock issued ................................................. Net income.................................................................... Cash dividends Series A preferred stock--$1 00 per share......... Common stock--$38 per share*.......................... Reduction m par value of common stock............... Current year translation adjustment.......................... Balance at December 31,1984 ................... .......... .. Common stock issued................................................. Net income................................................................... Cash dividends on common stock--$ 46 per share*.......................... Current year translation adjustment.......................... Balance at December 31.1985 ................, Serial Preferred Stock $ 5.521 (78) (5.057) Common Stock $ 73.552 74.782 -- 10.030 Other Capital Retained Earnings $ 12,728 (12,824) -- 6,316 $279,103 (61,958) (30) (923) 55,412 Cumulative Translation Adjustment $ (9,987) -- -- -- Treasury Stock ${1270'85) 4 -- (28,905) 1,204 -- 386 (13) (373) -- -- -- -- 158,364 -- 2,210 -- -- -- -- 6.220 -- 4.360 (102) (107) (13,868) -- 257,527 (18) (129) 65,006 -- -- -- \ 1,754) (11.741) -- - -- -- -- -- (39,706) (20,638) 665 -- ---- (ID -- -- (17,200) -- (134,822) 134,822 -- ------ -- -- -- (789) -- -- -- -- 25.852 520 --M. 145.402 7,870 305,175 -- 74,638 (12,530) -- -- (59,759) (724) -- -- (21,064) -- -- ------ (22) -- $ -....' S 26,372 S153.2B1 $358,749 $(12,552) $(60,483) Pei share data refleols the effect of the s Io c k split laser Bed in Note 2 See notes to consolidatec financial statements -.. '.................. ...-- 19 0007-SWP-035484 0007-SWP-000116906 Notes to Consolidated Financial Statements TheSherwin-wmieme Company and Subsidiaries 1 Years ended December 31.1985.1984 and 1983 Note 1 -- Significant Accounting Policies Consolidation. The consolidated financial statements include all significant subsidianes. Inter-company accounts and transactions have been eliminated. Short-term investments. Short-term investments are stated at the lower of aggregate cost or market value. Properly, plant & equipment Property, plant and equipment is stated on the basis of cost. Depreciation is provided principally by the straight-line method. The major classes of assets and ranges of depreciation rates are as follows: Buildings....................................................................... Machinery and equipment...................................................... Furniture and fixtures.............................................................. Automobiles and trucks....................... ........... ......... . 2%-6%% 4%-20% 5%-20% 1Q%-33%% intangibles. Intangible assets purchased in business acquisitions are amortized over the expected period of benefit Research and development costs. All research and development costs are charged to operations, and were $11,117,000, $11,077,000 and $10,136,000 for 1985,1984 and 1983. respectively. Net income per common share. Fully diluted net income per common share was computed based on the average number of shares outstanding after adjustment for the effect of the two-for-one stock split and assuming the conversion of the preferred stock (in 1984 and 1983) and 6.25% Convertible Subordinated Debentures (after adding to net income interest on the debentures net of income taxes) and the exercise of dilutive stock options. Primary net income per common share was computed based on the average number of common shares and common share equivalents outstanding during the year after adjusting net income for dividend requirements of the preferred stock. Reclassification. Certain amounts in the 1984 and 1983 financial statements have been reclassified to conform with the 1985 presentation. Note 2-Stock Split On February 18,1966, the company's board of directors authorized a two-for-one split of the common stock effected in the form of a 100 percent stock dividend to be distributed on March 31,1986, to holders of record on February 29, 1986. Accordingly, ail numbers of common shares and per share data have been restated to reflect the stock split The par value of the additional shares of common stock issued in connection with the stock split will be credited to common stock and a like amount charged to other capital in 1986. Note 3--Inventories Inventories are stated at the lower of cost or market. Cost is determined principally on the last-in, first-out (LlFO) method which provides a better matching of current costs and revenues. The following presents the effect on inventories, net income and net income per common share had the company used the FIFO and average cost methods of inventory valuation adjusted for income taxes at the statutory rate and assuming no other adjustments. This information is presented to enable the reader to make comparisons with companies using the FIFO method of inventory valuation. Thousands ofdollars. exceptper share data Yean ended December 31. IMS 1964 1963 Percentage of total inventories on UFO... Excess of FIFO and average cost over UFO................................................ Reduction of net Income due to UFO .... Reduction of net income per common share due to LIFO................................... 97% S65.112 3.205 07 99% S62.2B7 3,705 08 99% $55,425 1218 03 During each year certain inventories were reduced. These reductions resulted in liquidations of LIFO inventories carried at the lower costs of prior years, as compared with current year costs. The effect of these liquidations increased net income by $235,000 ($.01 per common share). $838,000 ($.02 per common share) and $2,208,000 ($.05 per common share) in 1985,1984 and 1983, respectively. Note 4--Acquisition* and Dlapoaftianii During the three year period ended December 31,1985, the company purchased various retail paint and drug stores, as well as certain paint manufacturers. Assets purchased consisted primarily of Inventory, accounts receivable and fixed assets. The results of operations of these businesses since the dates of acquisition were not material to consolidated results. The company received cash and other securities approximating net book value in November 1983 for Sherwin-Williams Container Corporation (a wholly-owned subsidiary) and in June 1985 for the majority of its Chemicals Division operations. The operations of these entities have been inducted in the company's Other Segment through their respective disposition dates. The net effect of these dispositions was not material to consolidated results of operations. | | 0007-SWP-035485 20 0007-SWP-000116907 Note 5--Income Taxes Thousands ofdollars The components ol income belore income taxes consist ol the following Domestic....................................... Foreign............................................ Total income before income taxes Years ended December 31. IMS 1964 1983 $122,453 $113,067 $ 96.79B 6.185 3.039 4414 SI 28.638 $116,106 $101,212 Not* 6--Retirement Benefits Substantially all employees of the company who meet certain requirements as to age and service participate in nonconlributory pension plans. The company generally funds pension costs accrued. Effective January 1,1984, the company established a defined contnbution pension plan for designated salaried employees hired on or after that date. Additionally, the The components ol mcome tax expense are as follows Current Federal....................................... Slate and local........................... Foreign....................................... S 39 366 $ 39.439 5.800 6.100 4483 1519 49.649 46.758 $ 41.024 7,200 1.573 49,797 company's salaried employees' retirement plan (a defined benefit pension plan) was amended to enable participating employees to make an irrevocable election to transfer into a defined contribution pension plan on July 1.1984, and receive full credit for their respective accrued benefits in this defined benefit plan. Deferred Federal....................................... Foreign..............................