Document zmr0OKE5mZDkaRoDeVJ1pLdm

N21773 iSBUU '4 armQl 0007-SWP-000116745 0007-SWP-035324 0007-SWP-000116746 0007-SWP-035325 0007-SWP-000116747 Highlights Thousands of dollars, except common snare data Years ended December 31, Net sales Pre-tax income Net income Per common share: Net income Cash dividends Book value Average shares outstanding Return on sales Return on common shareholders' equity Effective income tax rate Debt to capitalization Times interest earned Current ratio R&D expenditures Number of common shareholders of record Number of employees 1981 $1,536,807 57,721 31.385 1980 $1,263,721 48,351 24,864 1979 $1,196,343 33,436 17,493 3.07 .80 28.69 9,908,669 2.0% 11.6% 45.6% 43.0% 4.2 x 2.0 to 1 $9,766 8,858 23,507 2.44 .60 26.76 9,767,608 2.0% 9.8% 48.6% 43.5% 3.6 x 2.3 to 1 $8,854 8,688 16,808 1.55 .07! 25.00 10,581,750 1.5% 6.8% 47.7% 47.1% 2.7 x 2.8 to 1 $7,100 9,796 16,872 MnriAUS $1,131,107 . NIT INCOKI 831,318 NIT INCOME MX COMMON MIAMI 387 omiMNOi m COMMON SHAM 8.80 79 80 81 79 80 81 79 80 81 79 80 81 0007-SWP-035326 0007-SWP-000116748 Who We Are . .... . " ' . .... . : ....................................... . In 1981. Sherwin-Williams celebrated 115 years of doing business. Our core business is the manufacturing, selling and distribution of coatings, related products and specialty chemicals Dunng 1981, we acquired Gray Drug Stores, Inc, a regional chain drug com pany with sales of approximately $500 million. (We now call it the Gray Drug Fair Division.) We sell Sherwin-Williams labeled architectural coatings and industrial finishings through 1.410 company-owned paint and wallcovenng stores in 48 states. We also manufacture and sell coatings such as Kem, Martin-Senour, Dutch Boy and Baltimore plus pnvate label brands to independent dealers, mass merchandisers, and home improvement centers. We produce coatings for original equpment manufacturers in a number of industries and special purpose coatings for the automotive aftermarket and traffic paint market. Annual Meeting The annual meeting of shareholders will be held at 10.00 a.m. April 28,1982, at Stauffer's Inn on the Square, Public Square, Cleveland, Ohio Transfer Agent A Registrar AmeriTrust Company Cleveland, Ohio Investor Relatione Pamela A Jameson The Sherwin-Williams Company 101 Prospect Ave. N W. Cleveland, Ohio 44115 Independent Auditors Ernst & Whmney Cleveland, Ohio Trustees 5.45% Debentures: 9 45% Debentures AmeriTrust Company Cleveland. Ohio 6 25% Convertible Subordinated Debentures Central National Bank of Cleveland Cleveland, Ohio Headquarters The Sherwin-Williams Company 101 Prospect Avenue, N.W. Cleveland, Ohio 44115 (216) 566-2000 Common Stock Symbol: SHW Exchange Listing New York Stock Exchange The Sherwin-Williams Company seeks and employs the best quaffed people available -- without regard tothe race, religion, color, creed, sex. national origin, handicap, or age of any person. --2-- 0007--SWP-035327 0007-SWP-000116749 Domestic Operations (Symbols contain number of facilities per state) -3 -- 0007-SWP-035328 0007-SWP-000116750 To Our Shareholders earnings per share in 1981 increased to $3.07 from 1980's $2.44. Net income increased 26 per cent to $31,385,000, compared to $24,864,000 in 1980. The return on common shareholder's equity was 11.6 percent, compared to 9.8 percent in 1980. Like most U. S, companies, we operated in a difficult and declining economy for most of the year. Both new housing starts and residential housing resales fell to severe cyclical lows, caused by continuing high interest rates and the double dip recession. Durable goods, particularly autos, con tinued on the downward slide that started in early 1980. Despite the poor economic environ ment, most of our divisions improved their performance. Stores Division operated profitably for the third con secutive year. We expanded our in stock wallpaper program to 700 stores and continued remodeling, relocating, and opening new stores. We also introduced SuperPaint, a premium line of residential products which achieved reasonably good sales in a difficult market. Our Consumer Division continued integrating Dutch Boy into its opera tions and distribution network. In addi tion, cost reduction and operating efficiencies favorably affected the division's performance. Our Chemical Coatings Division also improved its re sults despite slowdownsinthe residen tial siding, railroad, and transportation markets. Automotive Aftermarket Divi sion benefited from an increase in the car-miles driven, which brought the miles-driven back to previous levels. In addition, the division increased sales to the fleet and U. S. foreign car market. Specialty Products Division in creased market share and margins in aerosol filling, brushes, and rollers. This division made a turnaround in 1981, and with the major problems behind it. we decided to consolidate it into the Consumer Division to take advantage of the synergy in distribution and mar keting between the two divisions. Lower demand for containers from the coatings industry and severe com petitive pricing adversely affected the Container Division, Our Chemicals Di vision was particularly hard hit by de clines in several of its end-use markets, especially rubber and plastics. We made cost reductions to stem these losses and, at the same time, concen trated on more promising markets such as energy field chemicals. All of our international operations showed modest improvement in 1981, with the exception of Canada where our efforts to improve sales have not been successful. We have recently made management changes in Canada to turn this operation around. In October 1981, we successfully tendered for the outstanding shares of Gray Drug Stores, Inc. Gray had ac quired Drug Fair Inc. in May 1981. Both ofthese companies havebeen margin ally profitable for several years In an industry that has experienced signifi cant profitable growth relative to overall retailing. We saw this acquisition as an opportunity to use our management capability in related areas to improve Gray Drug Fair's profitability. To concentrate on improving the man agement of this operation, we pro moted Carl A. Bellini to group vice president responsible for Gray Drug --4 -- 0007-SWP-035329 0007-SWP-000116751 Fair and Sherwin-Williams Stores. Richard R. Anglin was promoted to president and general manager of the Stores Division, and Alvin F. Towle was recruited to become president and general manager of Gray Drug Fair. At the same time, Edward D. Hopkins was promoted to group vice president responsible for our coatings divisions and the Container and Chemicals Divi sions. Subsequently, Thomas N. Bird was promoted to president and general manager of the Consumer Division, and Frank E. Butler was promoted to presi dent and general manager of the Chemicals Division. In the international group, Gerald B. Blouch was promoted to president and general manager of Sherwin-Williams Canada and Jesus M. Caravia was promoted to general manager -- Caribbean Area. It is unlikely that we will see signifi cant improvement in housing or auto motive markets in 1982. The general economy will stay under the pressure of a deepening recession, high unem ployment, and high interest rates caused by government deficit spend ing. Consequently, we expect to be operating in an extremely difficult en vironment for all of 1982. We plan to continue improvements in our Stores Division and our other operating divisions. We will concen trate particularly on turning Gray Drug Fair around and on developing a long-term strategy for this new segment of our company. Gray Drug Fair aided our fourth quarter results, and we are expecting that it will favorably affect allot 1982. The national economy Is going through a process of ccrrection and some economic signs are now turning positive. We hope that our government leaders will maintain their commitment to bri ng down inflation. All levels of gov ernment must continue to help rebuild the private sector to restore the coun try's competitive posture and our overall economic health. We are by no means satisfied with our 1981 results. We do, however, feel we ended 1981 as a stronger company with a commitment from our people to face up to economic adversity and to continue the successful turnaround of the company. In spite of the difficult economic environment we anticipate for 1982, we are confident of showing continuing improvement of our financial results. John G Breen, Chairman, President Chief Executive Officer February 17,1982 _^ 007 --SWP-03533Q 0007-SWP-000116752 Sherwin-Williams at a glance Segment Paint Stores Division Stores Division Drug Stores Gray Drug Fair Division Gray Drug Stores, Inc. Drug Fair Inc. Principal Products Major Markets Sherwin-Williams labeled architec tural coatings and industrial finishes, wallcoverings, floor coverings, win dow treatments, paint sundries, spray equipment. Do-it-yourself consumers, profes sional painters and contractors, commercial and industrial mainte nance accounts, small to medium sized manufacturers of products requiring factoiy finish. Prescriptions, health and beauty aids, General public. cosmetics, general merchandise. Coatings Chemicals International Consumer Division Automotive AFtermarket Division Chemical Coatings Division Container Division Chemicals Division International Division Sherwin-Williams Canada Sherwin-Williams Mexico Sherwin-Williams West Indies Sherwin-Williams Brazil (unconsolidated) Manufactures architectural finishes (under the Sherwin-Williams, MartinSenour, Dutch Boy, Baltimore, Kern and private brand labels), brushes, rollers, adhesives. Industrial and commercial mainte nance accounts, do-it-yourselfers, painting contractors. Automotive refinish products under Sherwin-Williams. Acme, Rogers, and private brand labels. Automotive body shops, fleets, automotive parts stores. Sherwin-Williams labeled industrial finishes for original equipment man ufacturers. Manufacturers of rail coating, siding, wood products, metal furniture, rail and on-road equipment business machines. Paint cans, oblong cans, aerosols. Manufacturers of paint (including Sherwin-Williams), and of consumer, personal and household products. Para cresol, saccharin, triazoles, isatoic anhydride, alkali blue, barite, BHT, zinc oxide products. Para cresol: manufacturers of anti oxidants for plastics, food and rob ber. Triazoles: manufacturers of cor rosion inhibitors for antifreeze, water treatment and related industrial proc esses. Saccharin: beverage and food industries. Alkali blue: printing ink manufacturers. Barite: mud service companies. Architectural coatings, industrial finishes, and automotive repaint finishes, paint sundries and various home decorative items. Painting contractors, do-ityourselfers, independent paint dealers, commercial and industrial maintenance accounts, automotive body shops, original equipment manufacturers. Qsnsrsl Business development--the ac quisition of Gray Orug Stores, Inc discussed m Note 6, was th9 only matenal change in the busi ness conducted by he company during the latest fiscal year. Raw materials and fuel supplies for al segments are generally available in sufficient quantities and from a vanety of sources. Environmental affairs _ the company be- lieves it is in substantial compliance with federal, state and local provisions regulating the discharge of materials into the environment. There aie no matenal capital expenditures anticipated for environmental control facilities during the next year. Customers and backlog--the loss of any single customer would not have a materially adverse effect on the business of the company or any segment. Backlog of orders is not significant m the business of any segment of the company --6-- 0007-SWP-035331 0007-SWP-000116753 Distribution Competition Through 1,410 company-owned stores in 48 states. Paint and wallpaper stores, mass market ers, home centers, independent hardware stores, hardware chains. Market frag mented and highly price, quality and serv ice competitive. Approximately 57% of sales generated in the second and third quarters. January and February smallest sales months. 