ask



                                       2000
THE   SHERWIN-WILLIAMS   COMPANY              ANNUAL   REPORT
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I       N       T   R       O       D        U        C        T        I       O         N




                          ...
O     u    r          F    o      u     r            O   p   e   r   a   t    i     n    g       S    e    g     m    e   ...
H         I       G         H         L        I      G      H          T    S



(Thousands of Dollars Except Per Share D...
Co lo r A ns w e r s S W 1 8 1 0 Sta r Sa p p h i r e
to
                                                                 ...
we made substantial progress in evolving        Our Diversified Brands Business Unit will      of the Chicago and Troy tec...
wife Joyce many years of continued good
a powder coatings manufacturer, strength-                                         ...
T       E     C     H      N     O      L        O   G      Y




                                                        ...
Advanced Permalast
                                                                            Technology gives our
      ...
D   I    S       T   R      I     B     U         T   I   O   N




                                                      ...
Our Automated Warehouse Control System (AWCS)
                                 uses barcode technology and radio frequency...
sk
                                                                 C     U     S      T    O       M         E       R   ...
In South America, mass merchandisers
                                     rely on paint manufacturers to hire and
        ...
FINANCIAL SUMMARY

(Millions of Dollars Except Per Share Data)


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M A N A G E M E N T ' S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LT ...
williams 2000_AR
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  1. 1. ask 2000 THE SHERWIN-WILLIAMS COMPANY ANNUAL REPORT |
  2. 2. I N T R O D U C T I O N How are we structured to maximize ask ask market opportunity? Sherwin-Williams is a manufacturer, distributor and retailer of coatings and other related products, with annual sales in excess of $5.2 billion. More than half of our worldwide revenue is generated by our network of North American company-operated paint stores and automotive branches. We also market branded, private label and licensed brand products through a variety of other channels. These include mass merchandisers, home centers, hardware stores, independent paint dealers, industrial and marine distributors, automotive distributors and body shops, joint ventures, and licensees of technology, trademarks and trade names. Our Company is organized into four operating segments. These segments allow us to closely tailor our technology, distribution and service to the needs of a particular marketplace. T A B L E O F C O N T E N T S Highlights - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2 The Sherwin-Williams Company recruits, selects and Letter to Shareholders - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3-5 hires the best qualified people available – without Company Overview - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6-11 discrimination based on race, religion, color, creed, Financial Summary - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 12 sex, national origin, age, disability, status as a special Management’s Discussion and Analysis disabled veteran, veteran of the Vietnam era or any of Financial Condition and Results of Operations - - - - - - - - - - - - -13-20 other unlawful consideration. Report of Management and Cautionary Statement Regarding Forward-Looking Information - - - - - - - - - - - - - - - - - - - - - - - - - - - - 21 Report of Independent Auditors - - - - - - - - - - - - - - - - - - - - - - - - - - 22 color on this page Co lo r A ns w e r s S W 1 67 2 S u ns p ot Consolidated Financial Statements and Notes - - - - - - - - - - - - - - -23-37 Directors, Officers, Managers - - - - - - - - - - - - - - - - - - - - - - - - - - - - 38 Shareholder Information - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 39 Subsidiaries - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 40