-- . Total income tax expense.................... 4.351 -- 4.349 (7) (3.973) (24) 4.351 4.342 (3.997) S 54.000 $ 51,100 $ 45.800 Pension expense for all company-sponsored plans, which for certain defined benefit pension plans included normal cost, interest on unfunded prior service costs and amortization of unfunded prior service costs over a period of 10 to 30 years, was $3,262,000, $2,615,000 and $13,248,000 for 1985,1984 and 1983, respectively. Pension The company has recognized the deferred income tax liabilities and benefits resulting Irom timing differences between financial and tax accounting, relating primarily to depreciation and other valuation allowances. It is the company's intention to reinvest undistributed earnings of foreign subsidiaries: accordingly, no deferred income taxes have been provided thereon. At December 31,1985, such undistributed earnings amounted to $1,712,000. Investment tax credits {accounted for by the flow-thfough method) aggregated $3,354,000, $2,655,000, and $1,641,000 for 1985.1984 and 1983, respectively. The source and deferred tax effect of timing differences is as follows: Thousands ofdollars Depreciation................................................ Disposition and termination of operations............................................ Revenue recognized on installment sale basis............................. Other items (each less than 5% of the computed "expected" tax amount) .... Years ended December 31, IMS 1984 1983 $5,666 S 5.047 S 4.640 (5.585) (612) (2.609) 1.040 790 (4.063) 3.230 (883) (1.965) S 4,351 $4,342 $00997) expense included provisions of $8,000,000 in 1985 and $3,500,000 in 1984 for the company's defined contribution pension plans. Pension expense for 1985 and 1984 included credits resulting from the effects of the modification to the salaried employees' retirement plan, favorable fund management experience and, for 1984, changes in actuarial assumptions. In addition, the company contributed $866,000, $912,000 and $1,166,000 to various multiemployer union retirement plans in 1985,1984 and 1983, respectively. The company is presently unable to determine its respective share of either the accumulated plan benefits or net assets available for benefits under the union plans. Actuarial information for the company's defined benefit pension plans as of the latest valuation date is presented below: Thousands otdollars Actuarial present value of accumulated plan benefits' Vested....................................... Non-vested ............................. January 1, 19M 1984 1983 $216912 $210,676 $214,912 6383 9870 13.169 A reconciliation of the statutory federal income tax rate and the effective tax rate follows: _____ Yean ended December 31. IMS 1984 1983 Net assets available for benefits... Weighted average assumed rate of return on accumulated plan benefits............... .......................... $223,095 $220246 $228,081 $336,548 $339,151 $300,070 85% 8.5% 80% Statutory tax rate............................................ 460% 46.0% Effect of State and local taxes.............................. Investment tax credrt.............................. Permanent differences where the tax bases of certain assets and liabilities (26) 28 38 (23) (16) In addition to providing pension benefits, the company provides certain health care and life insurance benefits under company-sponsored plans for retired employees. Substantially all of the company's employees who are not drfler from Iheir bases for financial members of a collective bargaining unit are eligible for reporting purposes . ............................. (25) (2-4) (23) these benefits upon retirement. The cost of these benefits i Other- net.................. .............................. LLSi- <-n -LSI for both active and retired employees is recognized as Effective tax rate............... .............................. 420% 44 0% 4531 claims are incurred and amounted to $24,867,000 and $24,583,000 for 1985 and 1984, respectively. There were 14,107 and 14,093 active employees and 4,007 and 3,915 retired employees entitled to receive benefits under these plans as of December 31,1985 and 1984, respectively. ----------------- 00D7-SWP-035486 21 i 0007-SWP-000116908 Not* 7--long-Tarm Prtt Thousands a!dollars 545% Debentures ............................. 6 25% Convertible Subordinated Debentures (Converlble into common stock at $5 75 a share) .... 9 45% Debentures ................................ 9 375% Promissory Notes ................... 1050% Promissory Noles (10% in 1984 and 1983).................................. 5 70% to 11 875% Industrial Revenue Bonds ................................ 8 90% Promissory Notes. $12.000 principal amount less unamortized discount based on imputed interest rate of 16 5% ........................ 8125% Mortgage Note $6225 principal amount less unamortized discount based on imputed interest rate of 16%, monthly payments of $53................................ 925% Promissory Notes, $6,500 pnnapal amount less unamortized discount based on imputed interest rate of 165% ........................ Obligations under capital leases-- less current portion of $1,349 in 1985. $2,482 n 1984 and $3,728 in 1983 ............................................... q u6 Dale 1992 Sinking Fund/ _____ Prepayments______ Amount Commence S 2,000 Payable currently Amount in Treasury _________December 31,_________ Amount Outstanding Net of Treasury __________Oecetnber 31, IMS19841983IMS19B4 1983 $ 7,896 $ 9.896 $11,896 $ 16.104 S 16.104 $ 16,104 1995 1999 1996 2.000 2,000 3.325 1998 Through 2002 2,997 vanes Payable currently Payable currently Payable currently Payable currently Payable currently 9,521 4.665 - 11.521 6.665 - 13,521 6,665 - 1248 33.335 33.375 3.334 33.335 36,700 5,265 33.335 40.025 - --- - 36.009 39.006 42.003 - 7,418 15.109 8.629 1991 1200 Payable currently - - - 4,653 6,732 7597 2002 - - - 4,106 4.143 4281 --- - 1,197 2.364 $22,082 $28,082 9,189 13218 15,704 $34062 $145,437 $16B,B78 $175507 Certain covenants under the note agreements require the company to maintain specified levels of working capital, limit the incurrence of debt, lease obligations and investments, and restrict the payment of dividends and other distributions on the company's stock. The company may, at any time, issue stock dividends or pay dividends on any outstanding shares of preferred stock under the terms of the note agreements. At December 31,1965, $151,674,000 was available for cash dividends on common stock. The company has sufficient debentures in treasury to satisfy most sinking fund requirements on public debenture issues through 1988. Maturities ot long-term debt, exclusive of capital lease obligations and after the above-mentioned reduction for sinking fund requirements to be satisfied from debentures on deposit with the trustee, are as folows for the next five years: 