-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IljIitinXWtojUCbP9AgUTbF4NFO2JAYsGuIhXGj42lSyi8k+MMKwkDTJUekOwnA GbVIvF9Q0KwzK9aIeE+/Kw== 0000950152-98-001897.txt : 19980312 0000950152-98-001897.hdr.sgml : 19980312 ACCESSION NUMBER: 0000950152-98-001897 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980311 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHERWIN WILLIAMS CO CENTRAL INDEX KEY: 0000089800 STANDARD INDUSTRIAL CLASSIFICATION: PAINTS, VARNISHES, LACQUERS, ENAMELS & ALLIED PRODUCTS [2851] IRS NUMBER: 340526850 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04851 FILM NUMBER: 98563734 BUSINESS ADDRESS: STREET 1: 101 PROSPECT AVE NW CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2165662200 10-K 1 THE SHERWIN-WILLIAMS COMPANY 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-4851 ---------------------------- THE SHERWIN-WILLIAMS COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO (State or other jurisdiction of incorporation or organization) 34-0526850 (I.R.S. Employer Identification No.) 101 PROSPECT AVENUE, N.W., CLEVELAND, OHIO (Address of principal executive offices) 44115-1075 (Zip Code) (216) 566-2000 Registrant's telephone number, including area code ------------------------------------------------------ Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ------------------- ------------------------------------ 9.875% Debentures due 2016 New York Stock Exchange Common Stock, Par Value $1.00 New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At January 31, 1998, 172,993,132 shares of the Registrant's Common Stock, with a par value of $1.00 each, were outstanding, net of treasury shares. The aggregate market value of such voting stock held by non-affiliates of the Registrant at that date was $4,916,017,711. DOCUMENTS INCORPORATED BY REFERENCE Definitive Proxy Statement dated March 11, 1998 relating to certain information required to be disclosed in Part III. ================================================================================ 2 THE SHERWIN-WILLIAMS COMPANY AND CONSOLIDATED SUBSIDIARIES As used in this Form 10-K, the terms "Company" and "Registrant" mean The Sherwin-Williams Company and its consolidated subsidiaries, taken as a whole, unless the context indicates otherwise. TABLE OF CONTENTS
ITEM NO. PAGE NO. - -------- -------- Part I 1. Business Segment Information 1 2. Description of Property 9 3. Legal Proceedings 10 4. Submission of Matters to a Vote of Security Holders 10 Executive Officers of the Registrant 11 Part II 5. Market for Common Equity and Related Stockholder Matters 13 6. Selected Financial Data 13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 8. Financial Statements and Supplementary Data 22 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24 Part III 10. Directors and Executive Officers of the Registrant 25 11. Executive Compensation 25 12. Security Ownership of Certain Beneficial Owners and Management 25 13. Certain Relationships and Related Transactions 25 Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26 Signatures 49 Exhibit Index 51 Consent of Ernst & Young LLP, Independent Auditors 55
NOTE ON INCORPORATION BY REFERENCE In Part III of this Form 10-K, various information and data are incorporated by reference from the Company's Definitive Proxy Statement dated March 11, 1998 ("Proxy Statement"). Any reference in this Form 10-K to disclosures in the Proxy Statement shall constitute incorporation by reference only of that specific information and data into this Form 10-K. 3 PART I ITEM 1. BUSINESS SEGMENT INFORMATION GENERAL DEVELOPMENT OF BUSINESS The Sherwin-Williams Company, which was first incorporated under the laws of the State of Ohio eighteen years after its founding in 1866, is engaged in the manufacture, distribution and sale of coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America. PAINT STORES SEGMENT The Paint Stores Segment is the marketer and seller of Sherwin-Williams(R) branded architectural coatings, industrial maintenance products, product finishes and related items produced by the Company's Coatings Segment. It is also a distributor of Con-Lux(R), Old Quaker(TM), Mercury(R) and other controlled-brand products produced by the Coatings Segment in addition to complementary coatings and other products manufactured by third parties. Paint, wallcoverings, floorcoverings, window treatments, spray equipment and other associated products are marketed by store personnel and direct sales representatives to the do-it-yourself customer, architect, professional painter, contractor, industrial and commercial maintenance customer, property manager and manufacturer of products requiring a factory finish. Competitors of the Segment are other paint and wallpaper stores, mass merchandisers, home centers, independent hardware stores, hardware chains and manufacturer-operated direct outlets. Product quality, service and price determine the competitive advantage in the highly fragmented paint and coatings markets. The loss of any single customer would not have a material adverse effect on the business of the Segment. During 1997, the Paint Stores Segment was successful in expanding its customer base through the addition of new stores, new products and the expansion into new markets made possible by internal efforts and from previous acquisitions. There were several key new architectural products introduced in 1997: a variety of primers sold under the Prep-Rite(TM) label; a new exterior high gloss latex sold under the SuperPaint(R) label with unique technology allowing for a high gloss with quick drying time; new chemical coatings products including low volatile organic compound (VOC) enamels and primers sold under the Kem(R) and Kem Aqua(R) labels; and, new industrial maintenance products including a variety of VOC-compliant products designed for high performance tank liners, industrial and marine markets, and other unique functions. These new products, along with the Segment's existing product base and product technologies obtained through acquisitions, helped the Segment achieve significant sales gains in 1997. The Segment also completed its first full year in new markets entered through acquired businesses, which include certain industrial and marine markets and the business and commercial aircraft markets. A new business unit has been formed to service the aviation market in order to capitalize on the acquired aircraft technology. The Segment will continue to aggressively pursue opportunities in all its markets and will expand its product lines as prudently needed to meet customer demand. To enhance its stores technologically, in 1998 the Segment will complete the installation of a satellite network among its stores. This network will bring all associated products onto a perpetual inventory system along with the current perpetual inventories for manufactured products, thus allowing the Segment to achieve purchasing efficiencies, better inventory control and sharing of inventory data among the stores. In 1998, the Segment also plans to introduce approximately twenty new products, including a new line of VOC-compliant interior stains, sealers and varnishes under the Wood Classics(TM) label. This line will offer unparalleled drying speed, a large color selection and maximum user flexibility. A new advertising campaign will be used to promote the Segment's full family of quality products and to increase customer awareness of the outstanding service available through the Sherwin-Williams' stores. The campaign theme is: "When Only the Best Will Do, Ask Sherwin-Williams.(TM)" The Product Finishes Business Unit of the Coatings 1 4 Division has been transferred to the Paint Stores Segment to provide improved management of the product line throughout the technical, manufacturing and selling processes. For financial reporting purposes, the results of this business unit will be reflected in the Paint Stores Segment beginning in 1998. COATINGS SEGMENT The five divisions within the Coatings Segment (Coatings, Consumer Brands, Automotive, Transportation Services and Diversified Brands) participated in the manufacture, distribution and/or sale of coatings and related products. In 1998, the Coatings and Consumer Brands Divisions have been consolidated to form one division responsible for technical, manufacturing and selling of products to the dealer, home center and mass merchandiser markets. The Segment has sales to certain customers that, individually, may be a significant portion of its revenues. However, the loss of any single customer would not have a material adverse effect on the overall business of the Segment. All technical expenditures sponsored by the Company occurred in the Coatings Segment. The expenditures for research and development appear on page 32 of this report. COATINGS DIVISION In the United States, the Coatings Division manufactures paint and paint-related products for do-it-yourself customers, professional painters, contractors, industrial and commercial maintenance accounts, and manufacturers of factory finished products. Sherwin-Williams(R) branded and controlled-branded architectural and industrial finishes are manufactured for the Paint Stores Segment. Labels, color cards, traffic paint, adhesives, private label and other branded products were manufactured for the Paint Stores Segment, the Consumer Brands Division and other divisions of the Company. Competitive factors for the Division are product innovation, product quality, service, distribution and price. Domestic competitors of the Division consist of other coatings manufacturers located throughout the United States. There are approximately 800 such manufacturers at the regional and national levels. The Coatings Division continues to strive to be the lowest cost supplier of high quality coatings in order to gain an advantage over its competitors. Worldwide, there are many competitors in each of the foreign markets served by the Division as it manufactures, distributes and sells its products through wholly-owned subsidiaries, joint ventures and licensees of technology, trademarks and trade names. At December 31, 1997, the Division included 8 subsidiaries and 3 joint ventures in 9 foreign countries and 34 licensing agreements in 26 foreign countries. The majority of the sales from licensees and subsidiaries are in South America, the Division's most important international market. A new licensing agreement was signed in Thailand in 1997. In 1998, the Division will continue to develop new business internationally by following a predetermined regional approach for the establishment of subsidiaries, joint ventures and licensees in selected countries. During 1997, the Coatings Division's efforts were focused on the rationalization of its existing facilities, primarily the transfer of production from one of its Chicago manufacturing facilities to other facilities in order to obtain improved efficiency. As a result of these changes, the ongoing integration of acquired businesses and new products for the Consumer Brands Division, the Division struggled with service and production problems in some of its manufacturing areas. In spite of these issues, the Division was able to improve overall productivity per gallon at the plant level. The Division's expansion of its powder coatings operations continued in 1997 with the addition of facilities in Arlington, Texas, Ontario, California and Spartanburg, South Carolina. Continued quality efforts at these plants were demonstrated by ISO 9001 certification at the Harrisburg, Pennsylvania plant and QS certification (automotive) at the Fort Wayne, Indiana plant -- the first manufacturing plant of the Company to obtain such certification. 2 5 Expansion through acquisitions also continued in 1997. In addition to Thompson Minwax Holding Corp. (Thompson Minwax), the acquisition of Sumare Industria Quimica, S.A. in February 1997 provided accelerated entry into the Brazilian industrial maintenance and product finishes coatings market. The acquisition of Pinturas Andina S.A. in June 1997 provided further expansion into the Chilean architectural coatings market. The Coatings Division's growth the past several years, both internally and through acquisitions, has brought significant challenges throughout the year but has also provided many future opportunities for continued improvement. In 1998, the Coatings Division will embark on a year of change. The Product Finishes Business Unit has been transferred to the Paint Stores Segment, certain caulks and sealants' business will transfer to the Diversified Brands Division, and the Division's remaining operations will be consolidated with those of the Consumer Brands Division. The newly-consolidated business will operate as the Coatings Division. This consolidation is expected to create improved efficiency by allowing the Coatings Division to be more responsive to the demands of, and changes in, the marketplace. The Division's priorities will include the development of common goals and the elimination of duplicate duties in efforts to obtain overall enhanced quality and service for its customers. Internationally, the Division plans to consolidate production in Chile in a new facility, expand production capacity in Brazil and launch a new industrial coatings program in Argentina. CONSUMER BRANDS DIVISION Consolidated with the Coatings Division since the beginning of 1998, the Consumer Brands Division is responsible for the sales and marketing of branded and private label products by a direct sales staff to unaffiliated home centers, mass merchandisers, independent dealers and distributors. Many of the country's leading retailers are among the Division's regional and national customers. The Division's competition for sales to these leading retailers comes from over 400 regional and national paint manufacturers and distributors of branded and private label paint and associated products. Important competitive factors are service, brand recognition, distribution and price. The Thompson Minwax acquisition brought the Thompson's(R) brand of exterior stains and watersealers to the Division's domestic product line and the Ronseal(TM) brand of interior varnishes and exterior stains to its product lines in the United Kingdom and Ireland. A new line of fence care products under the Thompson's(R) label was introduced in 1997, providing an entry into a currently untapped market. The integration of these acquired brands along with the brands obtained from the acquisition of Pratt & Lambert United, Inc. was aided by the addition of new advertising campaigns highlighting product attributes. The Division also launched its new line of paints under the Martha Stewart Everyday Colors(TM) label in May 1997. This line represents a new interior latex paint line consisting of 256 colors blended to provide unique shades in a high-quality, durable paint. In 1998, the Division, as part of the combined Coatings Division, will introduce new exterior and interior coatings product lines under the Dutch Boy(R) label. The exterior line, to be sold under the name Climate Guard(TM), consists of five different formulations designed to address the varying needs of regional climates. The interior line is a one-coat paint product aimed at the entry-level price market and will be sold under the name Classic One(TM). These products provide an excellent complement to the existing Dutch Boy(R) line. The Division will also launch a new advertising campaign in 1998 focusing on the protective qualities of the Thompson's(R) brand, particularly the waterseal and stain lines, in addition to continued promotion of its existing lines. The Thompson's Wood Protector(R) line is designed to provide protection from mildew and graying of color while also providing superior waterproofing protection. The Thompson's(R) stains, offered in semi-transparent and solid form, offer various qualities such as protection from water, fading and scuffing. With its new products and a streamlined management process, the Division hopes to significantly expand distribution in the coming year. 3 6 AUTOMOTIVE DIVISION The Automotive Division develops, manufactures and markets motor vehicle finish and refinish products under Sherwin-Williams(R) and other branded labels in the United States, Canada, Mexico and other countries. Through its network of 135 company-operated branches (as of December 31, 1997), supported by a direct sales staff, the Division sells directly to independent automotive body shops, automotive dealerships, fleet owners and refinishers, production shops, body builders and manufacturers requiring a factory finish. Products are also marketed through independent jobbers and wholesale distributors. The Division sold its joint venture interest in American Standox, Inc. in January 1998 and has retained the right to continue distributing Standox(R) branded vehicle refinishing paints to certain customers on a non-exclusive basis. Key competitive factors for the Automotive Division are technology, product quality, distribution and service. The Automotive Division has numerous competitors in its domestic and foreign markets with broad product offerings and several others with niche products. Strong distribution and high quality products have been the Division's greatest competitive advantages. A subsidiary in Jamaica manufactures and markets products that are sold through 10 stores and other dealers and by a direct sales force to independent dealers, painters, contractors, automotive body shops and industrial and commercial maintenance accounts. In recent years, the Division has further expanded its international presence through acquisitions in Mexico, Brazil and Chile. These acquired international automotive operations performed well during 1997, and the Division plans further market penetration in these areas in the future. Additionally, the Division has 14 licensees of automotive technology in 14 foreign countries. During 1997, the Division was successful in expanding its original equipment manufacturer business, particularly with VOLVO Trucks North America, Inc. (VOLVO). The Division's success resulted from continued improvement in product quality and color matching technology. The Division also introduced Vortex(TM) basecoat to the Class-8 heavy truck market, positioning itself for further growth. Vortex(TM) is the first low-bake waterborne basecoat system to be used in production by the heavy truck manufacturing market. It allows heavy truck manufacturers to offer a wider multitude of colors while still reducing solvent emissions without sacrificing performance. In 1998, the Division will continue to strengthen its market image and business through the introduction of new products, improved product quality and commitment to technological development. It will continue to meet customer demand for products that are compliant with national VOC regulations, and will seek to expand its presence in the factory finish market segment. Due to these efforts, the Company expects increased market penetration in both domestic and international regions during 1998. TRANSPORTATION SERVICES DIVISION The Transportation Services Division provides warehousing, truckload freight, pool assembly, freight brokerage and consolidation services primarily for the Company and for certain external manufacturers, distributors and retailers throughout the United States and Canada. This Division provides the Company with total logistics service support which allows increased delivery schedules, lower field inventory levels and fewer out-of-stocks. The Transportation Services Division has many different and diverse competitors. In the trucking industry, there are a few large carriers having small or moderate market share while thousands of other carriers compete for the balance of the market. The warehousing and distribution service market is characterized by a large number of competitors with none having dominant share. Since the primary business of the Division is to provide services for the Company's other divisions, gaining market share is not an objective. The Division successfully integrated the transportation and distribution functions of Thompson Minwax during 1997 while maintaining quality service. A supply chain management system, 4 7 Centralized Truckload Management, was implemented in 1997. This system tenders and monitors all truck load business via electronic data interchange, allowing for real-time tracking of in-transit truck load shipments and providing an enhanced technological measurement of carrier performance. The Division also experienced an improved safety record during the year, lowering its overall incident rate for recordable accidents. In 1998, the Division plans to open two new distribution centers. The Sierra, Nevada distribution