Annual Report (Form 10-K), fiscal year 1994

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 throughout North America.
PAINT STORES SEGMENT
The Paint Stores Segment exclusively distributes Sherwin-Williams(R) branded architectural coatings, industrial maintenance products, industrial finishes and related items produced by the Coatings Segment of the Company and others. Paint, wallcoverings, floorcoverings, window treatments, spray equipment and otherassociated products are marketed by store personnel and direct sale representatives to the do-it-yourself customer, professional painter, contractor, industrial and commercial maintenance customer, property manager, architect 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 outlets. Product quality, service and price determine the competitive advantage in the highly fragmented paint product market. The loss of any single customer would not have a material adverse effect on the business of the Segment.
During 1994, the Company launched an extensive national advertising campaign, highlighting the many superior products available, including its revolutionary new product called EverClean(TM). Led by EverClean(TM), our new product introductions during 1994 exceeded expectations. In our continuing efforts to be AMERICA'S PAINT COMPANY, the Company became an official sponsor of major league baseball with exclusive rights in the paint category. The sponsorship includes regular advertising on the new baseball network, a joint venture between ABC and NBC. Baseball stadiums across the country have selected Sherwin-Williams to be their coatings supplier. New ballparks such as Jacobs Field in Cleveland, Ohio and The Ballpark in Arlington, Arlington, Texas used Sherwin-Williams' products during their construction. These and many other ballparks use a wide variety of Sherwin-Williams' products for ongoing touch-up and maintenance needs. In addition to these national efforts, advertising programs with many of the individual baseball teams were also implemented. Among other items, local sponsorship may include prominent stadium signage and extensive radio, television and print advertising.
In 1995, in addition to the continued advertising campaigns, new product introductions and re-merchandising of paint stores, customer satisfaction and employee productivity will be enhanced by the configuration of an in-store computer network. This network will allow for the compilation of, and access to, store operations data by management. It will also seek to improve color accuracy and enhance inventory management by increasing the number of inventory turns and product availability while reducing obsolescence.
COATINGS SEGMENT
The five divisions within the Coatings Segment (Coatings, Consumer Brands, Automotive, Transportation Services and Specialty) participate in the manufacture, distribution or sale of coatings and related products. During 1994, the Segment's former International Group was realigned to allow the Segment's domestic expertise in the areas of manufacturing, product development, personnel and marketing to be applied to its international operations in efforts to better serve its customers.
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 are sponsored by the Company and occur
in the Coatings Segment. The expenditures for research and development appear on page 24 of this report.
COATINGS DIVISION
The Coatings Division manufactures paint and paint-related products for the do-it-yourselfer, professional painter, contractor, industrial and commercial maintenance account and manufacturer of factory finished products. Sherwin-Williams(R) branded architectural and industrial finishes are manufactured exclusively for the Paint Stores Segment. Labels, color cards, traffic paint, adhesives, private label and other branded products are manufactured for the Paint Stores Segment, the Consumer Brands Division and others. Competitive factors for the Division are product innovation, manufactured 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. As part of the realignment of the former International Group, the Coatings Division integrated the international operations which concentrated predominantly in the architectural paint business into their Division. There are many competitors in each of the foreign markets served as the Division sells its products around the world through subsidiaries and joint ventures and licenses technology, trademarks and trade names to foreign companies. At December 31, 1994, the Division had 44 licensing agreements in 36 foreign countries. The majority of the licensees' sales are in South America, the strongest market. New licensing agreements were signed in Bahamas, Belgium, Cyprus, India and Peoples Republic of China in 1994. New business development will take place following a predetermined regional approach for the establishment of subsidiaries, joint ventures and licensees in selected countries. The Coatings Division continues to strive to be the lowest cost producer of high quality coatings to gain an advantage over its competitors.
During 1994, in conjunction with the Consumer Brands Division, the Coatings Division continued its commitment to customer service as evidenced by the installation of a toll-free telephone service established to receive customer comments and inquiries. The Division's emphasis on delivering high-quality products to its customers also continued in 1994 through the development of regional technical labs which have led to a reduction in product development cycle time.
In 1995, the Coatings Division will concentrate on quality improvement projects and processes, focusing primarily on manufacturing consistency, production planning and process technology. Modifications within the manufacturing process that will improve service, increase effective capacity, enhance quality and reduce costs will be continually sought at each facility.
CONSUMER BRANDS DIVISION
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 500 regional and national wholesale distributors of branded and private label paint and associated products. The competitive factors that will set the leaders apart from the rest are service, brand recognition, distribution and price.
In 1994, the Consumer Brands Division launched its largest promotion of Dutch Boy(R) Paints ever. In conjunction with the National Basketball Association (NBA), USA Today and Healthy Families America, a non-profit child abuse prevention group, Dutch Boy(R) sponsored promotion of an "In The Paint" player of the week throughout the NBA season. The players selected were invited to join the Healthy Families Team to act as spokespeople in their local communities on behalf of Healthy Families America. Publication of the player selected was announced in the Tuesday edition of USA Today and on all Turner Network Television (TNT) NBA broadcasts. The campaign was well received by retailers and many provided additional support by matching our 50 cent per gallon donation for each gallon of Kid's Room(TM) Paint sold at their outlets.
During 1995, the Consumer Brands Division will continue expansion of its branded paint and stain products with strategic placement of premium products supported by award-winning point of sale materials and demographically-targeted marketing programs. In addition to traditional forms of brand promotion, including continued ventures with the NBA, TNT, American Telephone and Telegraph, USA Today and others, Dutch Boy(R) Paints will also sponsor and produce its own nationally-broadcast cable television show on decorating called Room by Room(TM). The show will air on the new Home and Garden Television Network on which Dutch Boy(R) has become a charter sponsor. Also, Martin-Senour(R) will, for the first time, introduce a celebrity spokesperson, Chi Chi Rodriguez, to promote its product line.
