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The Sherwin-Williams Company/1968 Report To Shareholders JUi*.. Sherwin-Williams--Paintmaker plus Our name means different things to different people: To professional painters, builders, home owners and to managers of hospitals, schools, office buildings, factories, etc., it means quality paints for beauty and protection. To thousands of jobbers and dealers it means a ready source of quality products, well advertised and merchandised, to meet the needs of their customers. To producers of appliances, furniture, farm implements, toys, machine tools, building components and a host of other products, if means paints, varnishes and lacquers for attractive and durable product finishes ^ To other industries, it represents colorful pigments for printing, textiles and plastics; and chemicals for petroleum additives, detergents, food preservatives, pharmaceuticals, sweeteners, soil nutrients and insecticides. To over 16,000 employees it means a successful enterprise affording gainful employment, and challenges and career opportunities that recognize and reward individual ability. To more than 8300 shareholders, it represents a growing investment in a century-old company corporately oriented to the space age. i Annual Meeting -- December 10. 1968 The Annual Meeting of Shareholders will be held at 11 A M. December 10. 1968. at the Sheraton-Clcvelpnd Hotel, Public Square, Cleveland, Ohio Sophisticated inst'cimans se 3 "uced' '"agr'et'C reso*,'3"ce scacftiCcca 3* tKe Chicago Research Cante' er-ac e sc -e-t * c ctf'scne' - c-coe ca-e-'a -atc'e of materials. The NMP spectrosccce -e.ea.s tr-e cnemica' st'.ctc-e :-;a- c ccmpcu-cs. Financial Highlights ; Net sales........................................................... ..... Income before income taxes.............................. Income taxes -- United States and foreign . . . . . . Net income.......................................................................... Cash dividends declared: Preferred................................................. ..... Common.......................................................................... Per Common Share: Net income........................ ....................................... Cash flow.................................. ....................................... Dividends paid...................................................... . . Working capital.......................................................................... Ratio of current assets to current liaoilities ... Capital expenditures................................................. Provisions for depreciation........................ ... ... ... ... ... ... ... ... ... .. ... ... 1968 August 31 1967 As Restated S452.526.660 S417.409.220 36.271.098 36.526.914 17.161.621 18.989.863 19.365.293 299.444 10.616.510 278.057 10.585.957 3.36 5.11 2.00 158.043.324 ' 31 to 1 3 .3.399 7.385.271 3.J4 4.88 2.00 144.221.514 4.77 to 1 26.998.256 6.578.007 S-W 000451 To Our Shareholders Nineteen sixty-eight for SherwinWilliams was a year of both accom plishment and problems. Sales were the highest in the Company's history. However, earnings were down slightly from 1967 levels as a result of the re cently enacted surtax and start-up costs incident to the Company's capi tal expenditure program. After, giving, effect to the recent ac quisition of The Osborn Manufacturing Company, consolidated sales were S452.526.660. an 8.4% increase over 1967 sales of $417,409,220. After-tax profits were SI 8.989.863 as compared to SI 9.365.293. After provision for divi dends on preferred stock, each com mon share earned S3.36 compared to the restated figure of $3.44 for 1967. Previously reported figures for 1967 were S18.051.350. which resulted in earnings per common share of S3.35. Cash flow per common share rose in 1968 over 1967 to S5.11 from S4.88. The effect of the surtax on 1968 earnings amounted to Si.115.298 or SO.21 per common share. In the main stream of our business, our basic strength was again evident. Sales and profits were very satisfactory in the large paint, varnish ahd lacquer areas of our business and in metal con tainers. The pigments, colors and chemicals portion suffered from in tense competition, both foreign and do mestic, and from rising costs, which re sulted in lower earnings from that seg ment of our business. Aside from the surtax, the major de pressants on total earnings were those start-up costs related to the current modernization and expansion program. In several of the newest facilities, start up costs were higher and the lag in pro duction greater than had been antici pated. These factors affected pretax profits adversely by approximately $2.000.000. While much of tn.s was ex pected. a substantial portion of the in crease resulted from delays in equip ment delivery and shortage of sxiiiea labor, both of which were beyond cur control. These abnormal costs should decline in fiscal 1969. even with the adciticn of the important S20.000.000 titanium di oxide plant and the S8.000.000 aixali blue plant. Our best calculation #cr '969 of the combination of start-up costs and profits in new facilities, indicates a modest contribution from these facili ties. in contrast to the adverse effect on profits experienced in 1968. In fiscal 1970, start-up costs should be further reduced and profit contribution ma terially increased. Net interest expense on