center, a 695,000 square foot state-of-the-art facility, will service the West Coast and a 200,000 square foot facility in Vaughn, Ontario will service the Division's Eastern and Central Canadian operations. These facilities will improve efficiency in the Division's overall distribution network through the consolidation of smaller centers and the synergies of combination. The facilities will contain the most advanced technology available with respect to computer systems, asset protection and safety. The Division will also continue to focus on technological innovations to improve distribution center productivity, truckload control and fleet operations. These innovations will include the installation of in-cab computers, an improved dispatch system, an improved fuel-efficient tractor fleet and automation within the distribution facilities. DIVERSIFIED BRANDS DIVISION The Diversified Brands Division competes in the following areas: retail and wholesale consumer aerosols; custom, industrial and automotive aerosols; interior stains, varnishes and wood finishing products; paint applicators; and cleaning products. The Division participates in the retail and wholesale paint, automotive, homecare products, institutional, insecticide and industrial markets. A wide variety of aerosol products are filled, packaged and distributed to regional, national and international customers. Products are marketed through mass merchandisers, home centers, automotive chains, independent dealers, industrial maintenance distributors and grocery stores in the United States, Canada, Mexico, Brazil and Chile. Approximately 7.8 percent of the Division's total sales in 1997 represented aerosols, paint applicators and interior stains sold to the Paint Stores Segment. In 1997, in its Cleaning Solutions Group, the Division lost some powdered detergent sales due to its unwillingness to match a competitor's price, and it incurred operating difficulties. Despite these problems, the Division was able to post significant improvements in 1997 over 1996. There are various primary competitors in each of the Division's product lines. The main competitive factors are technical expertise, quality, service and price. Superior quality products, excellent regulatory-complying products, breadth of product line, technical leadership in electronic commerce and strong customer relationships have enabled the Division to distinguish itself from the competition. The Thompson Minwax acquisition brought several new product lines to the Division's vast product offering, thereby expanding its market presence. Product lines added include interior stains and varnishes under the Minwax(R) name, finishing and enamel coatings under the Formby's(R) and Red Devil(R) brand names, wood floor staining systems under the Duraseal(R) name and high- performance specialty lubricants under the Tri-Flow(TM) brand name. The Minwax(R) line provides the Division with a complete line of leading wood finishing products that hold the top market position within their respective categories. Innovation and leadership within the industry have led to consistent growth in this product line. Since this acquisition, the Division has expanded distribution and product selection in several national home centers. The Division also expanded internationally in 1997 through the October acquisition of Marson Chilena, S.A., a leading producer and marketer of aerosol paint in Chile. In 1998, the Division's efforts will be targeted toward increased distribution of its current product line and expanded growth of its product offerings. In addition to new products offered under its Krylon(R), Cello(R) and Sprayon(R) labels, the Division will expand its Dupli-Color(R) product line to include engine enamels, high heat products and truck bed coatings. The Red Devil(R) brand will be expanded to include a new aerosol product line. The applicator product line will also feature two new patent-pending products for 1998. A new roller frame will be introduced under the Kwik- 5 8 Release(TM) brand, and a new paint brush line featuring crinkle filament bristles will be introduced under The Wave(TM) brand. These bristles are designed to hold more latex paint than any existing brushes, thereby increasing the painter's productivity. The Division will also concentrate on improving sales of its existing product lines, particularly its janitorial, industrial and consumer cleaning products. Also in 1998, the Division will assume the management responsibilities for the Company's caulk and sealant business and the Ronseal(TM) brand of interior varnishes and exterior stains. With continued focus on customer satisfaction combined with high-quality products, the Division is prepared to meet or exceed customer expectations while improving sales and maintaining profitability. OTHER SEGMENT The Other Segment is responsible for the acquisition, development, leasing and management of properties for use by the Company and others generally within the United States. Obtaining real estate in the proper location at the appropriate cost is a critical component for achieving the desired operating success, particularly for paint stores and distribution service centers. This Segment has many competitors consisting of other real estate owners, developers and managers in areas where we currently hold property. The main competitive factors are the availability of property and price. At the end of 1997, the Retail Properties Division owned or leased 220 properties, representing over 1,800,000 square feet of space, which are conducive to the sale of paint and associated products. Such properties include 134 freestanding buildings, for exclusive use by the Paint Stores Segment, and 86 multi-tenant properties, utilized when the basic needs of the paint store can be met and where external rental opportunities can be profitably operated. Multi-tenant properties are usually smaller "strip" shopping centers with adequate parking and, generally, the paint store will be located at the end of the shopping area for the most convenient access. The paint store must be easily accessible to professional painters and contractors with sufficient access to pickup and delivery areas. In 1998, the Division does not anticipate significant growth in the number of owned retail properties needed by the Paint Stores Segment. The occupancy rate for external space was 81.1 percent at December 31, 1997. The Non-Retail Properties Division owned or leased 27 properties at the end of 1997 consisting of office buildings, distribution service centers, idle manufacturing facilities and vacant land. Occasionally, such properties are acquired or developed to provide the lowest cost alternative for expansion of distribution operations. Locations that have been utilized profitably in the past which can no longer contribute to the Company's future plans are offered for sale or lease. By the end of 1997, the Division had obtained lease commitments for all of the office space vacated by a former large tenant as of December 31, 1996. This space will be fully occupied by March 31, 1998. In addition, it was able to obtain a tax credit for the rehabilitation of the building containing this space, resulting in a 20% tax credit on all capital expenditures made to the building over a five-year period. RAW MATERIALS AND PRODUCTS PURCHASED FOR RESALE With respect to the Paint Stores Segment, there are sufficient suppliers of each product purchased for resale that the Segment does not anticipate any significant sourcing problems. For the Coatings Segment, raw materials and fuel supplies are generally available from various sources in sufficient quantities that the Segment does not anticipate any significant sourcing problems during 1998. 6 9 SEASONALITY The majority of the sales for the Paint Stores Segment and Coatings Segment traditionally occur during the second and third quarters. There is no significant seasonality in sales for the Other Segment. TRADEMARKS AND TRADE NAMES Customer recognition of trademarks and trade names collectively contribute significantly to the sales of the Company. The Paint Stores Segment is identified with names such as Sherwin-Williams(R), SuperPaint(R), Pro Mar(R), EverClean(R), Glas-Clad(R), Perma-Clad(R), Old Quaker(TM), Con-Lux(R), Mercury(TM) and Brod-Dugan(TM). The Coatings Segment employs a variety of trade names and trademarks in marketing its products, such as Sherwin-Williams(R), Thompson's(R), Dutch Boy(R), Kem-Tone(R), Martin-Senour(R), Cuprinol(R), Pratt & Lambert(R), Globo(TM), Andina(TM), H&C(R), Lazzuril(TM), Excelo(TM), Western(R), Colorgin(TM), Rubberset(R), Dupli-Color(R), Rust Tough(R), Sprayon(R), Minwax(R), White Lightning(R), Krylon(R), Cello(R), Formby's(R), Red Devil(R), Tri-Flow(TM), Marson(TM) and Ronseal(TM). PATENTS Although patents and licenses are not of material importance to the business of the Company as a whole, the Automotive and Coatings Divisions' international operations derive a portion of their income from the license of technology, trademarks and trade names to foreign companies. BACKLOG AND PRODUCTIVE CAPACITY Backlog orders are not significant in the business of any Segment. Sufficient productive capacity currently exists to fulfill the Company's needs for paint and coatings products through 1998. EMPLOYEES The Company employed approximately 25,000 persons at December 31, 1997. ENVIRONMENTAL COMPLIANCE See Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 14 of this report, for further details on environmental compliance. 7 10 BUSINESS SEGMENTS
(MILLIONS OF DOLLARS) 1997 1996 1995 - -------------------------------------------------------------------------------------- NET EXTERNAL SALES Paint Stores $2,605 $2,410 $2,131 Coatings 2,264 1,709 1,129 Other 12 14 14 - -------------------------------------------------------------------------------------- Segment totals $4,881 $4,133 $3,274 INTERSEGMENT TRANSFERS Coatings $1,015 $ 924 $ 801 Other 21 21 19 - -------------------------------------------------------------------------------------- Segment totals $1,036 $ 945 $ 820 OPERATING PROFITS Paint Stores $ 225 $ 206 $ 158 Coatings 345 260 202 Other 12 13 13 Corporate expenses-net (155) (104) (55) - -------------------------------------------------------------------------------------- Income before income taxes $ 427 $ 375 $ 318 IDENTIFIABLE ASSETS Paint Stores $ 689 $ 634 $ 550 Coatings 2,711 1,764 846 Other 73 45 45 Corporate 563 552 700 - -------------------------------------------------------------------------------------- Consolidated totals $4,036 $2,995 $2,141 CAPITAL EXPENDITURES Paint Stores $ 27 $ 40 $ 29 Coatings 114 68 68 Other 9 3 4 Corporate 14 12 7 - -------------------------------------------------------------------------------------- Consolidated totals $ 164 $ 123 $ 108 DEPRECIATION Paint Stores $ 28 $ 26 $ 24 Coatings 52 40 31 Other 3 3 2 Corporate 7 7 6 - -------------------------------------------------------------------------------------- Consolidated totals $ 90 $ 76 $ 63
NOTES TO SEGMENT TABLE Intersegment transfers are accounted for at values comparable to normal unaffiliated customer sales. Operating profit is total revenue, including realized profit on intersegment transfers, less operating costs and expenses. Corporate expenses include interest which is unrelated to real estate leasing activities, certain provisions for disposition and termination of operations and environmental remediation which are not directly associated with or allocable to any operating segment, and other adjustments. Identifiable assets are those directly identified with each segment's operations. Corporate assets consist primarily of cash, investments, deferred pension assets and headquarters' property, plant and equipment. Net external sales and operating profits of consolidated foreign subsidiaries were $550 million and $54 million, respectively, for 1997. Identifiable assets of consolidated foreign subsidiaries totaled $240 million at December 31, 1997. Domestic operations account for the remaining net external sales, operating profits and identifiable assets. Corporate expenses and identifiable assets do not include any significant foreign operations. No single geographic area outside the United 8 11 States was significant relative to consolidated net external sales or consolidated identifiable assets. Consolidated foreign operations were not material for any year prior to 1997. Export sales and sales to any individual customer were each less than 10% of consolidated sales to unaffiliated customers during all years presented. ITEM 2. DESCRIPTION OF PROPERTY The Company's corporate headquarters are located in Cleveland, Ohio. The Company's principal manufacturing and distribution facilities, operated by the Coatings Segment, are located as set forth below.
Leased or Manufacturing facilities Owned - ------------------------ ------ Anaheim, California Owned Arlington, Texas Leased Baltimore, Maryland Owned Bedford Heights, Ohio Owned Chicago, Illinois Owned Coffeyville, Kansas Owned Columbus, Ohio Owned Crisfield, Maryland Leased Deshler, Ohio Owned Edison, New Jersey Owned Elk Grove, Illinois Owned Emeryville, California Owned Ennis, Texas Leased Flora, Illinois Owned Fort Wayne, Indiana Leased Fort Worth, Texas Owned Fountain Inn, South Carolina Owned Garland, Texas Owned Greensboro, North Carolina (2) Owned Harrisburg, Pennsylvania Leased Havre de Grace, Maryland Owned Holland, Michigan Owned Kankakee, Illinois Leased Lawrenceville, Georgia Owned Memphis, Tennessee Leased Memphis, Tennessee Owned Morrow, Georgia Owned Newark, New Jersey Owned Olive Branch, Mississippi Owned Ontario, California Leased Orlando, Florida Owned Richmond, Kentucky Owned San Diego, California Leased Spartanburg, South Carolina Leased Victorville, California Owned Wichita, Kansas Owned Arica, Chile Owned Buenos Aires, Argentina Owned Fort Erie, Ontario, Canada Owned Kingston, Jamaica Owned Mexico City, Mexico Owned Santiago, Chile Leased Santiago, Chile (2) Owned Sao Paulo, Brazil (5) Owned Sheffield, England Owned Zaragoza, Mexico Owned Distribution facilities - ------------------------ Bedford Heights, Ohio Leased Buford, Georgia Leased Dayton Valley, Nevada Owned Effingham, Illinois Leased Fredericksburg, Pennsylvania Owned Reno, Nevada Leased Richmond, Kentucky Owned Sparks, Nevada Leased Waco, Texas Leased Winter Haven, Florida Owned Buenos Aires, Argentina Owned Kingston, Jamaica Owned Mexico City, Mexico Owned Montreal, Quebec, Canada Owned Richmond Hill, Ontario, Canada Leased San Juan, Puerto Rico Leased Santiago, Chile (2) Owned Sao Paulo, Brazil (5) Owned Scarborough, Ontario, Canada Owned Zaragoza, Mexico Owned
9 12 In addition, the Coatings Segment included 135 company-operated automotive branches, of which 1 was owned, in the United States and Canada and 10 leased stores in Jamaica at December 31, 1997. The operations of the Paint Stores Segment included 2,195 company-operated specialty paint stores in the United States, Canada and Puerto Rico at December 31, 1997. All stores are leased locations with 220 being leased from the Company's Retail Properties Division in the Other Segment. The Paint Stores Segment is divided into four separate operating divisions, each of which is responsible for the stores located within its geographical region. At the end of 1997, the Mid Western Division operated 613 stores primarily located in the midwestern and upper west coast states and western Canada, the Eastern Division operated 458 stores along the upper east coast and New England states and eastern Canada, the Southeastern Division operated 583 stores principally covering the lower east and gulf coast states and Puerto Rico, and the South Western Division operated 541 stores in the plains and the lower west coast states. The Paint Stores Segment opened 39 net new stores in 1997 and relocated 40. All property within the Other Segment is owned by the Company except for 4 land leases in the Retail Properties Division and 2 warehouse leases in the Non-Retail Properties Division. ITEM 3. LEGAL PROCEEDINGS Reference is made to the legal proceeding reported in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 brought by the United States Department of Justice, on behalf of the United States Environmental Protection Agency, against the Company in the United States District Court for the Northern District of Illinois. On November 5, 1997, the Court approved the Consent Decree previously entered into between the Company and the United States of America, on behalf of the Administrator of the United States Environmental Protection Agency, under which the Company agreed to (i) comply with applicable environmental laws and regulations, (ii) pay a civil penalty in the amount of $4,700,000, (iii) spend $1,100,000 at two environmental remediation/restoration projects located in the south side of Chicago, Illinois which are unrelated to the Company's activities, (iv) conduct an investigation at its southeast Chicago, Illinois facility to determine the nature, extent and potential impact, if any, of environmental contamination at the facility, and (v) implement selected remedial action measures, if required, to address any environmental contamination identified pursuant to the investigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 10 13 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names and ages of the current Executive Officers, the positions and offices with the Company held by them as of February 28, 1998 and the date when each was first elected or appointed an Executive Officer.
Name Age Present Position ---- --- ---------------- John G. Breen 63 Chairman and Chief Executive Officer, Director Thomas A. Commes 55 President and Chief Operating Officer, Director Larry J. Pitorak 51 Senior Vice President -- Finance, Treasurer and Chief Financial Officer John L. Ault 52 Vice President -- Corporate Controller Christopher M. Connor 41 President, Paint Stores Group Michael A. Galasso 50 President & General Manager, Automotive Division Thomas E. Hopkins 40 Vice President -- Human Resources Conway G. Ivy 56 Vice President -- Corporate Planning and Development Joseph M. Scaminace 44 President & General Manager, Coatings Division Louis E. Stellato 47 Vice President, General Counsel and Secretary Richard M. Wilson 45 President & General Manager, Diversified Brands Division
The following is a brief account of each Executive Officer's business experience with the Company during the last five years: Mr. Breen has served as Chairman and Chief Executive Officer since June 1986 and has served as a Director since April 1979. Mr. Commes has served as President and Chief Operating Officer since June 1986 and has served as a Director since April 1980. Mr. Pitorak has served as Senior Vice President -- Finance, Treasurer and Chief Financial Officer since April 1992. Mr. Ault has served as Vice President -- Corporate Controller since January 1987. Mr. Connor has served as President, Paint Stores Group since August 1997 prior to which he served as President & General Manager, Diversified Brands Division commencing April 1994. From September 1992 to April 1994, Mr. Connor served as Senior Vice President -- Marketing, Paint Stores Group. Mr. Galasso has served as President & General Manager, Automotive Division since June 1997 prior to which he served as Vice President & Director -- Operations, Automotive Division commencing May 1992. Mr. Hopkins has served as Vice President -- Human Resources since August 1997 prior to which he served as Vice President -- Human Resources, Paint Stores Group commencing February 1996. From November 1989 to February 1996, Mr. Hopkins served as Director of Human Resources, Paint Stores Group. Mr. Ivy has served as Vice President -- Corporate Planning and Development since April 1992. 11 14 Mr. Scaminace has served as President & General Manager, Coatings Division since June 1997 prior to which he served as President & General Manager, Automotive Division commencing April 1994. From September 1985 to April 1994, Mr. Scaminace served as President & General Manager, Diversified Brands Division. Mr. Stellato has served as Vice President, General Counsel and Secretary since July 1991. Mr. Wilson has served as President & General Manager, Diversified Brands Division since August 1997 prior to which he served as Senior Vice President -- Marketing, Paint Stores Group commencing April 1994. From June 1987 to April 1994, Mr. Wilson served as President & General Manager, Southeastern Division, Paint Stores Group. There are no family relationships between any of the persons named. 12 15 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Sherwin-Williams Common Stock is listed on the New York Stock Exchange and traded under the symbol SHW.