358 retail stores in Delaware, Rorida, Kentucky, Maryland, New York, Ohio, Pennsylvania, Virginia, West Virginia, and the District <rf Columbia. Drug chains, food stores and mass market ers. Reacts to convenience, pricing, and merchandising. Seasonal with approximately 28% of sales occuring in the fourth quarter. The Stores Division, independent dealers, mass merchandisers, home centers. 1,100 coatings manufacturers at regional and national level. Quality, service, price, main competitive factors. Seasonal with the major portion of sales oc curing In the second and third quarters. 64 Sherwin-Williams automotive branches, direct sales representatives, distributors and jobbers. Division ranks among four major market leaders. Quality and service competitive. Moderately seasonal. Direct sales and Sherwin-Williams stores. Four major competitors with broad product offerings and several small companies with niche products. Product technology, quality and service key competitive factors. No significant seasonality. Direct sales representatives. Five container manufacturers. Price and service factors in competing. Sates flow fairfy evenly through the four quarters -- the fourth quarter the lowest. Direct sales representatives, distributors, warehouses. Major domestic and foreign chemical man Not considered seasonal. ufacturers. Business technology and price competitive. Direct sales force, distributors, jobbers. Company-owned stores as follows: Canada 96; Mexico 74; Brazil 13. Many competitors In each foreign market. Sherwin-Williams competitive position sigrificant only in Mexico. Canada, and the West Indies. Price, service and quality sen sitive. Canadian operation seasonal with majority revenues generated in second and third quarters; other operations not significantly seasonal. Patents and licensee ana not of material im portance In the business of the company How ever, a substantial part of the income of the Inter national segment is derived from the license ol technology, trademarksandtradenames to other foreign companies Financial results of these segments are in cluded on page 24 of this report Legal -- ths company has been cited by the tlon at the Chicago. Illinois container plant While the company's position has been upheld by an administrative lawjudge, the matter is being ap pealed by federal authorities Also, the company has been cited at the Chicago plant site by the Metropolitan Sanitary District or Greater Chicago The company has engaged in discussions with the sanitary authorities in an effort to resolve this issue. PacIHtlaa are listed on page 31 of this report. The majority of the plants are owned by the com pany. The company believes that the various production facilities of the Coatings segment are adequate to operate at a significantlyTijgher volume than in 19S1 Research and development expenditures arsdescribedonpage19 Virtually all such activi ties were sponsoredby the company rather than by customers. -- 7- 0007-SWP--035332 0007-SWP-000116754 1981 Operating Review Segment Paint Stores '. '. '. .'. "" ".... '' 'i Reorganized regional structure by streamfining from 10 regions to 5 and by increasing 1 staff lor each region. Resulted in more flexible, broader, regionalized management ] control. '>} Raced budgeting responaibiitiea with store managers so accountability for expense , and sales budgets now rests with individuals closest to daily operations. j SuperPaint successfully introduced.- " - Wallpapersales increased 10%, retail sale3 increased 9%, wholesale sales increased - 5* Improved profit 108*. " : ,. i Remodeled 42 stores, opened 19 stores, relocated 19 stores, dosed 20 stores. Developed training programs for all levels of field personnel. | Drug Stores Fourth quarter sates Increased. New management in place. Thousands of Dollars 575,fn 81S.O* m n 7t so n 78 79 1I73H I 80 81 Coatings Consumer Division Increased paint sales 39% because of Dutch Boy acquisition. Increased Specialty Products sales 17%. increased profit because of manufacturing and distribution efficiencies. Automotive Aftermarket Division Marketed US.-made product fine for Japanese Imports. Double-digit percent gain on dollar sales because of market strength and S-W marketing programs. Improved asset management -- reduced working capital to sales. Chemical Coatings Division Commercialized high-solids technology for metal office furniture market introduced in-mold technology for priming plastic parts to the automotive Industry. a Reorganized marketing organization around product lines. Went from a loss position to a profit Container Division Achieved record aerosol sales and production through successful marketing plan In . personal products. Profits flat because of softness in paint can market. Reduced Inventory levels to lowest level since 1968 despite Increase In sales of 300% ' in that time period. Accomplished this through Improved inventory control proce-: dures. Chemicals Chemicals Division Lost money because of high level of fixed costs and slow response lo downturn in economy. Established position in antioxidant market for plastics with rebuilding of BKT facility. . Opened four warehouses to serve drilling mud market in Oklahoma. am 78 ' 79...80 81 International a Record sales and earnings in Mexico and West Indies.' Record sales in Brazilian subsidiary, (unconsolidated) imm urn wn 78 79 80 81 --8-- 0007--SWP-035333 ___ 0007-SWP-000116755 Development for the future , '' New emphasis on industrial maintenance program. Continue to expand our distribution arid penetration in key markets. Plan to add 35 new stores, relocate 50 and dose 10. Progress in cost reduction through use of additional core staffing and payroll marv agement system. Operating Income (Lon) Thousands of Dollars tMn i I(.*> 1,771 7J SI " j ! i Begin strategic planning process. Establish merchandising strategy. Set up expansion plans and establish prototype store. Reduce administrative costs. Merge Specialty Products into Consumer to use distribution systems and strengthen merchandising position. Implement marketing programs to broaden distribution channels and improve ca pacity utilization. install mini-computer system in aftermarket branches for better control of assets and expenses. Expand distribution system fa small and medium sized manufacturers. Offer customer training in product applications. ! Fully commercialize plastic Poly-Pail0 one-gallon containers and go into limited production of plastic five-gallon containers in 1962. '(i Increase number of warehouses and product line in energy Field chemicals. Cost reduction in 1981should significantly reduce loss in 1982. 1i % ' { J 1 Develop more focused marketing programs in Canada and Mexico. Increase (censing and export programs. J > J1 4 l j --9 -- MM 1.M 71 It M 11 MIT 7.H7 78 79 *0 [J -m9,W Mm M 76 79 89 61 0007--SWP-035334 0007-SWP-000116756 Directors and Officers Board of Directors JameaA.Attwood, 54 Executive Vice President and Chief Investment Officer Equitable Life Assurance Society of the United States Keith S. Benson, 63 Retired, formerly Executive Vice President. Administration and finance Oglebay Norton Company John G. Braen, 47 Chairman. President and Chief Executive Officer The Sherwin-WilliCTiB Company D. WaynoCalloway, 46 President and Chef Executive Officer Fnto-Lay Division of PepsiCo, Incorporated Thomas A. Commas, 39 Senior Vice President, Finance The Sherwin-WUliams Company William J. Da Lancey, 65 Chairman and Chief Executive Officer Republic Steel Corporation Robert C.Doban, 57 Senior Vice President Science and Technology Ovens-Commg Rberglas Corporation Alton C. Holmes, 61 National Managing Partner Jones. Day. Raava & Pogue, attorneys J. Robert KJBpack, 59 President National City Bank and National City Corporation WIDIa/n Q.Mtcheil, 51 President Central Telephone and Utilities Corporation Patricks. Parker, 52 Chairman of the Board and Chief Executive Officer Paiker-Hannifin Corporation Officers John G. Breen Chairman, President and Chief Executive Officer Thomas A. Commas Senior Vice President, Finance F. Thomas Krotfna Senior Vice Presidert, Corporate Research and Development Carl A. Bellini Group Vioe President Edward D. Hopkins Group Vice President Alan 0. Childs Vice President and General Counsel and Corporate Secretary William B. EUradge Vice President, International Group Conway G. Ivy Vice Resident, Corporate Planning and Development Arthur D. Mains Vice President, Human Resources Robart A. Tscharmsn Vice President, Facilities and Administrative Services James E.Wallace Vice President, Corporate Controller Thomas RMIMleh Treasurer LarryAPHorak Director of Taxes and Assistant Secretary and Assistant Treasurer Richard R.Anglin President & General Manager, Stores Division Thomas N. Bird President & General Manager, Consumer division Frank E. Butler President & General Manager, Chemcals OMsion Joseph M. DeVKtorio President & General Manager, Chemical Coatings Division Joseph P. Matadra President & General Manager, Contaner Division Alvin F.Towto President & General Manager. Gray Drug Fair OMsion Leonard A. Ward President & General Manager. Automotive Aftermarket melon -- 10 -- 0007-SWP-035335 0007-SWP-000116757 Financial Summary Thousands of dollars, except per share data years ended December 31, Operation* Net sales Cost of products sold Selling, general and administrative expenses Interest expense Income (loss) before income taxes Income taxes (credit) Net income (loss) Funds provided from operations Financial Position Inventories Accounts receivable -- net Working capital Property, plant and equipment -- net Total assets Long-term debt Common shareholders' equity Total shareholders' equity Par Common Shara Data Average number of shares outstanding Common shareholders' equity per share (bookvalue) Net income (loss) per common share Fully diluted net income (loss) per common share Cash dividends declared per common share Financial Ratios Income (loss) as a percentage of sales Return on common shareholders' equity (A) Return on assets Dividend payout ratio Debt to capitalization Current ratio Times interest earned (B) Working capital as a percentage of sales Ganaral Capital expenditures Research and development expenditures Provision for depreciation and amortization Number of shareholders: Preferred Common Number of employees Sales per employee Sales per dollar of assets 1981 1980 1979 1978 1977 $1,536,807 1,070,171 402,472 18,332 57,721 26,336 31,385 63,226 $1,263,721 868,388 343,931 18,552 48,351 23.487 24,864 49,496 $1,196,343 829,183 323,206 19,366 33,436 15,943 17,493 44,763 $1,132,350 795,237 311,514 21,318 9.589 4.580 5,009 24.640 $1,035,989 732,049 283,879 17,965 (11,890) (3,683) (8,207) 11,117 $334,890 132,174 291,643 240,268 864,438 230,101 284,029 305,020 $237,399 131,265 307.451 210,754 768,592 212,934 262,964 286.876 $242,264 125,669 317,028 203,851 711,734 234,285 243,402 268,107 $243,508 135,047 311.537 209,580 653,799 242.362 242,868 267,793 $256,314 125.380 270,320 201,112 621,307 196,621 238,648 263,586 9,908,669 $ 28.69 3.07 2.72 .00 9.767,608 $ 26.76 2.44 2.12 .60 10,581,750 10,796,890 $ 25.00 $ 22.49 1.55 36 1.43 .36 .075 10,793,492 $ 22.10 (.86) (86) .83 2.0% 11.6% 3.6% 26.1% 43.0% 2.0 to 1 4.2 x 19.0% 2.0% 9.8% 3.2% 24.6% 43.5% 2.3 to 1 3.6 x 24.3% 1.5% 6.8% 2.5% 4.3% 47.1% 2.8 to 1 2.7 x 26.5% .4% 1.8% .8% -- 48.6% 3.6 to 1 1.5x 27.5% (8%) (3.6%) (1.3%) +100.0% 46.2% 3.0 to 1 .3 X 26.1% $43,072 9,766 21,668 750 8,858 23,507 $65,377 1.78 $23,704 8,854 19,979 855 8.688 16.B0B $75,186 1.64 $11,867 7,100 19,458 951 9,796 16,872 $70,907 1.68 $17,274 6,712 18,438 991 10,611 18.015 $62,856 1.73 $31,886 7.9^5 16,924 1,010 10,927 19,269 $53,765 1.67 (A) Based on common shareholders' equty at beginning of year. (B) Ratio of pre-tax income before interest expense to interest expense. This summary should be read In conjunction with the financial statements and notes on pages 15-29 of this report 0007--SWP--035336 --11 -- 0007-SWP-000116758 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition CASH FLOW SUMMARY Millions of OoHais 1M1 1980 '- 1979 1978 Sources: Profit........................................................................... ............ Depreciation ............................................................. ............ Uses: (Increase) decrease working capital .................... ............ Capital expenditures............................................... ............ Other........................................................................... ............ Net cash flow from operations............................... ............ Non operating: Acquisitions............................................................... ............ Dividends................................................................... Debt repurchases/issuance.................................... ............ Stock repurchases................................................... ............ Other........................................................................... ............ Net increase (decrease) cash.................................... ............ $ 31.4 21.7 53.1 -11.0 -43.1 9.1 -45.0 $ 8.1 -55.1 -11.8 - 3.2 - .3 -79.3 $-71.2 $ 24.9 20.0 44.9 51.7 -23.7 3.6 31.6 $ 76.5 -14.3 - 6.9 -18.6 - .1 2.7 -37.2 $ 39.3 $ 17.5 19.5 37.0 71.1 -11.9 6.5 65.7 $102.7 -- - 1.8 -9.5 -15.4 .7 -26.0 $ 76.7 $ 5.0 18.4 23.4 -15.1 -17.3 2.1 -30.3 $- 6.9 -- - .8 38.2 -- -- 37.4 $ 30.5 Working Capital Ratio of current assets to current liabilities was 2.0 at the end of 1981 compared to 2.3 at the end of 1980and 2.8 at the end of 1979. Decline from 1980 due primarily to acquisition of Gray Drug and an increase in certain expense accruals. The use of the UFO method of inventory valuation also con tinues to reduce the current ratio. The significant decline in cash is primarily attributable to acquisitions and expenditures forrepurchase of debt and common stock. The company has been free of short-term borrowings sincethe end of 1978 except forborrowings by our Cana dian subsidiary and Gray Drug Fair. Short-term borrow ings of the company's Canadian subsidiary and Gray Drug Fair Division were eliminated by the end of 1981. The company'scurrent cash flow position and anticipated future cash flow from operations should be sufficient to finance working capital needs presently anticipated. Capital ExpendRuraa/AcquIsMofia Capital expenditures were approximately $43,072,000 during 1981 compared to approximately $23,704,000 in 1980, excluding fixed assets acquired trough acquisi tions. Expenditures of the Stores Division increased substan tially over 1980 due to the decision to own rather than lease stores where financially attractive. Capital expenditures are not expected to increase sub stantially in 1982. Expendituresfor acquisitions totaled $55.079,000in 1981 (Gray Drug) and $14,359,000 in 1980 (Dutch Boy and Chemical Operations). External financing Is not anticipated for 1982, except for the store purchase program. Unas of Credit The company has an unused line of credit with a group of ten banks totaling $100,000,000- This credit agreement was entered into as of July 31.1981 and expires July 31, 1985. The company's Canadian subsidiary also has an unused line of credit for CD$i 7,000,000. Capital Structure The ratio of total debt (including capitalized lease obliga tions) to total capitalization was 43.0% at the end of 1981 compared to 43.5% at the end of 1980 and 47.1 % at the end of 1979. Improvement in this ratio has been accomplished primar ily through the repurchase of debt in the open market at a discount, the elimination of short-term borrowings and improved profltabiity. Total borrowings (including capitalized lease obligations) wire1230,101,000 at December 31,1961 as compared -- 12 -- 0 0 0 7 --S W P -0 3 5 3 3 7 0007-SWP-000116759 to S221.169,000 and $238,934,000 at December31.1980 and 1979. respectively Gray Drug debt included for 1981 amounted to S30.247.000. The company repurchased approximately 184,000 shares of its common stock during 1981. Depending on the company's cash position and market conditions, addi tional shares of common stock may be purchased for general corporate purposes. In October of 1979 the com pany repurchased 1,460,000 shares of its common stock from Gulf & Western Industries, Inc. There have been no other material changes in capitaliza tion during 1981 or 1980, nor has the company entered into any significant financing arrangements not reflected in the financial statements. Dividends The improved financial condition of the company since 1978 allowed for the reinstatement of the dividend in 1979 at a quarterly rate of $ 075 per share and subsequent increases to a q uarterly rate of $.20 per share during 1981. The board of directors at a meeting held February 17, 1982, declared a dividend of $.25 per share, an increase of 25% from the 1981 level. This is the third consecutive year that the dividend has been increased due to the performance improvement of the company The company's target dividend payout ratio is approxi mately 30% of earnings, depending on future capital needs of the company. Results of Operations --1981 vs 1980 Net Sales Consolidated netsales increased 22% during 1981 due to a combination of volume and price increases. Sales in all segments showed improvement in 1981 with sales of the Stores and Coatings segments being the primary contnbutors to the sales increase. Net sales in 1981 were affected favorably by the acquisi tion of Dutch Boy in September 1980 and Gray Drug in October 1981. Grose Profit Gross profit margin for the year was relatively flat due principally tothe significant decrease in the margins ofthe Chemicals segment which was affected by a severely depressed market for certain of its products in 1981. Profit margins continued to improve for the company's Coatings segment in 1981. The shift in sales mix to higher-margin products and continued emphasis on cost control contributed to the improved margins in this seg ment. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $58,541,000 over 1980 but declined as a percentage of sales from 27.2% in 1980 to 26.2% in 1981. Additional expensesfrom the Dutch Boy lineand the Gray acquisition accounted for a major part of the increase. Interest Incoma/lntsrast Expense Interest income declined from $16,845,000 in 1980 to $15,229,000 in 1981. The decline occured primarily be cause of reduced levels of funds available for investment due to expenditures for acquisitions and repurchases of debt and common stock. Interest expense declined slightly from $18,552,000 in 1980 to $18,332,000 in 1981. The decline was due to the repurchase of debentures and elimination of short-term borrowings in Canada offset to some extent by interest expense on Gray Drug debt Irom the dale of acquisition. Net Income Net income increased to $31,385,000, an increase of 26% from 1980. Increase primarily due to increased profitability in Stores and Coatings segments. Incremental profit from the Gray Drug subsidiary over the interest income which would have been earned on the funds expended for that acquisition also contributed to the increase. Effects of Inflation Supplemental information regarding the impact of inflation upon the company is presented on pages 25-27 of this report. Results of Operations --1980 vs 1979 Net Sales Sales increased 5.6% during 1980. Coatings and Chemicals segments were largest con tributors to the increase although sales in all segments increased. Sales increase attributable primarily to price. Gross Profit Gross profit margins increased from 30.7% to 31.3% in spite of adoption of UFO. Improvement primarily attributable to emphasis on cost reduction and shift in sales mix to higher-margin products. Selling, General and Administrative Expense Increased 6.4% over 1979 levels. Advertising expenses in Stores Division added signifi cantly to the increase in these expenses. Interest InconWInterest Expense Interest Income increased $8,714,000 in 1980 and interest expense declined $814,000. High interest rates and improved working capital man agement led to increase in interest income; interest expense declined primarily due to the repurchase of de bentures. Net Income Increased $7,371,000 from 1979. improved profitability in Paint Stores and International segments combined with the increased interest income contributed to the improvement. Income of Paint Stores and Coatings segments in 19B0 reflects the adoption of UFO for these segments. -- 13 -- 0 0 0 7 --S W P -0 3 5 3 3 8 i 0007-SWP-000116760 Report of Management Shareholders The Sheiwin-Williams Company We have prepared the accompanying consolidated financial statements and related information included herein for the years ended December 31,1981,1980 and 1979. 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 infor mation is prepared in accordance with generally accepted accounting pnnciples, 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 appropriate balance. The board of directors pursues its responsibility for these financial statements through the Audit Committee, composed exclusively of outside directors. The com mittee meets periodically with management, internal auditors and our independent auditors to discuss the adequacy offinancial controls, thequality offinancial 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. Chairman, President, Chief Executive Officer T A. Commas, Senior Vice President, Finance Chief Finanaal Officer Chet Accounting Officer Report of Bmat A WMnnty, Independent Auditor* 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 fisted in Item 11(a) of the Index on page 33. Our exam inations 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 In the circumstances. In our opinion, the consolidated financial statements listed in Item 11(a) of the Index present fairly the consolidated financial position of The Sherwin-Williams Com pany and subsidiaries at December 31,1981,1980 and 1979, and the consolidated results of their operations and changes in financial position for each of thethree years in the period ended December31.1981, inconformitywithgenerally accepted account ing principles applied on a consistent basis except for the changes, with which we concur, in the method of determining inventory cost as described in Note 3 to the consolidated financial statements. Cleveland. Ohio Februaiy 16,1982 -- 14 0007--SWP-035339 0007-SWP-000116761 Statements of Consolidated Income Thousands o! dollars except per share data Th StwrwhvWnftanu Cotnanv and Subaidlariaa Years ended December 31. Net sales .. 1901 .... ........ ............................ $1,536,807 Costs and expenses- Costs of products sold............................................. .................................. Selling, general and administrative expenses .................. .............................. Interest expense......................................................... ................................ Interest income......................................................... . Other ....................................................................... ................................. 1,070.171 402.472 18,332 3,340 1.479,086 Income before income taxes........................................... ........................... .. Income taxes....................................................................... .................................. 57,721 26 336 Net income ................................................................. .................................. $ 31,385 Net income per common share: Primary......................................................................... .................................. $ 3.07 Fully diluted ............................................................... .......... ........... $ 2.72 1980 $1,263,721 1979 $1,196,343 868,388 343,931 18,552 (16,845) 1,344 1.215.370 48 351 23.487 $ 24.864 829,183 323,206 19,366 (8,131) (717) 1,162,907 33,436 15,943 $ 17.493 $ 2.44 $ 1.55 $ 2.12 $ 1.43 See notes to consolidated financial statements -- 15 -- 0007-SWP-035340 0007-SWP-000116762 Consolidated Balance Sheets Thousands ol dollars Years ended December 31. Auets Current assets Cash and short-term investments................................... Accounts receivable, less allowance ............................ inventories: Finished products........................................................... Work in process and raw matenals.............. Other current assets .. ...................................... .......... Total current assets........................................... ................ Othfir aRRotR . . ............................................... Property, plant and equipment | gprt , . .. . ......................................... Machinery and equipment................................................... Construction in progress..................................................... Less allowances for depreciation and amortization ........ Liabilities and Shareholders' Equity Current liabilities Short-term borrowings......................................................... Accounts payable.............................. ................................ Compensation and amounts withheld................................ Pensions................................................................................. Other accruals....................................................................... Income taxes......................................................................... Total current liabilities ........................................................... Long-term debt......................................................................... Deferred income taxes............................................................. Other long-term liabilities.......................................................... Minority interest in subsidiary.................................................. Shareholders' equity Capital stock: Serial preferred................................................................. Common............................................................................. Other capital ......................................................................... Retained earnings................................................................. Cumulative foreign currency translation adjustment........ Less treasury stock, at cost................................................ Total shareholders' equity........................................................ See notes to consolidated financial statements. 16 Ike Wwrwrln WltSime Company and 1081 1980 1979 S 77,530 132,174 278,114 56,776 334,890 37.026 581.620 42,550 12,522 126,181 436,929 196,661 240.268 $864,436 $148,730 131,265 173,941 63,458 237.399 25,749 543,143 14,895 $109,402 125,669 177,748 64,516 242.264 16,006 493,341 14,542 6,925 115,461 256,166 15,207 393,759 183,005 210.754 $768,592 5,612 112,646 240,506 10,879 369,643 165,792 203,851 $711,734 ... S 153,982 42,730 14,140 70,983 8,142 289,977 230,101 29,790 7,920 1,630 $ 8,235 105,712 42,705 14,084 46,424 18,532 235,692 212,934 26,365 4,995 1,730 $ 4.649 78,885 34,912 14,899 28,445 14,523 176,313 234,285 24,873 5,326 2,830 7.545 2,393 247,485 (2,922) 324,307 19,287 $864,438 8.583 34,162 6,000 254,164 -- 302,929 16,053 286,876 $768,592 8,854 33,884 5,171 236.234 -- 284,143 16,036 268,107 $711,734 0 0 0 7 --S W P -0 3 5 3 4 1 0007-SWP-000116763 ' ' ' ........... ....... ... . . ; .,r. Statements of Changes In Consolidated Financial Post Tnousancs of dcars and SubaidtariM Years ended December 31. Funds provided from operations: Net income ..................................................................... Non-cash charges to net income. Depreciation and amortization...................... ..................................... Noncurrent deferred income taxes .. . ... ......... . ___ Disposition of noncurrent assets........................................................... Funds provided from operations ....................................... Funds required for operations: Decrease (increase) in working capital........................................................... Capital expenditures............................................................. ........................... Obligations under capital leases ................................................................... Other .................................................................................................................. Funds required for operations............................................. Net cash flow from operations............................................. Funds invested, distributed and other: Increase tn working capital from business acquisitions.............. ................ Noncurrent assets from business acquisitions ............................ ................ Purchase of debentures .............................................. ................ Cash dividends................................................................................. ................ Treasury stock ................................................................................. ................ Acquisition of minority interest in subsidiary.................................. ................ Other................................................................................................... ................ Funds invested, distributed and other................ ................ Net increase (decrease) in cash and short-term investments......................... ................ Cash and short-term investments: Beginning of the year....................................... ................ End of the year................................................. ................ 1981 $31,385 2t.668 3,425 6,750 63.228 (11,022) (43.072) (2,489) 1,410 (55,173) 8,055 (44,370) (9,406) (11,856) (8,907) (3,234) (43) (1,439) (79,255) (71,200) 148,730 $ 77,530 Decrease (increase) in working capital: Accounts receivable ....................................................................... Inventories......................................................................................... ................ Other current assets......................................................... ............... ................ Short-term borrowings..................................................................... ................ Accounts payable............................................................................. ................ Compensation and amounts withheld........................................... ................ Pensions............................................................................................. ................ Other accruals................................................................................... ................ Income taxes..................................................................................... ................ Decrease (increase) in working capital...................................... ................ (97,491) (11.277) (8,235) 48,270 25 56 24,559 (10,390) $(55,392) See notes to consolidated financial statements. 1980 $24,864 19,979 1,492 3,161 49,496 51,745 (23.704) (2.654) 1,607 26.994 76,490 (2,840) (10.420) (18,607) (6.914) (17) (1.297) 2,933 (37,162) 39,328 109,402 $148,730 $ (5,596) 4,865 (9,743) 3,586 26,827 7,793 (815) 17,979 4,009 $48,905 1979 $17,493 19,458 6.762 1,050 44,763 71,189 (11,867) 1,462 (2.912) 57,872 102,635 -- -- (9,474) (1,767) (15.421) -- 707 (25,955) 76,680 32,722 $109,402 % 9,378 1,244 2,664 (6,071) 42,031 4,816 289 8,620 8.218 $71,189 0007--SWP--035342 -- 17 -- 0007-SWP-000116764 Statements of Consolidated Shareholders1 Equity Thousands of dollars The Sharwin-Wlflafna Company Balance at December 31, 1978 ......................... Treasury stock acquired: 1,060,000 shares of common stock -- net of 400,000 shares sold ........................ 2.200 shares of Series B preferred stock .. . Common stock issued: 800 shares upon exercise of stock options . . Net income............................................................... Cash dividends declared: Series A preferred stock -- $4.00 per share . Series B preferred stock -- $4.40 per share .. Common stock -- $ 075 per share .............. Balance at December 31, 1979 ............................ Treasury stock acquired: 281 shares of Senes A preferred stock -- Common stock issued: 63,200 shares upon exercise of stock options 24,908 shares upon conversion of preferred stock............................................... 1,084 shares upon conversion of 6 25% Convertible Subordinated Debentures Net income............................................................... Cash dividends declared: Series A preferred stock -- $4.00 per share . Senes B preferred stock -- $4.40 per share .. Common stock -- $.60 per share................... Balance at December 31, 1980 ........................... Cumulative translation adjustment........................ Two-for-one stock split ......................................... Treasury stock acquired: 164,044 shares of common stock.................... Common stock issued: 138,838 shares upon exercise of stock options................................................... 93,782 shares upon conversion of preferred stock ............................................... 4.342 shares upon conversion of 6.25% Convertible Subordinated Debentures Net income............................................................... Cash dividends declared: Series A preferred stock -- $4.00 per share .. Series B preferred stock -- $4.40 per share .. Common stock -- $.80 per share.................... Current year translation adjustment...................... Balance at December 31, 1981............................ Serial Preferred Stock $ 8,854 Common Stock $33,881 -- '-- -- -- -- -- -- 8,854 -- -- (271) -- -- -- -- -- 8,583 -- -- -- -- -- 3 -- -- -- -- 33,884 -- 197 78 3 -- -- -- -- 34,162 -- 34,537 -- -- 552 (1,038) 535 -- 20 ---- -- -- -- -- $ 7.545 -- -- -- -- $69,806 Other Capital $ 5,240 Retained Earnings $220,508 Cumulative Translation Aciustment -- Treasury Stock $ (690) (75) -- 6 -- _ -- -- 17,493 -- (15,237) -- (109) ---- ---- -- (282) -- --" -- (785) -- -- (700) -- 5,171 236,234.. -- (16.036) -- --- --- (17) 615 -- -- -- 192 _ _ -- 22 -- --24.864 ---- -- -- -- (278) -- (775) -- (5,861) -- 6,000 ""''254; 184'"... .... ~ -- -- (1,548) (5,360) (29,177) -- -- -- (16,053) -- -- -- --- --- (3,234) 1,113 --- --- -- 503 --- -- -- 137 -- --31,385 ... -- _ --' -- -- -- -- $ 2,393 (271) (700) (7,936) -- (1,374) -- -- -- -- $247,485 S (2,922) $(19,287) See notes to consolidated financial statements 0007-SWP-035343 -- 10 -- 0007-SWP-000116765 Notes to Consolidated Financial Statements The SherwbMMIIenw Company andSuboMbirtos Years ended December 31. 1931.1980 and 1979 Note 1 -- Summary of Significant Accounting Polleiaa 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 cost, which approximates market. Inventones. Inventories are stated at the lower of cost or market. Cost is determined principally on the last-in, first-out (UFO) method. Property, 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% - 5% . . . 