19861987198819891990- $ 7,735,000 $ 8,226,000 $ 9,631,000 SI 0,417,000 $12,332,000 Interest expense on long-term debt amounted to $14,780,000, $15,784,000 and $16,812,000 for 1985.1984 and 1983, respectively. There were no interest charges capitalized during the periods presented. Under a credit agreement with a group of eleven banks, the company may borrow up ta $150,000,000 until August 31,1988. Amounts outstanding under the agreement may be converted into five-year term loans at any time. The credit agreement includes certain restrictive covenants regarding working capital levels and the working capital ratio. There are no compensating balance requirements. At December 31,1985, there were no borrowings outstanding under this credit agreement 0007--SWP-035487 22 0007-SWP-000116909 Note 8--Lo o ms The company leases stores, warehouses, office space and equipment Renewal options are available on the majority ot leases and, under certain conditions, options exist to purchase properties. In some instances, store leases require the payment of contingent rentals based on sales in excess of specified mimmums. Certain properties are subleased with various expiration dates. Property, plant and equipment includes the following amounts for capital leases, which are amortized by the siraigni-une meinoa over me lease term- Thousands ol dollars Buildings................................... Machinery and equipment .... ........... December 3t. S 7.979 1251 9.230 $ 9,745 11.241 20.966 S11.790 12,371 24.161 Less allowance lor amortization............................ 6.856 $ 2.374 15,521 S 5.465 16.174 $ 7.987 Rental expense for all operating leases was $84,665,000, $72,813,000 and$61.425.000for 1985.1984and 1963, respectively Contingent rentals included in rent expense were $12,212.000 in 1905, $11,899,000 in 1984 and $10,975,000 in 1983. Sublease rental income f- all years presented was not significant. Following is a schedule, by year and in the aggregate, of future minimum lease payments under capital leases and noncancelable operating leases having initial or remaining terms in excess of one year at December 31,1985: Thousands oldollars 1986.......................................................... 1987.......................................................... 1988.......................................................... 1989.......................................................... 1990.......................................................... Later years.............................................. Total minimum lease payments.............. Capital Leases 2363 21,927 Operating Leases $ 48.899 42,802 37.396 30.888 24,474 106150 $290,609 Amount representing interest................. Executory cosls...................................... Presenl value ol net minimum lease payments................... (10,042) (1.347) $10,538 Note 8--Capital Stock Shares in Treasury Cumulative Convertible Preferred Stock $400 Senes A $440 Series B $100 Common Stock Shares Outstanding Net of Treasury Cumulative Convertible Preferred Stock $400 Senes A $440 Series B $100 Common Stock Balance at January 1.1983 ........ ............... .............. Stock issued upon Exercise ol stock options ...................................... Redemption of preferred stock............................... Conversion of preferred stock............................... Conversion of 6 25% Convertible Subordinated Debentures................................... Treasury stock acquired/retired............................... .................. Balance at December 31.1983..................................................... Stock issued upon Exercise of slock options....................................... Redemption of preferred stock............................... Conversion of preferred slock............................... Conversion of 6 25% Convertible Subordinated Debentures..................................................... Contnbutton to PAYSOP......................................... .................. Treasury stock acquired/retired ............................... .................. Balance at December 31.1984................................. Stock issued upon- Exercise of stock options....................................... Conversion of 6 25% Convertible Subordinated Debentures................................... .................. Contribution to PAYSOP........................................ Treasury stock acquired/retired............................... Balance at December 31.1985................................. 90 371 -- -- (371) -- 2300 3.156,736 (286.000) (2300) -- -- -- -- _ -- -- -- -- -- -- -- - 2346.148 5.116.884 (74.000) -- -- -- (99,952) 1.716.468 6.661.400 ai.3oa -- (70,350) 16 6.672.374 57.750 (47.157) (90) 10.503 -- (845) (9.658) -- -- -- -- -- -- - 95.161 (5.155) (90.026) ~ -- -- *-- -- -- -- "" -- * - 43.916.472 684.524 1.803.318 1,401.526 (2346.148) 45359.692 632,778 -- 133358 335378 99352 (1.718.468) 45.042.890 595,940 362.662 70.350 (16) 46.071.826 All common share amounts reflect the effect of the stock split described in Note 2. An aggregate of 3,296,694,4,336,726, and 4,250,314 shares of common stock at December 31,1985,1984 and 1983. respectively, were reserved for conversion of preferred stock (1983 only) and convertible subordinated debentures, and exercise and future grants of stock options. During April 1984 the shareholders approved an amendment to the Amended Articles of Incorporation reducing the par value of the common stock from $6.25 per share to $1.00 per share. At December 31,1985, there were 100,000,000 shares of common stock and 30,000,000 shares of serial preferred stock authorized for issuance. The company called for redemption all outstanding Series A preferred stock effective April 1984; and Series B preferred stock effective April 1983. The redemption prices were $100 per share plus accrued dividends. Substantially all outstanding shares were converted into common stock by the redemption dales. The Series A and Series B preferred stock were convertible at base conversion prices of $7.24135 and $7.8125 per share of common stock, respectively, based on a value of $100 per share of preferred stock for this purpose. During 1983 the company recorded a two-for-one split of the common stock then outstanding effected in the form of a 100 percent stock dividend. 