borrowings, required largely to finance the capital expenditure program, increased m 1968 by approximately SI.400.000 over 1967 This item of expense will be larger again in 1969 and. based on present plans and forecasts, the increase ccu'd be as much as 52.000.000 ever '963 2 S-W 00045 Our current forecast for 1969. which assumes a favorable economic climate. Indicates a significant increase in sales. If saies goals are reached. '969 should be a satisfactory year. In fiscal 1970 ana beyona. the prospect for growth in sales and earnings appears bright. These optimistic expectations for the early seventies are quite realistic as we see it. Potentials in the ma'ketplace should be excellent: our plants will be iarger and more efficient: and our entire organization stronger than it has ever been. On the latter point much has seen cone in the last four to five years. Most careful study and attention has oeen given to the age and duality of our man agement group. Talenteo young men nave been ana are being assignee posi tions of much greater respo.nsioility. Aaaitional and specialized eaucation is bemg provded them through our Tui tion A'C P'ogram. The enthusiastic re sponse to mese moves ana challenges assures us of management competence m aectn `;r vears to come. We extend a hearty welcome to The Osborn Manufacturing Company -- the newest addition to cur organization. Bright days are ahead for this fine com pany and its many capable people. Since our last report, three outstand ing Directors have been added to our Board. As announced through the press following our shareholders' meeting in December 1967. Messrs. Willis B. Boyer. President of Republic Steel Cor poration: John A. Hill. President of Aetna Life & Casualty Company: and Victor Holt. Jr.. President of Goodyear Tire & Rubb~r Company, were at that time elected for three-year terms. Those of us responsible for the day-today management of the business wel come their wise counsel ana assistance. Agam me D-rectors v. sn to excress ;hoir smcere g'at me Ccm- cany s employees. s~arenoiaers. cus tomers ana sucp ers `cr them con tinued succor:. D rfi C C " * S-W 000453 Our Company and Fiscal 1968 in Perspective To understand better the position of The Sherwin-Williams Company in 1958. the year should be viewed in the pers, cective of the Company s approach to research, manufacturing, marketing and financial goals. Accordingly, in the pages that follow, the diverse nature of the business is examined in some de tail. with particular emphasis on the operations and results of fiscal 1968. Construction of new plants and the expansion and improvement of existing plants, together with increased aggres siveness in the marketing area, were the outstanding features of the fiscal year just ended. The current expansion and improve ment program began m 1966. moved into high gear in 1967, continued at an accelerated rate last year, and is expected to be largely completed with in the next year or two. By that time, we w'!I have invested approximately S100.000.000 in new plants and in mod ernizing existing facilities. The triple aim of this program is to provide needed additional capacity, achieve all pos sible cost efficiencies, and improve service to customers. Prom its incep tion. the program has been oriented to the future, but realistically scaled to meet both short and long-term goals. Last year we also devoted major ef forts to consolidating management con trols. achieving improved balance be tween production and distribution, expanding research and development activities and introducing new products. Paint, Varnish and Lacquer Paint, varnish and lacquer accounted for 64.5% of sales. Increased produc tion of these products was achieved through continuing plant modernization arid improvement programs, carried forward without interfering with preestablished production schedules. The Morrow. Georgia plant, completed in July 1967. contributed substantially to the increased production during the 1968 fiscal year. The same was true of the Friendship Furniture Service Center near Greensboro. North Carolina. This is a specialized plant producing a wide variety of furniture finishes. At this plant, production schedules are cur rently being revised upward to meet the increasing need for such finishes. At Oakland. California the productive capacity for polyester resins and resins for paint was doubled in 1968. A longrange expansion program was initiated at the plant of The Lowe Brothers Com pany Division at Dayton, Ohio. We are continuing to improve our physical distribution methods through increased use of computer control on inventories. Effective balancing of in ventories with demand is particularly important in the paint, varnish and lac quer field, where Sherwin-Williams pro duces thousands of products in a wide color range to meet requirements. The large markets for paints, var nishes and lacquers are reached through a network of 1,968 branches and by 290 leased departments which we also operate. Additionally, products of our manufacture are distributed through the largest jobber organization in the industry and by thousands of in dividual merchants operating such out lets as paint stores, hardware stores and building material dealerships. The highly specialized segments of the mar ket are served by a staff of over 200 direct sales representatives through zone sales offices. During fiscal 1968 we established 36 new branches, closed or consolidated 25. and relocated or expanded 113 others to keep pace with changing mar ket patterns. All of the branches are well equipped to serve retail customers, painting contractors, dealers and largescale commercial and industrial paint users with complete and jmmed.ateiyavanaDle pamtmg and decoratmg subplies. inciuding wailpaper. 