AUTOMOTIVE DIVISION
The Automotive Division develops and manufactures motor vehicle finish and refinish products which are marketed under the Sherwin-Williams(R) and other branded labels in the United States and Canada through its network of 139 company-operated branches. The branches are supported by a direct sales staff and products are also marketed through jobbers and wholesale distributors. The Division is the sole distributor of Standox(R) branded vehicle refinishing paints in the United States and Canada for American Standox, Inc., its joint venture with Herberts GmbH of Wuppertal, Germany. 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 (OEM). The Automotive Division has numerous competitors in its domestic and foreign markets with broad product offerings and several others with niche products. In the last several years, certain foreign competitors have entered the perceived lucrative U.S. automotive aftermarket. The Division assumed additional international responsibilities related to the automotive-related factory finish business in 1994 due to the former International Group's realignment within the Segment. A consolidated foreign subsidiary in Jamaica generally markets a full line of products. Products manufactured in Kingston, Jamaica are sold through 9 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 Jamaica. A portion of the income for the Division comes from the licensing of technology, trademarks and trade names to foreign companies. The Division has 15 licensees in 14 foreign countries, including a new agreement signed in Syria in 1994. Key competitive factors for the Automotive Division are distribution, product quality, technology and service. Strong distribution and high quality products have been the Division's greatest competitive advantages.
During 1994, the Automotive Division continued to strive to improve product quality and customer service, as servicing the Division's customers and meeting their objectives remains the highest priority. Evidencing the commitment to quality, ISO 9002 certification was achieved at the Richmond, Kentucky plant during the year. ISO standards now represent the Division's quality benchmark for the future. Reduction of order cycle times has led to better customer service and more efficient inventory management.
The Division's plans for 1995 call for opening a new state-of-the-art distribution center in Richmond, Kentucky. This facility will enhance customer service capabilities while allowing for more efficient inventory and freight management. The ISO certification program will be expanded to additional facilities in 1995. Additionally, the Division plans to introduce the 3.5 Volatile Organic Compound (VOC) Single Stage Urethane System for vehicle refinishing. This new product significantly reduces the VOC contaminants to the environment and has been designed for the Vehicle Refinish and Fleet/OEM market segments.
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. 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 of major significance.
During 1994, testing and installation of an automated transportation planning system was completed at the Effingham distribution center. This technology improves the efficiency of routing and shipping procedures. Installation of the automated system is planned for all sites in 1995. ISO 9003 certification was achieved at three additional facilities in 1994 and the Division will continue to pursue this certification at the remaining centers in 1995.
During 1995, the Division will expand its mission to the Company by consolidating the distribution and transportation requirements of the Specialty Division into its operations. Additional 1995 plans call for the opening of a new full-service distribution facility in Fredericksburg, Pennsylvania that will allow for consolidation of existing activity, leading to more efficient customer service in the surrounding region.
SPECIALTY DIVISION
The Specialty Division competes in three areas: custom and industrial aerosols; paint applicators; and retail and wholesale consumer aerosols. 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 and national customers. Approximately 8.2 percent of the Division's total sales represent aerosols and paint applicators sold to the Paint Stores Segment. The remaining products are marketed through mass merchandisers, home centers, automotive chains and maintenance distribution channels. There are various primary competitors in each of the Division's product lines. The main competitive factors are technical know-how, quality, service and price. The Specialty Division has superior quality products, more efficient manufacturing and distribution, frequent customer contact and better customer service at competitive prices which distinguish it from its competitors.
In 1994, the Specialty Division completed construction of the Dayton Valley, Nevada distribution center. This center is a state-of-the-art, safety compliant facility for aerosol products. In efforts to provide more efficient service to our customers, the responsibility for operation of this and other Specialty Division distribution centers will be assumed by the Transportation Services Division in 1995. In addition, in conjunction with the realignment of the former International Group in 1994, the Division assumed responsibility for exports and any potential international operations or licensees related to its product lines.
During 1995, the Division will introduce Rust Tough(R) Latex for Metal under the Krylon(R) label. It will be our first latex rust preventative product offered to the retail market. The Division plans to promote this product through advertising programs aimed at retail customers.
OTHER SEGMENT
The Other Segment is responsible for the acquisition, development, leasing and management of properties for use by the Company and others. 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 centers. This segment has many competitors consisting of other real estate owners, developers and managers in certain states where we currently hold property. The main competitive factors are the availability of property and price.
At the end of 1994, the Retail Properties Division owned or leased 209 properties, representing over 1,700,000 square feet of space, which are conducive to the sale of paint and associated products. Such properties include 127 freestanding buildings, for exclusive use by the Paint Stores Segment, and 82 multi-tenant properties, utilized when the basic needs of the paint store can be met and where
external rental opportunities can be profitably operated. The paint store must be easily accessible to professional painters and contractors with sufficient access to pickup and delivery areas. 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. In 1995, the Division anticipates continued growth in the number of retail properties needed by the Paint Stores Segment. Two freestanding locations currently under construction will be completed and one additional freestanding location will be developed. The occupancy rate for external space was 82.2 percent at December 31, 1994.
The Non-Retail Properties Division owned or leased 19 properties approximating 2.6 million square feet. These properties consisted primarily of office buildings, manufacturing facilities and distribution centers at the end of 1994. Occasionally, such properties are acquired or developed to provide the lowest cost alternative for distribution or manufacturing expansion. Locations that have been utilized profitably in the past which can no longer contribute to the Company's future plans are currently offered for sale or lease. Locations that can continue to operate efficiently and achieve the desired rate of return will continue to be held by this segment.
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 1995.