23 0007-SWP-035488 0007-SWP-000116910 Note 10--Stock Purchase and Stock Option Plano All common share amounts reflect the effect of the stock split described in Note 2. Currently 7.378 employees participate through regular payroll deductions in the company's Employee Stock Purchase and Savings Plan. The company's contribution charged to operations amounted to $9.612.000, $7,236,000 and $5.921.000 for 1985.1984 and 1983, respectively. Additionally, the company made contributions on behalf of participating employees, which represent salary reductions for income tax purposes, amounting to $4,395,000 in 1985. $3,898,000 in 1984 and $2,990,000 in 1983 Substantially all company employees not covered by a collective bargaining agreement are eligible to participate equally in The Sherwin-Williams Company Payroll Based Stock Ownership Plan ("PAYSOP"). The company's contribution to the PAYSOP of $1,417,000 for 1985, SI .310.000 for 1984 and $1.204.000 for 1983 resulted in corresponding reductions of applicable income tax liabilities. At December 31,1985, there were 7,501,988 shares of the company's common stock being held by these employee plans, representing 16% of the total number of common shares outstanding. Shares of company stock credited to each member's account under these plans are voted by the trustee under confidential instructions from each individual plan member. Nan-qualified and incentive stock options have been granted to certain officers and key employees under the company's stock option plans, at prices not less than fair market value of the shares at the date of grant The options generally become exercisable to the extent of one-third of foe optioned shares tor each full year of employment foliowing the date of grant and generally expire ten years after the date of grant. A stock appreciation rights plan and a plan providing for purchases of restricted stock by eligible employees were approved by the shareholders in 1984; however, no rights have been granted under these plans. Stock Option Plans Options outstanding beginning of year.................... Granted..................................................................... Exercised.................................................................. ................ Canceled................................................................... Options outstanding end d year............................. Exercisable................................................................ Reserved for future grants........................................ Employee contracts: Options outstanding beginning of year.................... Exercised................................................................. ................ Options outstanding end of year............................. ................ 19--_________ Shares Aggregate Price _________ 1984__________ ___ Shares Aggregate Price (603.046) $11250.000 5250.000 (3.469.000) (t,069.000) $11,942,000 1232.904 353.000 (561.978) (162.412) $10.331200 4,678.000 (2.425200) (1234200) 1,461514 $11250.000 489,494 2221,120 $ 195,000 (74.200) (195,000) -$ - 145.000 $ 360.000 (70,800) (185.000) 74200 $ 195.000 _________ 1963 Shares Aggregate Price 2.152,430 435.700 (441524) (313,752) 1532.904 446.396 1211,716 $ 9,031200 4.631.000 (1.645.000) (1.686.000) $10,331,000 368.000 S 1.012200 (243.000) (632.000) 145,000 $ 360.000 Koto 11 --Unconsolidated Real Estate Subsidiary Sherwin-Williams Development Corporation (''SWDC") is a wholly-owned unconsolidated subsidiary carried on the equity basis. This subsidiary owns, develops and leases real estate for the company and others. The majority of the square footage owned by SWDC is leased to unrelated parties. Under a revolving credit agreement, the subsidiary may borrow up to $75,000,000 until December 15,1995. Under a commercial paper program, which is backed by a letter of credit the subsidiary may borrow up to $50,000,000 on a short-term basis until December 15,1987. The Sherwin-Williams Company has not guaranteed either debt; however, the company and SWDC have a maintenance agreement that requires the company to make payments to SWDC in amounts sufficient to maintain SWOCs fixed charge coverage at specified minimum levels. Summarized financial data for SWDC is as follows: Thousands ofdonors Property, plant and equipment--net Other assets..................................... Total assets................................... December 31, IMS 1984 1983 $61,153 $46,976 $36,458 597 904 131 $61,750 $47,860 $36,569 Long-term debt................................. Other hatwRtles........................... Equity................................................. Total liabilities end equity............ $45,745 15260 925 $61,750 $36,955 9534 1291 $47560 $29232 4.917 1.740 $38589 Total revenues................................. Operating loss................................. Funds provided by operations........ $ 8253 (920) 2,158 $ 8559 (761) 1,9% $ 3235 (159) 1236 0007-SWP-035489 24 0007-SWP-000116911 Note 12--Quarterly Data (Unaudited) Quarterly Common Stock Pnces and Dividends* teas Quarter High Low 1st $ 17% S 13% 2nd 19% 15* 3rd 20 16% 4th 23% 17% Dividend S 115 115 115 115 1984 Quarter 1st 2nd 3rd 4th High $ 14% 14% 16 16% Low S 11% 11% 12 12% Dividend 5 095 095 095 095 Summary of Quarterly Results of Operations* Thousands of dollars, except pier share data Year Quarter Nat Sales 198S 1st 2nd 3rd 4th $492,123 606.619 578.782 517.401 1984 1st 2nd 3rd 4th 463.917 557,285 552.472 501.520 Gross Profit $168,636 220.633 215.7B1 188.074 151072 197,611 194.254 179.457 Net Income 5 5,714 28.535 29.094 11.295 4,995 25.567 25,343 9,101 Per Common Share Fully Diluted Primary S 12 61 62 24 S 12 62 63 24 11 11 55 55 .55 56 20 20 "Per share data reflects the etfect d th* dock spM described in Note 2 IMS Fourth quarter adjustments increased net income by $6230,000 ($.13 per common share). This increase was due to year-end inventory adjustments of $10.163.000 ($.22 per common share) offset primarily by provisions of $4,084,000 ($.09 per common share) for the disposition and termination of certain operations. 1984 The actuarial valuations determining pension plan costs for the 1984 plan year were received during the third quarter of 1984. This valuation resulted in a reduction of the estimated pension expense used by the company in the first two quarters. The effect of this adjustment increased third quarter net income by $3,180,000 ($.07 per common share). This adjustment was substantially offset by provisions for the restructuring of certain operations In order to better establish sales and distribution efficiencies which resulted in a reduction in third quarter net income of $2,800,000 ($.06 per common share). Fourth quarter adjustments increased net income by $6,482,000 ($.14 per common share). This increase was due primarily to year-end inventory adjustments of $7,290,000 ($.16 per common share) which were partially offset by net adjustments to other reserves and allowances. Note 13--Disposition and Termination of Operations The company is continually reevaluating its operating facilities with regard to the long-term strategic goals established by management and the board of directors. Operations which are not expected to contribute to the company's future plans are discontinued. Summarized at right is the financial data related to the decision to close or sell certain plants and operating units. Inventory, property, plant and equipment, and other assets have been reduced to their net realizable values, while the related costs for severance pay. shutdown expenses and estimated future operating losses to disposal date are included in current liabilities. The company expects to complete the closing and sale of the facilities at various dates through 1987.________________________________________ Thousands o! doSars Beginning accrual--January 1 ....... Provision included in cost of goods sold. Prevision included m costa and expenses--other................................ Total provision ....................................... Actual coats incurred and ad|ustments to prior accruals.................................. Biding accrual--December 31 ............ Net atter-tax provision ........................... Net atter-tax provision per common share ............................. ieaa 530,704 4388 It.583 15871 (17.380) 529.195 5 8,570 5 19 1984 $31,539 3,350 1,987 5,337 (6,172) 530.704 5 2,882 5 06 1983 533,738 4,520 3.951 8,471 (10,670) 531.539 5 4,574 5 .10 Note 14--Business Segments Business segment information appears on pages 4,5.8 and 9 of this report 0007-SWP-035490 25 Note 15--Inflation Accounting (Unaudited) In accordance with generally accepted accounting principles, financial statements have traditionally reported amounts reflecting historical costs which, especially during periods of high inflation, represent dollars of varying purchasing power and may not adequately reflect the effect of inflation on a business Consistent with the requirements of FASB Statement No. 33, as amended, a supplemental statement of consolidated income based on current cost data is presented herein to reflect the effect of changing prices on our primary financial statements. Adjustments have been made to estimate the effect of changing pnces of inventory, property, plant and equipment, and the related expenses of cost of goods sold arid depreciation. The major impact of inflation on inventory is currently recognized in the primary financial statements through the use of the LIFO method of inventory valuation. Accordingly, only minor adjustments are required in the supplemental statements. However, historical depredation expense based on the historical cost of assets understates the cost of replacing capital equipment at current prices. This higher cost is not presently reflected in the primary financial statements, and accoums for the majority of the supplemental statement adjustment. Because these additional costs are not currently deductible for income tax purposes, no adjustment of income tax expense has been made which results in a higher effective tax rate on a current cost basis. The supplemental statement also does not reflect the operating efficiencies expected to be generated from new assets which would at least partially offset the increased depreciation expense. In addition, the company would not necessarily replace the productive capacity which currently exists. These calculations involve a substantial number of management judgments and estimating techniques which have been employed to maintain a reasonable cost of accumulating the data. We believe the results may be a reasonable approximation insofar as they express overall trends in costs and reduced purchasing power; however, the data is experimental and imprecise and is not indicative of the present or future economic condition of the company. In addition, because of varying assumptions and estimates used by each company, we believe comparisons with other companies and industries should be used with caution. This data is not currently used tor internal management evaluations and decisions. Current Cost Data The current cost data represents the current cost of the assets of the company, reflecting specific price changes of the assets. The current cost of the majority of the company's plant and equipment was determined based upon externally generated indices, including the Consumer Price Index for aH Urban Consumers (CPI-U), of the major classes of assets. Depreciation expense is based on the current cost of plant and equipment during the year, and assumes the same depredation methods as those employed in the primary financial statements. Purchasing Power Gain The purchasing power gain on net monetary liabilities reflects the theoretical repayment of monetary liabilities in excess of monetary assets with dollars having a lesser value than at the beginning of the year. This amount represents an unrealized gain which benefits the company in terms of purchasing power by maintaining the riel monetary liabilities position. 0007-SWP-035491 26 0007-SWP-000116913 Supplemental Statement of Consolidated income For (he year ended December 31.1985. in average 1985 dollars Thousands of dollars except per share data Costs and expenses Cost ol goods sold.................................................................................................................................. ..... Selling, general and administrative expenses................................................................................................... Interest expense............................................. ............................................................................................ 1.... Interest and net investment income .................................. ........ . . ............................. ................................. Conventional Historical Cost ims Net income per common share'............................................................................................................................. Gam from decline in purchasing power of net amounts owed............................................................................. Increase m specific prices of inventories and property, plant and equipment held dunng the year.................... Effect of increase in general price level........................................................................................... Increase m the general price level over increase in specific prices............................................................... .............. Current Cost Data 19iS $2,194,925 1.410.B87 659.259 15.230 (11.165) 7.770 112.944 54.000 $ 58.944 5 128 S 5.344 S 6.578 (27.672) $ (21.094) Depreciation and amortization expense of $41,586,000 on a current cost basis has been allocated between cost of goods sold and selling, general and administrative expenses, consistent with the presentation in the primary financial statements. Cost of goods sold has been adjusted for changes in inventory costs in addition to depreciation and amortization expense. Selling, general and administrative expenses have been adjusted only for depreciation expense. The current cost of net inventory and net property, plant and equipment at December 31.1985. was $438,694,000 and $318,178,000, respectively. The current cost ot inventory exceeded the UFO cost of inventory at December 31, 1985, by $72,080,000. Five-Year Comparison of Selected Financial Data Adjusted for the Effects of Changing Prices Average 1985 dollars, except hrstohcel data Thousands of dollars, exceptpershare data Net sales' Historical cost............................................................................. Constant dolar............................................................................. IMS $2,194,925 2.194.925 Years ended December 31, 1984 1983 1982 $2,075,194 2.149278 $1,973,485 2,131,010 $1,851,776 2.083.973 Dividends per common share * Historical cost.............................................................................. Constant dollar............................................................................. 46 38 46 39 30 25 33 28 Market pnce per common share at year-end-' Historical cost............................................................................. Constant dolar............................................................................. . 22.13 2177 1400 1420 1313 1394 1100 12.12 Average consumer price mdex.......................................................... Net incomeHrstoncal cost............................................................................. Current cost.................................................................................. . 322.2 $ 74,638 58,944 311.1 $ 65,006 48589 296.4 $ 55,412 39,619 289.1 $ 42.931 20.097 Net income per common share.' Historical cost............................................................................. Current cost.................................................................................. . 