  3. 3. O u r F o u r O p e r a t i n g S e g m e n t s Pa i n t S t o r e s S e g m e n t Consum e r S egm e nt Products Sold: Paints, stains, caulks, applicators, wallcover- Products Sold: Branded, private label and licensed brand ings, floorcoverings, spray equipment and related products paints, stains, varnishes, industrial products, wood finishing products, applicators, corrosion inhibitors, aerosols and Markets Served: Do-It-Yourselfers, professional painting related products contractors, home builders, property managers, architects, interior designers, industrial, marine, aviation, flooring and Markets Served: Do-It-Yourselfers, professional painting con- OEM product finishes tractors and industrial maintenance Major Brands Sold: Sherwin-Williams®, Con-Lux®, Old Major Brands Sold: Dutch Boy®, Krylon®, Minwax®, Cuprinol®, Quaker™, Mercury™, Brod Dugan™, Pro-Line®, SeaGuard®, Thompson’s®, Formby’s®, Red Devil®, Pratt & Lambert®, Martin ArmorSeal®, Kem® Hi-Temp, Cook™, Sher-Wood®, Powdura®, Senour®, H&C™, White Lightning®, Dupli-Color® and Rubberset® Polane® and Kem Aqua® Outlets: Leading mass merchandisers, home centers, Outlets: 2,488 Sherwin-Williams stores in North America independent paint dealers, hardware stores and industrial distributors Automotive Finishes Segment I nte rn ati on a l Coati ngs S egm e nt Products Sold: High performance interior and exterior coat- Products Sold: Architectural paints, stains, varnishes, ings for the automotive and fleet industries, and automotive industrial maintenance products, aerosols, product finishes, and heavy truck original equipment manufacturer (OEM) wood finishing products and related products markets; as well as thousands of associated products Markets Served: Do-It-Yourselfers, professional painting Markets Served: Automotive jobbers, wholesale distributors, contractors, independent dealers, industrial maintenance and collision repair facilities, dealerships, fleet owners and refinish- OEM product finishes ers, production shops, body builders and original equipment Major Brands Sold: Sherwin-Williams®, Dutch Boy®, Krylon®, manufacturers (OEM) Kem-Tone®, Pratt & Lambert®, Minwax®, Sumare™, Ronseal™, Major Brands Sold: Sherwin-Williams®, Martin Senour®, Globo™, Pulverlack®, Colorgin™, Andina™ and Marson™ Western®, Lazzuril™, Excelo™, Marson™ and ScottWarren™ Outlets: Distribution in more than 20 foreign countries through Outlets: 175 company-operated branches in the United wholly-owned subsidiaries, joint ventures and licensees of States, Canada, Jamaica and Chile, and other operations in the technology, trademarks and tradenames, including 45 company- United States, Canada, Mexico, Brazil, Jamaica, Chile and Italy operated architectural and industrial stores in Chile and Brazil |1 The Sherwin-Williams Company 2000 Annual Report
  4. 4. H I G H L I G H T S (Thousands of Dollars Except Per Share Data) 1999 1998 2000 $ 5,003,837 $ 4,934,430 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,211,624 303,860 272,864 Net income before impairment (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309,654 Less: Impairment of long-lived assets, net of tax . . . . . . . . . . . . . . . . . . . . . . . 293,628 303,860 272,864 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,026 Per share: 1.80 1.57 Net income before impairment - diluted (1) . . . . . . . . . . . . . . . . . . . . . . . . . . 1.90 Less: Impairment of long-lived assets, net of tax . . . . . . . . . . . . . . . . . . . . . 1.80 1.80 1.57 Net income - diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 1.81 1.58 Net income - basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 .48 .45 Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54 10.25 10.03 Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.22 167,925 172,162 Average shares outstanding (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,912 6.1% 5.5% Return on sales (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9% 17.7% 17.1% Return on beginning shareholders’ equity (1) . . . . . . . . . . . . . . . . . . . . . . . . . . 18.2% 30.5% 33.1% Total debt to capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.7% 9.0x 7.1x Times interest earned (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0x 1.4 1.4 Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 $ 78,189 $ 73,417 Total technical expenditures (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83,627 265,411 282,817 Advertising expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,078 25,697 24,822 Number of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,095 Sales (millions) Net Income Per Share - Diluted (1) 5200 1.90 4800 1.80 4400 1.70 4000 1.60 3600 1.50 3200 1.40 2800 1.30 2400 1.20 2000 1.10 1.00 1600 .90 1200 .80 800 .70 400 1994 1995 1996 1997 1998 1999 2000 1994 1995 1996 1997 1998 1999 2000 (1) Based on net income before the impairment of long-lived assets charge in 2000, net of tax. See Note 2, page 28. (2) See Note 1, page 28, for a description of technical expenditures. | 2 The Sherwin-Williams Company 2000 Annual Report