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(TM), Glas-Clad(R), Perma-Clad(R) and Old Quaker(R). The Coatings Segment employs a variety of trade names and trademarks in marketing its products, such as Sherwin-Williams(R), Dutch Boy(R), Kem-Tone(R), Martin-Senour(R), Cuprinol(R), Old Quaker(R), Acme(R), Krylon(R), Color Works(R), Illinois Bronze(R), Rust Tough(R), Rubberset(R) and Dupli-Color(R).
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 substantial part 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 products through 1995.
EMPLOYEES
The Company employed approximately 17,900 persons at December 31, 1994.
ENVIRONMENTAL COMPLIANCE
See Management's Discussion and Analysis of Financial Condition and Results of Operations, on pages 10 through 15 of this report, for further details on environmental compliance.
NOTES TO SEGMENT TABLES
Operating profit is total revenue, including realized profit on intersegment transfers, less operating costs and expenses. Intersegment transfers are accounted for at values comparable to normal unaffiliated customer sales. 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.
Export sales, sales of foreign subsidiaries and sales to any individual customer were each less than 10% of consolidated sales to unaffiliated customers during all years presented.
ITEM 2.



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.
In addition, the Coatings Segment operates 139 company-operated automotive branches, of which 1 is owned, in the United States and Canada and 9 leased stores in Jamaica.
There were 2,046 company-operated paint stores in the forty-eight contiguous states, Canada and Puerto Rico which constitute the entire operations of the Paint Stores Segment. All stores are leased locations with 209 being leased from the Company's Retail Properties Division in the Other Segment. At the end of 1994, the Segment was comprised of four separate operating geographic divisions: the Mid Western Division with 576 stores primarily located in the midwestern and upper west coast states and western Canada; the Eastern Division which has 436 stores along the upper east coast and New England states and eastern Canada; the Southeastern Division which has 525 stores principally covering the lower east and gulf coast states and Puerto Rico; and the South Western Division with 509 stores in the plains and the lower west coast states. The Paint Stores Segment opened 35 new stores in 1994, closed 19, re-merchandised 492, and relocated 55.
All property within the Other Segment is owned by the Company except for 2 land leases in the Retail Properties Division.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
As previously reported in the Company's Quarterly Report for the period ended June 30, 1993, on July 16, 1993, the United States Department of Justice, on behalf of the United States Environmental
Protection Agency, filed a complaint against the Company in the United States District Court for the Northern District of Illinois. The complaint alleges violations under various environmental statutes concerning the Company's operations at its southeast Chicago facility. The relief sought demands an undetermined amount of civil penalties and further demands certain, unspecified corrective action be taken to clean up the site.
On September 27, 1994, the United States Environmental Protection Agency instituted a civil administrative action against the Company alleging violations of the Emergency Planning and Community Right-to-Know Act (EPCRA). The action is pending before the Administrator of the EPA and was brought in response to voluntary disclosures made by the Company regarding its possible failure to submit certain reporting forms required by EPCRA. The relief sought by the EPA includes corrective measures and civil penalties, which, taking into effect the voluntary nature of the disclosures made by the Company, is reasonably expected to be less than $200,000.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Following is a brief account of each Executive Officer's business experience with the Company during the last five year period:
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. Ault has served as Vice President -- Corporate Controller since January 1987.
Mr. Butler has served as President & General Manager, Coatings Division since February 1992 prior to which he served as President & General Manager, Consumer Division commencing May 1984.
Mr. Connor has served as President & General Manager, Specialty Division since April 1994 prior to which he served as Senior Vice President -- Marketing, Paint Stores Group commencing September 1992. From June 1986 to September 1992, Mr. Connor served as President & General Manager, Western Division, Paint Stores Group.
Mr. Ivy has served as Vice President -- Corporate Planning and Development since April 1992 prior to which he served as Vice President and Treasurer commencing January 1989.
Mr. King has served as President & General Manager, Consumer Brands Division since February 1992 prior to which he served as Vice President, Director of Sales and Marketing, Consumer Division commencing June 1987.
Mr. Kroeger has served as Vice President -- Human Resources since October 1987.
Mr. Macatee has served as President, Paint Stores Group since September 1992 prior to which he served as President & General Manager, South Central Division, Paint Stores Group commencing June 1986.
Mr. Pitorak has served as Senior Vice President -- Finance, Treasurer and Chief Financial Officer since April 1992 prior to which he served as Senior Vice President -- Finance and Chief Financial Officer commencing July 1991. From February 1988 to July 1991, Mr. Pitorak served as Vice President, General Counsel and Secretary.
Mr. Scaminace has served as President & General Manager, Automotive Division since April 1994 prior to which he served as President & General Manager, Specialty Division commencing September 1985.
Mr. Stellato has served as Vice President, General Counsel and Secretary since July 1991 prior to which he served as Assistant Secretary and Corporate Director of Taxes commencing December 1989.
There are no family relationships between any of the persons named.
The number of shareholders of record for Sherwin-Williams Common Stock, par value $1.00 each, as of January 31, 1995 was 12,312. The closing market value per share as listed on the New York Stock Exchange as of the close of business January 31, 1995 was $33.500.
ITEM 7.



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION -- 1994
During 1994, the Company generated more than $250.5 million in cash flow from operations. This cash flow provided the opportunity to reduce long-term debt by repurchasing certain outstanding debentures, to purchase over four million shares of the Company's common stock for treasury and to
increase the annual dividend to shareholders. The Statements of Consolidated Cash Flows, on page 22 of this report, present more detailed cash flow information. Cash and short-term investments decreased $18.4 million from 1993 levels to $251.4 million. Increases and decreases in other components of working capital occurred primarily due to increased sales and the related increase in manufacturing activity. Current year reductions in long-term debt and growth in shareholders' equity lowered the debt-to-capitalization ratio to 2.0 percent at the end of 1994. Total assets, valued at over $1.9 billion, grew by $47.4 million during 1994. The current ratio decreased to 2.0 at December 31, 1994 from 2.1 at the end of 1993 primarily due to the decrease in cash and short-term investments.