'ccr cc.erings and paint application ecu cr-n; As part of a continuing effort tc orcac=n our decorating services ana "C'ease sales and profits, we are'currs'v . al tering additional items suen as ca^ceting. draperies, unpainted furniture a^a related items m an increasing run-oer of branches.These miscellaneous Jems for paint application and home decora tion accounted for 17.5% of sales. In late May of 1968 we launched a noteworthy innovation in pamt mer chandising called the 'Color Boutique." This dispenser-display provides color samples nine inches wide ana of suffi cient length to answer effectively the buyers' perennial question: "How will it look on the walls?" The generous samples enable the user to visualize more accurately how the selected color will coordinate with draperies, floor coverings and furnishings. Among the new products which com pleted their first full sales year was Kem-1-Coat house paint. This premium product sells at a higher price per gal lon than regular house paints, but has such excellent hiding and durability that it actually results in a lower applied cost and longer life. Kem-1-Coat has established itself solidly along with Super Kem-Tone wall paint and KemGlo enamel on the nation's best-selling list of paint products. Kem-Gard. a fireretardant paint, designed to fill a real need in the residential, commercial and institutional fields, is being tested in selected markets. Results thus far point to a promising future. Another facet of our expanding paint, varnish and lacquer sales is the auto motive market, particularly the refimshing field. With more automobiles in use. the demand for products in the "after market" showed healthy increases in 1968. Continued gains seem assured. T^e exte^or o* "?w b'cck-:c^g A. yv Steubei T^cnmcai Canter reflects me `-net:erg' : am.-g cf me '".srior 7>e Center, ac.-acent to Chicago oami o:an;. is scheCij!ea `or ccmpierc" c me re s' '353 S-W 000455 D'S^C^SS ^.gro C-StOrne'S ; = o $g g3 ~a r*'s 3,ft acc ;;a: z* acu'pmept arid -e a tec recc'a`'0 ^ate'-a'S Suer as wa"oaDer z'-zzs* es 3-3 zz'z*'. -g Aer;so cars `cr autcrrsj.ye ^ ca--*s f'e c'ccuction -:r.e z* cur .-* 5 ^ 'o-s zz~`2 'e' i3.~.; T"-s *ac;-ity. csms'etes -> June '363 -ceases to `our the number of meial container oiants now n coe'at`on Our sales in the growing field of spe cialized product finishes, known as chemical coatings, also showed en couraging gains. New and changing methods of applying chemical coatings to many types of materials, particularly wood and metal, present technical chal lenges which require extensive re search and development. Sustained growth was maintained in the sale of coil coatings, specialized materials used to coat metal before it is formed into the shapes in which it will ultimately be used, such as alumi num siding, metal roof decking, appli ance parts and similar manufactured metallic items: Our advanced know how in the coil coatings field became an export item in 1966. when we li censed a paint producer in Sweden to manufacture coatings in accordance with our formulas. During this year we licensed paint manufacturers similarly in Great Britain, France and Italy. We expect considerable expansion in this area of licensing. We also provide finishes for wood products used for the exterior siding of homes and interior paneling. These finishes are applied at the factory, thus eliminating finishing at the construc tion site. The advances made in coil coatings and wood prefinishes put us in an ex cellent position to capitalize on the expanding construction market where many of these products are used. This holds promise of an extremely bright future for the years immediately ahead. One of the newest methods of apply ing chemical coatings is electro-depo sition. a method comparable to that of electroplating. Using this method, a completely uniform coating can be ap plied to all sections of the item being coated, including sharp edges and in accessible areas. While sales to date in this area are not significantly large because of the newness c-f the process, the potential is impressive. Multi-million dollar advertising ex penditures were mace to create and support the demand for our products. Major expenditures were for national TV, magazines and newspapers. A sub stantial sum was expended for pointof-sale display material. The advertis ing budget for fiscal 1969 will continue to promote our products vigorously. Pigments. Colors and Chemicals The Pigment, Color and Chemical Department markets the products of our colors and chemicals plants and shares in the marketing of the products of our subsidiary.The Maumee Chemical Com pany. This department accounted for 10.2% of sales. Despite certain soft areas in the markets served, the depart ment reached most of its marketing goals during the year. Products marketed by the depart ment cover wide and diversified fields. They include a group of barium chemi cals used in ceramics, brick and clay products, gasoline and diesel fuel ad ditives and diesel fuel smoke suppres sants: para cresol. a