QUARTERLY STOCK PRICES AND DIVIDENDS Quarter High Low Dividend ----------------------------------------------- 1997 1ST $29.125 $25.938 $ .10 2ND 32.375 24.125 .10 3RD 33.375 27.063 .10 4TH 30.188 25.188 .10 1996 1st $22.688 $19.500 $ .0875 2nd 23.500 20.938 .0875 3rd 23.563 21.125 .0875 4th 28.875 22.813 .0875
The number of shareholders of record for Sherwin-Williams Common Stock, par value $1.00 per share, at January 31, 1998 was 12,061. The closing market value per share as listed on the New York Stock Exchange at the close of business on January 31, 1998 was $28.625. ITEM 6. SELECTED FINANCIAL DATA (Millions of Dollars, except per share data)
1997 1996 1995 1994 1993 - ------------------------------------------------------------------------ OPERATIONS Net Sales $4,881 $4,133 $3,274 $3,100 $2,949 Net Income 261 229 201 187 165 FINANCIAL POSITION Total assets $4,036 $2,995 $2,141 $1,962 $1,915 Long-term debt 844 143 24 20 38 PER COMMON SHARE DATA Net income -- basic* $ 1.51 $ 1.34 $ 1.18 $ 1.08 $ .93 Net income -- diluted* 1.50 1.33 1.17 1.07 .92 Cash dividends .40 .35 .32 .28 .25
* Amounts reflect adoption of Statement of Financial Accounting Standards No. 128, "Earnings Per Share", effective December 31, 1997. All amounts shown for periods prior to adoption have been restated. See Note 1, page 31, and Note 16, page 47, for further per share information. 13 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION -- 1997 Net operating cash flow generated by the Company during 1997 exceeded $439.5 million. This cash flow, combined with a net increase in total debt of $691.9 million, provided the funds to invest in property, plant and equipment, to increase the annual dividend to shareholders, and to invest in the acquisitions of Thompson Minwax Holding Corp. (Thompson Minwax) and other smaller domestic and foreign acquisitions throughout 1997. The Company's Consolidated Balance Sheets and Statements of Consolidated Cash Flows, on pages 28 and 29 of this report, provide more detailed information on the Company's financial position and cash flows. The Company's current ratio increased to 1.37 at December 31, 1997 from 1.35 at the end of 1996. Other current assets decreased $78.1 million due primarily to the receipt of approximately $53.9 million from various insurance companies related to environmental matters. Short-term borrowings, primarily related to the Company's commercial paper program, decreased $61.0 million during the year. The Company's commercial paper program had unused borrowing availability of $893.3 million at December 31, 1997. Outstanding borrowings under the commercial paper program are fully backed by the Company's revolving credit agreements. Increases in other components of net working capital occurred during 1997 due to the effects of acquisitions combined with increased sales and manufacturing activity. Deferred pension assets of $276.1 million at December 31, 1997 represent the excess of the fair market value of the assets in the Company's defined benefit pension plans over the actuarially-determined projected benefit obligations. The 1997 increase in deferred pension assets of $21.7 million represents primarily the recognition of the current year net pension credit, described in Note 6 on page 36 of this report, and the recording of a settlement of a portion of the accumulated benefit obligation in one of its defined benefit pension plans in accordance with Statement of Financial Accounting Standards (SFAS) No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits". The assumed discount rate used to compute the actuarial present value of benefit obligations was lowered to 7.0 percent at December 31, 1997 due to decreased rates of high-quality, long-term investments, thereby increasing the benefit obligations and unrecognized net loss of the plans. The deferral of the increase in the actual return on plan assets during 1997 over the assumed return of 8.5 percent, which occurred due primarily to favorable returns on equity investments, caused an offsetting decrease to the cumulative unrecognized net loss of the plans. The net effect of these deferred items, combined with an increased asset base, will result in an increase to the net pension credit in 1998. Goodwill, which represents the excess cost over the fair value of net assets acquired in purchase business combinations, increased $614.7 million, and intangible assets, which represent items such as trademarks and patents, increased $206.0 million over 1996. These increases relate primarily to goodwill and intangible assets acquired during 1997 and other adjustments of $869.7 million reduced by amortization expense of $49.0 million during the year. The decrease in other assets of $60.1 million occurred primarily due to the reclassification of certain asset values associated with a previously unconsolidated foreign joint venture acquired in 1996 which was accounted for at cost and the reclassification of certain amounts to long-term liabilities. Net property, plant and equipment increased $142.9 million to $692.3 million at December 31, 1997 due to net fixed assets acquired of $61.8 million and capital expenditures of $164.0 million offset by depreciation expense of $90.2 million and the disposition or retirement of certain assets. Capital expenditures in 1997 represented primarily the costs of installing or upgrading point-of-sale terminals in the paint stores and costs for the construction, capacity expansion or upgrade of manufacturing and distribution centers. The decrease in capital expenditures during 1997 in the Paint Stores Segment occurred due primarily to reduced spending related to the installation of 14 17 point-of-sale terminals in the paint stores. The Coatings Segment's increase in capital expenditures during 1997 relates to construction costs for three new powder coatings facilities in Texas, California and South Carolina, construction costs for a new manufacturing facility in Brazil, construction costs for a new distribution center in Nevada and costs for capacity expansion at some of its existing facilities. Capital expenditures in the Other Segment increased due to costs related to refurbishing vacant tenant space prior to re-leasing. In 1998, the Company expects that its most significant capital expenditures will relate to construction of new facilities in Brazil and Chile, various capacity and productivity improvement projects at manufacturing facilities and new or upgraded information systems equipment. The Company does not anticipate the need for any specific external financing to support these capital programs. Long-term debt increased $701.2 million during the year to $843.9 million at December 31, 1997. As more fully explained in Note 8, on page 39 of this report, the net increase relates to the February 1997 issuance of $400.0 million of debt securities under the Company's $450.0 million shelf registration with the Securities and Exchange Commission, the February 1997 issuance of $300.0 million of debentures in private offerings not registered under the Securities Act of 1933, as amended (Securities Act), and the October 1997 issuance of the $50.0 million of debt securities remaining under the Company's $450.0 million shelf registration. The net proceeds from these borrowings were used to refinance a portion of the Company's commercial paper debt, which was incurred primarily to finance the acquisition of Thompson Minwax. In connection with the issuance of the long-term debt referenced above, in May 1997, the Company decreased the aggregate principal amount of unsecured short-term notes which may be issued under its commercial paper program to $1,000.0 million from $1,450.0 million, and in December 1997, the Company filed a new shelf registration with the Securities and Exchange Commission covering $150.0 million of debt securities. No securities have been issued pursuant to this shelf registration. The Company expects to remain in a borrowing position throughout 1998. The increase in the Company's long-term postretirement benefit liability occurred due to the excess of the net postretirement benefit expense over the costs for benefit claims incurred and the addition of postretirement obligations assumed in acquisitions. The current portion of the accrued postretirement liability, amounting to $9.5 million at December 31, 1997, is included in other accruals. The assumed discount rate used to calculate the actuarial present value of the postretirement benefit obligations was lowered to 7.0 percent at December 31, 1997 due to decreased rates of high-quality, long-term investments, thereby increasing the cumulative unrecognized net loss for the postretirement plans. The effect of this change on the net postretirement benefit expense for 1998 will be minimal as the cumulative unrecognized net loss is below the threshold for required amortization. See Note 7, on page 38 of this report, for further information on the Company's postretirement benefit obligations. Other long-term liabilities include accruals for environmental-related liabilities and other non-current miscellaneous items. The increase of $69.1 million during 1997 primarily relates to the increased accruals for environmental-related liabilities and the reclassification of certain amounts from current liabilities and other assets. See Note 10, on page 41 of this report, for additional information concerning the Company's other long-term liabilities. The Company and certain other companies are defendants in a number of lawsuits arising from the manufacture and sale of lead pigments and lead paints. It is possible that additional lawsuits may be filed against the Company in the future with similar allegations. The various existing lawsuits seek damages for personal injuries and property damages, along with costs involving the abatement of lead related paint from buildings and medical monitoring costs. The Company believes that such lawsuits are without merit and is vigorously defending them. The Company does not believe that any potential liability ultimately determined to be attributable to the Company arising out of such lawsuits will have a material adverse effect on the Company's business or financial condition. 15 18 The operations of the Company, like those of other companies in our industry, are subject to various federal, state and local environmental laws and regulations. These laws and regulations not only govern our current operations and products, but also impose liability on the Company for past operations which were conducted utilizing practices and procedures considered acceptable under the laws and regulations existing at that time. The Company expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and our industry in the future. The Company believes it conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs to protect the environment and promote continued compliance. Capital expenditures and other expenses related to ongoing environmental compliance measures are included in the normal operating expenses of conducting business. The Company's capital expenditures and other expenses related to ongoing environmental compliance measures were not material to the Company's financial condition or net income during 1997, and the Company does not expect such capital expenditures and other expenses to be material to the Company's financial condition or net income in the future. The Company is involved with environmental compliance and remediation activities at some of its current and former sites (including former sites which were previously owned and/or operated by businesses acquired by the Company). The Company, together with other parties, has also been designated a potentially responsible party under federal and state environmental protection laws for the remediation of hazardous waste at a number of third-party sites, primarily Superfund sites. The Company may be similarly designated with respect to additional third-party sites in the future. The Company accrues for certain environmental remediation-related activities relating to its past operations and third-party sites, including Superfund sites, for which commitments or clean-up plans have been developed or for which costs or minimum costs can be reasonably estimated. The Company also accrues for certain environmental remediation-related activities relating to sites obtained through acquisitions in a similar manner. The Company continuously assesses its potential liability for remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued, such as SOP 96-1 that was adopted in 1996, which require changing the estimated costs or the procedure utilized in estimating such costs. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to any given site, the volumetric contribution which may be attributed to the Company relative to that attributable to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site. Pursuant to a Consent Decree entered into with the United States of America, on behalf of the Environmental Protection Agency, filed in the United States District Court for the Northern District of Illinois, the Company has agreed, in part, to (i) conduct an investigation at its southeast Chicago, Illinois facility to determine the nature, extent and potential impact, if any, of environmental contamination at the facility, and (ii) implement remedial action measures, if required, to address any environmental contamination identified pursuant to the investigation. In addition, the Company is a defendant in a lawsuit brought by PMC, Inc. regarding one of the Company's former Chemical Division's manufacturing facilities which is located adjacent to the Company's southeast Chicago, Illinois facility. This former manufacturing facility was sold to PMC, Inc. in 1985. PMC, Inc. is seeking an undisclosed amount for environmental remediation costs and other damages based upon contractual and tort theories, and under various environmental laws. The Company is vigorously defending this lawsuit. 16 19 With respect to the Company's southeast Chicago, Illinois facility and its former manufacturing facility adjacent thereto, the Company has evaluated its potential liability and, based upon its preliminary evaluation, has accrued an appropriate amount. However, due to the uncertainties surrounding these facilities, the Company's ultimate liability may result in costs that are significantly higher than currently accrued. In such event, the recording of the liability may result in a significant impact on net income for the annual or interim period during which the additional costs are accrued. The Company does not believe that any potential liability ultimately attributed to the Company for its environmental-related matters will have a material adverse effect on the Company's financial condition, liquidity, cash flow or, except as set forth in the preceding paragraph, net income. See Note 10, on page 41 of this report, for discussion of the environmental-related accruals included in the Company's consolidated balance sheets. Shareholders' equity increased more than $190.9 million during 1997 due primarily to the excess current year net income over dividends paid to shareholders. The par value of $101.9 million for additional common shares issued in the form of a two-for-one stock split in March 1997 was credited to Common Stock and a like amount charged to other capital. The Company did not acquire any of its own shares through open market purchases during this period. Approximately 160,700 shares of the Company's Common Stock were received in exchange for stock issued in accordance with the Company's stock plans. The Company acquires its own stock for general corporate purposes and, depending on its future cash position and market conditions, it may acquire additional shares in the future. In April 1997, the Board of Directors authorized the Company to purchase, in the aggregate, 10,000,000 shares of Common Stock. The increase of $14.1 million in the cumulative foreign currency translation adjustment occurred due primarily to the strengthening of the U.S. dollar over the Company's foreign subsidiaries' currencies. The Company's Brazilian subsidiaries, which had been accounted for under highly inflationary accounting rules, are now accounted for under non-highly inflationary accounting rules beginning July 1, 1997. As of that date, the Brazilian Real is the functional currency for all Brazilian operations, and any resulting translation adjustments have been included in the cumulative foreign currency translation adjustment of shareholders' equity. The Company is engaged in a company-wide project to prepare the Company's computer systems and applications for the change in date from the year 1999 to 2000. This project consists of identifying and taking appropriate corrective action to address the Year 2000 issue in affected systems and applications. The Company expects its Year 2000 project (including testing and implementation) to be completed on a timely basis. All costs and expenses incurred to address the Year 2000 issue are charged against income on a current basis. The Company does not expect these costs and expenses to be material to the Company's financial condition, annual results of operation or cash flows. In addition, the Company commenced a multi-year, company-wide information technology project to enhance the Company's computer systems. The project will provide efficiencies and further integration of operations. The Company currently expects that full implementation of this project will involve significant capital expenditures over the next several years. Certain costs and expenses related to this project, including amortization costs, are charged against income on a current basis. While this project will reduce the Company's cash flows from operations in the first year, anticipated benefits in subsequent years will reduce any impact on cash flows. The capital expenditures, costs and expenses are not expected to have a material adverse effect on the Company's annual results of operations. The Company is exposed to market risk through various financial instruments, including fixed rate debt instruments and interest rate swaps. The Company does not believe that any potential loss related to these financial instruments in future earnings, fair values or cash flows from 17 20 possible near-term market movements will have a material adverse effect on the Company's financial condition or results of operations. At a meeting held February 4, 1998, the Board of Directors increased the quarterly dividend to $.1125 per share. This represents the nineteenth consecutive annual increase and a compounded annual rate of increase of 27.2 percent since the dividend was reinstated in the fourth quarter of 1979. The 1997 annual dividend of $.40 per share marked the eighteenth consecutive year that the dividend approximated our payout ratio target of 30 percent of the prior year's earnings. RESULTS OF OPERATIONS -- 1997 vs 1996 Consolidated net sales increased 18.1 percent over 1996 to $4.88 billion in 1997. Excluding incremental sales from Thompson Minwax and other smaller domestic and foreign acquisitions (collectively, the 1997 Acquisitions) which occurred at various times since December 31, 1996, net sales for 1997 increased 3.7 percent. The Paint Stores Segment's sales during 1997 increased 8.1 percent, or 6.6 percent excluding the 1997 Acquisitions, due primarily to increased paint gallons sold to wholesale customers combined with wholesale volume increases in the remaining major product lines. Wholesale customers include professional painters, contractors and industrial and commercial maintenance customers. Although volume sales to retail customers were soft in the second half of the year, overall retail sales increased in 1997 compared to 1996, thereby contributing to the sales improvement in the Paint Stores Segment. External sales in the Coatings Segment increased 32.5 percent during 1997 due primarily to incremental sales from the 1997 Acquisitions. Excluding the 1997 Acquisitions, sales declined 0.5 percent. Sales were affected by the loss of certain business due to our unwillingness to match or exceed the low prices offered by our competition. The Company expects sales from new products and product lines and the expansion of its presence at several retailers to offset the lost sales; however, the Segment's overall expected sales increase will be tempered during the first half of 1998 as compared to the first half of 1997. Reduced gallons sold to national accounts and home center customers, which resulted from poor out-the-door sales and the loss of certain product lines at one of its customers, accounted for a slight sales decline in the Consumer Brands Division after excluding the 1997 Acquisitions. External sales in the Automotive Division were higher than last year on both an as-reported basis and excluding the 1997 Acquisitions due primarily to sales gains in its automotive branches and at original equipment manufacturers combined with foreign sales gains resulting from increased market penetration in those areas. In the Diversified Brands Division, sales gains in the industrial and applicator product lines were offset by reduced sales to some customers in the retail national (formerly hardware) and cleaning solutions businesses, leading to slightly lower sales excluding the 1997 Acquisitions as compared to last year. External sales in the Coatings Segment's consolidated foreign subsidiaries increased significantly during 1997 and represented 11.3 percent of the Company's consolidated net sales due primarily to the Company's acquisition activity. Revenue generated by real estate operations in the Other Segment was lower than last year due to the loss of a large tenant in one of its office buildings at the end of 1996. Consolidated gross profit as a percent of sales increased to 43.0 percent from 41.8 percent in 1996 due in part to the effects of the 1997 Acquisitions, although improved gross profit margins were also obtained excluding the 1997 Acquisitions. The Paint Stores Segment's 1997 gross margin excluding the 1997 Acquisitions was higher than last year due primarily to sales gains in its higher-margin paint and paint-related product lines. Margins in the Coatings Segment were higher than last year due to above-average margins realized from some of the 1997 Acquisitions' businesses combined with a favorable sales mix in most of its divisions and favorable factory operations in the Automotive Division. 18 21 Consolidated selling, general and administrative expenses as a percent of sales increased to 32.2 percent from 31.7 percent in 1996. Excluding the 1997 Acquisitions, SG&A expenses as a percent of sales were even with last year. The Paint Stores Segment's SG&A expenses as a percent of sales were favorable to last year on both an as-reported basis and excluding the 1997 Acquisitions due to cost containment combined with the sales gains achieved. Increased merchandising and administrative costs related to new products, new customers and improved service levels led to an unfavorable SG&A ratio in the Coatings Segment for 1997 compared to 1996. Consolidated operating profits increased 21.6 percent in 1997, or 7.2 percent excluding the 1997 Acquisitions. Operating profits of the Paint Stores Segment increased 9.3 percent, or 8.9 percent excluding the 1997 Acquisitions, due primarily to increased paint volume combined with containment of selling, general and administrative expenses. The Coatings Segment's operating profits excluding the 1997 Acquisitions were 6.6 percent higher than last year due primarily to the realization of manufacturing efficiencies in certain business units. Operating profits of the Coatings Segment's consolidated foreign subsidiaries represented 12.6 percent of the Company's consolidated operating profits due primarily to profits from the Company's acquisitions. There are certain risks in transacting business internationally, such as changes in applicable laws and regulatory requirements, political instability, general economic and labor conditions, fluctuations in currency exchange rates and expatriation restrictions, which could adversely affect the financial condition or results of operation of the Company's consolidated foreign subsidiaries. The operating profits of the Other Segment decreased in 1997 due primarily to vacant lease space during part of the year related to the loss of a large tenant in one of its office buildings. Corporate expenses increased in 1997 due primarily to increased interest expense and net losses relating to translation of certain foreign investments which are not directly associated with or allocable to any individual operating segment. Refer to page 1 of this report for additional Business Segment Information. Interest expense increased significantly in 1997 due to the increases in long-term debt related to the financing of the 1997 Acquisitions. As a result, interest coverage decreased to 6.3 times from 16.3 times in 1996. Our fixed charge coverage, which is calculated using interest and rent expense, declined to 3.2 times from 3.9 times in 1996. Net interest and investment income increased in 1997 due primarily to higher average cash and short-term investment balances and higher average yields. See Note 4, on page 35 of this report, for further detail on other costs and expenses. As shown in Note 14, on page 44 of this report, the effective income tax rate in 1997 remained unchanged from the 1996 rate. Net income increased 13.7 percent in 1997 to $260.6 million from $229.2 million in 1996. Excluding the Acquisitions, net income increased 14.9 percent. Net income per common share-basic, calculated in accordance with SFAS No. 128 adopted for the fourth quarter ended December 31, 1997, increased 12.7 percent to $1.51 from $1.34 (as restated to conform to SFAS No. 128). See Note 1, on page 31 of this report, for additional discussion on the Company's adoption of SFAS No. 128 and Note 16, on page 47 of this report, for detailed computations. As a consequence of the lost external sales in the Coatings Segment in 1997, the Company's anticipated increase in net income during the first half of 1998 will be slightly impacted. Although the costs and expenses of the Company's Year 2000 project and the expenses associated with the information technology project will slightly impact operating profits and net income in 1998, the Company expects that 1998 sales and earnings will exceed the sales and earnings recorded in 1997. RESULTS OF OPERATIONS -- 1996 vs 1995 Consolidated net sales increased to $4.13 billion in 1996, a 26.2 percent increase over 1995. Excluding incremental sales from Pratt & Lambert United, Inc. and other smaller acquisitions (collectively, the 1996 Acquisitions) after date of acquisition, net sales for 1996 increased 7.5 percent. 19 22 Sales in the Paint Stores Segment increased 13.1 percent over 1995, or 9.1 percent excluding the 1996 Acquisitions, due primarily to increased paint gallons sold to both retail and wholesale customers. Comparable store sales were up 10.0 percent for the year. Despite selling price reductions on certain non-paint product lines in 1996, volume gains generated overall sales increases in all non-paint product lines except window treatments. Incremental sales from the 1996 Acquisitions led to an external sales increase of 51.4 percent over 1995 in the Coatings Segment. Excluding the 1996 Acquisitions, external sales increased 4.7 percent. Increased gallons sold to national accounts and independent dealers led to a net external sales increase excluding the 1996 Acquisitions over 1995 in the Consumer Brands Division. In the Automotive Division, 1996 external sales gains excluding the 1996 Acquisitions were generated primarily from sales growth in its branch distribution network. The addition of new products and new customers in the Diversified Brands Division during 1996 helped achieve sales gains in its custom, automotive, hardware and industrial product lines excluding the 1996 Acquisitions. Revenue generated by real estate operations in the Other Segment decreased slightly compared to 1995 due to the disposition of certain properties in late 1995 and in 1996. Lower gross profit margins from some of the 1996 Acquisitions' businesses caused consolidated gross profit as a percent of sales to decline to 41.8 percent from 42.7 percent in 1995. Excluding the 1996 Acquisitions, gross profit margins increased to 44.4 percent. Gross profit margins in the Paint Stores Segment, both including and excluding the 1996 Acquisitions, were higher than 1995 due to increased sales of its higher margin product lines combined with increased retail sales. Stable product costs combined with a favorable sales mix led to improved gross profit margins over 1995 in the Coatings Segment excluding the 1996 Acquisitions. Consolidated selling, general and administrative (SG&A) expenses as a percent of sales were favorable to 1995, declining to 31.7 percent from 32.8 percent, due to lower-than-average expenses in the 1996 Acquisitions' businesses. Excluding the 1996 Acquisitions, SG&A expenses as a percent of sales increased to 33.5 percent. The Paint Stores Segment's controlled spending throughout 1996 combined with its sales gains led to favorable SG&A expenses as a percent of sales on both an as-reported basis and excluding the 1996 Acquisitions. The Coatings Segment's SG&A expenses as a percent of sales excluding the 1996 Acquisitions were unfavorable to 1995 due primarily to increased merchandising costs, advertising and promotional expenses related to product introductions in the Consumer Brands and Diversified Brands Divisions. Consolidated operating profits increased 30.3 percent over 1995, or 19.2 percent excluding the 1996 Acquisitions. Operating profits of the Paint Stores Segment increased 30.2 percent, or 28.1 percent excluding the 1996 Acquisitions, due to volume gains and the continued containment of SG&A expenses. The Coatings Segment's operating profits excluding the 1996 Acquisitions increased 11.9 percent due to stable raw material costs and manufacturing efficiencies resulting from volume gains. The operating profits of the Other Segment increased in comparison to 1995 primarily due to the reduction in costs associated with disposed properties. Corporate expenses increased over 1995 due to increased interest expense, decreased net investment income and increases in other costs and expenses which are not directly associated with or allocable to any individual operating segment. The increases in long-term debt and short-term borrowings which occurred in 1996 due to the financing of the 1996 Acquisitions caused interest expense to increase significantly over 1995. Correspondingly, interest coverage decreased to 16.3 times from 126.8 times in 1995. Fixed charge coverage, which is calculated using interest and gross rent expense, declined to 3.9 times from 4.2 times in 1995. Net interest and investment income was lower than 1995 due to lower average cash and short-term investment balances offset partially by higher average yields. Other costs and expenses increased in 1996 due to increased provisions for dispositions and termination of operations and for environmental remediation-related matters and other items as more fully discussed in Note 4 on 20 23 page 35 of this report. The effective income tax rate increased in 1996, as shown in Note 14, on page 44 of this report, primarily due to the increase in non-deductible tax items, primarily goodwill. Net income increased 14.2 percent in 1996 to $229.2 million from $200.7 million in 1995. Excluding the 1996 Acquisitions, net income increased 12.6 percent. Net income per share increased 13.7 percent in 1996 to $1.34 from $1.18 (as restated in accordance with SFAS No. 128). In accordance with the consensus guidance in Emerging Issues Task Force No. 87-11, "Allocation of Purchase Price to Assets to be Sold", all 1996 results of operations exclude the results of operations of certain Pratt & Lambert United, Inc. subsidiaries through their respective dates of sale. These subsidiaries, which were sold during the third quarter of 1996, include essentially all operations of Pierce & Stevens Corp., a manufacturer of specialty chemicals, and Miracle Adhesives Corporation, a manufacturer of adhesives for the construction industry. The total operating profit related to these subsidiaries prior to their sale, approximately $3.0 million in 1996, has been excluded from the statement of consolidated income. The net gain realized on the sale of these subsidiaries was insignificant to the allocation of purchase price pursuant to APB Opinion No. 16. 21 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors The Sherwin-Williams Company Cleveland, Ohio We have audited the accompanying consolidated balance sheets of The Sherwin-Williams Company and subsidiaries as of December 31, 1997, 1996 and 1995, and the related statements of consolidated income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Sherwin-Williams Company and subsidiaries at December 31, 1997, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Ernst & Young LLP Cleveland, Ohio January 23, 1998 22 25 REPORT OF MANAGEMENT Shareholders The Sherwin-Williams Company We have prepared the accompanying consolidated financial statements and related information included herein for the years ended December 31, 1997, 1996 and 1995. The primary responsibility for the integrity of the financial information rests with management. This information is prepared in accordance with generally accepted accounting principles based upon our best estimates and judgments and giving due consideration to materiality. The Company maintains accounting and control systems which are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and which produce records adequate for preparation of financial information. There are limits inherent in all systems of internal control based on the recognition that the cost of such systems should not exceed the benefits to be derived. We believe our system provides this appropriate balance. The Board of Directors pursues its responsibility for these financial statements through the Audit Committee, composed exclusively of outside directors. The Committee meets periodically with management, internal auditors and our independent auditors to discuss the adequacy of financial controls, the quality of financial reporting and the nature, extent and results of the audit effort. Both the internal auditors and independent auditors have private and confidential access to the Audit Committee at all times. /s/ J. G. Breen /s/ L. J. Pitorak /s/ J. L. Ault J. G. Breen L. J. Pitorak J. L. Ault Chairman and Senior Vice President -- Finance, Vice President -- Chief Executive Officer Treasurer and Chief Financial Officer Corporate Controller
FORWARD-LOOKING STATEMENT Certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Business Segment Information" and elsewhere in this report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon management's expectations and beliefs concerning future events and discuss, among other things, anticipated future performance and revenues, expected growth and future business plans. Words and phrases such as "expects", "anticipates", "believes", "will likely result", "will continue", "plans to" and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the Company, that could cause actual results to differ materially from such statements. These uncertainties and other factors include such things as: general business conditions, strengths of retail economies and the growth in the coatings industry; competitive factors, including pricing pressures and product innovation and quality; raw material availability and pricing; changes in the Company's relationships with customers and suppliers; the ability of the Company to successfully integrate recent and future acquisitions into its existing 23 26 operations; changes in general domestic economic conditions such as inflation rates, interest rates and tax rates; risks and uncertainties associated with the Company's expansion into foreign markets, including inflation rates, recessions, foreign currency exchange rates, foreign investment and repatriation restrictions and other external economic and political factors; increasingly stringent domestic and foreign governmental regulations including those affecting the environment; inherent uncertainties involved in assessing the Company's potential liability for environmental remediation-related activities; the outcome of pending and future litigation and other claims; and unusual weather conditions. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. FINANCIAL STATEMENTS See "Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K" for the required Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 24 27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 regarding Directors is contained under the caption "Election of Directors (Proposal 1)" in the Proxy Statement which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year which information under such caption is incorporated herein by reference. The information required by Item 10 regarding Executive Officers is contained under the caption "Executive Officers of the Registrant" in Part I of this Form 10-K which information under such caption is incorporated herein by reference. The information required by Item 10 regarding certain significant employees is contained under the captions "Corporate Officers of the Company" and "Operating Managers of the Company" (excluding the Executive Officers) in the Proxy Statement which information under such captions is incorporated herein by reference. The information required by Item 10 regarding compliance with Section 16 of the Securities Exchange Act of 1934 is contained under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement which information under such caption is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is contained on pages 7 through 17 of the Proxy Statement and under the captions "Compensation of Directors" and "Compensation Committee Interlocks and Insider Participation" contained in the Proxy Statement which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is contained under the captions "Security Ownership of Management" and "Security Ownership of Certain Beneficial Owners" in the Proxy Statement which information under such captions is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 25 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements (i) Statements of Consolidated Income for the Years Ended December 31, 1997, 1996 and 1995 (ii) Consolidated Balance Sheets at December 31, 1997, 1996 and 1995 (iii) Statements of Consolidated Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 (iv) Statements of Consolidated Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 (v) Notes to Consolidated Financial Statements for the Years Ended December 31, 1997, 1996 and 1995 (2) Financial Statement Schedule Financial Schedule No. II for the Years Ended December 31, 1997, 1996 and 1995 -- All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) Exhibits See Exhibit Index at page 51 of this report which is incorporated herein by reference.