Net property, plant and equipment increased $15.1 million from 1993. Capital expenditures of $78.7 million were offset by depreciation expense of $60.6 million and certain retirements of assets. Capital expenditures in 1994 were principally for the opening, remodeling or relocating of paint stores and the construction and upgrade of facilities and equipment at manufacturing, distribution and research sites. In the Coatings Segment, capital expenditures were higher primarily due to expanding the manufacturing capacity at the Garland, Texas facility and the completion of a 180,000 square-foot distribution center in Dayton Valley, Nevada for use by the Transportation Services Division in consolidating certain distribution facilities on the west coast. There have been no significant acquisitions of property, plant and equipment during the past three years. In 1995, the most significant capital expenditures planned are the construction of a 1,000,000 square-foot distribution center in Fredericksburg, Pennsylvania and a 263,000 square-foot automotive products distribution center in Richmond, Kentucky. We plan to continue investing strategically in new facilities, improving or expanding existing facilities and in upgrading equipment. We do not anticipate the need for any external financing to specifically support our capital programs.
Changes in intangible and other noncurrent assets during 1994 resulted primarily from the amortization of intangible assets associated with prior acquisitions totaling $13.2 million. The $226.0 million of deferred pension assets represents the excess fair market value of the assets of the defined benefit pension trusts. As of December 31, 1994, the assumed discount rate was raised to 8.25 percent from 7.25 percent, decreasing the projected benefit obligation and the unrecognized net loss. The higher interest rate environment during 1994 caused the actual return on plan assets in the defined benefit pension trusts to be less than the 8.5 percent assumption used in the actuarial calculation, even though the returns realized on the fixed income portfolios exceeded comparable benchmark indices. This shortfall in the actual return increased the net amortization and deferral component of the net pension credit and the unrecognized net loss at December 31, 1994. The unrecognized net loss is an accumulation of actuarial gains and losses which is amortized over the average remaining service lives of the plan participants beginning in the period after the change or difference occurred. Thus, the net pension credit in 1995 will be reduced by approximately $3.2 million from the increasing amount of unrecognized net loss. See Note 5, on page 27 of this report, for further clarification of the excess pension assets, unrecognized items and the components of the net pension credit.
Long-term debt was reduced during 1994 when the Company acquired $13.1 million principal of certain outstanding 9.875 percent debentures in addition to normal maturities. As more fully explained in Note 7, on page 30 of this report, if a significant advantageous investing opportunity should arise, we have in place additional financing flexibility. We did not utilize any of our short-term borrowing capacity during 1994. Sufficient cash flows should be generated from operations to avoid any short-term borrowings in 1995.
The current year change in the liability for postretirement benefits other than pensions resulted from the excess of the net postretirement benefit expense, as required by Statement of Financial Accounting Standards No. 106, less the costs for benefit claims incurred. The current portion of the postretirement benefits liability, amounting to $8.2 million, is included in other accruals. As of December 31, 1994, the assumed discount rate used to calculate the present value of the postretirement benefit plan obligation was raised to 8.25 percent from 7.25 percent, similar to the change in the assumption for determining the defined benefit pension plan liability. This change decreased the accumulated postretirement benefit obligation and the unrecognized net loss at
December 31, 1994. Because the resulting unrecognized net loss is within the boundaries of the amortization "corridor", the impact on future annual postretirement benefit expense is negligible. Plan amendments made January 1, 1993 significantly reduced the accumulated postretirement benefit obligation, creating an unrecognized prior service credit. The reduction of the annual postretirement benefit expense for these amendments began in 1993 and will continue through 2004. See Note 6, on page 29 of this report, for additional information concerning the Company's postretirement benefit obligations.
Other long-term liabilities include accruals for environmental-related matters and other unrelated non-current liabilities. The decrease in the total accrual to $119.1 million was primarily due to the resolution of certain obligations sooner than anticipated and the reclassification of certain amounts to current liabilities.
The Company and certain other companies were named 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 incurred to abate the lead related paint from buildings. 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.
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 designed to protect the environment and ensure continued compliance.
The Company is involved with environmental compliance and remediation activities at some of its current and former sites. 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.
Capital expenditures and expenses for ongoing compliance measures are included in the normal operating expenses of conducting business. The Company's capital expenditures and other expenses for ongoing compliance measures were not material to the Company's financial condition or net income during 1994, 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 accrues for certain environmental remediation 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 continuously assesses its potential liability for remediation activities with respect to its past operations and third-party sites. Any potential liability ultimately determined to be attributable to the Company, however, is subject to a number of uncertainties including, among others, the number 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, and the method and extent of remediation. The Company's environmental-related accruals are adjusted as information becomes available upon which more accurate costs can be reasonably estimated.
The Company is a defendant in a lawsuit filed by the United States Department of Justice, on behalf of the United States Environmental Protection Agency, regarding the Company's operations at its southeast Chicago facility. The lawsuit, which alleges violations under various environmental statutes, seeks an undeterminable amount of civil penalties and further demands that certain, unspecified, corrective action be taken to clean up the site. The Company is also a defendant in a lawsuit brought by PMC, Inc. regarding one of the Company's former Chemical Division's manufacturing facilities. This facility is located adjacent to the Company's southeast Chicago facility referenced above and 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 both of these lawsuits.
With respect to the Company's southeast Chicago facility and its former manufacturing facility adjacent thereto, both referenced above, 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.
In the opinion of the Company's management, any potential liability ultimately attributed to the Company for its environmental-related matters will not have a material adverse effect on the Company's financial condition, liquidity or cash flow. See Note 9, on page 31 of this report, for discussion of the environmental-related accruals included in the Company's consolidated balance sheets.