basic building block chemical for various items used by food and chemical industries: alkali blue used in printing inks: phthalocyanine and other organic pigments for the paint, printing ink, plastics and other industries: zinc oxide, an important raw material in tire manufacturing and agri cultural chemicals: and Sherdye pig ment dyes for textiles. The department also markets a broad spectrum of other products ranging from pharmaceutical chemicals to soil micronutrients. The Maumee Chemical. Company markets a number of products for in dustrial application such as saccharine, widely used as a synthetic sweetener in beverages and foods' and benzotriazole. which has found broad application in detergents, anti-freeze and in the protection of copper products. New plants for production of pig ments. colors ana chemicals now under construction are proceeding or sched ule. The largest of these are: The new 2,2 million pounds per year alkali blue plant at Chicago, representing an investment of ap proximately S8.000.000. It s sched uled to go on stream late m "968. The new titanium dioxide cigment facility at our chemical com plex at Ashtabula. Ohio, which will cost over S20,000.000. This plant is expected to be operational by late fall of 1969. We plan to use the output mainly for our own paint manufacturing operations. Meta! Containers Metal containers made a iarger con tribution to our total sales volume and to earnings in 1968 than in any previous year. Sales were 4.3% of the total. Originally developed to produce con tainers only for our own use. this opera tion has expanded so that 59.1% of its products were sold to customers out side the Company in the year just ended. This compares with external sales of 45% only three years ago. With the opening of the new Elgin; Illinois plant in June 1968. our four con tainer plants now have the capacity to produce 700 million containers annual ly. For improved distribution, we have coupled expansion of container, manu facturing facilities with the addition of warehouse space for containers at strategic locations. In addition, we have made a sus tained effort to increase our technical competence in the container field. Prospects for future profitable expan sion of our mefal container business are good. In the immediate future we expect to reap the economies inherent in the use of coil tin plate instead of hat tin plate. A coil line is now operative at Elgin and substantial savings are al ready evident. 6 S-W 000456 S-W 000458 S-W 000459 000460 vec*'ar',23!,cr' z- orcer ^c.-9 ```su'es rrs'cvec se'vce :c customers t *i5 extcs'C" *?t ^ r * ^ Cur S6w3f|< N j WS'S'C-SS S !"3 31 2 ;et jsec " asse^S'^g srvc~,e-'*5 re -very tar j a q Other Operations Other operations important to the overall sales and earnings picture in clude three subsidiaries whose prod ucts give us broader penetration-of our markets. These are the Rubberset Com pany. Sprayon Products. Inc. and the Deshler Products Division. Rubberset is a large manufacturer of paint brushes. In addition to supplying the needs of our Company-operated branches and of our dealers, this sub sidiary also markets brushes through jobbers and dealers. Operations were moved from a leased factory at East Newark. New Jersey to a new plant at Crisfield. Mary land during the year. This created some dislocations in production, but these have now been corrected and output is at the highest level ever achieved. The consolidated, wholly-owned Rubberset Co. (Canada). Ltd. achieved record sales and very satisfactory earn ings in 1968. Sprayon Products. Inc. is a custom filler of aerosol-packaged paints and also markets a line of aerosol-packaged maintenance materials for industry. Sales and profits have grown consist ently since we acquired the company two years ago and a sizable increase is projected for next year. In anticipation of further.rapid growth, a feasibility' study for added capacity is under way. The Deshler Products Division at Deshler. Ohio produces a well-rounded line of painting accessories. It includes: paint rollers: painting trays: colorantadditive machines for tinting paints at the point of sale: paint shakers used to condition paint for immediate applica tion at the time of purchase: powerdriven turbo agitators for paint pack aged in five-gallon containers: and tack rags, treated wiping cloths that assure a dust-free painting surface. The recently acquired Osborn Manu facturing Company is engaged in the manufacture and distribution of indus trial power-driven and maintenance brushes and finishing machinery used in conjunction therewith: of foundry machinery for making sand molds and cores of all types: and of molding and core handling equipment. It accounted for 3.5o of sales. Research and Development Maintenance of our position as "paintmaker plus" is becoming increas ingly dependent upon our ability to keep pace with innovations in science and technology. Hence, our Company is continuing to devote increasing man power and funds to research and devel opment activities. In 1968. our total research, develop ment and testing expenditures rose to S13.500.000. up from the S11.900.000 in 1967. The number of people involved in all types of research, development and testing operations increased to 1.266 at the end of the fiscal year. We were granted a number of patents during the year, covering a variety of products and processes. These in cluded a