(b) Reports on Form 8-K -- The Company did not file any Reports on Form 8-K during the quarterly period ended December 31, 1997. 26 29 STATEMENTS OF CONSOLIDATED INCOME (Thousands of Dollars Except Per Share Data)
Year ended December 31, - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Net sales $4,881,103 $4,132,879 $3,273,819 Costs and expenses: Cost of goods sold 2,784,392 2,405,178 1,877,083 Selling, general and administrative expenses 1,573,510 1,309,086 1,075,442 Interest expense 80,837 24,537 2,532 Interest and net investment income (8,278) (6,819) (11,518) Other 23,365 25,520 11,782 - ---------------------------------------------------------------------------- 4,453,826 3,757,502 2,955,321 - ---------------------------------------------------------------------------- Income before income taxes 427,277 375,377 318,498 Income taxes 166,663 146,220 117,844 - ---------------------------------------------------------------------------- Net income $ 260,614 $ 229,157 $ 200,654 ============================================================================ Net income per common share: Basic $ 1.51 $ 1.34 $ 1.18 ============================================================================ Diluted $ 1.50 $ 1.33 $ 1.17 ============================================================================
See notes to consolidated financial statements. 27 30 CONSOLIDATED BALANCE SHEETS (Thousands of Dollars)
December 31, - ------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 3,530 $ 1,880 $ 249,484 Short-term investments 20,000 Accounts receivable, less allowance 546,314 452,421 334,304 Inventories: Finished goods 587,680 529,148 395,817 Work in process and raw materials 133,988 113,539 67,270 - ------------------------------------------------------------------------------ 721,668 642,687 463,087 Deferred income taxes 124,669 105,065 71,583 Other current assets 136,072 214,134 100,440 - ------------------------------------------------------------------------------ Total current assets 1,532,253 1,416,187 1,238,898 Goodwill 1,161,129 546,461 38,792 Intangible assets 310,221 104,206 84,070 Deferred pension assets 276,086 254,376 233,574 Other assets 63,854 123,969 89,362 Property, plant and equipment: Land 64,367 53,705 45,203 Buildings 383,485 312,954 282,011 Machinery and equipment 841,343 716,015 629,786 Construction in progress 68,649 51,258 30,434 - ------------------------------------------------------------------------------ 1,357,844 1,133,932 987,434 Less allowances for depreciation 665,586 584,541 531,077 - ------------------------------------------------------------------------------ 692,258 549,391 456,357 - ------------------------------------------------------------------------------ Total Assets $4,035,801 $2,994,590 $2,141,053 ============================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 106,913 $ 168,001 Accounts payable 424,184 385,928 $ 276,863 Compensation and taxes withheld 118,709 103,353 78,148 Current portion of long-term debt 53,926 2,133 755 Other accruals 367,392 325,635 231,280 Accrued taxes 44,539 65,957 31,891 - ------------------------------------------------------------------------------ Total current liabilities 1,115,663 1,051,007 618,937 Long-term debt 843,919 142,679 24,018 Postretirement benefits other than pensions 199,839 184,551 175,766 Other long-term liabilities 284,200 215,121 110,206 Shareholders' equity: Common stock -- $1.00 par value: 172,907,418, 171,831,178 and 170,909,626 shares outstanding at December 31, 1997, 1996 and 1995, respectively 204,538 101,650 101,110 Other capital 119,695 203,223 182,311 Retained earnings 1,602,454 1,411,295 1,242,167 Treasury stock, at cost (301,418) (295,954) (292,805) Cumulative foreign currency translation adjustment (33,089) (18,982) (20,657) - ------------------------------------------------------------------------------ Total shareholders' equity 1,592,180 1,401,232 1,212,126 - ------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $4,035,801 $2,994,590 $2,141,053 ==============================================================================
See notes to consolidated financial statements. 28 31 STATEMENTS OF CONSOLIDATED CASH FLOWS (Thousands of Dollars)
Year Ended December 31, - ----------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------- OPERATIONS Net income $ 260,614 $ 229,157 $ 200,654 Non-cash adjustments: Depreciation 90,202 76,176 62,947 Deferred income tax expense 59,247 (13,798) (3,316) Provisions for disposition of operations 4,152 17,366 6,267 Provisions for environmental-related matters 7,607 15,494 10,136 Amortization of intangible assets 49,044 27,447 14,971 Defined benefit pension plans net credit (20,173) (15,298) (7,612) Net increase in postretirement liability 5,452 3,258 3,652 Other 15,133 8,408 10,077 Change in current items-net: Increase in accounts receivable (22,190) (20,338) (19,571) Decrease (increase) in inventories (30,940) (85,911) 3,922 Increase in accounts payable 6,841 60,410 17,283 Increase (decrease) in accrued taxes (24,671) 33,147 (8,877) Other current items 4,398 11,869 1,471 Proceeds of insurance settlement 53,900 Increase in long-term accrued taxes 12,174 4,735 2,477 Costs incurred for environmental-related matters (18,052) (9,400) (6,291) Costs incurred for disposition of operations (17,585) (6,993) (4,704) Other 4,377 3,586 (761) - ----------------------------------------------------------------------------------------------- Net operating cash 439,530 339,315 282,725 - ----------------------------------------------------------------------------------------------- INVESTING Capital expenditures (163,955) (122,720) (108,392) Decrease (increase) in short-term investments 20,000 (20,000) Acquisitions of assets (884,525) (670,755) (72,349) Decrease (increase) in other investments (5,633) 37,829 (49,833) Other (6,375) 9,148 5,824 - ----------------------------------------------------------------------------------------------- Net investing cash (1,060,488) (726,498) (244,750) - ----------------------------------------------------------------------------------------------- FINANCING Net (decrease) increase in short-term borrowings (61,692) 134,654 Increase in long-term debt 750,653 101,792 Payments of long-term debt (2,194) (72,426) (804) Payments of cash dividends (69,027) (60,029) (54,553) Proceeds from stock options exercised 14,760 12,800 11,104 Treasury stock acquired (8,437) (3,149) (17,367) Other financing of acquisitions 4,542 22,000 18,948 Debt issue costs (6,050) Other 53 3,937 2,766 - ----------------------------------------------------------------------------------------------- Net financing cash 622,608 139,579 (39,906) - ----------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,650 (247,604) (1,931) Cash and cash equivalents at beginning of year 1,880 249,484 251,415 - ----------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 3,530 $ 1,880 $ 249,484 =============================================================================================== Taxes paid on income $ 119,464 $ 144,359 $ 122,687 Interest paid on debt 59,572 22,950 2,526 - -----------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 29 32 STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (Thousands of Dollars Except Per Share Data)
Cumulative Foreign Currency Common Other Retained Treasury Translation Stock Capital Earnings Stock Adjustment - -------------------------------------------------------------------------------------------------- Balance at January 1, 1995 $100,370 $ 159,562 $1,096,066 $(282,648) $(20,006) Treasury stock acquired (14,404) Stock issued 740 22,749 4,247 Net income 200,654 Cash dividends -- $.32 per share (54,553) Current year translation adjustment (651) - -------------------------------------------------------------------------------------------------- Balance at December 31, 1995 101,110 182,311 1,242,167 (292,805) (20,657) Stock issued 540 20,912 (3,149) Net income 229,157 Cash dividends -- $.35 per share (60,029) Current year translation adjustment 1,675 - -------------------------------------------------------------------------------------------------- Balance at December 31, 1996 101,650 203,223 1,411,295 (295,954) (18,982) Two-for-one stock split 101,876 (101,876) Stock issued 1,012 21,321 (5,464) Stock acquired for trust (2,973) Net income 260,614 Cash dividends -- $.40 per share (69,027) Unfunded pension losses-net of taxes (428) Current year translation adjustment (14,107) - -------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $204,538 $ 119,695 $1,602,454 $(301,418) $(33,089) ==================================================================================================
See notes to consolidated financial statements. 30 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES Consolidation. The consolidated financial statements include all controlled subsidiaries. Inter-company accounts and transactions have been eliminated. Business segments. Business segment information appears on pages 1 through 9 of this report. Foreign currency translation. All consolidated non-highly inflationary foreign operations use the local currency of the country of operation as the functional currency and translate the local currency asset and liability accounts at year-end exchange rates while income and expense accounts are translated at average exchange rates. The resulting translation adjustments are accumulated as a separate component of Shareholders' Equity titled "Cumulative foreign currency translation adjustment". All consolidated highly inflationary foreign operations use the Company's currency as the functional currency. Cash flows. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Nature of operations. The Company is engaged in the manufacture, distribution and sale of coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America. Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Environmental matters. Capital expenditures for ongoing environmental compliance measures are recorded in the consolidated balance sheets and related expenses are included in the normal operating expenses of conducting business. The Company is involved with environmental compliance and remediation activities at some of its current and former sites and at a number of third-party sites. The Company accrues for certain environmental remediation-related activities for which commitments or clean-up plans have been developed or for which costs or minimum costs can be reasonably estimated. All accrued amounts are recorded on an undiscounted basis. In 1996, the Company adopted American Institute of Certified Public Accountants Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities". SOP 96-1 proscribes that accrued environmental remediation-related expenses include direct costs of remediation and indirect costs related to the remediation effort. Although the Company previously accrued for the direct costs of remediation and certain indirect costs, additional indirect costs were required to be accrued by the Company at the time of adopting SOP 96-1 such as compensation and benefits for employees directly involved in the remediation activities and fees paid to outside engineering, consulting and law firms. The effect of initially applying the provisions of SOP 96-1 was treated as a change in accounting estimate and was not material to the accompanying financial statements. See Note 4 and Note 10 for discussions of the environmental remediation-related expense and accruals included in the financial statements. Stock-based compensation. The Company uses the intrinsic value method of accounting for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25. See Note 13 for pro forma disclosure of net income and earnings per share under the fair value method of accounting for stock-based compensation as proscribed by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". 31 34 Property, plant and 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 2% - 6-2/3% Machinery and equipment 4% - 20% Furniture and fixtures 5% - 20% Automobiles and trucks 10% - 33-1/3%
Investment in life insurance. The Company invests in broad-based corporate owned life insurance. The cash surrender values of the policies, net of policy loans, are included in Other Assets. The net expense associated with such investment is included in Other Costs and Expenses. Such expense is immaterial to income before income taxes. Goodwill. Goodwill represents the cost in excess of fair value of net assets acquired in purchase transactions and is amortized on a straight-line basis over periods not exceeding 40 years. The Company evaluates the recoverability of goodwill at each balance sheet date and would record an impairment if necessary. Accumulated amortization of goodwill was $48,596, $18,186 and $3,821 at December 31, 1997, 1996 and 1995, respectively. Intangibles. Accumulated amortization of intangible assets was $85,242, $74,450 and $61,293 at December 31, 1997, 1996 and 1995, respectively. These assets are amortized by the straight-line method over the expected period of benefit. The Company reviews such assets for impairment and revises the related estimated remaining lives if necessary. Technical expenditures. Total technical expenditures include research and development costs, quality control, product formulation expenditures and other similar items. Research and development costs included in technical expenditures were $24,748, $18,661 and $17,238 for 1997, 1996 and 1995, respectively. Advertising expenses. The cost of advertising is expensed as incurred. The Company incurred $295,942, $212,448 and $152,588 in advertising costs during 1997, 1996 and 1995, respectively. Earnings per share. Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share". Accordingly, basic net income per share was computed based on the weighted-average number of common shares outstanding during the year, and diluted net income per share was computed based on the weighted-average number of common shares outstanding plus all potentially dilutive securities outstanding during the year. All per share amounts shown for periods prior to adoption have been restated to conform to the provisions of SFAS No. 128. See Note 16 for computation. Letters of credit. The Company occasionally enters into standby letter of credit agreements to guarantee various operating activities. These agreements, which expire in 1998, provide credit availability to the various beneficiaries if certain contractual events occur. Amounts outstanding under these agreements totaled $18,844, $17,092 and $17,075 at December 31, 1997, 1996 and 1995, respectively. Fair value of financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate fair value. Short-term investments: The carrying amounts reported in the consolidated balance sheets for marketable debt and equity securities are based on quoted market prices and approximate fair value. Investments in securities: The Company maintains certain long-term investments, classified as available for sale securities, in a fund to provide for payment of health care benefits of 32 35 certain qualified employees. The estimated fair values of these securities, included in other assets, of $28,751, $31,785 and $34,709 at December 31, 1997, 1996 and 1995, respectively, are based on quoted market prices. Long-term debt (including current portion): The fair values of the Company's publicly traded debentures, shown below, are based on quoted market prices. The fair values of the Company's non-traded debt, also shown below, are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
December 31, ------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------------------------------------------------------------------- CARRYING Fair Carrying Fair Carrying Fair AMOUNT Value Amount Value Amount Value ------------------------------------------------------------------------------------------- Publicly traded debt $764,725 $826,400 $ 15,900 $ 18,670 $15,900 $20,065 Non-traded debt 133,012 122,354 130,460 110,295 8,715 6,162 -------------------------------------------------------------------------------------------
Interest rate swaps: The Company occasionally enters into interest rate swaps primarily to hedge against interest rate risks. These agreements generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Counterparties to these agreements are major financial institutions. Management believes the risk of incurring losses related to credit risk is remote. The fair values for the Company's off-balance-sheet instruments, shown below, are based on pricing models or formulas using current assumptions for comparable instruments.