4* -12% 5% -10% 10% - 33'/i% 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 $9,766,000, $8,854,000 and $7,100,000 for 1981,1980 and 1979, respectively. Net income per common share. Primary net income per common sharewas computed based on the average number of shares outstanding afteradjusting net income for dividend requirements of the preferred stock. Fully diluted net income per common share was computed based on the average number of shares outstanding and assumed the conversion of the 6.25% Convertible Subordinated Debentures (afteradding to net income intereston the debentures net of incometaxes), preferred stock and the exercise of dilutive stock options. Foreign Currency Translation. The financial statements of foreign entities for the year ended December 31,1981 have been translated to U. S. dollars in accordance with FASB Statement No. 52, "Foreign Currency Translation." Under that Statement, for certain foreign operations, all balance sheet accounts are translated at the current exchange rate and income statement items are translated at the average exchange rate for the year. Resulting translation adjustments are made directly to a separate component of shareholders' equity. For 1980 and prior years, certain balance sheet accounts (principally inventory and properly and equipment) and related income statementitems are translated at historical exchange rates, and all translation adjustments are made directly to income. The new method of accounting increased 1981 net income by $1,910,000 ($.19 per share). If the company had adopted the new Statement for 1980and 1979, reported net income for those years would not have changed significantly. Adoption of Statement No. 52 resulted in establishing a new cumulative translation adjustment account that decreased shareholders' equity by $1,548,000 at January 1,1981. Note 2 --Stock Split On February 18, 1981, the company's board of directors authorized a two-for-one split of the common stock effected in the form of a 100% stock dividend which was distributed on March 30,1981, to holders of record on March 9, 1981. Accordingly, all numbers of common shares and per share data have been restated to reflect the stock split. The parvalue of the additional shares of common stock issued in connection with the stock split was credited to common stock and a like amount charged to other capital and retained earnings. Note 3 --Inventories Effective January 1,1980 and 1979, the company changed its method of determining inventory cost from the FIFO and the average cost methods to the UFO method for substantially all inventories. The company believes the UFO method more fairly presents its results ofoperations by reducing the effectof inflationary cost increases in these inventories and results in a better matching of current costs and revenues. The following presents the effect on inventories, net income and net income per 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 at dollars, excopt per sham data Percentage or total inventones on UFO.................. Excess of FIFO and average cost over UFO . ................... Effect of UFO on net income .. . Effect of UFO on net income per common share.................. Years ended December 31, t980 1979 94% 90% 55,949 32,424 12,703 14,150 1.28 145 20% 6.221 3,359 32 0007--SWP-035344 Note 4 - Ptntlon* Substantially all employees of the company who meet certain requirements as to age and service participate in noncontnbutoiy pension plans. The company funds the amount charged to expense, which represents normal cost and amortization of unfunded priorservice cost over 30 years. Pension expense was $14,546,000. $15,020,000, and SI 5,556,000 for 1981.1980 and 1979, respectively. Increased benefits and additional employees related to business acquisitions increased 1981 and 1980 pension expense by approximately $1,200,000 and $1,100,000, respectively. However, certain actuarial assumpbon changes and plan amendments were made which decreased pension expense. In addition, the company contributed approximately $174,000 to various defined contribution union retirement plans. The company is presently unable to determine its respective share ofeitherthe accumulated plan benefitsornet assets available for benefits under the union plans. Actuarial information for the company's pension plans as of the latest valuation date is presented below: Thousands of dollars Actuarial present value of accumulated plan benefits: Vested Mon-Vested .. Net assets available for benefits . ... Weighted average assumed rate of return on accumulated plan benefits January 1, INI 1980 5187,330 14.336 $202,266 $241,547 ax $168,522 8.070 $176,592 $182,735 8% Note 9 -- Income Taxes Thousands of dollars Years ended December 31, INI 1980 1979 The components of income before income taxes consist of the following: Domestic Foreign Total income before income taxes $50,364 7.357 $57,721 $39,360 8,961 $48,351 $27,353 6,083 $33,436 The components of income tax expense are as follows: Current: Federal Stale and Local .. Foreign.......................... DeferredFederal............................ Foreign -- Total income lax expense . ... $14,264 2.600 3,041 19,906 $16430 2,600 4.479 23409 $ 7.080 1,419 3,400 11,899 6.511 (80) &431 $26,336 (774) 352 (422) $23,467 3.966 78 4.044 $15,943 The company has recognized the deferred income tax liabilities 3rid benefits resulting from 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 Ihereon. At December 31, 1981, such undistributed earnings amounted to approximately $15,140,000. Investment tax credits (accounted for by the flow-through method) aggregated $2,837,000, $1,500,000and $1,483,000 for 1981. 1980 and 1979. respectively. The source and deferred tax effect oftiming differences is as follows: Thousands ct dollars Years ended December 31. INI I960 1979 Depreciation inventory valuation reserves . . Provision for disposition and temnnabon of operations Investment tax credits and other carryforwards. . . Gam on purchase of debentures Revenue recognized on instalment sale basis Accrued vacation pay ........... Other items (each less than 5% of Ihe computed "expected" tax amount) $ 3,184 434 (3,545) 700 69 6.786 (1.197) $ 6,431 $ 3,112 ft210* (1,530) 239 1,351 1.702 (1.029) (57) $ (422) S 3.486 (1.302) (1.157) 3.093 610 (456) (230) $ 4,044 A reconciliation of the statutory federal income tax rate and the effective tax rate follows: Years ended December 31, INI 1980 1979 Statutory tax rate............. Effect of State and local taxes .... . Investment tax credt . Foreign tax credit.................. Foreign operations subject to varying income tax rates Ottwr -- net Effective tax rate... ......... 46 OX 24 (49) (1 1) 1.1 21 45 ex 46.0X 2.9 (3.1) (13) 2.8 1.3 48.6% 46.0% 22 (39) (1-2) 3.0 16 477% 0D07--SWP--035345 0007-SWP-000116767 *_ " * . .n'r"T"."r............... . iT. . "T- . Note 6 -- Acquisitions Effective October 3, 1981, the company acquired for cash, through a wholly-owned subsidiary, the outstanding stock of Gray Drug Stores, Inc ("Gray") for $21.00 per common share. For financial statement purposes, the acquisition has been accounted for under the purchase method. Accordingly, the operations of Gray since the date of acquisition (net sales ol $137,860,000 and net income of $3,444,000 or $.35 per share) have been reflected in the statement of consolidated income. The aggregate purchase price of $55,079,000 has been allocated to the fair value of the net assets acquired based upon a preliminary allocation of the purchase price. The excess of fair value of net assets acquired over the purchase pnce has been allocated to reduce proportionately the fair values assigned to fixed assets and leased property under capital leases A summary of assets acquired and liabilities assumed (excluding net current assets of $45,673,000) is as follows: Pro forma financial information has been prepared in accordance with Accounting Principle Board Opinion No. 16 and is based upon the assumption that Gray was acquired as of January 1,1980, at the same purchase price. In management's opinion, the pro forma financial information is not indicative of results of operations that may have occurred had the acquisition of Gray taken place January 1,1980 or of future results of operations of the combined companies under the ownership and operation of the company. The following pro forma data reflects adjustments for interest income on short-term investments and gives effect to adjustments resulting from the acquisition: Thousands ot dollars, except per share data Net sales ... Net ncome Net ncome per common share Pnmaiy ... Fully diluted .. ............... Years ended Decernber31, 10M I960 $1,907,000 $1,751,000 24.300 23.500 236 229 197 182 Property, plant ana equipment Other non-current assets Long-term debt and omar liabilities ---- ------------- ------------------ - $t4,504.ooo 28.596.000 (33,694,000) $ 9,406,000 . . --.......... In 1980, the company purchased certain businesses from Dutch Boy, Inc., Ashland Chemical Co. and the Eagle-Picher Co. for a total of $14,359,000. The assets acquired consist primarily of manufacturing facilities and the related machinery and equipment. Net* 7 -- Capital Stock Authorized Shares Serial Preferred Stock-- without par value $4 00 Cumulative Convertible Preferred Stock, Senes A $4 40 Cumulative Convertible Preferred Stock, Senes 8 Common Stock-- $6 25 par value 1,500.000 50,000,000 1M1 Shares m Treasury. December 31. 1990 1979 --- ------:----------i:..'.; Shares Outstanding Net of Treasury, December 31. INI 1980 1979 281 281 -- 2,200 1,269,046 2,200 1,105,002 2,200 1,105,010 67,194 68,370 70,498 142,713 9,899,944 170,755 9,827,026 176,549 9,737,826 The shares of Series A and Senes B preferred stock are convertible at base conversion prices of $28.965and $31.250per shareof common stock, respectively, based on a value of $100 per share of preferred stock for this purpose. The holders of the preferred stock are entitled to one vote for each share. The company may redeem the Series A and Series 8 preferred stock at $100 per share. The aggregate preference of the preferred stock in involuntary liquidation was approximately $20,991,000, $23,913,000 and $24,705,000 at December 31.1981, 1980, and 1979, respectively. The excess of the aggregate price in involuntaiy liquidation over the aggregate slated value does not create any restrictions on the distribution of retained earnings. In October, 1979 the company purchased the 1,460,000 shares (13.5%) of its common stock held by Gulf & Western Industries, Inc. at a cost of $20,987,500. In December, 1979 the Sherwin-Williams Pension Plans purchased 400,000 shares of common stock from the company for $5,675,000 at the closing market price on the date of sale. An aggregate of 2,651,236,3,164,562, and 3,724,954 shares of common stock, at December 31,1981,1980, and 1979, respectively, were reserved forconversion of preferred stock, convertible subordinated debentures and exercise ofstock options. -- 21 -- 0007-SWP-035346 .............. ..... ....... ... 0007-SWP-000116768 Note B -- Stock Purchase and Stock Option Plans Approximately 5,000 salaried employees currently are participating through regular payroll deductions in the company's Employee Stock Purchase and Savings Plan which became effective April 1,1969. In this employee fund at December 31,1981 there were l , 991,112 shares of common stock, representing approximately 20% of the total number of common shares outstanding. The company's contribution charged to operations during 1981 amounted to approximately $2,957,000 Shares of company stock credited to each member's account are voted by the trustee under confidential instructions from each individual plan member. Stock options have been granted to certain officers and key employees under the company's stock option plan, at prices not less than fair market value of the shares at date of grant and become exercisable to the extent of one-fifth of the optioned shares for each full year of employment following the date of grant, expiring ten years after date of grant During 1979, the board of directors granted 146,000 stock options to certain officers at the fair market value on the date of grant with an aggregate prioe of $1,518,000. These options are part of related employment contracts and carry substantially the same terms as options granted under the company's stock option plan. Exercises of these options totalled 25,000 and 24,000 shares during 1981 and 1980, respectively, at an aggregate price of $258,125 and $247,250. A stock appreciation rights plan was approved by the shareholders in 1979; however, no rights have been granted under the plan. Options outstanding beginning o) year Granted ... Exercised . Canceled Optons outstanding end of year Exercisable Reserved for future grants 1M1 Shares Aggregate Price 639,600 ... 