161 142 128 107 116 1.01 83 47 Total net assets- Historical cost.............................................................................. . Current cost.................................................................................. 465,367 615,555 404,140 594529 370,970 581.956 348532 621594 Increase in the general price level over (under) increase in specific prices.......................................................... 21,094 (13596) . 12.055 5.023 Gain from decline m purchasing power of net amounts owed.......... 5,344 6,351 6,678 10529 Constant dollar data reflects historical cods adjusted for the effect of general inflation based on the CPt-U. *AI per share data reflects the effect of the stock split described m Note 2. 1981 $1,536,607 1,817512 20 24 550 630 2724 $ 31565 10232 77 23 305,020 607.515 8,367 18,447 0007-SWP-035492 27 0007-SWP-000116914 Hof 16--Financial Sdwdulw Marketable Securities--Other Investments (10-K, Schedule I) The short-term investments at December 31.1985 consist of: Thousands ofdollars _______ Municipal securities........................... ,............................ Bank time certificates ...................................................... Other securities ................................................................ Total ............................................................................. SI05,776 48.014 16,235 SI 70.025 Amounts Receivable From Related Parties (10-K, Schedule II) Included in other assets were the following notes receivable from certain officers of the company: Thousands ofdollars Beginning Ending Debtor Balance Additions Deductions Balance TloVsSe3------------------------------------------------------- - 11 1 J G. Breen $ 560 $ (560) T A Commas 160 S 160 C A Bellim 160 $ 680 -- $ (560) 160 $ 320 1964 J. G. Breen T A Commes C. A. Bern $ 560 160 160 S 860 -- -- _ __ -- -- --........ ..... $ 560 160 160 S 880... 1983 J G. Breen T A. Commes C A. Bellini -- -- -- $ 560 160 160 -- -- -- $ 560 160 160 $ 880 _ S 660 Each of these outstanding amounts represent 570*% Promissory Notes, due July 28,1988, with interest payable annually. Property, Plant and Equipment (IO-K, Schedulee V and VI) Property, plant and equipment classifications are disclosed in the balance sheet Additions and retirements of property, plant and equipment were as follows: ______ Thousands ofdollars Years ended December 31, INC 1984 1963 Balance--beginning of year.. Total additions at cost............ Assets acquired through acquisitions .......... Total retirements at cost........ Reductions due todispcutiom .................... Other changes....................... Balance--end of year............ $438,638 58,737 1,174 (6.547) (63,325) (2.575) $426,102 $406,431 47378 9,605 (14376) -- (12.500) $438,638 $448,726 31,906 1,733 (9326) (59,909) (4,701) $408,431 Other changes for all years presented consist primarily of capitalized leases, the translation of foreign assets to U.S. dollars and, for 1984, the sale of property to various Canadian companies. Total accumulated depreciation and amortization of property, plant and equipment were as follows: Thousands ofdollars Years ended December 31, ION 1984 1983 Balance--beginning of year... Total charged lo expense........ Retirements ............................. Reductions due to dispositions........................... Other changes.......................... Balance--end of year.............. $217,493 26327 (4.742) (56.368) 13324 $195,934 $209,548 24,919 (9,900) -- (7.074) $217,493 $220,322 24,220 (6.590) (24,024) (4.380) $209,548 Other changes for all years presented consist primanly of capitalized leases, reserves for the disposition and termination of operations and, for 1984, the sale of property to various Canadian companies. Valuation and Qualifying Accounts and Raaarvaa (10>K, Schodula VIII) Changes in the allowance for doubtful accounts are as follows: Thousands ofdollars Years ended December 31. INS 1964 1963 Beginning balance........ ........... Bad debt expense ....... Net incoHectible accounts written oft.............. Ending balance ........................ $3,759 8136 (9,099) f3,796 $3350 10321 (9.912) $3,759 $2856 4800 (4,106) $3350 Thousands ofdotars Beginning balance.................... Charged~lo expense ................ Reserve (deductions) additions Ending balance ....................... ng-terrn iiabiifiites: * Years ended December 31. 1SN 1984 1983 $36,630 (1.914) (2314) $30,636 (901) 6893 $26374 7808 (3.644) $32,502 $36,630 $30,638 Charges to other long-term liabilities consist primarily of adjustments to estimated pension liabilities, deferred compensation, and other items. Reserve deductions and additions consist primarily of balance sheet reclassifications. Short-Term Borrowings (IO-K, Schedule IX) Thousands ofdtms Years ended December 31, INS 1984 1 963 Notes payable to banks at December 31 ........ Weighted average Interest rate at December 31 ............ Maximum amount outstanding at any monlh-and ................ Average amount outstanding during the period.................. Weighted average Interest rate during the period ...... _ $ 89 $ 22 18.584 S 149 22.584 $ 758 $ 422 22.084 Short-term borrowings are included in accounts payable on the balance sheet and pertain solely to foreign susidiaries. The average amount outstanding is the total of monthend outstanding balances divided by twelve months. The weighted average interest rate is the actual interest on short-term debt divided by average short-term debt outstanding. 0007--SWF--035493 28 0007-SWP-000116915 Supplementary Income Statement Information (1O-K, Schedule X) _______________ Thousands of dollars198J Maintenance and repairs...................... Advertising costs................................... Years ended December 31, 1964 1983 $22,971 $24,103 $29,593 75,319 68 349 61,358 Amounts for depreciation and amortization of intangible assets, preoperating costs and similar deferrals, taxes other than payroll and income taxes, and royalties are not presented because such amounts are each less than 1 % of total net sales. Exhibit Index Number Pag* 3. Articles of Incorporation, as amended, filed with Exhibit 3 of Form 10-K dated March 11,1985, and Regulations filed as Exhibit 4(b) to Form S-3 dated May 17,1982 and incorporated herein by reference. 4. Not applicable. 9. Not applicable. 10. Material Contracts-lncorporated by reference to pages 10-11 from the definitive Proxy Statement dated March 10.1986. 11. Computation of Net Income Per Common Share. 29 12. Not applicable. 13. Not applicable. 18. Not applicable. 19. Not applicable. 22. Subsidiaries of the registrant. 31 23. Not applicable. 24. Consent of Independent Auditors. 32 25. Power of Attorney on file with the Securities and Exchange Commission. 28. Not applicable. 29. Not applicable. Computation of Not Income Per Common Share (Exhibit 11, Form 10-K)* Thousands of dollars, except per share data Fully Diluted Average shares outstanding........................................................................................... Options--treasury stock method............................................................. ..................... Assumed conversion oh Series A preferred stock............................................................................................. Series B preferred stock........ ................................................................ ................. 