December 31, --------------------------------------------------------------------------------------- 1997 1996 1995 --------------------------------------------------------------------------------------- Carrying amount $ (808) $(1,275) Fair value $ 443 770 (943) Notional amount 100,000 109,669 9,711 Number of agreements outstanding 2 3 1 ---------------------------------------------------------------------------------------
Non-traded investments: It was not practicable to estimate the fair value of the Company's investment in certain non-traded investments because of the lack of quoted market prices and the inability to estimate fair values without incurring excessive costs. The carrying amounts, included in other assets, of $17,587, $100,797 and $31,491 at December 31, 1997, 1996 and 1995, respectively, represent the Company's best estimate of current economic values of these investments. Reclassification. Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform with the 1997 presentation. NOTE 2 -- ACQUISITION AND MERGER Effective January 7, 1997, the Company, through a wholly-owned subsidiary, acquired all outstanding shares of Thompson Minwax Holding Corp. (Thompson Minwax). The total amount of funds required to acquire the shares and pay off certain indebtedness of Thompson Minwax was approximately $830 million. The excess purchase price over the fair value of the net assets acquired is being amortized over 40 years using the straight-line method. For financial statement purposes, the acquisition was accounted for under the purchase method of accounting. Accordingly, the results of operations of Thompson Minwax since the date of acquisition are included in the Company's statements of consolidated income. The following unaudited pro forma combined condensed statement of consolidated income for the year ended December 31, 1996 was prepared in accordance with Accounting Principles Board Opinion No. 16 and assumes the merger had occurred on January 1, 1996. The following pro forma data reflects 33 36 adjustments for interest expense, net investment income and amortization of goodwill and intangible assets. In management's opinion, the pro forma financial information is not necessarily indicative of the results of operations which would have occurred had the acquisition of Thompson Minwax taken place on January 1, 1996 or of future results of operations of the combined companies under the ownership and operation of the Company. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF CONSOLIDATED INCOME ------------------------------------------------------------
1996 ----------- Net sales $4,497,250 Net income 217,794 Net income per common share-basic 1.27 Net income per common share-diluted 1.26
Effective January 10, 1996, the Company, through its wholly-owned subsidiary, SWACQ, Inc., acquired all outstanding stock and completed its merger with Pratt & Lambert United, Inc. (Pratt & Lambert) for a total cash purchase price of approximately $400,000. The excess purchase price over the fair value of the net assets acquired is being amortized over 40 years using the straight- line method. For financial statement purposes, the acquisition was accounted for under the purchase method of accounting. Accordingly, the results of operations of Pratt & Lambert are included in the Company's statements of consolidated income since the date of acquisition. In addition, during the three-year period ended December 31, 1997, the Company purchased various domestic automotive and retail paint distributors, coatings manufacturers, and aerosol and liquid filling businesses. Various foreign architectural and automotive paint manufacturing and aerosol filling businesses located in South America were also acquired during the three-year period. The results of operations of these businesses were not material to consolidated pro forma results. NOTE 3 -- INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined principally on the last-in, first-out (LIFO) method which provides 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 first-in, first-out (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.
1997 1996 1995 - ------------------------------------------------------------------------------------------ Percentage of total inventories on LIFO 93% 96% 97% Excess of FIFO and average cost over LIFO $104,637 $94,138 $102,725 Increase (decrease) in net income due to LIFO (3,604) 4,698 (14,642) Increase (decrease) in net income per basic share due to LIFO (.02) .03 (.09) - ------------------------------------------------------------------------------------------
34 37 NOTE 4 -- OTHER COSTS AND EXPENSES A summary of significant items included in Other Costs and Expenses is as follows:
1997 1996 1995 - ----------------------------------------------------------------------------- Dividend and royalty income $(3,361) $(5,127) $(10,433) Net expense of financing and investing activities 16,559 11,764 9,376 Provisions for environmental matters -- net (see Note 10) 107 15,494 10,136 Provisions for disposition and termination of operations (see Note 5) 4,152 5,506 1,007 Miscellaneous 5,908 (2,117) 1,696 - ----------------------------------------------------------------------------- $23,365 $25,520 $ 11,782 =============================================================================
The net expense of financing and investing activities represents the net realized gains and losses from disposing of fixed assets, the net gain or loss associated with the investment of certain long-term asset funds, the net gains and losses relating to translation of certain foreign investments and the net pre-tax expense associated with the Company's investment in broad-based corporate owned life insurance. The provisions for environmental matters reflect the increased estimated costs of environmental remediation at current, former and third-party sites. Beginning in 1996, such provisions include estimates of certain indirect costs related to environmental matters which are required to be accrued in accordance with SOP 96-1 (see Note 1). In 1997, the provisions for environmental matters were partially offset by a settlement of $7,500 with certain insurance carriers pertaining to environmental-related matters. In 1996, a similar settlement of $56,000 with certain other insurance carriers partially offset the provisions for environmental matters required. For the year ended December 31, 1995, the provisions for environmental remediation reflect only the increased estimated environmental remediation costs at such sites and do not include the additional estimated indirect costs required by adopting SOP 96-1. NOTE 5 -- DISPOSITION AND TERMINATION OF OPERATIONS The Company is continually re-evaluating its operating facilities with regard to the long-term strategic goals established by management and the board of directors. Operating facilities which are not expected to sufficiently contribute to the Company's future plans are closed or sold. At the time of the decision to close or sell a facility, a provision is made and the expense included in Other Costs and Expenses to reduce property, plant and equipment to its estimated net realizable value. Similarly, provisions are made which reduce all other assets to their estimated net realizable values and provide for all qualified exit costs such as lease cancellation penalties, post-closure rent expenses, incremental post-closure expenses, and the estimated costs of employee termination benefits if management has approved a termination plan and communicated such plan to the affected employees. The expenses associated with the provisions for all other assets and for such exit costs and termination benefits are included in Cost of Goods Sold. Adjustments to all previous accruals, as closure or disposition occurs, are included in Other Costs and Expenses. There were no provisions made in 1997. The provisions made during 1996 provided for the reduction to net realizable value of certain assets and exit costs related to one manufacturing facility and consolidations of certain redundant distribution and administrative facilities. The 1995 provisions represent the reduction to net realizable value for certain assets and exit costs associated with closing certain warehouses due to distribution consolidation. 35 38 A summary of the financial data related to the closing or sale of the facilities is as follows:
1997 1996 1995 - ------------------------------------------------------------------------------ Beginning accruals -- January 1 $ 60,544 $ 27,545 $ 25,982 Provisions included in cost of goods sold 11,860 5,260 Provisions and adjustments to prior accruals included in costs and expenses -- other 4,152 5,506 1,007 - ------------------------------------------------------------------------------ Total charges to current operations 4,152 17,366 6,267 Accruals related to acquired sites 22,626 Actual expenditures (17,585) (6,993) (4,704) - ------------------------------------------------------------------------------ Ending accruals -- December 31 $ 47,111 $ 60,544 $ 27,545 ============================================================================== Net after-tax charges to current operations $ 2,699 $ 11,288 $ 4,073 Net after-tax charges per basic share $ .02 $ .07 $ .03 - ------------------------------------------------------------------------------
NOTE 6 -- PENSION BENEFITS Substantially all employees of the Company participate in noncontributory defined benefit or defined contribution pension plans. Defined benefit plans covering salaried employees provide benefits that are based primarily on years of service and employees' compensation. The defined benefit plans covering hourly employees generally provide benefits of stated amounts for each year of service. Multi-employer plans are primarily defined benefit plans which provide benefits of stated amounts for union employees. The Company's funding policy for defined benefit pension plans is to fund at least the minimum annual contribution required by applicable regulations. Plan assets consist primarily of cash, equity investments and fixed-income securities. There were 1,938,800 shares of the Company's stock included in these assets at December 31, 1997, 1996 and 1995. The assumed discount rate used to determine the actuarial present value of benefit obligations was lowered at December 31, 1997 due to decreased rates of high-quality, long-term investments, thereby increasing the projected benefit obligation. The net effect of the change in the assumed discount rate and the increased plan asset earnings resulted in a decrease to the unrecognized net loss at December 31, 1997. A previous decrease to the assumed discount rate at December 31, 1995 caused a net decrease to the unrecognized net loss at that date, thereby increasing the net pension credit in 1996. The net pension credit for defined benefit plans and its components was as follows:
1997 1996 1995 - ------------------------------------------------------------------------------ Service cost $ 2,570 $ 3,516 $ 2,401 Interest cost 11,859 10,933 8,929 Actual return on plan assets (60,143) (49,923) (53,926) Net amortization and deferral 25,541 20,176 34,984 - ------------------------------------------------------------------------------ Net pension credit $(20,173) $(15,298) $ (7,612) ==============================================================================
36 39 Based on the latest actuarial information available, the following table sets forth the funded status and amounts recognized in the Company's consolidated balance sheets for the defined benefit pension plans. Certain defined benefit plans formerly sponsored by Pratt & Lambert United, Inc. and its subsidiaries are included beginning in 1996, and certain defined benefit plans formerly sponsored by Thompson Minwax Holding Corp. are included beginning in 1997.
1997 1996 1995 - --------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $(163,152) $(148,534) $(116,335) Accumulated benefit obligation $(166,577) $(151,376) $(118,585) Projected benefit obligation (PBO) $(175,204) $(158,876) $(128,335) - --------------------------------------------------------------------------------- Plan assets at fair value in: Plans with assets in excess of the PBO 434,730 391,865 323,216 Plans with assets less than the PBO 11,541 - --------------------------------------------------------------------------------- 446,271 391,865 323,216 Excess (deficient) plan assets in: Plans with assets in excess of the PBO 276,427 232,989 194,881 Plans with assets less than the PBO (5,360) - --------------------------------------------------------------------------------- 271,067 232,989 194,881 Unrecognized net asset at January 1, 1986, net of amortization (4,304) (6,943) (9,865) Unrecognized prior service cost 808 858 393 Unrecognized net loss 3,903 27,472 48,165 Adjustment required to recognize minimum liability (708) - --------------------------------------------------------------------------------- Net pension assets $ 270,766 $ 254,376 $ 233,574 ================================================================================= Net pension assets recognized in the consolidated balance sheets: Deferred pension assets $ 276,086 $ 254,376 $ 233,574 Minimum liability included in long-term liabilities (708) Accrued pension liability included in current liabilities (4,612) - --------------------------------------------------------------------------------- $ 270,766 $ 254,376 $ 233,574 ================================================================================= Assumptions used in determining actuarial present value of benefit obligations: Discount rate 7.00% 7.25% 7.25% Weighted-average rate of increase in future compensation levels 5.00% 5.00% 5.00% Long-term rate of return on plan assets 8.50% 8.50% 8.50% =================================================================================
The Company's annual contribution for its defined contribution pension plans, which is based on a level percentage of compensation for covered employees, offset the pension credit by $28,255 for 1997, $24,730 for 1996 and $20,326 for 1995. The cost of multi-employer and foreign plans charged to income was immaterial for the three years ended December 31, 1997. 37 40 NOTE 7 -- BENEFITS OTHER THAN PENSIONS In addition to providing pension benefits, the Company provides certain health care and life insurance benefits under company-sponsored plans for active and retired employees. Beginning in 1996, these plans include certain health care and postretirement benefit plans formerly sponsored by Pratt & Lambert United, Inc. and its subsidiaries. Beginning in 1997, these plans include certain health care and postretirement benefit plans formerly sponsored by Thompson Minwax Holding Corp. The health care plans are contributory and contain cost-sharing features such as deductibles and coinsurance. There were 16,049, 16,935 and 14,823 active employees entitled to receive benefits under these plans as of December 31, 1997, 1996 and 1995, respectively. The cost of these benefits for active employees is recognized as claims are incurred and amounted to $47,484, $44,221 and $37,194 for 1997, 1996 and 1995, respectively. The Company has a fund, to which it no longer intends to contribute, that provides for payment of health care benefits of certain qualified employees. Distributions from the fund amounted to $5,025 in 1997, $4,618 in 1996 and $5,265 in 1995. Employees of the Company who were hired prior to January 1, 1993 and who are not members of a collective bargaining unit, and certain groups of employees added through acquisitions, are eligible for certain health care and life insurance benefits upon retirement from active service, subject to the terms, conditions and limitations of the applicable plans. There were 4,229, 4,152 and 4,008 retired employees entitled to receive benefits as of December 31, 1997, 1996 and 1995, respectively. The plans are unfunded. The assumed discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 7.0% in 1997 and 7.25% in 1996 and 1995. The discount rate was lowered at December 31, 1997, due to decreased interest rates of high-quality long-term investments, thereby increasing the accumulated postretirement benefit obligation, the effect of which increased the unrecognized net loss. The assumed weighted-average annual rate of increase in the per capita cost of covered benefits (i.e., the health care cost trend rate) is 7.2 percent for 1998 and decreases gradually to 5.5 percent for 2003 and thereafter. The health care cost trend rate has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by $14,689 and the aggregate service and interest cost components of net periodic postretirement benefit cost for 1997 by $1,191. Based on the latest actuarial information available, the following table sets forth the amounts recognized in the Company's consolidated balance sheets for postretirement benefits other than pensions:
1997 1996 1995 - --------------------------------------------------------------------------------- Actuarial present value of accumulated postretirement benefit obligation: Retirees $(119,600) $(109,116) $(105,200) Fully eligible active participants (22,530) (20,486) (17,590) Other active participants (63,877) (53,577) (49,120) - --------------------------------------------------------------------------------- (206,007) (183,179) (171,910) Effect of changes in the accumulated postretirement benefit obligation to be amortized over future years: Unrecognized prior service credit (20,116) (21,570) (24,268) Unrecognized net loss 16,784 11,288 12,262 - --------------------------------------------------------------------------------- Total accrued postretirement benefit liability $(209,339) $(193,461) $(183,916) =================================================================================
38 41
1997 1996 1995 - --------------------------------------------------------------------------------- Accrued postretirement benefit liabilities recognized in the consolidated balance sheets: Amount included in current liabilities $ (9,500) $ (8,910) $ (8,150) Amount of long-term postretirement benefits other than pensions (199,839) (184,551) (175,766) - --------------------------------------------------------------------------------- Total accrued postretirement benefit liability $(209,339) $(193,461) $(183,916) ================================================================================= The expense for postretirement benefit plans and its components was as follows: Service cost $ 3,720 $ 3,327 $ 2,723 Interest cost 13,708 12,483 11,998 Net amortization of unrecognized prior service credit (2,689) (2,696) (2,693) - --------------------------------------------------------------------------------- Net postretirement benefit expense $ 14,739 $ 13,114 $ 12,028 =================================================================================
NOTE 8 -- LONG-TERM DEBT
Amount Outstanding ------------------------------- DUE DATE 1997 1996 1995 - --------------------------------------------------------------------------------------------------- 6.85% Notes 2007 $199,710 7.375% Debentures 2027 149,900 7.45% Debentures 2097 149,390 6.5% Notes 2002 99,955 6.25% Notes 2000 99,948 Floating Rate Notes Through 1999 50,000 $100,000 5.5% Notes 2027 49,922 9.875% Debentures 2007 to 2016 15,900 15,900 $15,900 6% to 9% Promissory Notes Through 2004 23,791 22,618 5,328 8% to 12% Promissory Notes partially secured by Through 2005 4,495 3,242 2,632 certain land and buildings and other 4.75% Promissory Note 2000 800 800 Other Obligations 108 119 158 - --------------------------------------------------------------------------------------------------- $843,919 $142,679 $24,018 ===================================================================================================
Maturities of long-term debt are as follows for the next five years: $53,926 in 1998; $63,781 in 1999; $105,932 in 2000; $4,141 in 2001; and $102,949 in 2002. Interest expense on long-term debt amounted to $52,351, $8,602 and $2,387 for 1997, 1996 and 1995, respectively. There were no interest charges capitalized during the periods presented. Effective August 31, 1995, the Company entered into revolving credit agreements with a group of banks to borrow up to an aggregate of $600,000. There were no outstanding borrowings under these agreements at the end of 1996 or 1995. Effective January 3, 1997, these agreements were terminated and the Company entered into the following new revolving credit agreements: 1) a 364- day revolving credit agreement, under which the Company may borrow up to $290,000; and, 2) a five-year revolving credit agreement, under which the Company may borrow up to $1,160,000. Effective March 31, 1997, the maximum borrowing amounts under these agreements were reduced 39 42 to $216,000 and $864,000, respectively. There were no outstanding borrowings under these agreements at the end of 1997. Effective January 2, 1998, the aggregate amount of these agreements was further reduced to $1,064,000. On February 10, 1997, the Company issued $400,000 of debt securities under its $450,000 shelf registration with the Securities and Exchange Commission consisting of $100,000 of 6.25% notes due February 1, 2000, $100,000 of 6.5% notes due February 1, 2002 and $200,000 of 6.85% notes due February 1, 2007. In addition, on February 10, 1997, the Company issued $150,000 of 7.375% debentures due February 1, 2027 and $150,000 of 7.45% debentures due February 1, 2097 in a private offering not registered under the Securities Act of 1933, as amended (Securities Act). In July 1997, the Company completed offers to exchange all of its outstanding $300,000 of debentures for an equal principal amount of newly-issued debentures containing identical terms except that the newly-issued debentures were registered under the Securities Act. The net proceeds from these borrowings were used to refinance a portion of the Company's commercial paper debt. On October 6, 1997, the Company issued the remaining $50,000 of debt securities under this shelf registration consisting of 5.5% notes, due October 15, 2027, with provisions that the holders, individually or in the aggregate, may exercise a put option which would require the Company to repay the securities at an earlier date. This option is first available to the holders on October 15, 1999, and then annually on each October 15 thereafter. The net proceeds from this borrowing were used to refinance short-term commercial paper debt. In December 1997, the Company filed a new shelf registration with the Securities and Exchange Commission covering $150,000 of unsecured debt securities with maturities greater than nine months from the date of issue. The Company may issue these securities from time to time in one or more series and will offer the securities on terms determined at the time of sale. The aggregate principal amount of unsecured short-term notes which may be issued under the Company's commercial paper program was increased from $600,000 to $1,450,000 in January 1997 and subsequently decreased to $1,000,000 in May 1997. At December 31, 1997, outstanding borrowings under this program totaled $106,748 and are included in short-term borrowings on the balance sheet. The weighted-average interest rate related to these borrowings was 5.89% at December 31, 1997. NOTE 9 -- LEASES The Company leases certain stores, warehouses, manufacturing facilities, office space and equipment. Renewal options are available on the majority of leases and, under certain conditions, options exist to purchase some properties. Rental expense for operating leases was $113,339, $104,894 and $95,536 for 1997, 1996 and 1995, respectively. Certain store leases require the payment of contingent rentals based on sales in excess of specified minimums. Contingent rentals included in rent expense were $10,396 in 1997, $9,877 in 1996 and $9,102 in 1995. Rental income, as lessor, from real estate leasing activities and sublease rental income for all years presented was not significant. 40 43 Following is a schedule, by year and in the aggregate, of future minimum lease payments under noncancellable operating leases having initial or remaining terms in excess of one year at December 31, 1997: 1998 $ 84,004 1999 68,973 2000 55,168 2001 41,967 2002 26,512 Later years 81,089 -------- Total minimum lease payments $357,713 ========