  5. 5. Co lo r A ns w e r s S W 1 8 1 0 Sta r Sa p p h i r e to color on this page to our shareholders In 2000, The Sherwin-Williams Company enced a slow down in the demand for our a significant advantage over all other posted record sales of $5.2 billion repre- products over the second half of the year. paint store competitors serving profes- senting a 4.2 percent improvement over Even though we believe that we contin- sional painting contractors. last year, our strongest sales performance ued to gain market share in most product As a critical component of this contractor in the past several years. Our net income, categories, our sales results lagged focused strategy, we remain committed to excluding a one-time charge for the behind our expectations. There were a expanding our network of company paint impairment of long-lived assets, also set number of positive results in our operat- stores. This past year, we opened 92 net a new high at $309.7 million, a 1.9 per- ing segments that give us confidence as new stores, providing more convenient cent increase over 1999’s performance. we begin 2001. access to every customer in these neigh- Earnings per share from operations, prior borhoods. Included in this number are Pa i n t S t o r e s S e g m e n t to the asset impairment charge, improved nine stores acquired from the Norfolk 5.6 percent from $1.80 in 1999 to $1.90 in 2000 marked the twentieth consecutive Paint Company in Norfolk, Virginia that 2000. This represents our 23rd consecu- year of improved sales results from our now proudly offer Sherwin-Williams® tive year of improvement in earnings from Paint Stores Segment. Net sales increased products. In addition to new stores, this operations. This past year we also increas- 6.1 percent to $3.2 billion while compara- Segment added 70 new sales representa- ed the dividend for our 22nd consecutive ble-store net sales improved by 3.7 tives and launched 35 new products, year. As a sign of the Company’s confi- percent. Operating profit rose 9.2 percent strengthening our commitment to be dence in our future and in the value of our to $411.5 million. Gallon gains were posted the service and technology leader in stock, we purchased 6.8 million shares of in the architectural, industrial and marine our industry. our stock on the open market for treasury. and chemical coatings categories. The price of our stock at year-end com- This past year, our industrial and marine While servicing do-it-yourself customers pared to last year was up over 25 pecent. business continued to be an important remains an important part of our architec- growing part of our Company. The acquisi- Despite these positive results, we were tural coatings mission, we are increasingly tion of the business of General Polymers disappointed with our performance in focused on the professional painting con- Corporation added a full line of industrial 2000. We expected to do better and fell tractor market. There has been a signifi- floor coatings to our existing broad line short in a number of areas. This past year cant increase in the purchase of architec- of industrial products. Our chemical we experienced significant raw material tural gallons by painting contractors. This coatings business also posted improved cost increases driven by a sharp run up shift is driven by the demographic changes results as we accelerated our original in the price of oil. Management reacted in our country as our population ages and equipment manufacturer specification quickly by implementing selective mid- has less free time to tackle major projects approval process, launched new products year price increases in some of our oper- around the home. We are further encour- and successfully grew our powder coat- ating segments and making tough cuts in aged by the fact that painting contractors ings business. spending in all of our segments. However, continue to purchase almost all of their we were not able, in the short term, to We believe the internet will play an product requirements from the paint overcome the severity of these increases increasing role in helping paint cus- store channel. Our 2,488 company paint and margins suffered. We also experi- tomers choose a supplier. Last year, stores throughout North America give us |3 The Sherwin-Williams Company 2000 Annual Report
  6. 6. we made substantial progress in evolving Our Diversified Brands Business Unit will of the Chicago and Troy technical facili- our award-winning web site from a compre- be responsible for the sales, marketing, ties as the Segment moved to its new hensive information source to an e-busi- manufacturing and technical development state-of-the-art automotive technology of our Krylon® and Red Devil® brands of ness platform for professional customers. center in Warrensville Heights, Ohio. This A select group of diverse professional aerosol and small package paint, our new facility will improve the efficiency customers took part in a pilot program to industrial, automotive and custom-filled and productivity of our automotive finish- aerosol products, our White Lightning® help us design a site that serves a broad es product development effort. range of their business needs. In the years brand of caulks and sealants and our In 2000, the Automotive Finishes ahead, we will continue to enhance this applicator business. This business will be Segment expanded its distribution net- site and expand the