625% Convertible Subordinated Debentures............................................................ Average fully diluted shares........................................................................................... ........ Net income...................................................................................................................... ............ Less preferred dividend requirements.......................................................................... Add 625% Convertible Subordnated Debentures interest net of tax.......... ............... Net income applicable to fully diluted shares................................................................ ............ Net income per common share..................................................................................... ........ Primary Average shares outstanding........................................................................................... Options--treasury stock method................................................................................... Average shares and equivalents................................................................................... Net income.......................................................... ........................................................... Less preferred dividend requirements........................................................ ................... Net ncome applicable to shares and equivalents........................................................ ............ Net ncome per common share..................................................................................... ........... IMS 4S75M $74.63$ 54 $74,0$ $150 $H,$3$ $151 December 31, 1984 45263,772 597.460 36.036 894346 46,591,614 $65,006 (A) 165 $65,171 $140 45263.772 565576 45549,648 $65,006 11 $64,995 $1.42 1983 46242.404 1.420.000 306.966 255,244 1254.942 49.479.576 $55,412 (A) 292 $55,704 $1.13 46242,404 1.396,834 47539238 $55,412 209 *55203 $i:i6 (A) Assumed conversion ol preferrad into common shares. 'Common share amounts and per share data relect the effect of the stock split described in Note 2 to the consolidated financial statements. 0007--SWP-035494 29 0007-SWP-000116916 Beard ef Directors Executive Officers James A. Attwood, 58 Chairman and Chief Executive Officer Mutual Life Insurance Company Keith S. Benson, 67 Retired, formerly Executive Vice President Finance and Administration Oglebay Norton Company John G. Breen, 51 Chairman. Presideni and Chief Executive Officer The Sherwin-Williams Company John G. Breen, 51 Chairman. President and Chief Executive Officer Thomas A Commas, 43 Senior Vice President. Finance Dr. F. Thomas Krotlne, 44 Senior Vice President Corporate Research and Development D. Wayne Calloway, 50 President and Chief Operating Officer PepsiCo, Inc. Leigh Carter, 60 Vice Chairman and Chiel Operating Officer The BFGoodnch Company Thomei A. Commas, 43 Senior Vice President Finance The Sherwin-Williams Company _____ Group Vice President WMIam B. Eldredge, 57 Group Vice President Alan D. Chllda, 55 Vice President and General Counsel and Corporate Secretary William J. De Lancey, 69 Retired, formerly Chairman and Chief Executive Officer Republic Steel Corporation (LTV Steel Company) Dr. Robert C. Doban, 61 Senior Vice President Science and Technology Owens-Coming Fiberglas Corporation Alien C. Holme*, 65 Senior Partner Jones. Day, Reavis & Pogue J. Robert Klllpack, 63 President National City Corporation William G. Mitchell, 55 President Centel Corporation Ralph E. Schey, 61 Chairman and Chief Executive Officer, The Scott & Fetter Company Conway G. Ivy, 44 Vice President Corporate Planning arid Development Arttiur D. Maine, 46 Vice President Human Resources Robert A Tschannen, 63 Vice President Facilities and Administrative Services Thomas R. MlkUch, 38 Treasurer Franchi C. Plcclrlllo, 36 Assistant Secretary and Corporate Director of Taxes Division Managers Frank E. Butter, 49 President & General Manager, Consumer Division Joseph M. DeVRtorio, 51 President & General Manager, Chemical Coabnga Division MaxImWano Duarte, 52 Vice President, International Group David L Fuente, 40 President & General Manager. Stores Division James P. Mastrlan, 43 President & General Manager, Gray Drug Fair Leonard A Wild, 59 President & General Manager, Automokvs Aftermarket Division Joseph M. Scamlnace, 32 President & General Manager, Sprayon Division Shareholder Information Annual Matting The annual meeting of shareholders writ be held at lOOO am., April 23,1986, at the Hoilenden House Hotel, Cleveland, Ohio. The Sherwin-Williams Company 101 Prospect Ave., N.W. Cleveland, Ohio 44115 (216) 566-2000 Stock Trading Sherwin-Wilams Common StockSymbol, SHW--is traded on the New York Stock Exchange. 5.45% Debentures 9.45% Debentures AmenTrust Company NA Cleveland. Ohio 6.25% Convertible Subordinated Debentures Central National Bank of Cleveland Cleveland, ONo Tranafar Agant A Registrar AmenTrust Company NA Cleveland, Ohio Indtpindtnl Ain Mo is Ernst &Whfonay Cleveland, Ohio Investor Rotations Dianne McCormick The Sherwin-Williams Company 101 Prospect Ave., N.W. Cleveland, Ohio 44115 Dividend Reinvestment Program A dvidend reinvestment program is available (o shareholders of common stock. Fbr information, contact Investor Relations office as described above. The Sherwm-Wttiams Company seeks and employs the best qualified people available--without regent to the race, religion, color, creed, sex, national origin, handicap, or age of any person. COMMON STOCK TRADING STATISTICS " * * 1 1 High..................................................................................... 1MB tm Close December 31............................................................ Shares traded.................................................. .. % of average outstanding shares............................ Number of common shareholders of record...................... ii.aio^M 114*4 1964 $1614 Hit 14 23.612,800 52% 9,777 1963 $15* 9* 1354 29266,600 64% 9,641 . 19S8122H 454 11 24.032600 57% 6590 ' 1981 .......... $ 514 " 414 5% 14.084,800 36% 8558 1980 $ 554 2* 4% 21,458.000 55% 8,688 All common share amounts and per share daia reflect the effect cl the stock spin described m Note 2 to the consolidated financial statements. 0007--SWP-035495 ` 30 Directory of Operations Subsidiaries Brazil--Sherwin-Williams do Brasil Industna e Comercio Lida., Sao Paulo* Canada--Sherwin-Williams Canada Inc. Gravenhurst --Sherwin-Williams Automotive Finishes. Inc., Mississauga --Dupli-Color Canada, Ltd, Scarborough Mexico--Compama Sherwin-Williams. S A de C.V., Mexico City* West Indies--Sherwin-Williams Cayman Islands Ltd, Grand Cayman* --The Sherwin-Williams Co. Resources Limited. Kingston, Jamaica -Sherwin-Williams (Caribbean) NV. Curasao -Sherwin-Williams (West Indies) Ud,, Kingston, Jamaica -Sherwin-Williams (Barbados) Ltd.. Bridgetown, Barbados -Sherwin-Williams Foreign Sales Corporation Limited. Charlotte Amalie. Virgin Islands USA--Sherwin-Williams Development Corporation* --Contract Transportation Systems Co. --Gray Drug Fair, inc. --The Marshall Drug Company --Gray Drug Stores, Inc. --GDF, Inc. --Drug Way Stores, Inc --Drug Fair, Inc. --Drug Fair of Pa., Inc. --CTS Brokerage, Inc. -Dupli-Color Products Company Unconsolidated Joint Venturoo Canada--BAPCO. Toronto. --128639 Canada, Inc. Toronto Ecuador--Sherwin-Williams del Ecuador Fdbnca Nacnnal de Pinturas, SA, Guayaquil Ireland--FSW Coatings