molybdated zinc oxide, an ad vanced rust inhibitor, used in paint: a liquid developer toner applicable in the office copier field: and. as previously referred to. a process for forming metal containers. Additionally, a number of patent applications on which action is awaited, were filed in 1968. A notable move in the research and development area will take place late this year when 150 of our development and other technical personnel will move into the new block-long. 70.000-squarefoot A. w. Steudei Technical Center adjacent to the Chicago paint manufac turing facility. The Center ,s named ,r honor of Mr. Steudei. who. fcr many years, was President and Chairman of the Board. Approximately SACCO.CC0 .s being invested in the structure ang equipment. The construction was aroely completed in fiscal 1968. Major functions at the new Center will be m the area of development, with basic research continuing at the Chi cago Research Center. The transfer of some personnel from the latter location to the new building will make more space available for basic research. At the same time, the new Center will en able us to consolidate many technical services and development activities m . a single structure. This is expected to result in greater efficiency. Among the laboratories that will be housed in the Center are those devoted to automotive and industrial lacquers, technical services for chemical coat ings. development of varnishes and resins, including those for the electri cal industry, and a laooratory to devel op and test finishes for furniture ana other forest products. Now under construction also is a new technical center for the metal container department at Countryside. Illinois, midway between the Elgin and Chicago container plants. We expect to occupy these larger, better-equipped facilities for research, development and engi neering early in 1969. Internatipnal Operations Our international operations cover the sales of Sherwin-Williams paint products in all areas other than the domestic market. They consist of ex ports and sales by foreign subsidiaries ana licensees. International sales rose slightly over the previous year anc in come from operations also increased. S-W 000461 D We now have five wholly-owned for eign subsidiaries, including Ruoberset Co. iCar.aca). Ltd. Two of these--Brazil and Mexico -- produce a broad and growing range of trade, maintenance ana ncsustrial paints. At present the Brazilian subsidiary s production facili ties expansion program .s nearing com pletion. The subsidiary >n Mexico is expanaing its market through additional Comoany-operatec orancnes patterned after these m the United States. Sherwin-Williams Co. lEuropei S A. and The Sherwin-Williams Co. iWest ind'es: Ltd. distripute >n Europe ana the West Indies respectively. As our Company progresses m the development of specialized coatings, we have Degun to license well-estaoiisneo paint manufacturers overseas to oroouce these products. As previously mentioned, there are such licensees m Swecen. Great Britain. France ana Italy. Contracts m several ether countries are oeing actively negotiateo. Canada and Puerto Rico The results of Canadian operations appear in the statements of Consohdatea Income and Earned Surplus and the Consolidated Balance Sheet begin ning on page 20 of this report. i" Latin America, oesiaes our own companies m Brazil and Mexico. Sher- win-Wiiiiams pamts are manufactured by licensees m El Salvador /Central American Common-Marketi. Colombia. Venezuela. Ecuador. Argentina and Peru. Sherwin-Williams Venezoiana. C. A. is presently m the process of ex panding its sales territories to include the Dutch islands of Aruba and Cura cao. Similarly, our El Salvador licensee is extending sales activities to include the Republic of Panama. Our iicensee in the Philippines con tinues to make profitable anc steady progress and has Degun to expe-t tc some countries m Southeast Asia In Spain. :ne progress m sales and profitability of our Spanish licensee is accelerating rapidly. We are continually seeking to expand our overseas operations through tne addition o` new licensees anc the estapf-snment of wheffy- or partly- CV.n6C jp 0t^9r CCjP*r*6S The Sherwin-Williams Co. of Puerto Rico. Inc., in which we holo a majority interest, was organized in 1962. It is a joint venture with Sues, de A. Mayol & Co., which has distributed our products m the Commonwealth for more than sixty years. The operation in Puerto Rico consists of a paint manufacturing plant whose products are sold by the Mayol organization. Sales and .profits of the operation fell somewhat below expectations in fis cal 1968. This was due directly to the changing buying habits emerging m the Commonwealth, which require some alteration m marketing practices. Marketing changes began to be m- piemented in August of 1968. whe~ our distributor opened a new. mcrs con veniently located wareKc-se which should e^ab'e tegamzat m tc serve more ma-kets ~r-e e" : e-t We ex pect. m --e a substantia! sales mprease -s ; "ateriai.zes. the plant w 11 oe :ce-ar rg at close to ca- oac t> .-.n c- w na-.e a markeoiy fav erse e er'ec: ear-mss. Laoor Relations anc Manpower .Development During the fiscal yea' ,,st e-cec :-r total work `orce increased 622 to 19AG3. 