service to a significant managed by Tim Knight, Senior Vice work through both company branches and number of our professional customers. President – Diversified Brands. independent distributors. Three net new The Consumer Division will be responsi- Sherwin-Williams branches were opened Consum e r S egm e nt ble for the sales and marketing of our or acquired bringing our total to 175 facili- Net sales for our Consumer Segment branded and private label architectural ties. The acquisition of ScottWarren S.p.A. ended the year at $1.2 billion, essentially coatings other than the Sherwin- in Italy, a manufacturer of automotive flat with last year’s performance. More Williams® brand. These names include coatings for the collision repair market, disappointing, operating profit declined Dutch Boy®, Pratt & Lambert® and Martin provides a solid base upon which to grow 8.0 percent to $142.5 million, excluding Senour®, as well as nationally recognized our presence in Europe and enhances our the asset impairment charge. Our poor private label and licensed brands. This color match capability for all European performance in this Segment reflects our Division will continue to be responsible automobile makes. lackluster sales and inability to pass on for the manufacturing and technical The Automotive Finishes Segment begins raw material cost increases to our cus- development for all architectural and 2001 under new leadership. Ron Nandor tomers in a timely fashion. industrial and marine coatings for our has been promoted back into this Company domestically. Tom Seitz, In addition, certain parts of our Consumer Segment to the position of President & President & General Manager, Consumer Segment, specifically Pratt & Lambert, General Manager, Automotive Division, Division, will lead this team. Thompson’s and Cleaning Solutions, after a successful assignment as lacked the past financial performance or In addition to these organizational Executive Vice President - Marketing management’s expectations of future changes, two non-core business units in of our Paint Stores Group. cash flow to support the carrying value of the Consumer Segment are currently certain long-lived assets, particularly I nte rn ati on a l Coati ngs being marketed for potential divestiture. goodwill, resulting in a $293.6 million Segment We believe the Cleaning Solutions and after-tax write off for impaired long-lived Graphic Arts businesses will perform 2000 proved to be another difficult year assets ($1.80 per diluted share on an better within an organization where for our International Coatings Segment. annual basis). This one-time charge had their focus relates more closely to the Net sales improved 2.6 percent to $307.0 no cash effect on our Company in 2000. core function of a potential acquirer. million, but operating profit declined by After a year like this, it is important that 47.9 percent to finish at $17.7 million. A The Consumer Segment has a portfolio management reacts, makes changes and harsh economic climate in South America of outstanding brand names and relation- moves in a different direction. We have negatively impacted our performance in ships with the top retailers in our country. done that. We have made organization and the entire region, most notably in We expect these changes will improve our management changes to reduce the com- Argentina. In the United Kingdom, an ability to react quickly to changing market plexity of our operation, gain greater focus extended truck strike, poor weather and conditions and bring a heightened sense on individual product lines and further rising oil prices took their toll on our of urgency to required improvements. reduce costs. As a result, we have created Ronseal operations. three operating units within this Segment. Automotive Finishes Segment Despite our results in this Segment, we The Wood Care Business Unit will be The Automotive Finishes Segment ended remain optimistic about our growth responsible for the sales, marketing, the year with $493.4 million in net sales prospects in these markets over time. Last manufacturing and technical develop- for a 4.8 percent improvement. Operating year, Sherwin-Williams and our sub- ment of our Thompson’s®, Minwax® and profit declined to $61.3 million from sidiaries introduced 60 products to meet Formby’s® product lines. Harvey Sass, $66.5 million in 1999. Operating profit specific coatings needs in these countries, Senior Vice President - Wood Care, will was negatively impacted in 2000 by a with much of the technology transferred head this organization. $6.8 million provision for the disposition from our domestic operations. In Brazil, the acquisition of Pulverlack Tintas Ltda., | 4 The Sherwin-Williams Company 2000 Annual Report