Limited, Dublin FSW Paints Ltd .Dublin Japan--Nippon Sherwin-Williams Chemicals Co., Ltd., Osaka Panama--Sherwin-Williams de Panama SA Panama City Saudi Arabia--Sherwin-Williams Saudi Arabia Ltd., Jeddah Licensees Argentina--Sherwin-Williams Argentina Industrial y Comercial, SA --National Lead, SA Bolivia--Fabnca de Pinturas 'EspintboL" S A Chile--Pinturas Andna, SA. Colombia--Fabrrca Nacional de Pinturas Sherwin-Williams de Colombia, S A Costa Rica--Sherwm-Wiiliams de Costa Rica, SA. Dominican Republic--Acabados Automotnces, S.A El Salvador--Sherwin-Williams de Centro America. SA deCV. France--Akzo Coatings, S A. --Corsam.SA Haiti--Peintures Ideates, S A. Honduras--Sherwin-Williams de Honduras. S.A. de C V India--Garware Paints. Ltd. Italy--Akzo Coatings, S p A. Japan--Atom Chemical Paint Ltd. --Nippon Paint Company. Ltd. --Dai Nippon Toryo Co, Ltd. Korea--Daihan Ink and Paint Manufacturing Company Lebanon--Amer Paints Trading Establishments --Universal Paint and Chemical Industries SA.R.L "CHEMIPAINT Netherlands--Sikkens Groep. N.V. Peru--Sherwin-Williams Peruana, SA Philippines--Qlobesco. Inc. Puerto Rico--Enco Manufacturing Corporation South Africa--Advanced Coatings PTY, Ltd. Spain--Industrias Outmicas Procolor. SA. --Coatings Caribbean, S.A. --Bamices Valentine, SA Switzerland--Kurt Vogelsang, AG. Taiwan (R.OJ--Eastern Paint Co.. Ltd. Thailand--Bangkok China Paint Mfg. Co. Ltd. Venezuela--CA Qulmica Integrada --CA Venezoiana de Pigmentos --CA. Venezoiana de Pinturas West Germany--Akzo Coatings GmbH Plants PAINT Baltimore, MO Chicago. IL Garland, TX Greensboro, NC Met Mom Eastern Md-Central Southeastern South Central Western 341 427 411 29B ISO 1.627 OTHER Morrow, GA Newark, NJ Emoryville, CA Richmond, KY Anaheim, CA Bedford Hts., OH CoffeyvMe, KS Crisfield, MD Deshler, OH Ora* Drug Fair Northern Southern Atlantic 176 73 194 443 31 Elk Grove, IL Fords. NJ Gravenhurst, Canada North Olmsted. OH Scarborough, Canada INTERNATIONAL Guayaquil, Ecuador Jeddah, Saudi Arabia Kingston. Jamaica Mexico City, Mexico Montreal, Canada Panama City, Panama Sao Paulo, Brazil Toronto. Canada Virginia, Ireland 0007-SWP--035496 0007-SWP-000116918 CoaMntof IndependentAuditor* Shareholders and Board of Directors The Sherwin-Williams Company Cleveland. Ohio We consent to the incorporation by reference in Post-Effective Amendment Number 2 dated May 14.1985. to Registration Statement No 280510 and Registration Statement Number 291401 on Form S-8 dated May 25.1984. of our report on the consolidated financial statements included in the annual report on Form 10-K of The Sherwin-Williams Company for the year ended December 31.1985 Cleveland. Ohio March 10,1986 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland, and State of Ohio, on the 10th day of March, 19B6. THE SHERWIN-WILLIAMS COMPANY ^ A. D. CHILDS______________________ TM A,D.Childs.Secretary___________ ___________________________ _ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities indicated on March 10,198$. Officers and Directors of The Sherwin-Williams Company J G. BREEN J G. Breen T A.COMMES T. A. Commas Chairman, President and ChiefExecutive Officer, Director Senior Vice President, Finance ChiefFinancial Officer, Director J. A. ATTWOOO J. A. Attwood K. S. BENSON K. S. Benson D W. CALLOWAY D W. Calloway L CARTER L Carter A. C. HOLMES A. C. Holmes J R. KILLPACK J. R. Killpack W. G. MITCHELL W. G. Mitchell R- E. SCHEY R. E Schey Director Director Director Director Director Director Director Director The undersigned, by signing his name hereto, does sign this report on behalf of the designated Officers and Directors of The Sherwin-Williams Company pursuant to Powers of Attorney executed on behalf of each such Officer and Director. h* A,. D. CHI,LD y A. D. Childs, Attorney-in-fact March i o, 19B6 0007-SWP--035497 32 0007-SWP-000116919 Form 10*K Anrual Report Pursuant to Section 13 or 15(ai of the Secunties Exchange Act of 1934 For ihe Year Ended December 31.1985 Commission File Number 1 -4851 Securities aridExchange Commission Washington. D C. 20549 t h e s h e r w in -w il u a ms COMPANY AN OHIO CORPORATION IRS e mp l o y e r IDENTIFICATION NO. 34-052S8SO 101 Prospect Avenue. N W. Cleveland. Ohio 44115 Telephone (216) 566-2000 Form 10--K Portions of this report are not required by the Form 10-K and are not "filed'' as part of the company's 10-K Only the sections referenced m the index below are incorporated in the 10-K. The Secunlies and Exchange Commission has not approved or disapproved this report or passed upon its accuracy or adequacy. Securities Registered Pursuant to Section 12(b) of the Act: Title of --cli cliil.................. ' Mime et xcTiaw-- on which mgUterad 9.45% Debentures Due 1999 New York Stock Exchange 625% Convertible Subordinated Debentures Due 1995 New York Stock Exchange 5 45% Debentures Due 1992 New York Stock Exchange Common Stock, Par Value $1.00 New York Stock Exchange Secunties Registered Pursuant to Section 12(g) of the Act: None The Registrant 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 and has been subject to such filing requirements for the past 90 days. The Registrant had 46,118,342 shares of common stock, par value $100, outstanding at January 31,1986 after adjustment for the effect of Ihe two-for-one stxk split These shares were held by 11.354 holders of record on this data The aggregate market value of the voting stock at January 31,1986 was $1,060.633.257, excluding the voting stock held by certain executive officers MM-Perm KMC Wport Item No. 1 Business a General Development of Business..............................4 b. Financial Information About Business Segments.. 8-9 c. Narrative Description of Business Segments....... 4-5 d. Foreign end Domestic Operations and Export Sales.. 9 2 Properties......................................... 31 3. Legal Proceedings............................ 4 5. Market for the Registrant's Common Equity and Related Stockholder Matters............ 25&30 6 Selected Financial Data......... ....... 14 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... ..10-13 8. Financial Statements and Supplementary Data The response to this item s submitted in Item 14 of this report Hem He. 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K a. Statements of Consolidated Income for the Years Ended December 31.1985,1984 and 1983..............................16 Consolidated Balance Sheets at December 31, 1985,1984 and 1983 ... 17 Statements of Changes in Consolidated Financial Position for the Years Ended December 31, 1985,1984 arid 1963 ........... Statements of Consolidated Shareholders' Equity for the Years Ended December 31.1985. 1984and1983 ..................... Notes to Consolidated Financial Statements for the Years Ended December 31,1985, 1984 and 1983 ............... 20-29 Financial Schedules Nos. 1. II, V, VI, VIII, IX and X for the Years Ended December31,1985, 1984 and 1983 ............... 28-29 b. Reports on Form 8-K None Fled during fourth quarter of 1985. a Exhibits Exhtoit Index ......................... 29 Items Number 10,11,12 and 13 are Incorporated by reference from the definitive Proxy Statement dated March 10,1986, filed with the Securities and Exchange Commission pursuant to Regulation 14A. Items Number 4 and 9 and aH other schedules {Nos. Ill, IV, VII, XI, XII, XIII and XIV) for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 0007--SWP-035498 33 0007-SWP-000116920 0007-SWP-035499 ' 0007-SWP-000116921