'We are pleased to report t~at r-r laocr relations ccnfnueo cn a sat s`ac- tcry oasis. There were or e` strikes a! two plants while un.cn contracts were bemg negctiatea. out these were set tled -without noticeable ejects _pcn operations. All major union contracts presently m effect will continue rnre-gn June '970. We have .nteosif'ec cur recru:t-~g programs `or `uture managerne-t ta'en't ana for scientifically frameo personnel to meet our increasing researen. devel opment and engineering needs. Our framing programs for employees at ail levels, including our long.estaoiished Tuition Aid program, are oemg stepped- up. Participants include not only non degree employees framing themselves for advanced assignments m researcn ana development, cut also h-ghiy- tramed personnel seeking increased competence m particular fieids. We take pride that our Company, a leader among equal opportunity em ployers. is taking an active par' m the National Alliance of Businessmen (NAB) Jobs Program. We are currently working with the Manpower Adminis tration and are committed to hire 169 haro-core unemployed as trainees at various, facilities under the permanent part of the NAB program. This commit ment is now being implemented. In ad dition. we earned cut successfully a commitment to the NAB Summer Youth PreC'am for 80 jobs. - e commitments are - aco-t to ...- long-stated policy c` c'dv.a.ng fui1 eaual.tv. of employment cover, jnt es -wherever we `-a-e ocerat :-s S-W 000463 !< i ' Financial Review ^ i I Sales The impact of the surtax on total Long-term debt at August 31. 1968 Consolidated net sales for the year consolidated earnings in fiscal 1968 amounted to $.21 per common share. consisted of $50,000,000 in debentures and $3,000,000 bank debt under our Re ended August 31. 1968 amounted to volving Credit and Term Loan Agree S452.526.660. This is a record high and ment. Ratio of net worth to long-term I represents an 8.4o increase over fis cal 1967. Income Taxes The provision for federal income debt at August 31. 1968 was 4.17 to i. With minor exceptions, all divisions of the business contributed to the sales increase. Particularly gratifying were the sales increases through branches taxes for 1968 amounted to $16,220,000 and includes $1,420,000 deferred in come taxes arising from the difference between financial and tax depreciation. Working capital at August 31. 1968 amounted to $158,043,324. The ratio of current assets to current liabilities was 4.81 to 1. and leased departments, in metal con tainers and by Sprayon Products. Inc. and Compania Sherwin-Williams. S. A. de C. V. in Mexico. In determining the tax provision, the investment tax credit of $1,038.953 was deducted. Inventories at year end were some what higher than immediate sales pros pects required. A substantial portion of the increase resulted from hedge buy Sales of the recently acquired Os born Manufacturing Company are in cluded in fiscal 1968 and in the restated sales figure for 1967.. Financial Position Our Company continues to maintain a strong financial position. During the ing of tin plate ar.d the purchase of cer tain pasic raw materials in anticipation of price increases which have subse quently occurred. year we entered into a $25,000,000 Re Net Earnings volving Credit and Term Loan Agree ment with a group of banks. This Cash flow from operations, which in cludes net income, depreciation and I Consolidated net earnings totalled gether with long-term debt arc inter deferred Federal taxes, increased to I $18.989.863. After preferred dividends, this is equivalent to $3.36 per common nally generated funds, w. h provide the financing m connects- w v* cur ex $28,295,134 or S5.11 per common share in fiscal 1968. from S26.988.300 or $4.83 share as compared to $3.44 last year.. pansion anc '-p-c .e-e-t p-cgram re per common share m fiscal i96~ The decline of $.08 per common share ferred to etsewoe-e - i- s report. We resulted from a drop of $.04 m Sherwr- do not foresee a-, -eeo 'or additional Cur financial strength prcvces me Wiiiiams' operations before "pooling'' financ rg dur rg me rggg fiscal year, base for continued growth a-c ` e* c - and S.C4 - Osborn s operations m '963. except for seasonal borrowings. ty n finarC "0 '-fm? OCPC'f-- ' ?S i S-W 000464 Statements of ~.. Consolidated Income and Retained Earnings THE s h e r w in -w il l iams c o mp a n y And Consolidated Subsidiaries Income Net sales Dividends, interest, and miscellaneous........................ Costs and expenses (including depreciation of S7.885.271 in 1968 and S6.578.007 in 1967 restated): Cost of products sold................................................. Selling, general, and administrative expenses . . Pensions--Note G...................................................... Interest ...................................................... .... . Miscellaneous........................................................... Income taxes- Income Before Income Taxes United States: Payable currently...................................................... Deferred..................................................................... Foreign...................................................... .... Net Income Net income per common share....................................... Year Ended August 31 1967 1968 As Restated tNote A) As Reported . Previously S452.526.660 2.114.418 454.641.078 S417.409.220 1.789,426 419.198.646 S401.714.376 1.504.750 403.219. '26 278.692.052 132.161.993 3.699.458 3.352.065 464.412 418.369.980 36.271.098 255.690.442 121.666.251 3.412.994 1.488.140 413.905 382.671.732 36.526.914 245.647.333 118.378.594 3.1 n 9.