  7. 7. wife Joyce many years of continued good a powder coatings manufacturer, strength- are ingrained in this Company as a result health and happiness. ens our industrial position in this region. of Jack’s leadership. While he is missed on a daily basis, Jack continues to play Our long-time Chairman, Jack Breen, com- A key management change was made in an important role as an active member of pleted the last phase of the Company’s our International Coatings Segment as our Board of Directors. We wish Jack and orderly management succession plan as well. Mike Galasso was named President, Mary Jane an active life, full of adventure, he stepped down from his position as International Division after his successful good health and happiness. Chairman of our Board of Directors. The assignment as President & General legacy Jack leaves behind is impressive, Manager of our Automotive Division. Every day our hard working team arrives beginning with the consecutive years of at Sherwin-Williams commited to improv- Outlook for 2001 earnings growth and strong stock per- ing your Company. We are blessed with formance throughout his tenure. But the most dedicated and talented employ- While the economic climate does not more lasting for those of us who had the ees in our industry. We are thankful for look promising at the beginning of this pleasure of knowing and working for him, the loyalty of our customers and the sup- new year, we look forward with optimism will be the manner in which Jack conduct- port of our suppliers. We are excited and confidence. This optimism and confi- ed his personal and business affairs. about our future, proud of our past and dence comes from sound strategic plans Words like integrity, honesty and morality most appreciative of your continuing in support of each of our Segments, a trust. track record of past success and 26,000 employees committed to making this year better. We are focused on the significant opportunities we have to gain market share in every business segment regard- less of the economic environment. Management Changes This past year, we said goodbye to two long-time leaders of our Company. Don Fields retired after 46 years of service, most recently as President of our Christopher M. Connor Joseph M. Scaminace International Division. Don’s steady hand Chairman and Chief Executive Officer President and Chief Operating Officer touched many different divisions at Sherwin-Williams over his impressive career and he has made numerous signif- icant contributions. We wish Don and his |5 The Sherwin-Williams Company 2000 Annual Report
  8. 8. T E C H N O L O G Y sk What is our commitment to ask technology and new product development? Technology has been a cornerstone of our ability to attract the most talented Sherwin-Williams throughout our history. technical people within the industry. Being first to market with new and inno- These new facilities complement our vative products makes our customers major industrial lab in Chicago. more successful and strengthens the We also recognize the need to support image of our brands and our Company. research and development enterprises Over the past five years, this commitment outside the United States. These facili- to R&D has helped us bring more than ties enable us to tailor products to the 330 new products to market. performance requirements and cultural In recent years, we have made a number preferences of our local customers. Our of strategic investments to further international product development enhance our research and development efforts are facilitated by the transfer of The John G. Breen Technology capability. Last summer we dedicated the technology across borders and by strong Center is the hub of Sherwin- John G. Breen Technology Center in down- relationships with global raw materials Williams’ worldwide architectur- al products research and devel- town Cleveland. Nearly twice the size of suppliers. opment efforts. This includes the original Cleveland Technical Center, new product development – lab Our mission is to develop products that are technicians can scale up new this new facility is the hub of our world- product prototypes from small both market-responsive and environmen- wide architectural product research and bench samples to fifty-gallon tally responsible. That means meeting or production batches on site – to development effort. In 2000, we also ongoing quality assurance and exceeding our customers’ performance opened The World Automotive Center in competitive product testing. expectations with products that also meet Warrensville Heights, Ohio, a research or exceed current environmental regula- and development facility for automotive tions. We believe the ongoing development coatings that consolidates labs previous- of technology to produce environmentally ly located in Chicago and Troy, Michigan. responsible, high-performance coatings These two state-of-the-art facilities will help to ensure our continued success strengthen our research and develop- in the years ahead. ment capabilities and further enhance color on this page D u tch B oy 1 4 D • 6 Str a w b e r r y F e s t i va l | 6 The Sherwin-Williams Company 2000 Annual Report