86.000 (113.838) (62,162) 1,727,000 (1,407,000) (797,000) 551.800 $8,141,000 89,600 429,016 Shares 1980 Aggregate 374,584 479,000 (39,200) (174,784) 639,600 94.SOO 454,854 ' $5,607X00 6,847.000 (565.000) (3,171,000) $8,618,000 Shares 1979 Aggregate Pace 432,068 30.000 (800) (86,684) 374,584 232,584 ' $61704,006 326.000 (6.000) (1,515.000) $5,507,000 759.070 Not* 9 -- Uu h The company leases stores, warehouses, office space and equipment. Renewal options are available on the majority of leases, and, under certain conditions, options exist to purchase properties. In some instances, store leases require specified minimums. Certain properties are subleased with various expiration dates. Property, plant and equipment includes the following amounts for capital leases, which are amortized by the straight-line method over the lease term: Thousands of Mien 1M1 December 31, 1980 1979 Buttings .......................... Machinery and Equipment ___ $16,753 14,541 31.294 $18,100 12,931 31,031 $19,085 12,612 31,697 Less alcwance tor amortization 15,756 $15,539 13,834 $17,197 11,324 $20,373 Following is a schedule, by year and in the aggregate, of future minimum lease payments under capital leases and noncancetable operating leases having initial or remaining terms in excess of one year at December 31.1981: Thousands of dollars 1982..................................................... 1983..................................................... 1964 ..................................................... 1985..................................................... 1986................................................... Later years...................................... Total rrimmum tease payments ........... Capital Leases $ 3,156 7.708 6.812 5,740 3.759 20.455 52.639 Opening Leases $27,584 20.850 14,683 9.777 6.392 15.993 $95,279 Amount representing interest............... Executory costs..................................... Present value of net minimum lease payments................. (21.132) (3226) $28,281 Rental expense for all operating leases was $36,472,000, $34,529,000 and $30,726,000 for 1981,1980 and 1979, respectively- Contingent rentals and sublease income for all teases were not significant. 0007-SWP-035347 -22- 0007-SWP-000116769 Note 10 -- Long-Tarm Dbt Thousands of dollars 5 45% Debentures 6 25% Convertible Sub ordinated Debentures (Convertible into common stock at S23 a share) 9 45% Debentures 9 375% Promissory Notes 10% Promissory Notes . . 5 25% to 6 30% and Variable Rate Industrial Revenue Bonds. 9 25% Promissory Notes. S6.500 principal amount less unamortized discount based on imputed interest rate of 16 5% 6 90% Promissory Notes. $12,000 principal amount less unamortized discount based on imputed interest rate of 16 5% 8125% Mortgage Note. $6,225 principal amount less unamortized discount based on imputed interest rate of 16%. monthly payments of $53 . . Obligations under capital leases -- less current portion of $4,099 in 1981, $3,044 in 1980. and $2,975 in 1979 Date 1992 1995 1999 1996 1998 Through 1992 1966 1992 2002 Sinking Fund/ Prepayments Amount Commence $2,000 Payable currently 2.000 2.000 3,325 2,997 Vanes Payable currently Payable currently 1982 1984 Payable currently 1.300 Payable currently 1,200 19B3 N/A N/A Amount in Treasury December 31. (Ml 1980 1979 $9,896 $ 6,696 S 3.664 Amount Outstanding Net of Treasury December 31. 1M1 I960 1979 $ 22,104 $ 27.104 $ 32.336 17.646 5.331 -- -- 13.190 6,831 -- -- 2.350 6,271 -- -- 20.354 40,669 50.000 45.000 9.323 26.810 41.169 50,000 45,000 6.300 37,650 43,729 50,000 45.000 6,365 4.523 9.470 4.476 $32,673 $26,917 $12,265 24.162 $230,101 16.551 $212,934 19,205 $234,285 Certain covenants under the note agreements require the company to maintain specified levels ofworking capital, limit the incurrence of debt, lease obligations and investments and restrictthe payment of dividends andotherdistributions on the company's stock. The company may, at any time, issue stock dividends or pay dividends on presently out standing shares of preferred stock under the terms of the note agreements. At December 31,19B1, approximately $37,421,000 was available for cash dividends on common stock. The company has sufficient debentures in treasury to satisfy most sinking fund requirements through 1983. The gain on purchase of debentures amounted to $2,220,000, $3,487,000and $1,656,<M0 in 1981,1980 and 1979, respec tively. Maturities of 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 follows forthe next fiveyears: 1982 -- $4,690,000,1983 -- $8,590,000, 1984 -- $10,556,000,1985 -- $10,887,000, 1986 -- $10,991,000. Interest expense on long-term debt amounted to $17,147,000, $17,380,000 and $18,060,000 for 1981,1980 and 1979, respectively. There were no interest charges cap italized during the periods presented. Under a credit agreement with agroup of ten banks, the company may borrow up to $100,000,000 until July 31,1985. Amounts outstanding under the agreement may be con verted into four-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. Sherwin-Williams Canada, Inc. had certain lines of credit available to it from the Bank of Montreal during the year In the amount of $CD17,000,000. At December 31,1981 there were no bor rowings outstanding under these lines of credit. 0007-SWP--035348 -- 23 -- 0007-SWP-000116770 Not* 11 -- Business Segments Thousands of dollars Paint Stores Drug Stores Coalings Chemicals International Segment totals Corporate expenses -- net Interest expense Income before income taxes 1MI Net Salas $ 615,434 137.860 668,566 116,965 97,992 $1,536,807 Operating Income $ 16,176 6.895 61,055 (8,007) 7.096 83.215 (7.162) (18.332) $57,721 Years sndad December 31, 1980 1979 1978 Net Salas $ 582,292 Operating Income $ 7,605 Net Sales S 585,312 ' Operating.... ........r......~ Operating Income Salat Income $ 5.779 S 575,579 $ (14,076) 476,968 115,271 89.170 $1,263,721 45,927 9,323 9,271 72,326 (5.423) (18,552) $48,351 426.160 102.132 82.739 $1,196,343 41,862 7,567 5.884 ' 61.092 (B.290) (19,366) $33,436 ' 393,842 84,020 78.909 $1,132,350 61,112 8,427 2386 47.849 (16942) (21318) $ 9,689 Thous&ids of dollars Paint Stores Drug Stores Coatings Chemicals International . Segment totals Corporate Consolidated totals identifiable Assets Years endedDecember 31, IMi I960 1979 1978 $166,711 $159,342 $165,694 $179,390' 172,734 317,805 329.130 317.608 333.929 76,405 68,006 61,658 55,256 55.266 51,809 45,378 44.738 . 788.921 608.287 590.338 513,313 75,517 160,305 121.396 40,486 ______ Capital Expenditures__________ Depreciation Years ended December 31, 1SS1 I960 1979 1976 Years ended December 31. 1--1 I960 1979 1978 $ 9.889 742 14,285 14,406 1.039 $ 5,814 8.764 6,514 1.023 $ 1388 4.638 3,990 598 $ 2,671 11.625 1,162 781 40361 22.115 10,614 16.239 2.711 1,589 1.253 1.035 $ 5,853 96 9.796 3,753 B81 20379 1,289 $ 5,260 9.696 3,199 1,051 19.2C6 773 $ 5,226 9.398 2,924 1,079 18,627 831 $ 4,775 9.074 2,754 1,323 17,926 512 $864,438 $768,592 $711,734 $653,799 $43,072 $23,704 $11,867 $17,274 $21,668 $19,979 $19,458 $18,438 Descriptions of these segments appear on pages 6-7 of this report. The Paint Stores segment, formerly the Stores segment, has been retitled due to the acquisition of the additional retail segment of drug stores. The Drug Store segment consists of the assets and operations of Gray Drug Stores, Inc., acquired during the fourth quarterof 1981. The above data contains: the results of operations of this segment beginning October 3, 1981. The Packaging Products and Specialty Products seg ments have been reclassified as part of the Coatings seg ment and the information for years prior to 1981 reclassified to conform to this presentation. This segment now includes all of the company divisions related to the manufacture and wholesale distribution of paint and related products. The following table summarizes the effect of the adop tion of LIFO on segment income: Thousands of dollars Segment Paint Stores .. . Drug Stores Coatings . . Chemicals .. . International. Year of Adoption I960 1981 1979, 1980 1979 1981 Decrease in Operating Income INI 1980 1979 $ 5,098 3,620 10,470 2,564 1,773 $ 8,720 15.199 2384 * _ $ 3,340 2*.881 $23,525 $26,203 $ 6,221 In addition to the above capital expenditures, property, plant and equipment acquired through acquisitions in 1981 totaled $14,504,000 related to the Drug Stores segment. In 1980 the Coalings and Chemicals segments acquired through acquisitions property, plant and equipment totaling $4,109,000 and $4,076,000, respectively. Operating income is total revenue, including profit on intersegment transfers, less operating costs and expenses, excluding interest expense and corporate expenses. Identi fiable assets by segment include both assets directly iden tified with those operations and an allocable share of jointly usedassets. Corporate assets consistprimarily of cash, investments, headquarters properly, plant and equipment and certain property under capital leases. Export sales, sales of foreign subsidiaries and sales to any individual customer were each less than 10% of consoli dated sales to unaffiliated customers during ail years pres ented. Operations attributable to the minority interest in the consolidated Canadian subsidiary and the equity in net in come or loss of affiliated companies are not significant. The data presented above reflects external sales of each segment. Intersegment transfers, which are accounted for at values comparable to normal, unaffiliated customer sales, are set forth in the following table: Year# ond*a Oaceftoer 31. Thousands at dofta/s1W_______________ 1800 1979 1978 Coaling# ........................ All other segments......... Segment totals......... S264.3S3 1,595 $285,978 $230,039 $216,042 $219,885 1,438 1,198 819 $231,477 $217,240 $220,704 0007-SWP-035349 -- 24 -- 0007-SWP-000116771 of Operations In 1981 the company provided $15,262,000 ($8,241,000 after tax or $.83 per common share) for costs related to the closing or sale of certain plants and operating units. The provision reduced inventory and property, plant and equipment and other assets to thar net realizable values, while related costs for severance pay, shutdown expenses and estimated future operating losses to disposal date increased current liabilities. Approximately $9.178,000 of the provision is included in cost of products sold and $6,084,000 in costs and expenses, other Costs incurred during 1981 totaled $3,287,000. An accrual of $19,773,000 for future costs of disposition and termination of operations remains as of December 31,1981. In 1980 the company provided $4,867,000 ($2,628,000 after tax, or $.27 per common share) for costs related to the closing of certain plants and operating units. This provision reduced inventory and property, plant and equipment totheir estimated net realizable values, while other related costs increased current liabilities. Approximately $1,500,000 of the provision is included in cost of products sold and $3,367,000 in costs and expenses, other. Costs incurred during 1980 totaled $3,182,000. An accrual of$7,798,000for disposition of operations remained as of December 31,1980. In 1979 the company provided $3,703,000 (51,766,000 after tax, or $. 17 per common share) for costs related to the closing of certain plants and additional expenses for anticipated costs associated with previous provisions. This provision reduced inventory and property, plant and equipment to their net realizable values, while other related costs increased current liabilities. Approximately $2,540,000 of the provision is included in cost of products sold; $287,000 in selling, general and administrative expenses: and $876,000 in costs and expenses, other. Net costs incurred during 1979 totaled $1,770,000. An acciual of $6.113,000 for the disposition of operations remained as of December 31,1979. The company expects to complete the closing and sale of the facilities at various dates through 1983. Note 13 -- Inflation Accounting (Unaudited) In accordance with generally accepted accounting principles, financial statements have traditionally reported amounts reflecting historical costs, the prices that were in effect when the transactions occurred. These historical costs, especially during periods of high inflation, represent dollars of varying purchasing power and may not adequately reflect the effect of inflation on a business. Presented here, consistent with the requirements of Financial Accounting Standards Board (FASB) Statement No. 33, are two estimates, using differing assumptions, of the effect of changing prices on our primary financial statements. These estimates include adjustment for the changing prices of inventory, property, plant and equipment, and the related expenses of cost of goods sold, and depreciation expense. The major impact of inflation on inventory is currently recognized in the primaryfinancial statements through the use of the UFO method of inventory valuation. Accordingly, only minor adjustments are required in the supplemental statements. However, historical depreciation expense based on the historical cost of assets understates the cost of replacing capital equipment at current prioes. This highercost is not presently reflected in the primary financial statements, and accounts for the majority of the supplemental statement adjustment. Because these additional costs are not currently deductiblefor income tax purposes, no adjustment of income tax expense has been made. The supplemental statement also does not reflectthe operating efficiencies expected to be generated from new assets which would at least partially offset the increased depreciation expense. 