NOTE 10 -- OTHER LONG-TERM LIABILITIES Other long-term liabilities consist of the following:
1997 1996 1995 - ------------------------------------------------------------------------------------------ Environmental-related $143,276 $139,057 $ 70,310 Other 140,924 76,064 39,896 - ------------------------------------------------------------------------------------------ $284,200 $215,121 $110,206 ==========================================================================================
The accrual for environmental-related long-term liabilities represents the Company's provisions for estimated costs associated with extended environmental remediation-related activities at some of its current and former sites. Also, the Company, together with other parties, has been designated a potentially responsible party under federal and state environmental protection laws for the remediation of hazardous waste at a number of third-party sites, primarily Superfund sites. In general, these laws provide that potentially responsible parties may be held jointly and severally liable for investigation and remediation costs regardless of fault. The Company provides for, and includes in long-term liabilities, its estimated potential long-term liability for investigation and remediation costs with respect to such third-party sites. The Company initially provides for the estimated cost of certain environmental-related activities relating to its current, former and third-party sites when minimum costs can be reasonably estimated. These estimates are determined based on currently-available facts regarding each site. If the best estimate of costs can only be identified within a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is accrued. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company estimates the cost of similar environmental-related activities at sites obtained through acquisition on the same basis as described above. The Company believes that any additional liability in excess of amounts provided which may result from the resolution of such matters will not have a material adverse effect on the financial condition, liquidity or cash flow of the Company. The increase in the accrual for environmental-related long-term liabilities in 1996 reflects adjustments to the previous accrual resulting from the ongoing evaluation of environmental matters at certain current, former and third-party sites, liabilities accrued relating to certain sites obtained in 1996 acquisitions, and the accrual of certain additional indirect costs relating to the adoption of SOP 96-1 (see Note 1). In addition to the accrual for environmental-related long-term liabilities shown above, accruals for certain current environmental-related liabilities are included in other accruals in current liabilities on the consolidated balance sheets. 41 44 NOTE 11 -- STOCK PURCHASE PLAN As of December 31, 1997, 14,448 employees participated through regular payroll deductions in the Company's Employee Stock Purchase and Savings Plan. The Company's contribution charged to income amounted to $33,582, $29,935 and $26,795 for 1997, 1996 and 1995, respectively. Additionally, the Company made contributions on behalf of participating employees, which represent salary reductions for income tax purposes, amounting to $18,905 in 1997, $15,282 in 1996 and $12,775 in 1995. At December 31, 1997, there were 25,560,734 shares of the Company's stock being held by this plan, representing 14.8 percent of the total number of shares outstanding. Shares of company stock credited to each member's account under the plan are voted by the trustee under instructions from each individual plan member. Shares for which no instructions are received are voted by the trustee in the same proportion as those for which instructions are received. NOTE 12 -- CAPITAL STOCK
Shares Shares in Treasury Outstanding - ------------------------------------------------------------------------------------------------- Balance at January 1, 1995 31,088,146 169,651,660 Stock issued upon: Exercise of stock options 171,226 1,042,086 Conversion of 6.25% Convertible Subordinated Debentures 123,336 Restricted stock grants 144,000 Treasury Stock: Acquired 822,600 (822,600) Issued for acquisition (771,144) 771,144 - ------------------------------------------------------------------------------------------------- Balance at December 31, 1995 31,310,828 170,909,626 Stock issued upon: Exercise of stock options 158,688 918,552 Restricted stock grants 3,000 - ------------------------------------------------------------------------------------------------- Balance at December 31, 1996 31,469,516 171,831,178 Stock issued upon: Exercise of stock options 160,739 967,040 Restricted stock grants 109,200 - ------------------------------------------------------------------------------------------------- Balance at December 31, 1997 31,630,255 172,907,418 =================================================================================================
An aggregate of 21,594,603, 8,686,286 and 9,779,730 shares of stock at December 31, 1997, 1996 and 1995, respectively, were reserved for future grants of restricted stock and the exercise and future grants of stock options. At December 31, 1997, shares outstanding include 115,000 shares of stock held in a revocable trust. At December 31, 1997, there were 300,000,000 shares of common stock and 30,000,000 shares of serial preferred stock authorized for issuance (3,000,000 shares of the authorized serial preferred stock have been designated as cumulative redeemable serial preferred stock which may be issued pursuant to the Company's shareholders' rights plan if the Company becomes the target of coercive and unfair takeover tactics). NOTE 13--STOCK PLAN The Company's 1994 Stock Plan permits the granting of stock options, stock appreciation rights and restricted stock to eligible employees. The 1994 Stock Plan succeeded the 1984 Stock Plan which expired on February 15, 1994. Although no further grants may be made under the 1984 Stock Plan, all rights granted under such plan remain. In April 1997, the 1994 Stock Plan was amended to authorize an additional 14,000,000 shares to the shares then available for future grants. Non-qualified and incentive stock options have been granted to certain officers and key 42 45 employees under the plans at prices not less than fair market value of the shares, as defined by the plans, at the date of grant. The options generally become exercisable to the extent of one-third of the optioned shares for each full year following the date of grant and generally expire ten years after the date of grant. In April 1997, the 1997 Stock Plan for Nonemployee Directors was adopted. This plan provides for the granting of stock options and restricted stock to members of the Board of Directors who are not employees of the Company. There were 400,000 shares authorized as available for grant under the 1997 Stock Plan. Grants made pursuant to the 1997 Stock Plan are authorized by the Board of Directors. The number of options and any period of service required before the options may be exercised is determined by the Board of Directors at the time of grant. No options may be exercised more than ten years from the date of grant. Restricted stock grants, with an outstanding balance of 361,000 shares at December 31, 1997, were awarded to certain officers and key employees which generally require four years of continuous employment from the date of grant before vesting and receiving the shares without restriction. The number of shares to be received without restriction is based on the Company's performance relative to a peer group of companies. There were 123,200 and 208,000 shares vested and delivered pursuant to these grants during 1997 and 1995, respectively. No shares were vested during 1996. Unamortized deferred compensation expense with respect to the restricted stock amounted to $5,401, $2,962 and $4,024 at December 31, 1997, 1996 and 1995, respectively, and is being amortized over the four-year vesting period. Deferred compensation expense aggregated $528, $3,983 and $1,563 in 1997, 1996 and 1995, respectively. No stock appreciation rights have been granted. A summary of restricted stock granted during 1997, 1996 and 1995 is as follows:
1997 1996 1995 ------------------------------------------------------------- Shares granted 232,000 3,000 196,000 Weighted-average fair value of restricted shares granted during year $ 27.91 $20.72 $ 16.35
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APBO No. 25), and related interpretations, in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), requires use of highly subjective assumptions in option valuation models. Under APBO No. 25, because the exercise price of the Company's employee stock options is not less than fair market price of the shares at the date of grant, no compensation is recognized in the financial statements. Pro forma information regarding net income and earnings per share, determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123, is required by that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for all options granted:
1997 1996 1995 ----------------------------------------------------------------------- Risk-free interest rate 6.10% 5.99% 6.25% Expected life of option 3 YEARS 3 years 3 years Expected dividend yield of stock 2.00% 2.00% 2.00% Expected volatility of stock 0.164 0.201 0.221
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair 43 46 value estimate, it is management's opinion that the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The amounts below represent the pro forma information calculated through use of the Black-Scholes model. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
1997 1996 1995 - ------------------------------------------------------------- Pro forma net income $257,757 $228,126 $200,229 Pro forma net income per common share: Basic $1.49 $1.33 $1.18 Diluted $1.48 $1.32 $1.17
Due to the required phase-in provisions, the effects of applying SFAS No. 123 to arrive at the above pro forma amounts are not representative of the expected effects on pro forma net income or earnings per share in future years. A summary of the Company's stock option activity, and related information for the years ended December 31, 1997, 1996 and 1995, is shown in the following table in accordance with SFAS No. 123:
1997 1996 1995 - -------------------------------------------------------------------------------------------------------- WEIGHTED- Weighted- Weighted- AVERAGE Average Average OPTIONED EXERCISE Optioned Exercise Optioned Exercise SHARES PRICE Shares Price Shares Price - -------------------------------------------------------------------------------------------------------- Outstanding beginning of year 5,434,596 $14.91 4,976,268 $12.35 5,212,918 $11.23 Granted 1,746,500 27.93 1,648,500 20.82 1,008,400 16.39 Exercised (1,127,779) 12.88 (1,077,240) 11.28 (1,213,312) 9.19 Canceled (242,846) 22.68 (112,932) 18.36 (31,738) 15.72 - -------------------------------------------------------------------------------------------------------- Outstanding end of year 5,810,471 $18.47 5,434,596 $14.91 4,976,268 $12.35 ======================================================================================================== Exercisable at end of year 2,924,515 $13.96 3,011,242 $11.99 3,342,388 $11.03 Weighted-average fair value of options granted during year $4.53 $3.57 $3.50 Reserved for future grants 15,784,132 3,251,686 4,803,462
Exercise prices for optioned shares outstanding as of December 31, 1997 ranged from $6.47 to $32.28. A summary of these options by range of exercise prices is shown as follows:
Outstanding Exercisable -------------------- --------------------- Weighted- Weighted- Weighted- Average Average Average Remaining Range of Optioned Exercise Optioned Exercise Contractual Exercise Prices Shares Price Shares Price Life (years) - -------------------------------------------------------------------------------------------- less than $10.00 1,087,866 $ 9.04 1,087,866 $ 9.04 1.88 $10.00-$14.99 322,202 13.61 322,202 13.61 3.94 $15.00-$22.00 2,635,235 18.41 1,470,988 17.41 7.35 greater than $22.00 1,765,168 27.67 43,459 22.96 9.09 - -------------------------------------------------------------------------------------------- 5,810,471 $18.47 2,924,515 $13.96 6.66 ============================================================================================
NOTE 14 -- INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax 44 47 bases of assets and liabilities and are measured using the enacted tax rates and laws that are currently in effect. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995 - -------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation $ 38,605 $ 24,393 $ 21,630 Deferred employee benefit items 26,128 27,873 26,360 - -------------------------------------------------------------------------------------------- Total deferred tax liabilities $ 64,733 $ 52,266 $ 47,990 ============================================================================================ Deferred tax assets: Dispositions, environmental and other similar items $ 61,537 $ 55,143 $ 32,425 Other items (each less than 5% of total assets) 99,120 100,679 82,193 - -------------------------------------------------------------------------------------------- Total deferred tax assets $160,657 $155,822 $114,618 ============================================================================================
Significant components of the provisions for income taxes are as follows:
1997 1996 1995 - -------------------------------------------------------------------------------------------- Current: Federal $ 87,626 $124,847 $ 97,936 Foreign 3,472 8,125 2,470 State and Local 16,318 27,046 20,754 - -------------------------------------------------------------------------------------------- Total Current 107,416 160,018 121,160 Deferred: Federal 46,890 (12,169) (3,062) Foreign 2,375 417 State and Local 9,982 (2,046) (254) - -------------------------------------------------------------------------------------------- Total Deferred 59,247 (13,798) (3,316) - -------------------------------------------------------------------------------------------- Total income tax expense $166,663 $146,220 $117,844 ============================================================================================
For financial reporting purposes, income before income taxes include the following components:
1997 1996 1995 - -------------------------------------------------------------------------------------------- Domestic $382,325 $343,445 $309,467 Foreign 44,952 31,932 9,031 - -------------------------------------------------------------------------------------------- $427,277 $375,377 $318,498 ============================================================================================
A reconciliation of the statutory federal income tax rate and the effective tax rate follows:
1997 1996 1995 - -------------------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Effect of: State and local taxes 4.0 4.3 4.2 Investment vehicles (3.3) (2.9) (2.6) Other, net 3.3 2.6 0.4 - -------------------------------------------------------------------------------------------- Effective tax rate 39.0% 39.0% 37.0% ============================================================================================
45 48 The provision includes estimated taxes payable on that portion of retained earnings of foreign subsidiaries expected to be received by the Company. No provision was made with respect to $14,761 of retained earnings at December 31, 1997 that have been invested by foreign subsidiaries. It is not practicable to estimate the amount of unrecognized deferred tax liability for the undistributed foreign earnings. Included in the Company's deferred tax assets are valuation reserves of $19,836, $19,158 and $17,784 at December 31, 1997, 1996 and 1995, respectively, resulting from the uncertainty as to future recognition of certain foreign net operating losses and other foreign assets. NOTE 15 -- SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
1997 - ---------------------------------------------------------------------- NET NET GROSS NET INCOME PER INCOME PER QUARTER NET SALES PROFIT INCOME SHARE-BASIC SHARE-DILUTED - ---------------------------------------------------------------------- 1ST $1,069,787 $443,614 $23,134 $.13 $.13 2ND 1,373,351 597,556 93,203 .54 .54 3RD 1,346,531 583,391 99,211 .58 .57 4TH 1,091,434 472,150 45,066 .26 .26
Year-end adjustments during the fourth quarter slightly decreased net income with no effect on net income per share. Cost of goods sold decreased by a net of $2,998 ($1,949 after-tax, $.01 per share) as a result of physical inventory adjustments of $6,967 ($4,529 after-tax, $.03 per share) which were partially offset by various year end charges of $3,969 ($2,580 after-tax, $.02 per share). Administrative expenses were reduced $2,451 ($1,593 after-tax, $.01 per share) due to other year-end adjustments. Other costs and expenses increased $5,525 ($3,591 after-tax, $.02 per share) due to provisions for environmental-related matters at certain current, former and third-party sites of $493 ($320 after-tax, no per share effect) and increases to prior accruals for the disposition and termination of operations of $5,032 ($3,271 after-tax, $.02 per share).
1996 - ---------------------------------------------------------------------- Net Net Gross Net Income per Income per Quarter Net Sales Profit Income Share-Basic Share-Diluted - ---------------------------------------------------------------------- 1st $ 857,771 $337,493 $19,593 $.11 $.11 2nd 1,145,254 469,981 81,902 .48 .47 3rd 1,171,010 492,237 88,550 .52 .51 4th 958,844 427,990 39,112 .23 .23
Net income during the fourth quarter decreased by $1,176 ($.01 per share) due to net before-tax adjustments of $1,809. Cost of goods sold decreased by a net of $9,516 ($6,185 after-tax, $.04 per share) as a result of physical inventory adjustments of $17,380 ($11,297 after-tax, $.07 per share) which were partially offset by provisions for the closing costs associated with certain operations of $7,560 ($4,914 after-tax, $.03 per share) and other year-end adjustments of $304 ($198 after-tax, no per share effect). Administrative expenses were reduced by $5,623 ($3,655 after-tax, $.02 per share) due to other year-end adjustments. Other costs and expenses increased $16,948 ($11,017 after-tax, $.06 per share) due to the provision of $11,621 ($7,554 after-tax, $.04 per share) for environmental-related matters at current, former and third-party sites and to the provision of $5,327 ($3,463 after-tax, $.02 per share) for the adjustment to net realizable value of certain net fixed assets. 46 49 NOTE 16 -- NET INCOME PER COMMON SHARE
1997 1996 1995 - ------------------------------------------------------------------------------------------- BASIC Average common shares outstanding 172,107,459 171,117,390 169,941,813 =========================================================================================== Net income $ 260,614 $ 229,157 $ 200,654 =========================================================================================== Net income per common share $ 1.51 $ 1.34 $ 1.18 =========================================================================================== DILUTED Average common shares outstanding 172,107,459 171,117,390 169,941,813 Non-vested restricted stock grants (see Note 13) 312,988 300,000 349,600 Stock options -- treasury stock method 1,611,895 1,408,386 1,107,734 Assumed conversion of 6.25% Convertible Subordinated Debentures 7,942 - ------------------------------------------------------------------------------------------- Average common shares assuming dilution 174,032,342 172,825,776 171,407,089 =========================================================================================== Net income $ 260,614 $ 229,157 $ 200,654 =========================================================================================== Net income per common share $ 1.50 $ 1.33 $ 1.17 ===========================================================================================
Net income per common share has been computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 128 adopted for the quarter ending December 31, 1997. All net income per share amounts shown for periods prior to adoption have been restated to conform to the provisions of SFAS No. 128. The effect of adopting SFAS No. 128 increased net income per share -- basic by $.01 in each year shown above over the previous method of computing net income per share. All 6.25% Convertible Subordinated Debentures outstanding at December 31, 1994 were converted to common stock during the first quarter of 1995 without incurring further interest. 47 50 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (SCHEDULE II) Changes in the allowance for doubtful accounts are as follows:
1997 1996 1995 - --------------------------------------------------------------------------------------------- Beginning balance $ 22,631 $ 15,154 $ 10,820 Bad debt expense 15,741 19,095 13,793 Net uncollectible accounts written off (11,481) (11,618) (9,459) - --------------------------------------------------------------------------------------------- Ending balance $ 26,891 $ 22,631 $ 15,154 ============================================================================================= Activity related to other asset reserves: 1997 1996 1995 - --------------------------------------------------------------------------------------------- Beginning balance $ 111,921 $ 83,897 $ 80,853 Charges to expense 49,499 28,838 15,672 Other additions (deductions) (7,840) (814) (12,628) - --------------------------------------------------------------------------------------------- Ending balance $ 153,580 $ 111,921 $ 83,897 =============================================================================================
Charges to expense consist primarily of amortization of goodwill and intangibles. Other additions (deductions) consist primarily of actual costs incurred and balance sheet reclassifications and, in 1997 and 1995, removal of fully-amortized items. 48 51 SIGNATURES 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 11th day of March, 1998. THE SHERWIN-WILLIAMS COMPANY By: /s/ L. E. STELLATO ------------------------------------ L. E. Stellato, Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities indicated on March 11, 1998.