Shareholders' equity increased $20.2 million during 1994 due primarily to current year net income partially offset by dividends paid to shareholders and the purchase of treasury stock. The Company acquired 4,013,800 shares of its common stock and additional shares were received in exchange for certain other stock issued in accordance with the Company's stock plans. From time to time in the future, depending on our cash position and market conditions, we may acquire additional Company stock for general corporate purposes. At December 31, 1994, the Company had unfulfilled Board authorization to purchase up to 5,194,000 additional shares for treasury purposes. See the Statements of Consolidated Shareholders' Equity, on page 23 of this report, and Note 10, on page 32 of this report, for equity and capital stock detail.
At a meeting held February 15, 1995, the Board of Directors increased the quarterly dividend to $.16 per share. This represents the sixteenth consecutive increase and a compounded rate of increase of 30.2 percent since the dividend was reinstated in the fourth quarter of 1979. The 1994 annual dividend of $.56 per share marked the fifteenth consecutive year that the dividend approximated our payout ratio target of 30 percent of the prior year's earnings.
RESULTS OF OPERATIONS -- 1994 VS 1993
Consolidated net sales increased in 1994 by $150.8 million to $3.1 billion, an increase of 5.1 percent. The growth in sales was driven primarily by gains in the Paint Stores Segment.
The Paint Stores Segment realized an 8.5 percent sales increase, despite continued sluggish retail sales, as all operating divisions achieved sales results better than the results of 1993. Comparable-store sales increased 7.8 percent. Strong emphasis was placed on store-level pricing discipline, however, continued competitive pressures allowed the implementation of only selective price increases during the year. Most of the Segment's sales increase resulted from increased paint gallons sold to wholesale customers, complemented by wholesale sales increases in most other major product lines. Wholesale customers include professional painters, contractors and industrial and commercial maintenance customers.
Sales of the Coatings Segment were essentially flat for 1994. Reduced demand by certain large customers as they adjusted their inventories downward affected many of the divisions within the
Segment. The Consumer Brands Division also was impacted by the loss of a portion of the business of a home center account. New customers added to our distribution base during 1994 partially offset the effect of the above declines. Improved 1994 sales for the Automotive Division resulted primarily from sales growth in its branch distribution network and strong gains at original equipment manufacturers. Krylon(R) branded products provided the primary impetus for the improved sales results of the Specialty Division. Revenue for the real estate operations in the Other Segment was also flat in comparison to 1993.
Consolidated gross profit dollars were 6.0 percent higher than last year while gross profit as a percent of sales increased to 42.8 percent from 42.5 percent in 1993. The Paint Stores Segment's 1994 gross margin remained constant in comparison to 1993. Despite continued sales mix shifts to lower-margin items in the Specialty and Automotive Divisions, manufacturing efficiencies, stable raw material costs for most of the year, cost containment and a favorable sales mix in the Segment's other divisions led to an increase in the Coatings Segment's 1994 gross margin.
Consolidated selling, general and administrative expenses decreased as a percent of sales to 32.9 percent from 33.3 percent in 1993. The Paint Stores Segment's SG&A costs as a percent of sales were below last year due primarily to containment of selling and administrative expenses combined with the sales gain achieved. The Coatings Segment's SG&A expenditures were approximately the same in 1994 as in 1993. Due to this segment's flat sales, a slight increase in SG&A costs as a percent of sales resulted.
As a result of the above, consolidated operating profits increased 14.0 percent over 1993. The Paint Stores Segment's operating profits improved 20.3 percent due primarily to volume gains and the containment of SG&A costs. Despite sluggish sales, the Coatings Segment's operating profits increased 3.4 percent due primarily to the favorable edge in gross margin. The operating profits of the Other Segment increased in comparison to 1993 due primarily to reduced interest expense on long-term debt allocable to the real estate operations of the Segment. The reduction is the result of various debt acquisitions. Corporate expenses, which are not directly associated with or allocable to any operating segment, were approximately the same as 1993. Refer to pages 1 through 6 of this report for additional Business Segment information.
Total interest expense decreased 50.1 percent from last year due to repurchases of long-term debt and normal maturities. Correspondingly, our interest coverage improved to 93.8 times in 1994 compared to 42.0 times in 1993. Our fixed charge coverage, which is calculated using interest and rent expense, improved to 4.1 times in 1994 versus 3.7 times in 1993.
Interest and net investment income increased 17.1 percent to $8.2 million primarily as a result of increased investment yields partially offset by reduced cash and short-term investment balances resulting primarily from the purchase of common stock for treasury purposes during the year. Other costs and expenses increased in 1994 primarily due to increased costs related to financing and investing activities which are further explained in Note 3 on page 26 of this report. As shown in Note 13, on page 33 of this report, the effective income tax rate remained the same in 1994 as in 1993.
Net income increased 12.9 percent to $186.6 million and net income per share increased 16.2 percent to $2.15. Approximately $.04 of the increase in net income per share over 1993 was due to the purchase of common stock for treasury purposes at various times throughout 1994.
RESULTS OF OPERATIONS -- 1993 VS 1992
Consolidated net sales increased 7.3 percent to $2.95 billion as all segments improved sales during the year. The Company's consolidated market share of gallons sold continued to increase as our gallons sold increased at a faster rate than total gallons sold for the paint industry, according to U.S. Government statistics.
The Paint Stores Segment, which accounted for 73.7 percent of the Company's sales improvement, realized an 8.8 percent sales increase. Strong sales to wholesale customers were partially offset by continued soft retail sales in the first half of the year. Comparable-store sales increased 8.5
percent. Modest selling price increases within select product categories were partially offset by selling price adjustments on certain non-paint products to result in overall 1993 price levels remaining relatively constant with the prior year. Therefore, most of the Segment's sales increase resulted from increased paint gallons sold, complemented by volume increases in certain associated products.