  9. 9. Advanced Permalast Technology gives our Duration® coating a thicker, more flexible film and unpar- alleled protective properties. Which is why our Duration® coating has become a favorite among homeowners and pro- fessional painting contractors alike – including the contrac- tor painting this 129 year-old Yaquinta Bay lighthouse (the oldest existing wooden framed lighthouse) on the Pacific Coast of Oregon. In 2000, we introduced POWDURA® Low- Cure Epoxy, Low-Cure Polyurethane and Low-Cure TGIC Polyester powder coat- ings. All three offer appearance, appli- cation and performance characteristics comparable to standard cure powder, but require less energy and less time to cure – big advantages for manufactur- ers of heavy equipment, machine tools and heavy automotive components. In 2000, Sherwin-Williams introduced Painting Images™, a sophisticated soft- ware tool for painting contractors. Painting Images™ enables contractors to quickly and easily “paint” a digitized photograph of their customer’s home or building to facilitate color selection prior to starting work. This powerful tool gives customers confidence in their choice of color, and in their choice of contractor. Low-odor paints minimize the dis- ruption of painting in occupied areas, giving homeowners greater peace of mind and commercial paint- ing contractors more productive hours during the day. For these rea- sons, Sherwin-Williams has devel- oped a broad range of high-per- formance, low-odor paints to serve a variety of customer applications. The World Automotive Center, opened in September of 2000, is both a research and development facility and a training center. It houses a state-of-the-art applications center that can replicate nearly any refin- ishing environment – from climate variations to airflow conditions to robotic applications. Our Automotive Learning Centers trained more than 5,000 customers and employees last year on curricula ranging from product specifications to color to business management. |7 The Sherwin-Williams Company 2000 Annual Report
  10. 10. D I S T R I B U T I O N How does our distribution sk ask infrastructure help us satisfy more customers? Having the right products in the right place presence in independent paint stores, at the right time is a prerequisite of good hardware stores, home centers and mass customer service. To ensure our products merchandisers throughout North America. reach customers wherever and whenever Our International Coatings Segment man- they choose to buy, we have developed an ufactures and distributes products extensive network of independent and through wholly-owned subsidiaries, joint company-operated distribution channels. ventures and licensing agreements, in Our Paint Stores Segment, comprised of addition to company-operated stores in 2,488 company-operated stores throughout Chile and Brazil. North America, provides a strong distribu- Ensuring the timely and efficient delivery tion platform for Sherwin-Williams® branded of so many products to so many outlets products. These specialty paint stores offer requires a very sophisticated distribution a broad product assortment that can be tai- infrastructure. The hub of our distribution lored to the specific needs and preferences system in North America is a network of of customers in a specific locale. seven Distribution Service Centers (DSC), Sherwin-Williams’ Automotive Finishes comprising nearly 4.4 million square feet. In South America, we are aggres- Segment distributes products through a An advanced Automated Warehouse sively expanding our industrial maintenance and chemical coatings combination of 175 company-operated Control System (AWCS) uses radio fre- base with Sumare™, a chain of branches, including outlets in the US, quency and barcode technology to track chemical coatings outlets. Sumare™ has helped us establish controlled Canada, Jamaica and Chile, and a variety inventory movement through the DSCs. distribution, even in dealer-domi- of independent channels. This Segment The system records the production, stor- nated markets such as Brazil. also conducts business through nine age, order receipt, fulfillment and trans- wholly-owned subsidiaries in five foreign portation of DSC inventory to internal and countries and twelve foreign licensing external customers throughout North agreements spanning 29 countries. America. Sherwin-Williams’ dedicated fleet of tractor-trailers moves product Our Consumer Segment sells products from DSCs to retail outlets. This complex under well known brands such as Dutch system helps efficiently manage our Boy®, Thompson’s® and Minwax® working capital, while ensuring our through some of the top retailers in our customers a ready supply of the country. Successful licensed brand pro- products they need. grams and private label manufacturing agreements have further extended our color on this page A u tomot i ve Fo r e s t G r e e n P e a r l | 8 The Sherwin-Williams Company 2000 Annual Report