SIGNATURE --------- * J. G. BREEN Chairman and Chief Executive Officer, - ----------------------------------------------------------- Director (Principal Executive Officer) J. G. Breen * T. A. COMMES President and Chief Operating Officer, - ----------------------------------------------------------- Director T. A. Commes * L. J. PITORAK Senior Vice President -- Finance, - ----------------------------------------------------------- Treasurer and Chief Financial Officer L. J. Pitorak (Principal Financial Officer) * J. L. AULT Vice President -- Corporate Controller - ----------------------------------------------------------- (Principal Accounting Officer) J. L. Ault * J. M. BIGGAR Director - ----------------------------------------------------------- J. M. Biggar * D. E. COLLINS Director - ----------------------------------------------------------- D. E. Collins * D. E. EVANS Director - ----------------------------------------------------------- D. E. Evans * R. W. MAHONEY Director - ----------------------------------------------------------- R. W. Mahoney * W. G. MITCHELL Director - ----------------------------------------------------------- W. G. Mitchell * A. M. MIXON, III Director - ----------------------------------------------------------- A. M. Mixon, III
49 52
SIGNATURE --------- * C. E. MOLL Director - ----------------------------------------------------------- C. E. Moll * H. O. PETRAUSKAS Director - ----------------------------------------------------------- H. O. Petrauskas * R. K. SMUCKER Director - ----------------------------------------------------------- R. K. Smucker
* The undersigned, by signing his name hereto, does sign this report on behalf of the designated Officers and Directors of The Sherwin-Williams Company pursuant to Powers of Attorney executed on behalf of each such Officer and Director. By: /s/ L. E. STELLATO March 11, 1998 - ----------------------------------------------------------- L. E. Stellato, Attorney-in-fact
50 53 EXHIBIT INDEX 3. (a) Amended Articles of Incorporation, as amended April 25, 1997, filed as Exhibit 3(i) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, and incorporated herein by reference. (b) Regulations of the Company, as amended, dated April 27, 1988, filed as Exhibit 4(b) to Post-Effective Amendment No. 1, dated April 29, 1988, to Form S-8 Registration Statement Number 2-91401, and incorporated herein by reference. 4. (a) Indenture between the Company and Chemical Bank, as Trustee, dated as of February 1, 1996, filed as Exhibit 4(a) to Form S-3 Registration Statement Number 333-41659, dated December 8, 1997 (also deemed to be filed as Exhibit 4(a) to Form S-3 Registration Statement 333-01093, dated February 20, 1996 and as Exhibit 4(b) to Form S-3 Registration Statement Number 33-22705, dated June 24, 1988), and incorporated herein by reference. (b) 364-Day Revolving Credit Agreement, dated January 3, 1997, between the Company, Texas Commerce Bank National Association, as Administrative Agent, The Chase Manhattan Bank, as Competitive Advance Facility Agent, and the financial institutions which are signatories thereto, filed as Exhibit 99.2 to Form 8-K, dated January 7, 1997, and incorporated herein by reference. (c) Amendment No. 1 to 364-Day Revolving Credit Agreement, dated March 31, 1997, between the Company, Texas Commerce Bank National Association, as Administrative Agent, The Chase Manhattan Bank, as Competitive Advance Facility Agent, and the financial institutions which are signatories thereto, filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, and incorporated herein by reference. (d) Five Year Revolving Credit Agreement, dated January 3, 1997, between the Company, Texas Commerce Bank National Association, as Administrative Agent, The Chase Manhattan Bank, as Competitive Advance Facility Agent, and the financial institutions which are signatories thereto, filed as Exhibit 99.1 to Form 8-K, dated January 7, 1997, and incorporated herein by reference. (e) Amendment No. 1 to Five Year Revolving Credit Agreement, dated March 31, 1997, between the Company, Texas Commerce Bank National Association, as Administrative Agent, The Chase Manhattan Bank, as Competitive Advance Facility Agent, and the financial institutions which are signatories thereto, filed as Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, and incorporated herein by reference. (f) Term Loan/Bankers' Acceptance Agreement, by and between the Company and SunTrust Bank, Atlanta, dated February 1, 1996, filed as Exhibit 4(f) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference. (g) Indenture between Sherwin-Williams Development Corporation, as issuer, the Company, as guarantor, and Harris Trust and Savings Bank, as Trustee, dated June 15, 1986, filed as Exhibit 4(b) to Form S-3 Registration Statement Number 33-6626, dated June 20, 1986, and incorporated herein by reference. (h) Rights Agreement between the Company and The Bank of New York, as successor Rights Agent to KeyBank National Association, dated April 23, 1997, filed as Exhibit 1 to Form 8-A, dated April 24, 1997, and incorporated herein by reference. 10. *(a) Form of Director and Corporate Officer Indemnity Agreement (filed herewith).
51 54 *(b) Employment Agreements with J.G. Breen, T.A. Commes and C.G. Ivy filed as Exhibit 28(b) to Form S-3 Registration Statement Number 33-22705, dated June 24, 1988, and incorporated herein by reference. *(c) Amendments to Employment Agreements with J.G. Breen, T.A. Commes and C.G. Ivy filed as Exhibit 10(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference. *(d) Forms of Severance Pay Agreements, filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997, and incorporated herein by reference. *(e) Schedule of Certain Executive Officers who are Parties to the Severance Pay Agreements in the forms referred to in Exhibit 10(d) (filed herewith). *(f) The Sherwin-Williams Company Deferred Compensation Savings Plan filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference. *(g) Amendment No. 1 to The Sherwin-Williams Company Deferred Compensation Savings Plan filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference. *(h) The Sherwin-Williams Company Key Management Deferred Compensation Plan (1994 Amendment and Restatement) filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference. *(i) Form of Executive Disability Income Plan filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference. *(j) Form of Executive Life Insurance Plan filed as Exhibit 10(h) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference. *(k) Form of The Sherwin-Williams Company Management Compensation Program filed as Exhibit 10(l) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference. *(l) The Sherwin-Williams Company 1994 Stock Plan, as amended and restated in its entirety, effective April 23, 1997, filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997 and incorporated herein by reference. *(m) The Sherwin-Williams Company 1997 Stock Plan for Nonemployee Directors, dated April 23, 1997, filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, and incorporated herein by reference. *(n) The Sherwin-Williams Company Director Deferred Fee Plan (1997 Amendment and Restatement), dated April 23, 1997, filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997, and incorporated herein by reference. (o) Agreement and Plan of Merger, dated as of November 4, 1995, among the Company, SWACQ, Inc. and Pratt & Lambert United, Inc., filed as Exhibit(c)(1) to the Tender Offer Statement on Schedule 14D-1/Schedule 13D, filed November 9, 1995, as amended, and incorporated herein by reference.
52 55 (p) Stock Purchase Agreement, dated November 22, 1996, among the Company, Silver Acquisition Corp., Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership -- V, L.P., MTF Partners, L.P. and certain individual shareholders who are signatories thereto, filed as Exhibit 2 to Form 8-K, dated January 7, 1997, and incorporated herein by reference. *(q) Split-Dollar Agreement, dated March 25, 1996, among the Company, National City Bank and John G. and Mary Breen filed as Exhibit 10(q) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference. *(r) The Sherwin-Williams Company Estate Protection Plan Trust, dated November 15, 1996, between the Company and National City Bank filed as Exhbit 10(r) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference. 21. Subsidiaries -- Page 54. 23. Consent of Ernst & Young LLP, Independent Auditors -- Page 55. 24. Powers of Attorney (filed herewith). 27. Financial Data Schedule. *Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
53 56 EXHIBIT 21 SUBSIDIARIES UNITED STATES SUBSIDIARIES Contract Transportation Systems Co. DIMC, Inc. Dupli-Color Products Company Rubberset Company Sherwin-Williams Automotive Finishes Corp. Sherwin-Williams Diversified Brands, Inc. SW Racing Corp. SWIMC, Inc. The Sherwin-Williams Acceptance Corporation Thompson Minwax International Corp. FOREIGN SUBSIDIARIES Compania Sherwin-Williams, S.A. de C.V. Distribuidora Excelo, S.A. de C.V. Globo Tintas Ltda. Kriesol, S.A. Marson Chilena, S.A. Pinturas Excelo, S.A. de C.V. Productos Quimicos y Pinturas, S.A. de C.V. Proquipsa, S.A. de C.V. Quetzal Pinturas, S.A. de C.V. Ronseal (Ireland) Limited Ronseal Limited (U.K.) Sherwin-Williams Argentina I.y C.S.A. Sherwin-Williams do Brasil Industria e Comercio Ltda. Sherwin-Williams Canada Inc. Sherwin-Williams Cayman Islands Limited Sherwin-Williams Chile S.A. Sherwin-Williams Foreign Sales Corporation Limited Sherwin-Williams Japan Co., Ltd. Sherwin-Williams (Caribbean) N.V. Sherwin-Williams (West Indies) Limited The Sherwin-Williams Company Resources Limited 147926 Canada Inc. 54 57 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated January 23, 1998, with respect to the consolidated financial statements and schedule of The Sherwin-Williams Company included in the Annual Report (Form 10-K) for the year ended December 31, 1997, in the following registration statements and related prospectuses:
REGISTRATION NUMBER DESCRIPTION - ------------ ----------- 333-41659 The Sherwin-Williams Company Form S-3 Registration Statement 333-25671 The Sherwin-Williams Company 1997 Stock Plan for Nonemployee Directors Form S-8 Registration Statement 333-25669 The Sherwin-Williams Company 1994 Stock Plan Form S-8 Registration Statement 333-25607 The Sherwin-Williams Company S-4 Registration Statement 333-01093 The Sherwin-Williams Company Form S-3 Registration Statement 333-00725 The Sherwin-Williams Company Form S-4 Registration Statement 33-62229 The Sherwin-Williams Company Employee Stock Purchase and Savings Plan Form S-8 Registration Statement 2-80510 Post-Effective Amendment Number 5 to Form S-8 Registration Statement relating to The Sherwin-Williams Company Employee Stock Purchase and Savings Plan 33-52227 The Sherwin-Williams Company 1994 Stock Plan Form S-8 Registration Statement 33-28585 The Sherwin-Williams Company 1984 Stock Plan Form S-8 Registration Statement 33-22705 The Sherwin-Williams Company Form S-3 Registration Statement
Cleveland, Ohio March 9, 1998 ERNST & YOUNG LLP 55 EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10(a) FORM OF INDEMNITY AGREEMENT ------------------- This Indemnity Agreement (this "Agreement") is made as of this ____ day of ____________ by and between The Sherwin-Williams Company, an Ohio corporation ("the Company"), and __________ (the "Indemnitee"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Indemnitee has agreed to serve or to continue to serve in one or more of the following capacities: as a director, officer, employee or agent (an "Official") of the Company or one or more of its subsidiaries and in such capacity will render valuable services to the Company; WHEREAS, the Company has investigated the sufficiency of liability insurance and Ohio statutory indemnification provisions to provide its Officials and its subsidiaries' Officials with adequate protection against various legal risks and potential liabilities to which such individuals are subject due to their position with the Company or its subsidiaries and has concluded that such insurance and statutory provisions may provide inadequate and unacceptable protection; WHEREAS, the Company has further determined that its prior form of indemnification agreement entered into with certain of its Officials should be replaced with a new form of indemnity agreement; WHEREAS, in order to induce and encourage highly experienced and capable persons such as the Indemnitee to serve as Officials of the Company or one or more of its subsidiaries, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of this Agreement and the various other options available to the Company and the Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent but necessary to promote and ensure the best interests of the Company, its subsidiaries and its shareholders; WHEREAS, the parties agree that it is their intent that the Company indemnify the Indemnitee to the fullest extent permitted by law and, therefore, that this Agreement be construed and enforced to effectuate such intent; and WHEREAS, to the extent that a change in Ohio law or the laws of any other jurisdiction under which the Company is organized at the time (whether by statute or judicial decision) permits greater indemnification by agreement than 2 would be afforded currently under the Regulations of the Company and this Agreement, it is the further intent of the parties hereto that Indemnitee enjoy by this Agreement the greater benefits so afforded by such change. NOW, THEREFORE, in consideration of the services of the Indemnitee and in order to induce the Indemnitee to serve or continue to serve as an Official of the Company or one or more of its subsidiaries and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally binding hereby, the Company and the Indemnitee do hereby agree as follows: 1. AGREEMENT TO SERVE. The Indemnitee agrees to serve as an Official of the Company or one or more of its subsidiaries for so long as the Indemnitee is duly elected or appointed, or until such time as the Indemnitee tenders the Indemnitee's resignation in writing or is otherwise removed from the Indemnitee's position, or until Indemnitee's relationship and/or employment with the Company is terminated. 2 INDEMNIFICATION IN THIRD PARTY ACTIONS. The Company shall indemnify the Indemnitee in accordance with the provisions of this Section 2 if, whether prior to, on or after the date of this Agreement, the Indemnitee is or has been a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Company or a subsidiary of the Company to procure a judgment in its favor), by reason of or arising out of the fact that the Indemnitee is or was an Official of the Company or one or more of its subsidiaries, or is or was serving at the request of the Company or a subsidiary of the Company as an Official, trustee, member or manager of another corporation, domestic or foreign, nonprofit or for profit, a limited liability company, or partnership, joint venture, trust, or other enterprise ("Another Enterprise"), or in relation to any action taken or omitted by the Indemnitee on behalf of the Company, one or more of its subsidiaries or Another Enterprise, against all Expenses, judgments, fines, penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement (provided that any settlement be approved in writing by the Company, which approval shall not be unreasonably withheld) of such Proceeding, to the highest and most advantageous extent to the Indemnitee, as determined by the Indemnitee, of one or any combination of the following: (a) The benefits provided by the Company's Regulations, as amended (the "Regulations") in effect on the date hereof, a copy of the relevant provisions of which are attached hereto as Exhibit A; - 2 - 3 (b) The benefits provided by the Company's Amended Articles of Incorporation, as further amended, and the Regulations in effect at the time the Proceeding is initiated or the Expenses are incurred by the Indemnitee; (c) The benefits allowable under Ohio law in effect at the date hereof; (d) The benefits allowable under the laws of the jurisdiction under which the Company is organized at the time the Proceeding is initiated or the Expenses are incurred by the Indemnitee; (e) The benefits available under any liability insurance obtained by the Company; and (f) Such other benefits as are or may be otherwise available to the Indemnitee. Combination of two or more of the benefits provided by clauses (a) through (f) shall be available to the extent that the Applicable Documents, as hereinafter defined, do not require that the benefits provided therein be exclusive of other benefits. The document or law providing for the benefits listed in clauses (a) through (f) above is called the "Applicable Document" in this Agreement. The Company hereby undertakes to use its best efforts to assist the Indemnitee, in all proper and legal ways, to obtain the benefits selected by Indemnitee under clauses (a) through (f) above. 3 INDEMNIFICATION IN PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company shall indemnify the Indemnitee in accordance with the provisions of this Section 3 if, whether prior to, on or after the date of this Agreement, the Indemnitee is or has been a party to or threatened to be made a party to or otherwise involved in any Proceeding by or in the right of the Company or a subsidiary of the Company to procure a judgment in its favor by reason of or arising out of the fact that Indemnitee was or is an Official of the Company or one or more of its subsidiaries, or is or was serving at the request of the Company or a subsidiary of the Company as an Official, trustee, member or manager of Another Enterprise, or in relation to any action taken or omitted by the Indemnitee on behalf of the Company, one or more of its subsidiaries or Another Enterprise, against all Expenses actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such Proceeding, to the same extent provided in Section 2 above. - 3 - 4 4. CONCLUSIVE PRESUMPTION REGARDING STANDARD OF CONDUCT. (a) The Indemnitee shall be conclusively presumed to have met the relevant standards of conduct as defined by the Applicable Documents for indemnification pursuant to this Agreement, unless a determination is made that the Indemnitee has not met such standards by (i) the Board of Directors of the Company by a majority vote of a quorum thereof consisting of Directors who were not parties, or are not threatened to be made parties, to such Proceeding or any other Proceeding arising from the same or similar facts ("Disinterested Directors"), (ii) if such a quorum is not obtainable or if such quorum is obtainable and a majority of such quorum directs, a written opinion by Independent Legal Counsel (compensated by the Company), or (iii) if there are no Disinterested Directors or if a majority of Disinterested Directors (whether or not a quorum) directs, the shareholders of the Company entitled to vote in the election of Directors by majority vote; provided, however, that any such determination to be made after a Change of Control shall be made only pursuant to clause (ii) if the Indemnitee so elects. (b) Prior to any decision under clauses (a)(i) or (a)(ii) above, an Official will be given an opportunity, together with counsel, to be heard before the Board of Directors if such decision is being made pursuant to clause (a)(i), or the Independent Legal Counsel if such decision is being made pursuant to clause (a)(ii). (c) The determination will be made as promptly as possible. 5. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee has been successful in defense of any Proceeding or in defense of any claim, issue or matter therein, on the merits or otherwise, including the dismissal of a Proceeding without prejudice, the Indemnitee shall be indemnified against all Expenses incurred in connection therewith to the fullest extent permitted by any Applicable Document. 6. ADVANCES OF EXPENSES. The Expenses incurred by the Indemnitee in any Proceeding shall be paid by the Company within twenty days of the written request of the Indemnitee to the fullest extent permitted by any Applicable Document; provided that the Indemnitee shall undertake in writing, in the form attached hereto as Exhibit B, to repay such amount to the extent that it is ultimately determined that the Indemnitee is not entitled to indemnification under the Applicable Document. - 4 - 5 7. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgments, fines, penalties or ERISA excise taxes actually and reasonably incurred by the Indemnitee in the investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for the portion of such Expenses, judgments, fines, penalties or ERISA excise taxes to which the Indemnitee is entitled. 8. INDEMNIFICATION PROCEDURE; DETERMINATION OF RIGHT TO INDEMNIFICATION. (a) Promptly after receipt by the Indemnitee of written notice of the commencement of any Proceeding, the Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company in writing of the commencement thereof. The omission so to notify the Company will relieve it from any liability which it may have to the Indemnitee under this Agreement only to the extent that the Company is able to establish that its ability to avoid such liability was materially prejudiced by such omission. Any such omission, however, will not relieve the Company from any liability which it may have to the Indemnitee otherwise than under this Agreement. (b) If a claim under this Agreement is not paid by the Company within twenty days of receipt of written notice, the right to indemnification as provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction. The burden of proving by clear and convincing evidence that indemnification or advances are not appropriate shall be on the Company. Neither the failure of the Board of Directors, the shareholders of the Company or Independent Legal Counsel to have made a determination prior to the commencement of such action that indemnification or advances are proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the Board of Directors, the shareholders of the Company or Independent Legal Counsel that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action that the Indemnitee has not met the applicable standard of conduct, nor shall such failure or determination create a presumption that the Indemnitee has or has not met the applicable standard. (c) The Indemnitee's Expenses incurred in connection with any proceeding concerning the Indemnitee's right to indemnification or advancement of expenses in whole or in part pursuant to this Agreement shall also be - 5 - 6 indemnified by the Company regardless of the outcome of such proceeding, unless a court of competent jurisdiction determines that the material assertions made by the Indemnitee in such proceeding were not made in good faith or were frivolous. (d) With respect to any Proceeding for which indemnification is requested, the Company will be entitled to participate therein at its own expense and, except as otherwise provided below, to the extent that it may wish, the Company may assume the defense thereof, with counsel reasonably satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, the Company will not be liable to the Indemnitee under this Agreement for any legal or other expenses subsequently incurred by the Indemnitee in connection with defense thereof, other than reasonable costs of investigation or as otherwise provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. The Indemnitee shall give the Company such cooperation as the Company may reasonably request and as shall be within the Indemnitee's power. The Indemnitee shall have the right to employ the Indemnitee's counsel in any Proceeding but the fees and expenses of such counsel incurred after written notice from the Company of its assumption of the defense thereof shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of a Proceeding, or (iii) the Company shall not in fact have employed counsel to assume the defense of a proceeding, in each of which cases the fees and expenses of the Indemnitee's counsel shall be at the expense of the Company. The Company shall not be entitled to assume or control the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee has made the reasonable conclusion that there may be a conflict of interest between the Company and the Indemnitee. 9. LIMITATIONS ON INDEMNIFICATION. No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance Expenses to the Indemnitee with respect to Proceedings initiated or brought voluntarily by the Indemnitee, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law, but such indemnification or advancement of Expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; - 6 - 7 (b) To indemnify the Indemnitee for any Expenses, judgments, fines, penalties or ERISA excise taxes for which payment is actually made to the Indemnitee under a valid and collectible insurance policy or under any other agreement, contract or otherwise, except in respect of any excess beyond the amount of payment under such insurance or under any such agreement, contract or otherwise; (c) To indemnify or advance to the Indemnitee for any Expenses, judgments, fines or penalties sustained in any Proceeding for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the rules and regulations promulgated thereunder and amendments thereto or similar provisions of any federal, state or local statutory law; (d) To indemnify the Indemnitee for any Expenses, judgments, fines, penalties or ERISA excise taxes resulting from the Indemnitee's conduct which is finally adjudged to have been willful misconduct, knowingly fraudulent or deliberately dishonest; or (e) If a court of competent jurisdiction shall finally determine that any indemnification hereunder is unlawful. 