-1 -i g 1.488.054 443 055 369.076.155 34.142.971 14.800.000 1.420.000 1.061.235 17.281.235 S 18.989.863 S 3.36 15.087.000 1.045.000 1.029.621 17.161.621 S 19.365.293 S 3.44 14.050.000 1.045.000 996.621 16.091.621 S 18.061.350 S 3.35 Retained Earnings Balance at beginning of year............................................ Retained earnings of Osborn at September-1. 1966- Note A................................................. .... Net income 'or tre year ................................... Cash dividends oedareo Series A Preferred Stock................................... Common--$2.00 a share............................. Osborn divioerds--pr:or to meroer Ba'ance at end cf year............................. : S170.513.115 ! -0 170.513.115 18.969.863 189.502.97S SI 51,996.944 10.805.508 162.802.452 19.365.293 182,167.745 299.444 10.616.510 753.493 11.669.447 S'77.833.531 278.057 10.585.957 790.616 11,654.630 S170.513.H5 See rates to f-ra-o a- stater-rents or case '6. SI 51,996.944 -- 0-151.996.944 -jatosL350 170.048.294 278.057 10.585.957 -010.864.014 S159.184.280 S-W 000465 Consolidated Balance Sheets Assets Current Assets Cash.................................................................................... Shortterm investments--at cost....................................... Trade accounts receivable, less allowances of. S642.000 in 196S and S628.000 in 1967 as restated . . Inventories -- at lower of cost (average or first-in. first-cut method) or market: Finished merchandise............................................ Work in process, raw materials, and supplies ........................................................... Total Current Assets ------------ 1968 *--- August 31 --------- --------- 1967 ---- . . , -------- As Restated As Reported (Note A) Previously S 12.827.350 S ii.256.457 S 10.498.790 1.216.860 8.083.771 6.975 452 52.068.837 47.445.960 45.559 585 90.978.001 42.419.662 133.397.663 199.510.710 80.606.711 35.122.529 115.729.240 182.515.428 78.846.538 32.082.309 HC.929.347 174.063.284 Investment ana Other Assets Common shares of The Sherwin-Williams Company of Canada. Limited--at cost-- Note A.......................................................................... Receivables, advances, and miscellaneous other assets................................................................ j ; 4,182.766 2.709.737 6.892.503 Property. Plant, and Ecuipment -- on the basis of cost Land.................................................................................... Buildings.......................................................................... Machinery and equipment. . ......................... .. Less allowances for depreciation................................... Short-term investments allocated for piant and equipment additions............................................ ' j j 1 j i 4.860.145 i 50.827.651 | 131.235.513 I 74.275.950. 112.647.359 -c112.647.359 Deterred Charges Advertising stock and supplies....................................... Prepaid insurance and other items......................... 2 Cl 7.811 2.C27.871 5 045.682 S324.096.254 : 4.182.766 2.656.716 6.839.482 4.444.656 48.135.696 106.149.374 68.739.467 89 990.259 25.000.000 114.990.259 2.133.390 2.395,235 4.528.625 S308.873.794 4.182.766 1.796.049 5.978.815 3.537.323 43.517.232 98.952.911 61.708.628 34.348.338 25.000.000 109.348.838 2.125.006 2.305.487 4.430.493 S293.821.43C S-W 00.0466 T a* THE SHERWIN-WILLIAMS COMPANY And Consolidated Subsidiaries Liabilities and Shareholders' Equity Current Liabilities Traae accounts payacle.................... Payrolls, corrpensation. and other accruals . Divioenc pavaole cn Preferred Stock . Taxes, other tear, .ncome taxes . . . Inccme taxes....................................... Tcta! Current L ap'iifes . 1968 S 15.666,843 18.735.074 74.600 2.576.098 4 414 766 41.467.386 _ August 31 1967 As Restated As Reported 'Note Ai Previously S 10.685.696 16.649.255 74.948 S '0.243.44- 76.303.569 -4 44 5 2.369.426 8.514.539 38.293.9-4 27 35.696 ~ 96- 23 j 36.437.554 Long-Term Debt 5.45== Deoertu-es due in 1992 .\ith annua! payments c: S2.000.00C commencing in 1973 . . Revolving credit note payable--Note 3................... Reserves For deferred Unitec States income taxes . . For pens cs 3-d otner items .... .. Shareholders' Ecuity Capital stock--Notes C. D. and E' Serial Preferred--.vithcut par value...................... Common--36.25 car va:ue .................................. Otner capital--Note F . . Retamec ear^-cs Less cost of 5CC ::~rcr snares - veas-ry *"`C!cS ' ~ 4 rc.f'Z 2 5*2!r'^,|5r'*S C2Cr *6 50.000.000 3.000.COO 53.000.000 ' 7.043.100 1.635.981 1 S.679.081 i 11 t 9 344 360 33 2 * 07*56 sc:-"3 333 531 22C 988.820 39.C33 223 949 737 S324.096.254 5C.CC0.000 --0 -- 50.000.000 50.C00.CCC _j__ 50.000.000 5.623.100 1.690.043 7.313.143 5.6237 20 1.690.043 7.313.143 9.377,960 33748 450 227.2-2 '70.513 115 2-3.266.737 -02-3.266.737 7 494 SCO 33 -43.45: 1 92.773 159 -34 282 2CC 020 323 -0 200 020 223 S308.873 794 S293 32- 432 S-W 000.467 Notes tO Financial Statements August 31. 1968 THE SHERWIN-WILLIAMS COMPANY And Consolidated Subsidiaries Note A -- P-.ncicies of Cc'sc 'Cai c* The consoiicated franciai statements mcude at! s-os z a* es except The Sherwm-W-itiams Company of Canaoa L muse t~4s0 c**es:. The Company's eou'ty n the consol-dated net assets of iha? subsidiary amounted to $7,408,279 at August 31. 