The Coatings Segment had a sales increase of 5.0 percent for 1993. The Consumer Brands Division increased its sales volume in 1993 over the prior year results primarily due to growth in the Dutch Boy(R) brand and increased gallons sold to certain national customers. The Automotive Division had steady sales growth in its domestic branches and the majority of its major product lines resulting in an overall sales increase for 1993. The sales results of the Specialty Division improved primarily due to growth in Krylon(R) brand products. Revenue for the real estate operations in the Other Segment was essentially the same as 1992.
Consolidated gross profit as a percent of sales increased to 42.5 percent from 42.2 percent in 1992. The Paint Stores Segment's gross margin increased slightly. An increase in the Coatings Segment's gross margin was due primarily to continuing volume gains and the associated improvement in capacity utilization, overall stable raw material costs and cost containment.
Consolidated selling, general and administrative expenses remained constant at 33.3 percent when comparing 1993 to 1992. Higher dollars spent occurred in the Coatings Segment as compared to last year due primarily to additional costs for market penetration efforts for new customers, increased promotional expenses associated with the introduction of new products and ongoing brand support.
Consolidated operating profits increased 11.2 percent in comparison with 1992. Operating profits of the Paint Stores Segment increased 28.5 percent due primarily to volume gains. The Coatings Segment's operating profits increased 11.9 percent due primarily to gains in gross profit. The operating profits of the Other Segment decreased in comparison to 1992 due primarily to various provisions made for disposition of certain non-retail properties. Corporate expenses increased over 1992 as a result of changes in various provisions and other items which are not directly associated with or allocable to any operating segment. Refer to pages 1 through 6 of this report for additional Business Segment information.
Interest expense decreased 24.8 percent from last year due to normal maturities and acquisitions of long-term debt and no short-term borrowings being utilized during 1993. Correspondingly, our interest coverage improved to 42.0 times in 1993 compared to 27.4 times in 1992 (based on income before income taxes and cumulative effects of changes in accounting methods). Our fixed charge coverage, which is calculated using interest and rent expense, improved to 3.7 times in 1993 versus 3.4 times in 1992 (based also on income before income taxes and cumulative effects of changes in accounting methods).
Interest and net investment income increased 48.2 percent to $7.0 million primarily as a result of higher cash and short-term investment balances partially offset by lower effective yields. Other costs and expenses decreased to $7.3 million primarily due to reductions in the net adjustments to prior accruals relating to the disposition and termination of operations and in the provisions for environmental remediation. See Notes 3 and 4, on page 26 of this report, for further detail of other costs and expenses. The effective income tax rate increased in 1993 as compared to 1992, as shown in Note 13, on page 33 of this report, primarily due to an increase in the federal income tax rate legislated by Congress in the Omnibus Budget Reconciliation Act of 1993. Income before cumulative effects of changes in accounting methods increased 14.2 percent and income per share before cumulative effects of changes in accounting methods increased 13.6 percent.
During 1993, the Company generated $256.0 million in cash flow from operations. This allowed us to acquire certain outstanding debentures, acquire additional common shares for treasury, increase the annual dividend and still increase our cash and short-term investments by more than $100 million.
ITEM 8.


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, 1994, 1993 and 1992, and the related statements of consolidated income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed at Item 14(a)(2) on page 19. The financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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, 1994, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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.
As discussed in Notes 6 and 13 to the consolidated financial statements, in 1992 the Company changed its methods of accounting for postretirement benefits other than pensions and income taxes, respectively.
/s/ Ernst & Young LLP
Cleveland, Ohio January 19, 1995
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, 1994, 1993 and 1992. 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.
FINANCIAL STATEMENTS
See "Item 14 -- Financial Statement Schedule, Reports on Form 8-K and Exhibits" for the required Financial Statements.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.



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" 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 Item 405 of Regulation S-K is contained under the caption "Section 16(a) Reporting Compliance" in the Proxy Statement which information under such caption is incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is contained under certain captions and tables in the Proxy Statement which information under such captions and tables is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is contained under the caption "Security Ownership of Management" in the Proxy Statement which information under such caption is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14.

ITEM 14. FINANCIAL STATEMENT SCHEDULE, REPORTS ON FORM 8-K AND EXHIBITS
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended December 31, 1994.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Unless Otherwise Indicated)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The consolidated financial statements include all significant controlled subsidiaries. Inter-company accounts and transactions have been eliminated.
Business segments. Business segment information appears on pages 1 through 6 of this report.
Foreign currency translation. All consolidated 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".
Cash flows. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
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:
Investment in Life Insurance. The Company invests in broad-based corporate owned life insurance. The cash surrender value 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.
Intangibles. Intangible assets were $105,821, $115,765 and $128,222, net of accumulated amortization of $62,744, $49,562 and $35,986, at December 31, 1994, 1993 and 1992, respectively. These assets are amortized by the straight-line method over the expected period of benefit.
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 $16,319, $17,190 and $15,661 for 1994, 1993 and 1992, respectively.
Net income per share. Net income per share was computed based on the average number of shares and share equivalents outstanding during the year. See computation on page 41 of this report.
Letters of credit. The Company occasionally enters into standby letter of credit agreements to guarantee various operating activities. These agreements, which expire in 1995, provide credit availability to the various beneficiaries if certain contractual events occur. Amounts outstanding under these agreements totaled $20,091, $24,656 and $29,882 at December 31, 1994, 1993 and 1992, 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 in a fund to provide for payment of health care benefits of certain qualified employees. These investments are classified as held-to-maturity securities with the related carrying amounts included in Other Assets. The estimated fair values of these securities, shown below, 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.