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 experimentaland impreciseand 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 comparisions with other companies and industries should be used with caution. Constant Dollar Data The constant dollar data represents the historical amounts of certain revenues and expenses stated in dollars of the same purchasing power. Under this measurement method, historical amounts of inventory, property, plant and equipment and the related cost of goods sold and depreciation expense were adjusted to reflect the increase in the Consumer Price Index (CPI-U) since the acquisition date of the assets. The CPI-U is a general index, however, and is not necessarily representative of changes in cost for a manufacturing company. Current Cost The current cost data representstine currentcost of the assets of the company, reflecting specific price changes of the assets. The current cost of the majorityof the company's plant and equipment was determined based upon externally generated indices of the major classes of assets. Current costs ofproperty and the remaining plant and equipment were estimated using the CPMJ. Depreciation expense is based on the current cost of plant and equipment during the year, and assumes the same depreciation methods as those employed in the primary financial statements. The current cost of products sold approximates that used in the primary financial statements under the UFO inventory method. Adjustments were made for those inventories not on UFO. Purchasing Power Gain A separate disclosure, gainfrom declinein purchasing power of net amounts owed, is also presented. During periods of inflation, liabilities payable in a fixed doflar amount (monetary liabilities) will be repaid in dollars having less purchasing power than when borrowed or incurred. This gain in purchasing power has been calculated based on the company's net monetary liabilities during the year, adjusted for file change in the CPI-U for the year. Although this amount does not represent actual funds available for distribution to stockholders, it can be considered to represent the benefit the company received in terms of purchasing power by maintaining the net liability position. 0007-SWP-035350 0007-SWP-000116772 SUPPLEMENTAL STATEMENT OF CONSOLIDATED INCOME For the year ended December 31.1961 in average 1961 dollars Thousands Ot dollars, except per share data Net Sales Casts and expenses Cose ol products sold Selling, general and administrates expenses Interest expense interest income Other Income before income taxes Income taxes Net income Net income per common share. Gam from decline m purchasing power ot net amounts owed Increase m specific pnees of inventories and property, plant and equpment htl during the year Effect of increase in general pnee level Increase in the general price level over increase in specific pnees . .. Conventional Historical Cost 1M1 $1,536,607 1.070,171 402.472 18,332 (15.229) 3,340 57.721 26.336 $ 31,365 $ 307 Constant Dollar Data Current Cost Data ' Mil.............. ............. 19M " $1,536,807 $1,536,607 1.063,784 409.253 18.332 (15,229) 3,340 37,327 26.336 $ 10.991 $ 101 1,084,824 410,555 18.332 (15.229) 3,340 34,985 26,336 $ 8.549 $ 77 $ 15,594 $ 53,388 (60.461) $ 7,073 Depreciation and amortization expense has been allocated between cost of products sold and selling, general and administrative expenses, consistent with the presentation in the primary financial statements. Cost of products 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 31,1981 was approximately $405,415,000 and $395,106,000 respectively. The current cost of inventory exceeded the UFO cost of inventory at December 31.1981 by $70,524,000. 0007-SWP-035351 0007-SWP-000116773 Five*Year Comparison off Soloctad Financial Data Adjusted for the Effects of Changing Prices (Unaudited) Average 1981 dollars, except historical data (Thousands of dollars, except pet sham data) Net sales Historical cost Constant dollar Dividends declared per share Historical cost Constant dollar Market price per share at year-end- Historical cost Constant dollar .. Average consumer price index Net income (loss) Historical cost ... Constant dollar Current cost . . .... ......... Income (loss) per common share: Historical cost Constant dollar Current cost .. Total net assets Historical cost Constant dollar Current cost ... .. ... .. . Shareholders' equrty per common share: Historical cost Constant dollar Current cost .. Total depredation and amortization expense; Histoncal cost Constant dollar Current cost . .. .... .. Effective tax rateHistorical cost Constant dollar Current cost . .... .... ... ... . . .. Increase in the general price level over (under) increase in specific prices . . .. Gain from decline in purchasing power of net amounts owed ............ ........... ........... 'Information for 1978 and 1977 not required. INI $1,536,807 t .536,807 60 80 2200 2129 2724 31.385 10.991 8.649 307 101 77 305.020 520.631 513.574 28.69 5047 4976 21.668 37.891 41.004 456% 70.6% 75.3% 7,073 15,594 Years Ended December 31. 1980 1979 1978 $1263,721 1.394.804 $1,196,343 1.499005 $1,132,350 1.578567 60 075 -- 66 10 -- 17.75 18.72 246.8 24,864 8,768 5889 2.44 78 49 286,876 505826 507,122 26 76 48.59 48 92 19.979 36.424 39,382 486% 74.7% 61.5% (2.826) 21,636 1331 1576 2174 17,493 (19,811) (23.259) 155 (200) (233) 268.107 480,101 464.364 25.00 46 50 46.94 19.458 35646 41.528 47.7% +100.0% + 100.0% 3.604 26,846 1000 1343 1954 * * ' ' * m 1977 $1,035,989 1.554,833 S3 124 1381 20.22 1615 * * * * -- 27 -- 0007-SWP-035352 0007-SWP-000116774 Not* 14 -- Quarterly Data (Unaudited) QUARTERLY STOCK PRICES AND DIVIDENDS Year 1981 1980 Quarter 1st 2nd 3rd 4th 1st 2nd 3rd 4th Stock'Pnce Data Common Senes B Preferred High Low High Low $2314 .............. $17%........ 2314 20 22 16% 23 17% 18% 11% 15 12% 20Vi 14% 20% 17 $73% 74 67 72 57 53% 65 65 $58 63 55 57 41 44% 52 58 Dividends' ................ "Tfeferred Common ........Senes A Senes B ...-fair- ..... ........ 20 100 1 10 20 100 1 10 20 100 1 10 15 100 1.10 15 100 1 10 15 100 1 10 15 1.00 1 10 SUMMARY OF QUARTERLY RESULTS OF OPERATIONS Thousands of dollars, except per sham data Year Quarter 1981 1st 2nd 3rd 4th 1980 1st 2nd 3rd 4th ^ Sales $308,201 399.145 396.971 430.490 284.893 333.905 348.751 296.372 Grass Profit $ 88.735 122,953 124,573 130.375 81.671 106,984 106,769 99.909 Net Income ........ $ 1,713 14,666 14,608 0n9n0a 778 9,884 10.621 3.581 Per Common Share Primary Fully Diluted S 15 145 145 02 06 98 106 34 " $ .15 1 24 1 27 02 05 83 88 31 1981 First quarter net income includes an after-tax gain of SI .050,000 ($.11 per common share) on the repurchase of debentures to satisfy future sinking fund requirements. The actuarial valuation determining pension plan con tributions forthe 1981 plan yearwas received during the third quarter of 1981. This valuation resulted in a reduction of the estimate of pension expense used by the company in the first two quarters. The effect of this adjustment was recorded in the third quarter and increased third quarter net income $861,000 ($.09 per common share) as a result. Fourth quarter adjustments increased after-tax profits by approximately $4,676,000 ($.47 per common share). The adjustments include an after-tax provision of $8,241,000 ($.83 per common share) for the disposition and termination of certain operations offset primarily by higher-than esti mated gross margins, inventory adjustments and the effects of the adoption of FASB No. 52 in the fourth quarter. Prior quarters were not restated lor the adoption of FASB No. 52 since the effect on those quarters was not significant. 1880 First, second and fourth quarter net income includes after-tax gains of $610,000 ($.06 percommon share), $716,000 ($.07 per common share) and $472,000 ($.05 per common share), respectively on the repurchase of debentures to satisfy fu ture sinking fund requirements. During the third quarter, net income for each of the first two quarters was restated by approximately $1,830,000 ($.19 per common share) due to the adoption of LIFO. The actuarial valuation determining pension plan con tributionsforthe 1980 plan yearwas received during the third quarter. This valuation resulted in a reduction of the estimate of pension expense used by the company in the first two quarters. The effect of this adjustment was recorded in the third quarter and increased third quarter net income $694,000 ($.07 per common share) as a result. During thefourth quarter, net income foreach ofthe first three quarters was restated by an additional $802,000 ($.08 per common share) due to the further adoption of LIFO ($500,000) and the change in accounting for vacation pay ($302,000). Fourth quarter adjustments increased after-tax profits by approximately $4,275,000 ($.44 per common share). The adjustments include a $7,841,000 after-tax increase in prof its ($.80 per common share) related to higherthan estimated gross margins, offset primarily by provisions for reorganiza tion and disposition expenses of certain operations, inven tory adjustments and other related liabilities. -- 28 -- 0007-SWP-035353 0007-SWP-000116775 Note 18 -- Financial Idwdutet ______________ Marketable Securities (10-K, Schedule I) The marketable securities at December 31,1981, consist of: Thousands of dollars Certificates of deposit Eurodollar deposits Repurchase agreements Other securities Total S 19.000 13,000 33.430 12.100 $ 77.530 Property, Plant and Equipment (10-K, Schedule 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 of dollars Years ended December 31. ieei 19B0 1979 Balance -- beginning of year Total additions at cost Assets acquired through acquisitions Total retirements at cost Other changes Balance -- end of year $393,759 43,072 14.504 (10.490) (3.916) $436,929 $369,643 23,704 8,165 (7.187) (586) $393,759 $362,231 11.807 -- (7,821) 3.366 $369,643 The above changes in property, plant and equipment each constitute less than 10 percent ofthe ending balance of the period. Other changes dunng 1981 relate primarily to the trans lation of foreign assets to U. S. dollars. Other changesduring 1979 relate primarily to capitalized leases. Total accumulated depreciation and amortization of property, plant and equipment were as follows: Thousands of dollars Years ended December 31. 1M1 1980 1979 Balance -- beginning of year Total charged to expense Retirements Other changes Balance -- end of year . $183.005 21.668 (7.043) (969) $196,661 $165,792 19.979 (5.286) 2.520 $183,005 $152,651 19.458 (5,768) (549) $165,792 Other changes for all years presented relate primarily to capitalized leases and reserves for tha disposition and ter mination of operations. Valuation and Qualifying Accounts and Reserves (10-K, Schedule VIII) Changes in the allowance for doubtful accounts are as fol lows: Thousands at dollars Beginning balance Bad debt expense . Net uncollectible accounts written off Ending balance .................. Years ended December 31, 1M1 i960 1979 $ 2,025 3,640 $ 2,059 2.934 $ 2.008 4.179 (3,243) $ 2,422 (2,968) $ 2.025 (4.128) $ 2,059 Activity related to other long-term liabilities: Thousands of dollars Beginning balance Addition to reserve Deductions from reserve Ending balance Years ended December 3i. IM1 1980 1979 $ 4.995 2.982 $ 5.326 869 $ 3.607 2.496 (57) $ 7.920 (1.200) $ 4.995 (777) S 5.326 Reserves for pensions and other items are adjusted to the estimated year-end liability. Deductions from the reserve consist primarily of pension and deferred compensation payments. Short-Term Borrowings (10-K, Schedule IX) Thousands of dollars Notes payable to banks at December 31 Years ended December 31, 1M1 1980 1979 -- $ 6,235 $ 4.649 Weighted average interest rate at December 31 . 