1968 whicn mc-uces u^c stnouted earnmgs s-nce acquisition of $4.922.f57. For the .ear enceo August 3t. 1963. the Company's equity in the undistributed earnmgs amounted to S235.385. >-e aggregate preference of the Serial Pre'erred Stock m involuntary qu-cat on s S26 303.SCO. Note D -- Reservation of Common Shares: At August 3i. 1968. an aggregate of 5CS.C98 common shares were re served for conversion privileges of the Preferred Stock and exercise of outstanding stock opt:cn$. On September 3. 1968. pursuant to an agreement dated n May. 1968. The Osborn Manufactur ng Company was merged mto tne Company by the issuance of 166.436 snares o* $4.40 Cumulative Convertible Preferred Stock. Senes 8. This transaction has been accounted for as a pooling of interests and accordingly, the accounts of Osborn have been included m the consolidated financial statements for 1968 and 1967 as restated. Net sales and net income of Osborn were $16 000.225 and $1,099,435 m 1968. and $15,694,844 and $1,313,943 m 1967. Note B -- Revolving Credit: Under the terms of a Credit Agreement, a group of banks have made available to the Company until December 31. 1970. a revolving c-edit n the aggregate amount of S25.C0C.C00. On or before December 31. 197C. the Company may replace any outstanding revolving credit notes w tn term notes payable m s>x equal semiannual installments. The Credit Agreement requires the Company to maintain consolidated net current assets of not less than $100,000,000. Note C -- Capital Stock: The foiiowmg t3bie sets `orth the authorized and .ssuec shares of various classes of stock at August 31. 1968: Shares Authorized issues Serial Preferred Stock........................ $4.00 Cumulative Convertible Preferred Stock. Series A............................. S4.40 Cumulative Convertible Preferred Stock. Ser-es B............................. Common Stock....................................... 500000 7.500.000 74.600 188436 5.313.72' The snares of Series A and Series B Preferred Stock are converge at case conversion prices of $60.00 and $62.50 per share of Common Stock respectively, taxing eacn share of Preferred Stock at $1CQ for this purpose Cwr-ng the year, 348 shares of Senes A Preferred Stock were convened mto 580 common shares. The holders of the Preferred Stock a'e entit.ed to one vote for each share. The potentia1 diiuhon m net -ncome per common share assuming rHe aforementioned conversion ana exercise of options, would amount to $0.10 per share in 1968 and 1967 as restated. Note E -- Stock Options: At August 31, 1968. there were 151.421 common shares reserved for issuance to officers and key employees under a stock option plan. Options are granted at prices not less than the fair market value of the shares at cate of grant. In general, the options are exercisable to the extent of pne-na-f or one*f;Mh of the optioned shares for eacn <uU year of employ ment fo;iowmg the .date of grant, and exoire five or ten years aftef cate z* gTant. A summary of the oot'Cn transactions during the year s srown ze cw. in addition, ootions assumed m connection wtn the Osborn '-e'cer are outstanding for t 000 shares of the $4.40 Cumulat-ve C.M-e*':? de ferred Stock. Senes 8. at $73.50 per share. At August 31. '963 - s~a'es were exercisable of which 250 became exercisab'.e cur ng tne year ~nese options exoire m 1970. Note F -- Other Caoitai: Other Capita! at August 3i. i960, consists principally of tne excess of proceeds over par value of common shares issued unaer the stock option plan. Note G -- Retirement Plans: Substantially an employees of the Company and ns domestic subS'diares. who meet certain requirements as to age ana length of service, sarticioate m ron-contnoutory pension plans The Company $ coney * to accrue contributions for its oension funos representing norma, cost amortization of unfunded prior service costs over 3C years, and interest on unfunded prior service cost. At the most recent actuarial determination dates, the assets of the pension funds and the balance sheet accrual exceeded the actuartaily computed value of vested benefits. The Company may redeem the Senes A Preferred Stock commencing Note H -- Leases: m 1972 at S104 per share and at a declining amount each year to S1CC Branches, offices and certain warehouses and plants are leased for per share m **980 and thereafter, ana the Senes 9 Preferred Stock per- var ous periods. The rental expense of leased premises for the year encec mencmg m Decemoer *963. at $*i2 ana declining amounts to Si CC n 1981 anc thereafter. August 31. 1968. aggregated approximately $12~CC,00C. Approximately 35o of these rentals reiates to leases expiring in five years or less. { At beginning of year. Ostions oursia'ic'ig....................................... Reserved for future options............................ Changes during the yea' Cot'ons s-amec , . ... Options bee cm ng exerc sac e . . . . Options exercised Ooiisns cancc.ei........................................ ... At en o! year: Options outstand-ng Options exerc sac-e . . Reserved *cr future oot-ons .. ...................... .... Shares OPTION PRICES Per Share Total S4C.25 toS49 5C SJ:S64.421 Market Prices 39 CCG . 4i 9 259 , - 45 62: 43 25 :c. 49 5C 43 25 :: 49.5C . AS 525 ; 49.5C a : 25 to 49 5C - * -Z 2z :0 49 5C 1 "9.375 1.924 692 396 822 38.438 SI 779.375 2.238.850 487.1'9 8.2:8 536 4 237 526.. 16 S-W 000463