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 of 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. All fair value amounts shown represent a liability position at the respective date.
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 $18,829, $25,778 and $21,431 at December 31, 1994, 1993 and 1992, respectively, represent the Company's best estimate of current economic values of these investments.
Reclassification. Certain amounts in the 1993 and 1992 financial statements have been reclassified to conform with the 1994 presentation.
The net expense of financing and investing activities represents the realized gains or losses associated with disposing of fixed assets, the net gain or loss associated with the investment of certain long-term asset funds, the premium associated with the retirement or acquisition of certain outstanding 9.875 percent debentures and, in 1994, the net pre-tax expense associated with the Company's investment in broad-based corporate owned life insurance.
During the three years ended December 31, 1994, provisions for environmental remediation reflect the increased estimated costs of environmental remediation at operating facilities, idle facilities and Superfund sites.
NOTE 4 -- 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 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 the estimated related costs of severance pay, environmental-related matters and other shutdown expenses and future operating losses to disposal date. The expenses associated with the related closing cost provisions are included in cost of goods sold. Adjustments to all previous accruals, as disposition occurs, are included in other costs and expenses. A portion of the ending accruals represents estimated expenditures for environmental-related matters which are anticipated to
occur beyond one year. Accordingly, that portion of the ending accruals has been classified as a long-term liability (see Note 9) with the remaining amount included in other current liabilities.
The provisions made in 1994 represent additional estimated environmental remediation costs for property adjacent to a site closing and the costs associated with closing certain warehouses which are to be replaced by larger, more efficient facilities during 1995. In 1993, provisions were made for the closing of certain warehouses, small manufacturing facilities and selected unprofitable retail paint stores as part of production and distribution consolidations. In 1992, the provisions represented primarily the estimated increased operational losses to disposal date of closed facilities.
NOTE 5 -- 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 plan covering hourly employees generally provides 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. Plan assets consist primarily of cash, equity and fixed-income securities. There were 969,400 shares of the Company's stock included in these assets at December 31, 1994, 1993 and 1992, respectively.
On December 31, 1993, the hourly defined benefit pension plan was merged with a frozen participation salaried defined benefit pension plan associated with previously discontinued operations. The plan assets of the resulting merged plan, known as the Employees' Retirement Plan, exceed the projected benefit obligation. The Company's funding policy for defined benefit pension plans is to fund at least the minimum annual contribution required by applicable regulations.
Due to increased rates of high quality long-term investments, the assumed discount rate was changed December 31, 1994, decreasing the projected benefit obligation. The increased interest rates during 1994 negatively impacted the return on plan assets in the defined benefit pension trusts. The effect of the change in the assumed discount rate and the reduced earnings on plan assets resulted in a net increase in the unrecognized net loss which will be amortized beginning in 1995. Changes in the assumed discount rate and rate of return on plan assets at December 31, 1993 previously increased the unrecognized net loss whose 1994 amortization reduced the net pension credit.
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 $20,193 for
1994, $19,809 for 1993 and $17,110 for 1992. The cost of multiemployer and foreign plans charged to income was immaterial for the three years ended December 31, 1994.
NOTE 6 -- 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. The health care plans are contributory and contain cost-sharing features such as deductibles and coinsurance. Certain provisions of the plans concerning deductibles, coinsurance and eligibility were amended as of January 1, 1993. There were 14,160, 13,883 and 13,741 active employees entitled to receive benefits under these plans as of December 31, 1994, 1993 and 1992, respectively. The cost of these benefits for active employees is recognized as claims are incurred and amounted to $32,694, $35,597 and $35,047 for 1994, 1993 and 1992, respectively. The Company has a fund to provide for payment of health care benefits of certain qualified employees. Distributions from the fund amounted to $4,662 in 1994, $5,719 in 1993 and $35,447 in 1992. The Company last contributed to the fund in 1992 and does not intend to make any further contributions.
Substantially all employees of the Company who are not members of a collective bargaining unit are eligible for certain health care and life insurance benefits upon retirement. There were 4,093, 4,126 and 4,201 retired employees entitled to receive benefits as of December 31, 1994, 1993 and 1992, respectively. The health care and life insurance plan amendments decreased the accumulated postretirement benefit obligation resulting in a net prior service credit which was first amortized beginning in 1993. The plans are unfunded.
During the fourth quarter of 1992, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", effective January 1, 1992. The Company recognized a one-time charge to consolidated income on January 1, 1992 of $99,828 ($1.12 per share) for the accumulated postretirement benefit obligation which was not recognized by the Company prior to the adoption of SFAS No. 106.
The assumed discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 8.25%, 7.25% and 8.50% for 1994, 1993 and 1992, respectively. Due to the increased interest rates of high quality long-term investments, the assumed discount rate was changed December 31, 1994 decreasing the accumulated postretirement benefit obligation, the effect of which decreased 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 9.5 percent for 1995 and decreases gradually to 5.5 percent for 2003 and thereafter. The assumed health care cost trend rate was lowered one percentage point at December 31, 1993 for each year thereafter, which decreased the accumulated postretirement benefit obligation. 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, 1994 by $12,174 and the aggregate service and interest cost components of net periodic postretirement benefit cost for 1994 by $1,064.
Maturities of long-term debt are as follows for the next five years: $926 in 1995; $755 in 1996; $662 in 1997; $467 in 1998; and $506 in 1999.
Interest expense on long-term debt amounted to $2,768, $6,136 and $7,438 for 1994, 1993 and 1992, respectively. There were no interest charges capitalized during the periods presented.
The Company had the following financing arrangements available, however there were no outstanding borrowings at December 31, 1994.