  11. 11. Our Automated Warehouse Control System (AWCS) uses barcode technology and radio frequency to track the movement of inventory through our seven North American Distribution Service Centers. The sys- tem helps us manage working capital more efficiently by monitoring inventory movement and maximizing warehouse productivity and storage space utilization. Today more than 90% of the US population lives within a 50-mile radius of one of our Sherwin- Williams paint stores. We are committed to expanding this network of company-operated stores to provide do-it-yourself customers and professional painting contractors through- out North America with conven- ient access to Sherwin-Williams® branded products. Sherwin-Williams’ extensive distribution network of “brick and mortar” outlets is now complemented by virtual outlets. Last year, our Automotive Division opened E-Store, an on-line outlet for a broad assortment of Automotive products. Also in 2000, our Paint Stores Group launched Sher-Link™, a secure site that offers on- line access to select users to browse, More than 600 quality-certified collision repair learn about and purchase Sherwin- shops across North America have been enrolled in Williams® products. our Automotive Division’s A-Plus™ Program. This program offers members valuable services such as employee training, facility design services, product guarantee plans and preferred customer discounts at Sherwin-Williams Paint Stores. |9 The Sherwin-Williams Company 2000 Annual Report
  12. 12. sk C U S T O M E R S Which markets represent ask growth opportunities for us? One of Sherwin-Williams’ foremost Growing our business within each of these Through programs like our Automotive Division’s A-Plus™ Club, we’re growing strengths is the diversity of our customer markets means focusing on the things base. We supply coatings products to that make each customer more success- customer loyalty by providing technical nearly every sector of the economy, from ful. Highly differentiated products, like training and valuable marketing and manufacturing, industrial, transportation low-odor paints that allow a commercial business management services. We and utilities, to healthcare, hospitality, contractor to work in an occupied office restructured our Consumer Group into commercial and residential construction, building with minimal disruption, or UV three smaller, more manageable business property management, institutional and curable stains and topcoats that increase units to sharpen our customer focus and government facilities and do-it-yourself a cabinetmaker’s throughput, help our improve our account service across major consumers. In North America, South customers improve their productivity. product categories. And we will continue America and Europe, our products are Licensed products, like our new Disney to expand our network of company- sold under various brand names to line, build demand for our products operated stores in North America to pro- commercial and do-it-yourself customers among current and future generations of vide more customers with convenient through company-operated outlets, inde- homeowners. access to our products and more respon- pendent distributors and dealers, home sive service. Providing high-value products is only one centers and mass merchandisers. We way we’re helping our customers to suc- believe each of these markets represents ceed. Focusing our organization to be a substantial growth opportunity for us. more customer-responsive is another. To help OEM product finishers deal with ever tightening environ- mental and safety regulations, Sherwin-Williams developed Kem Aqua® Hydralon™ coatings. This environmentally compliant, water- based finish for metal and plastic outperforms many urethane coat- Sherwin-Williams’ Automotive Division trained more than ings in durability and appearance. 5,000 customers and employees over the past year. Six Automotive Learning Centers in the US, one in Brazil and color on this page K r y lo n 19 13 Pu r p l e one in Mexico offer curriculum ranging from color match- ing and applying paint, to hiring and training the right people, to salesmanship and estimating. | 10 The Sherwin-Williams Company 2000 Annual Report