18 3% 15 0% Maximum amount outstanding at arty month-end . $10,576 $ 9,370 $11,647 Average amount outstanding dunng the period ... $ 3.888 $ 7.653 $ 8,161 Weighted average interest rata dunng the period 165% 153% 16 0% The average amount outstanding is the total of monthend outstanding balances divided by the number of months in the period. The weighted average interest rate is the actual interest on short-term debt divided by average short-term debt out standing. Supplementary Income Statement Information (10-K, Schedule X) Thousands of dollars Maintenance and repairs. ... Advertising costs....... Years ended December 31, 1M1 1980 1979 $31,265 43.029 $28,468 29,454 $26,907 21.252 Amounts for depreciation and amortization of intangible as sets, preoperating costs and similar deferrals, taxes, other than payroll and income taxes, and royalties are not pres ented because such amounts are less than 1 % of total net sales. 0007-SWP--035354 -- 29 -- 0007-SWP-000116776 Exhibit Index Mumtar tag* 3 Articles of incorporation and by-laws, as amended, filed as Exhibit 4(a) and 4(b) to Form S-8 dated April 22,1981 and incorporated herein by reference. 4 Not Applicable. 10 Not Applicable. 11 Computation of Nel Income Per Common Share. 30 12 Not Applicable. 13. Not Applicable. 19 Not Applicable. 20 Not Applicable. 22. Subsidianes of the registrant. 31 Computation of Not Income Par Common Share (Exhibit 11, Foam 10-K) Thousands of dollars, except per share data Primary Average shares outstanding Net income Lass preferred dividend requirements Net income applicable to common . Net income per common share .... ... Fully Diluted Average shares outstanding Options -- treasury stock method ............. Assumed conversion of1 Senes A preferred stock Senes B preferred stock 6 25% Convertible Subordinated Debentures Average fully diluted shares ,,. Net Inoome . . ................. Less preferred dividend requirements . ....................................... .. Add 6 25% Convertible Subordinated Debentures interest net of tax ................ Net income applicable to fully diluted shares......................................................... Net income per common share . . .......................... (A) Assumed conversion of preferred into common shares. 1M1 9908,669 $31,385 971 $30,414 $3.07 December 31. I960 9.767.608 $24,684 1.053 $23,811 $2.44 9908,669 223,808 233.406 502,483 960.314 11,828,680 $31,385 (A) 764 $32,149 $2.72 9.767.608 198,730 239.130 546,416 1,567.344 12,319,228 $24,864 (A) 1,247 $26,111 $2.12 1979 10,561,750 $17,493 1.067 $16,426 $1.55 10.581.750 65.010 243.388 570,820 1,645,834 13,106.802 $17,493 (A) 1,295 $18,788 $1.43 -- 30 -- 0007-SWP--035355 0007-SWP-000116777 Directory of Operations Subsidiaries Brazil -- Sherwin-Williams do Brasil Industna e Comere10 Ltda., Sao Paulo* Canada -- Sherwin-Williams Canada Inc, Montreal Mexico -- Compahia Sherwin-Williams, S A. de C.V, Mexico City West Indies -- Sherwin-Williams (West Indies) Ltd., Kingston, Jamaica -- Sherwin-Williams (Caribbean) NV., Curasao USA -- Contract Transportation Systems Co. Gray Drug Stores, Inc. Drug Fair Inc. `Unconsofcdated Joint Vsnturss Ireland -- FSW Coatings Limited, Dublin Japan -- Nippon Sherwin-Williams Chemicals Co., Ltd., Osaka Panama -- Sherwin-Williams de Panatfii, S A.. Panama City UCWIMM Argentina -- Sherwin-Williams Argentina Industrial y Comercial, S.A. Australia -- Taubmarts Proprietary Limited Bolivia -- Fdbrica Nacional de Pinturas "Espintbol," SA Chile -- Pinturas Andina, S.A. Colombia -- Fdbriea Nacional de Pinturas Sherwin-Williams de Columbia, S.A. Costa Rica -- Sherwin-Williams de Costa Rica, S.A. Denmark-Norway -- Sadoln S Holmblad A/S Dominican Republic -- Acabados Automotrices, S.A. Ecuador -- Sherwin-Williams del Ecuador Fgbnca Nacional de Pinturas, S.A. El Salvador -- Sherwin-Williams de Centro America. SA de C.V. Finland -- O. Y. Sadolin, A.B France -- Astral, S.A. -- Corsain, S.A. Haiti -- Peintures Iddales. S A. Hong Kong -- China Paint Mfg. Co. (1946) Ltd. Italy -- Vercolac. SPA Japan -- Nippon Paint Company, Ltd. Netherlands -- Sikkens Groep, N.V. New Zealand -- Taubmans International (N.Z.), Ltd. Peru -- Sherwin-Williams Peruana, S.A. Philippines -- Sherwin-Williams, Philippines, Inc. South Africa -- Advance Coatings PTY, Ltd. Spain -- Industrias Quimicas Procolor, SA Switzerland -- Kurt Vogelsang, AG. Thailand -- Bangkok China Paint Mfg. Co. Ltd. United Kingdom -- Donald Macpherson Group, Ltd. Venezuela -- C.A Quimica Integrada -- CA Venezolaoa de Pigmentos -- C A Venezoiana de Pinturas West Germany -- Deutsche Akzo Coatings Plant* COATINGS Anaheim, CA Baltimore. MD Bedford Heights, OH Chicago. IL Cleveland, OH Cnsfield, MD Deshler. OH COATINGS (Cont.) Elgin, (L Fulton, KY Garland. TX Gravenhurst, Canada Greensboro. NC Hubbard, OH Los Angeles. CA COATINGS (Cont.) Morrow, GA Newark, NJ North Olmsted, OH Oakland, CA Richmond. KY San Leandro, CA CHEMICALS Cincinnati, OH Chicago, IL Fords. NJ Coffeyvllle, KS Hillsboro. IL INTERNATIONAL Kingston, Jamaica Mexico City, Mexico SSo Paulo, Brazil Montreal, Canada Virginia, Ireland Panama City, Panama MM ty ft* Graph* Art* unt or TT Shenmmvm Company -- 31 -- 0007--SWP-035356 ' ...........i.--..i..i.ii..--....' ... ...... . ...in ........... ------ ........... 0007-SWP-000116778 individual financial statements of tne registrant have been omitted as the regis trant is pnmarily an operating company and all subsidianes included in the consolidated financial statements filed, in the aggregate, do not have minority equity interests and/or indebtedness to any person other than the registrant or its consolidated subsidiaries in amounts which together (excepting indebt edness incurred in the ordinary course of business which is not overdue and matures withm one year from the date of >t3 creation, whether or not evidenced by securities, and indebtedness of subsidiaries which is col lateralized by the registrant by guarantee pledge, assignment or otherwise) exceed 5% of the total assets as shown by the most recent consolidated balance sheet Financial statements (and summarized fi nancial information) of unconsolidated sub sidianes or 50% or less owned persons ac counted for by the equity method have been omitted because they do not. considered individually or in the aggregate, constitute a significant subsidiary 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 l?th day of February. 1982 THE SHERWIN-WILLIAMS COMPANY _by A----D----C--H--I-L.D...S.. . A 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 February 17.1982 Officers and Directors of The Sherwin-Williams Company J G BREEN J G Breen Chairman of the Board President and Chief Executive Officer. Director T A COMMES T A Commes Senior Vice President - Finance Principal Financial Officer. Director Vice President, J E WALLACECorporate Controller and j E Walace Pnncipal Accounting Officer Consent of Independent AudHoce Shareholders and Board of Directors The Sherwin-Williams Company Cleveland, Ohx> We consent lo the incorporation by reference in Post-Effective Amendment Number 2 to RegistrationStatement Number 2-64247on Form S-8 dated Aprs 28.1981 of our report on the consolidated financial statements included in the annual report on Form 10-K of The SherwirvWiliams Company for the year ended December 31.19S1 Cleveland. Oho March 12.1962 J A ATTWOOD J A Attwood K S BENSON K S Benson D W CALLOWAY D W Calloway W J, DE LANCEY W J Da Lancay H C OOBAN R C Doban J R. K1LLPACK J R Killpack W G MITCHELL W G Milchel 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 ofThe Sherwin-Williams Company pursuant to Powers of Attorney executed on behalf of each such Officer and Director. A D CHILDS_____________ A D Childs, Attorney-in-fact February 17.1982 -- 32 -- 0007-SWP--035357 0007-SWP-000116779 Secures and Exchange Commission Washington 0 C 20549 Form 10-K Annuai Report pufSuantto Section 13 or 15(d) of the Securities Exchange Act of 1934 For ihe Year Endeo December 31, 1981 Commission File Number 1-4851 THE SHERWIN-WILLIAMS COMPANY AN OHIO CORPORATION IRS EMPLOYER IDENTIFICATION NO. 34.0S3SES0 Securities Registered Pursuant to Section 12(b) of the Act. Title ef eaeh class Name f exchange on which regtetered 9 45% Debentures Due 1999 New York Stock Exchange 6.25% Convertible Subordinated Debentures Due 1995 New York Stock Exchange 101 Prospect Avenue. NW, Cleveland, Ohio 44115 Te'ephone (216) 566-2480 5 45% Debentures Due 1992 $4.40 Cumulative Convertible Preferred Stock, Series B New York Stock Exchange New York Stock Exchange i Common Stock, Par Value $625 New York Stock Exchange Form 10-K Securities Registered Pursuant to Section 12(g) ot the Acf None l 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 refer 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. enced in the index below are incorporated in the 10-K The Registrant had 9.921,672 shares of Common Stock, par value $6.25, outstanding at II The Securities and Exchange Commission January 29.1982. These shares were held by 8.B70 holders of record on this date. i has not approved or disapproved this report or passed upon its accuracy or adequacy. The aggregate market value of the voting stock at January 29,1982, is $206,074,079, excluding the voting stock held by the executive officers. Items Number4,9 and 10 are incorporated by reference from the defi nitlva Proxy Statement dated March 12, 1982, filed with the Securities and Exchange Commission pursuant to Regulation 14A. Index - Form 10-K Report 1 Business a General Development of Business ... 6 b. Financial Information About Industry Segments 24 c Narrative Description of Business . . 6-7, 24 d Foreign and Domestic Operations and Export Sales ... 24 2. Properties ...............3, 7. 31 3 Legal Proceedings....................... 7 5 Market for the Registrant's Common Stock and Related Security Holder Matters.. .. 2, 28, 33 6 Selected Financial Data ............. 11 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations ___ 12-13 8 Financial Statements and Supplementary Data The response to this item is submitted in Item 11 of this report 11. Exhibits, Financial Statement Schedules and Reports on Form 8-K Rem No. hw a Statements of Consolidated Income for the Years Ended December 31, 1981,1980 and 1979 . .. 15 Consolidated Balance Sheets at December 31,1981, 1980 and 1979................... 16 Statements of Changes in Consolidated Financial Position for the Years Ended December 31. 1981, 1980 and 1979.... 17 Statements of Consolidated Shareholders' Equity for the Years Ended Oecember 31.1981, 1980 and 1979................... 18 Notes to Consolidated Financial Statements December 31, 1981, 19B0 and 1979............. 19-29 Schedules for the Years Ended Oecember 31.1981, 1980 and 1979 Schedule I -- Marketable Securities (1981 only)......................... 29 Schedule V -- Property, Plant and Equipment..............................29 Schedule VI -- Accumulated Depreciation, Depletion and Amortization................. 29 Nem'NiK..... ..............Page... Schedule VIII -- Valuation and Qualifying Accounts and Reserves .. ... . . 29 Schedule IX -- Short-Term Borrowings.. 29 Schedule X -- Supplementary Income Statement Information___ 29 b. Reports on Form 8-K Form 8-K tiled on October 7, 1981 reporting tender offer on Gray Drug Store, Inc. Common Stock. c. Exhibits Exhibit Index.......................30 Allotherschedules(Nos.!l,lll, IV. VII, XI. XII. XIII)forwhich provision is made in theappli cable accounting regulation of the Securi ties and Exchange Commission are not re quired under the related instructions or are inapplicable, and therefore have been omitted. 0007-SWP-035358 -- 33 -- 0007-SWP-000116780