Under a credit agreement with a group of eleven banks dated June 22, 1987, the Company may borrow up to $280,000. The termination date of the agreement is automatically extended by one year on each anniversary date, but shall not extend beyond the twentieth anniversary of the agreement. Amounts outstanding under the agreement may be converted into two-year term loans at any time. The credit agreement includes certain restrictive covenants regarding the working capital ratio. There are no compensating balance requirements.
The Company has a commercial paper program under which $280,000 aggregate principal amount of unsecured short-term notes can be issued.
Under a shelf registration with the Securities and Exchange Commission covering $200,000 of unsecured debt securities with maturities ranging from nine months to thirty years, the Company may issue securities from time to time in one or more series and will offer the securities on terms determined at the time of sale.
NOTE 8 -- LEASES
The Company leases stores, warehouses, office space and equipment. Renewal options are available on the majority of leases and, under certain conditions, options exist to purchase some properties. Rental expense for operating leases was $93,637, $91,672 and $86,944 for 1994, 1993 and 1992, 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 $8,985 in 1994, $9,234 in 1993 and $8,215 in 1992. Certain properties are subleased with various expiration dates. Rental income, as lessor, from real estate leasing activities and sublease rental income for all years presented was not significant.
The Company has provided for the estimated costs associated with environmental remediation 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 its estimated potential 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 believes that any additional liability in excess of amounts provided which may result from the resolution of these matters will not have a material adverse effect on the financial condition, liquidity or cash flow of the Company.
In addition to the long-term portion of environmental-related accruals shown above, current accruals for certain environmental-related liabilities associated with the disposition and termination of operations (see Note 4) and those associated with other current, former and third-party sites are included in other accruals in current liabilities on the balance sheet.
An aggregate of 5,663,772, 4,087,364 and 4,707,520 shares of stock at December 31, 1994, 1993 and 1992, respectively, were reserved for conversion of convertible subordinated debentures, and exercise and future grants of stock options. At December 31, 1994, there were 300,000,000 shares of common stock and 30,000,000 shares of serial preferred stock authorized for issuance.
The Company has a shareholders' rights plan which designates 1,000,000 shares of the authorized serial preferred stock as cumulative redeemable serial preferred stock which may be issued if the Company becomes the target of coercive and unfair takeover tactics.
NOTE 11 -- STOCK PURCHASE PLAN
As of December 31, 1994, 10,918 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 $22,242, $20,658 and $17,321 for 1994, 1993 and 1992, respectively. Additionally, the Company made contributions on behalf of participating employees, which represent salary reductions for income tax purposes, amounting to $11,456 in 1994, $10,335 in 1993 and $8,646 in 1992.
At December 31, 1994, there were 12,848,911 shares of the Company's stock being held by this plan, representing 15.2 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 confidential 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 -- STOCK PLAN
The Company's 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. The 1994 Stock Plan authorized an additional 2,000,000 shares to be added to authorized shares of the 1984 Stock Plan which were not granted as of the 1984 Stock Plan's expiration date. Non-qualified and incentive stock options have been granted to certain officers and key 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 of employment following the date of grant and generally expire ten years after the date of grant.
Restricted stock grants, with an outstanding balance of 218,000 shares at December 31, 1994, were awarded to certain officers and key employees which require four years of continuous employment from the date of grant before 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. Unamortized deferred compensation expense with respect to the restricted stock amounted to $1,612 at December 31, 1994, $3,760 at December 31, 1993 and $3,456 at December 31, 1992 and is being amortized over the four-year vesting period. Deferred compensation expense aggregated $1,416, $3,271 and $1,366 in 1994, 1993 and 1992, respectively. No stock appreciation rights have been granted.
NOTE 13 -- INCOME TAXES
During 1992, the Company adopted 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 bases of assets and liabilities and are measured using the enacted tax rates and laws that are currently in effect. As of January 1, 1992, the Company recognized a one-time benefit to consolidated income of $18,057 ($.20
per share) from the change in accounting for income taxes from the deferred method to the liability method as required by SFAS No. 109.
It is the Company's intention to reinvest undistributed earnings of foreign subsidiaries; accordingly, no deferred income taxes have been provided thereon. At December 31, 1994, such undistributed earnings amounted to $3,941.
Net income for the fourth quarter was reduced $809 ($.01 per share) due to certain year-end adjustments. A net decrease in cost of goods sold resulted from physical inventory adjustments of $19,017 ($12,361 after-tax, $.14 per share) which were partially offset by certain provisions for the disposition and termination of operations of $13,600 ($8,840 after-tax, $.10 per share). A net increase in administrative expenses due to other year-end adjustments of $2,150 ($1,398 after-tax, $.01 per share) and in other costs and expenses due to the remaining provisions for the disposition and termination of operations of $1,812 ($1,178 after-tax, $.02 per share) and provisions for environmental remediation at certain sites of $2,700 ($1,755 after-tax, $.02 per share) more than offset the gain in cost of goods sold.
Fourth quarter adjustments reduced net income by $1,219 ($.01 per share). The effect on net income was due to a year-end decrease in cost of goods sold for adjustments of inventory quantities and prior quarters' LIFO expense of $15,547 ($.17 per share) primarily offset by increases in administrative and other costs and expenses by provisions for the disposition and termination of certain operations of $4,954 ($.05 per share), provisions for environmental remediation at certain sites of $2,830 ($.03 per share), and other year-end adjustments of $8,983 ($.10 per share).
Charges to expense consist primarily of amortization of intangibles and, in 1994, adjustments to reduce certain assets to their estimated net realizable values. Other additions consist primarily of actual costs incurred and balance sheet reclassifications.
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 15th day of March, 1995.
THE SHERWIN-WILLIAMS COMPANY
By: /s/ L. E. STELLATO ------------------------------------ L. E. Stellato, Secretary
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 15, 1995 -------------------------------- L. E. Stellato, Attorney-in-fact
EXHIBIT INDEX