10. MAINTENANCE OF LIABILITY INSURANCE. To the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance ("D&O Insurance"), the Indemnitee shall be named as an insured under such D&O Insurance in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors and/or officers, as appropriate, under such D&O Insurance. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance. 11. LIMITATION OF ACTIONS AND RELEASE OF CLAIMS. No Proceeding shall be brought and no cause of action shall be asserted by or on behalf of the Company or any subsidiary against the Indemnitee, the Indemnitee's spouse, heirs, estate, executors or administrators after the expiration of two years from the earlier of (i) the date the Company or any subsidiary of the Company discovers the facts underlying such cause of action, or (ii) the date the Company or any subsidiary of the Company could have discovered such facts by the exercise of reasonable diligence; provided, however, this sentence shall not be deemed to waive or toll any statute of limitations that otherwise might apply. Any claim or - 7 - 8 cause of action of the Company or any subsidiary of the Company, including claims predicated upon the negligent act or omission of the Indemnitee, shall be extinguished and deemed released unless asserted by filing of a legal action within such period. This section shall not apply to any cause of action which has accrued on the date hereof and of which the Indemnitee is aware on the date hereof, but as to which the Company has no actual knowledge apart from the Indemnitee's knowledge. 12. CHANGE OF CONTROL. As collateral security for its obligations hereunder and under similar agreements with other Officials, within the earlier of (i) five (5) business days after the occurrence of an event that in the reasonable opinion of the Board of Directors will likely result in a Change of Control or (ii) the occurrence of an actual Change of Control, the Company shall dedicate and maintain, for a period of six (6) years or such longer time as is necessary for the final disposition of any Proceeding existing at the expiration of such six year period, an escrow account in such aggregate amount as is reasonably calculated to be sufficient to satisfy any and all Expenses reasonably anticipated in connection with any and all Proceedings, which in no event shall be less than Ten Million Dollars ($10,000,000), by depositing assets or bank letters of credit in escrow that may be drawn down by an escrow agent in said amount (the "Escrow Reserve"). Promptly following the establishment of the Escrow Reserve, the Company shall (i) provide the Indemnitee with a true and complete copy of the Agreement relating to the establishment and operation of the Escrow Reserve, together with such additional documentation or information with respect to the Escrow Reserve as the Indemnitee may from time to time reasonably request, (ii) deliver an executed copy of this Agreement to the escrow agent for the Escrow Reserve to evidence to such agent that the Indemnitee is a beneficiary of the Escrow Reserve, and (iii) deliver to the Indemnitee the agent's signed receipt evidencing delivery of the Agreement to the agent. Notwithstanding anything to the contrary contained in this Section 12, any assets deposited by the Company in the Escrow Reserve shall at all times be and remain subject to the claims of the general creditors of the Company. If prior to the date of a Change of Control, the Board of Directors has actual knowledge that all third parties have abandoned or terminated their efforts to effect a Change of Control and a Change of Control at that time is unlikely and the Board of Directors so advises the escrow agent, the assets and letters of credit comprising the Escrow Reserve, if any, and any interest earned thereon, shall be returned to the Company by the escrow agent. 13. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall not be exclusive of, and shall be in addition to, any other rights to which the Indemnitee may be entitled under the - 8 - 9 Company's or any subsidiary's articles of incorporation, bylaws or regulations, or any vote of shareholders or disinterested directors or applicable law, both as to action in the Indemnitee's official capacity and as to action in another capacity on behalf of the Company or any subsidiary while holding such office or position. 14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and shall inure to the benefit of the Indemnitee and the Indemnitee's heirs, executors, administrators, personal representatives and assigns, and the Company, its successors (whether direct or indirect, by purchase, merger, consolidation, operation of law, or otherwise) to all or substantially all of the business and/or assets of the Company, and its assigns. 15. SEPARABILITY. Each provision of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. To the extent required, any provision of this Agreement may be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under applicable law. 16. ENTIRE AGREEMENT. This Agreement, together with all exhibits hereto, constitutes the entire understanding and agreement of the parties with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, agreements, understandings, duties or obligations with respect to the subject matter hereof; provided, however, that if this Agreement, in its entirety, is held to be invalid or unenforceable for any reason, the indemnification agreement, if any, between the Company and the Indemnitee which was in effect immediately prior to the execution of this Agreement shall govern. 17. INTERPRETATION; GOVERNING LAW; VENUE. This Agreement shall be construed as a whole and in accordance with its fair meaning. Headings are for convenience only and shall not be used in construing meaning. This Agreement shall be governed and interpreted in accordance with the laws of the State of Ohio without regard to principles of conflicts of laws thereof. The party bringing any action under this Agreement shall only be entitled to choose the federal or state courts in the State of Ohio as the venue for such action, and each party consents to the jurisdiction of the court chosen in such manner for such action. 18. AMENDMENTS. No amendment, waiver, modification, termination or cancellation of this Agreement shall be effective unless in writing - 9 - 10 signed by the party against whom enforcement is sought. The indemnification rights afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Company's or any subsidiary's charter, bylaws or regulations (or similar constitutive documents) or by amendments to any agreements other than agreements executed by the Indemnitee that expressly refer to this Agreement. 19. NO PERSONAL LIABILITY. The Indemnitee agrees that no director, officer, employee, representative or agent of the Company or any of its subsidiaries shall be personally liable for the satisfaction of the Company's obligations under this Agreement, and Indemnitee shall look solely to the assets of the Company for satisfaction of any claims hereunder. 20. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to the other. 21. NOTICES. All notices, demands, requests, or other communications which may be or are required to be given, served or sent by either party to the other party pursuant to this Agreement, shall be in writing and shall be hand delivered, sent by express mail or other overnight delivery service or mailed by registered or certified mail, return receipt requested, postage prepaid, or transmitted by telegram, telex or telecopy, addressed as follows: If to the Company: The Sherwin-Williams Company 101 Prospect Avenue, N.W. Cleveland, Ohio 44115 Attn: Vice President, General Counsel and Secretary Telecopier No.: 216-566-2947 If to the Indemnitee: To the Indemnitee's last known address Each party may designate by notice in writing a new address (or substitute additional persons) to which any notice, demand, request or communication may thereafter be so given, served or sent. Each notice, demand, - 10 - 11 request, or communication which shall be mailed, sent, delivered, telefaxed or telexed in the manner described above, or which shall be delivered to a telegraph company, shall be deemed sufficiently given, served, sent or received for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt or, with respect to a telex or telefax, the answer back being deemed conclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. 22. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 23. NOT EMPLOYMENT CONTRACT. Neither this Agreement nor any action taken hereunder shall be construed either (i) as a contract of employment or (ii) as giving Indemnitee any right to be retained in the employ or otherwise as an Official. 24. DEFINITIONS. As used herein the following terms shall have the following meanings: (a) The term "PROCEEDING" shall include any threatened, pending or completed action, suit or proceeding, whether brought in the name of the Company or one or more of its subsidiaries, or otherwise, and whether of a civil, criminal or administrative or investigative nature, or otherwise, and whether formal or informal, by reason of or arising out of the fact that the Indemnitee is or was an Official of the Company or one or more of its subsidiaries, or is or was serving at the request of the Company or a subsidiary of the Company as an Official, trustee, member or manager of Another Enterprise, or relating in any way to any actions taken or omitted by the Indemnitee on behalf of the Company, one or more of its subsidiaries or Another Enterprise, in all cases whether or not the Indemnitee is serving in such capacity at the time any liability or Expenses are incurred for which indemnification or reimbursement is to be provided under this Agreement. For purposes of this Agreement, references to "Another Enterprise" shall include, without limitation, employee benefit plans for employees of the Company or its subsidiaries without regard to ownership of such plans. (b) The term "EXPENSES" shall include, without limitation, attorneys' fees, disbursements and retainers, accounting and witness fees, travel - 11 - 12 and deposition costs, expenses of investigations, judicial or administrative proceedings or appeals, amounts paid in settlement (provided that any settlement be approved in writing by the Company, which approval shall not be unreasonably withheld) by or on behalf of the Indemnitee, and any expenses of establishing a right to indemnification, pursuant to this Agreement or otherwise. (c) The term "INDEPENDENT LEGAL COUNSEL" shall mean legal counsel retained jointly by, and mutually acceptable to, the Company and the Indemnitee. The Indemnitee and the Company each may submit no more than three (3) candidates for the position of Independent Legal Counsel. All candidates shall disclose to the Indemnitee and the Company any circumstances likely to affect his or her impartiality, including, without limitation, bias, interest in the resolution of the Proceeding, and past or present relations with the Indemnitee, the employer of the Indemnitee or the Company. Under no circumstances shall the Independent Legal Counsel be (or have been during the six (6) year period prior to the date of such appointment) a relative, employee, officer, director or shareholder of either the Indemnitee, the employer of the Indemnitee or the Company, or an Affiliate of the employer of the Indemnitee or the Company. Each party may reject a candidate for good cause, such as reasonable concern regarding that candidate's independence, impartiality, access to confidential information or failure to meet agreed upon qualifications. Once Independent Legal Counsel has been selected and jointly retained by the parties, the Company shall pay all costs and expenses of such counsel. Independent Legal Counsel may retain such additional experts as he or she determines are necessary or useful for the rendering of his or her advice, provided that he or she in good faith determines, after notifying the Company and the Indemnitee of the selection of such expert and soliciting any objections either party might have, that such expert does not appear to have a conflict of interest. Circumstances that might cause doubt regarding the expert's independence or impartiality include bias, interest in the result of any Proceeding, and past or present relations with the Indemnitee, the employer of the Indemnitee (including an Affiliate of such employer), the Company (including an Affiliate of the Company) or their respective counsels. Under no circumstances shall any such expert be (or have been during the six (6) year period prior to the selection of the Independent Legal Counsel) a relative, employee, officer, director or shareholder of the Indemnitee, the employer of the Indemnitee or an Affiliate of such employer, the Company or an Affiliate of the Company, or an individual otherwise providing material services to the Indemnitee, the employer of the Indemnitee or the Company, or an Affiliate of the employer of the Indemnitee or the Company. - 12 - 13 (d) A person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act shall be deemed the "BENEFICIAL OWNER" of and shall be deemed to "beneficially own" any securities: (i) which such person or any of such person's "Affiliates" or "Associates" (as such terms are defined in Rule 12b-2, as in effect on April 23, 1997, of the General Rules and Regulations under the Exchange Act) is considered to be a "beneficial owner" under Rule 13d-3 of the General Rules and Regulations under the Exchange Act, as in effect on April 23, 1997; (ii) which such person or any of such person's Affiliates or Associates, directly or indirectly, has or shares the right to acquire, hold, vote (except pursuant to a revocable proxy as described in the proviso to this Section 24(d)) or dispose of such securities (whether any such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed to be the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such person or any of such person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (iii) which are beneficially owned, directly or indirectly, by any other person (or any Affiliate or Associate of such other person) with which such person (or any of such person's Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing), with respect to acquiring, holding, voting (except as described in the proviso to this Section 24(d)) or disposing of any securities of the Company; provided, however, that a person shall not be deemed the Beneficial Owner of, nor to beneficially own, any security if such person has the right to vote such security pursuant to an agreement, arrangement or understanding which (A) arises solely from a revocable proxy given to such person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Exchange Act, and (B) is not also then reportable on Schedule 13D (or any comparable or successor report) under the Exchange Act; and provided, further, that nothing, in this Section 24(d) shall cause a person engaged in business as an underwriter of securities to be the Beneficial Owner of, or to beneficially own, any securities acquired through such person's participation in good faith in a firm commitment underwriting until the expiration of forty (40) - 13 - 14 days after the date of such acquisition or such later date as the Board of Directors may determine in any specific case. (e) A "CHANGE OF CONTROL" shall be deemed to have occurred if: (i) Any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) who or that, together with all Affiliates and Associates of such person, is the Beneficial Owner of ten percent (10%) or more of the shares of Common Stock of the Company then outstanding, except: (A) the Company; (B) any of the Company's subsidiaries in which a majority of the voting power of the equity securities or equity interests of such subsidiary is owned, directly or indirectly, by the Company; (C) any employee benefit or stock ownership plan of the Company or any trustee or fiduciary with respect to such a plan acting in such capacity; or (D) any such person who has reported or may, pursuant to Rule 13d-1(b)(1) of the General Rules and Regulations under the Exchange Act, report such ownership (but only as long as such person is the Beneficial Owner of less than fifteen percent (15%) of the shares of Common Stock then outstanding) on Schedule 13G (or any comparable or successor report) under the Exchange Act. Notwithstanding the foregoing, (1) no person shall become the Beneficial Owner of ten percent (10%) or more (fifteen percent (15%) or more in the case of any person identified in clause (D) above) solely as the result of an acquisition of Common Stock by the Company that, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such person to ten percent (10%) or more (fifteen percent (15%) or more in the case of any person identified in clause (D) above) of the shares of Common Stock then outstanding; provided, however, that if a person becomes the Beneficial Owner of ten percent (10%) or more (fifteen percent (15%) or more in the case of any person identified in clause (D) above) of the shares of Common Stock solely by reason of purchases of Common Stock by the Company and shall, after such purchases by the Company, become the Beneficial Owner of any - 14 - 15 additional shares of Common Stock which have the effect of increasing such person's percentage ownership of the then-outstanding shares of Common Stock by any means whatsoever, then such person shall be deemed to have triggered a Change of Control, and (2) if the Board of Directors determines that a person who would otherwise be the Beneficial Owner of ten percent (10%) or more (fifteen percent (15%) or more in the case of any person identified in clause (D) above) of the shares of Common Stock has become such inadvertently (including, without limitation, because (a) such person was unaware that it Beneficially Owned ten percent (10%) or more (fifteen percent (15%) or more in the case of any person identified in clause (D) above) of the shares of Common Stock or (b) such person was aware of the extent of such beneficial ownership but such person acquired beneficial ownership of such shares of Common Stock without the intention to change or influence the control of the Company) and such person divests itself as promptly as practicable of a sufficient number of shares of Common Stock so that such person would no longer be the Beneficial Owner of ten percent (10%) or more (fifteen percent (15%) or more in the case of any person identified in clause (D) above), then such person shall not be deemed to be, or have been, the Beneficial Owner of ten percent (10%) or more (fifteen percent (15%) or more in the case of any person identified in clause (D) above) of the shares of Common Stock, and no Change of Control shall be deemed to have occurred. (ii) During any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company and any new director (other than a director initially elected or nominated as a director as a result of an actual or threatened election contest with respect to directors or any other actual or threatened solicitation of proxies by or on behalf of such director) whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof. (iii) There shall be consummated any consolidation, merger or other combination of the Company with any other person or entity other than: (A) a consolidation, merger or other combination which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty-one percent - 15 - 16 (51%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such consolidation, merger or other combination; or (B) a consolidation, merger or other combination effected to implement a recapitalization and/or reorganization of the Company (or similar transaction), or any other consolidation, merger or other combination of the Company, which results in no person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), together with all Affiliates and Associates of such person, becoming the Beneficial Owner of ten percent (10%) or more (fifteen percent (15%) or more in the case of any person identified in Section 24(e)(i)(D)) of the combined voting power of the Company's then outstanding securities. (iv) There shall be consummated any sale, lease, assignment, exchange, transfer or other disposition (in one transaction or a series of related transactions) of fifty percent (50%) or more of the assets or earning power of the Company (including, without limitation, any such sale, lease, assignment, exchange, transfer or other disposition effected to implement a recapitalization and/or reorganization of the Company (or similar transaction)) which results in any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), together with all Affiliates and Associates of such person, owning a proportionate share of such assets or earning power greater than the proportionate share of the voting power of the Company that such person, together with all Affiliates and Associates of such person, owned immediately prior to any such sale, lease, assignment, exchange, transfer or other disposition. - 16 - 17 (v) The shareholders of the Company approve a plan of complete liquidation of the Company. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date first written above. INDEMNITEE /S/ ------------------------------------------ Signature THE SHERWIN-WILLIAMS COMPANY By: /S/ John G. Breen ------------------------------------- Name: John G. Breen Title: Chairman and Chief Executive Officer - 17 - EX-10.5 3 EXHIBIT 10.5 1 EXHIBIT 10(e) Schedule of Certain Executive Officers who are Parties to the Severance Pay Agreements in the Forms Attached as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q For the Period Ended June 30, 1997 -------------------------------- Form A of Severance Pay Agreement - --------------------------------- John G. Breen Thomas A. Commes Form B of Severance Pay Agreement - --------------------------------- John L. Ault Christopher M. Connor Michael A. Galasso Thomas E. Hopkins Conway G. Ivy Larry J. Pitorak Joseph M. Scaminace Louis E. Stellato Richard M. Wilson EX-24 4 EXHIBIT 24 1 EXHIBIT 24 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Officer and Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 30, 1998 /s/ J.G. Breen ---------------------------- ------------------------------------ J. G. Breen Chairman and Chief Executive Officer, Director 2 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Officer and Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints J.G. Breen, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 30, 1998 /s/ T.A. Commes -------------------------- ------------------------------------- T. A. Commes President and Chief Operating Officer, Director 3 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Officer of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints J.G. Breen, T.A. Commes and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 30, 1998 /s/ L.J. Pitorak -------------------------- ------------------------------------- L. J. Pitorak Senior Vice President - Finance, Treasurer and Chief Financial Officer 4 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Officer of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 30, 1998 /s/ J.L. Ault -------------------------- ------------------------------------- J.L. Ault Vice President - Corporate Controller 5 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: February 4, 1998 /s/ J.M. Biggar -------------------------- ------------------------------------- J.M. Biggar Director 6 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: February 3, 1998 /s/ D.E. Collins -------------------------- ------------------------------------- D. E. Collins Director 7 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: February 2, 1998 /s/ D.E. Evans -------------------------- ------------------------------------- D. E. Evans Director 8 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: February 3, 1998 /s/ R.W. Mahoney -------------------------- ------------------------------------- R.W. Mahoney Director 9 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: February 4, 1998 /s/ A. M. Mixon, III -------------------------- ------------------------------------- A. M. Mixon, III Director 10 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: February 4, 1998 /s/ W. G. Mitchell -------------------------- ------------------------------------- W. G. Mitchell Director 11 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: February 4, 1998 /s/ C. E. Moll -------------------------- ------------------------------------- C. E. Moll Director 12 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: February 4, 1998 /s/ H. O. Petrauskas -------------------------- ------------------------------------- H. O. Petrauskas Director 13 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said Annual Report on Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: February 4, 1998 /s/ R. K. Smucker -------------------------- ------------------------------------- R. K. Smucker Director EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0000089800 THE SHERWIN-WILLIAMS COMPANY 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 3,530 0 573,205 26,891 721,668 1,532,253 1,357,844 665,586 4,035,801 1,115,663 843,919 0 0 204,538 1,387,642 4,035,801 4,881,103 4,881,103 2,784,392 2,784,392 23,365 15,741 80,837 427,277 166,663 260,614 0 0 0 260,614 1.51 1.50 Represents net income per common share - basic (see Note 16 to Consolidated Financial Statements).
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