  13. 13. In South America, mass merchandisers rely on paint manufacturers to hire and train “Promoters” to sell the advan- tages of their products in stores. Our strong commitment to growth in these markets is reflected in our International Division’s workforce of more than 2,100 employees, with an annual voluntary turnover rate of less than one percent. Although changing demographics in North America are shifting a greater share of residential painting and decorating to con- tractors, many homeowners still take pride and satisfaction in doing it themselves. We have built our reputation on providing the quality, name brand paints, stains and decorative products, and the expert advice they need to achieve beautiful results. A challenging work environment – structural steel spanning 420 feet above the canyon floor – combined with the nation's strictest environmental regulations, made coating the Cold Springs Canyon bridge in California difficult for even the most seasoned industrial painting contractor. Sherwin-Williams® Zinc Clad XI water-based, lead-free coating was specified for its ease of applica- tion, durability and environmental compliance. In 2000, the US Navy When property and facil- approved Sherwin- ity managers need to Williams® Nova-Plate™ UHS, turn vacant rental prop- an ultra-high solids epoxy erty fast, our broad primer and topcoat system range of coatings, specifically formulated for equipment, sundries and immersion service. The expertise, combined with most recent of many such a network of dedicated specifications, this Sherwin-Williams floor- approval further solidifies covering centers, make our position as a leading us the ideal single- supplier of marine coat- source solution. People ings to the US Navy. know us for high quali- ty paint products, but we are also one of the largest carpet whole- salers in North America. | 11 The Sherwin-Williams Company 2000 Annual Report
  14. 14. FINANCIAL SUMMARY (Millions of Dollars Except Per Share Data) 1999 1998 1997 1996 2000 Operations $ 5,004 $ 4,934 $ 4,881 $ 4,133 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,212 2,755 2,804 2,784 2,405 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 2,904 1,673 1,598 1,574 1,309 Selling and administrative expenses . . . . . . . . . . . 1,740 Impairment of long-lived assets . . . . . . . . . . . . . . . 352 61 72 81 25 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 490 440 427 375 Income before income taxes . . . . . . . . . . . . . . . . . . 143 304 273 261 229 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 304 273 261 229 Net income before impairment (A) . . . . . . . . . . . . . 310 Financial Position $ 703 $ 683 $ 722 $ 643 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 704 606 605 546 452 Accounts receivable - net . . . . . . . . . . . . . . . . . . . . . 594 437 458 417 365 Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436 712 719 692 549 Property, plant and equipment - net . . . . . . . . . . . . 722 4,033 4,051 4,036 2,995 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,751 624 730 844 143 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624 747 848 1,005 313 Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 1,699 1,716 1,592 1,401 Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . 1,472 Per Share Data 167,925 172,162 172,107 171,117 Average shares outstanding (000’s) (B) . . . . . . . . . 161,912 $ 10.25 $ 10.03 $ 9.21 $ 8.15 Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.22 1.80 1.57 1.50 1.33 Net income before impairment - diluted (A)(B) . . . . 1.90 1.80 1.57 1.50 1.33 Net income - diluted (B) . . . . . . . . . . . . . . . . . . . . . . .10 1.81 1.58 1.51 1.34 Net income - basic (B) . . . . . . . . . . . . . . . . . . . . . . . .10 .48 .45 .40 .35 Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54 Financial Ratios 6.1% 5.5% 5.3% 5.5% Return on sales (A) . . . . . . . . . . . . . . . . . . . . . . . . . 5.9% 1.2x 1.2x 1.2x 1.4x Asset turnover (A) . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3x 7.5% 6.7% 6.5% 7.7% Return on assets (A) . . . . . . . . . . . . . . . . . . . . . . . . 7.5% 17.7% 17.1% 18.6% 18.9% Return on equity (A)(C) . . . . . . . . . . . . . . . . . . . . . . 18.2% 26.6% 28.5% 26.5% 26.2% Dividend payout ratio (A) . . . . . . . . . . . . . . . . . . . . . 28.5% 30.5% 33.1% 38.7% 18.3% Total debt to capitalization . . . . . . . . . . . . . . . . . . . 33.7% 1.4 1.4 1.4 1.3 Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 9.0x 7.1x 6.3x 16.3x Times interest earned (D) . . . . . . . . . . . . . . . . . . . . 9.0x 8.7% 9.3% 8.5% 8.8% Working capital to sales . . . . . . . . . . . . . . . . . . . . . 8.4% 38.0% 38.0% 39.0% 39.0% Effective income tax rate (A) . . . . . . . . . . . . . . . . . . 37.5% General $ 134 $ 146 $ 164 $ 123 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . $ 133 78 73 63 53 Total technical expenditures (E) . . . . . . . . . . . . . . . 84 265 283 296 212 Advertising expenditures . . . . . . . . . . . . . . . . . . . . 276 46 45 45 38 Repairs and maintenance . . . . . . . . . . . . . . . . . . . . 48 105 98 90 76 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 50 50 49 27 Amortization of intangible assets . . . . . . . . . . . . . . 51 11,475 11,929 11,964 11,933 Shareholders of record . . . . . . . . . . . . . . . . . . . . . . 10,813 25,697 24,822 24,964 20,768 Number of employees . . . . . . . . . . . . . . . . . . . . . . . 26,095 $ 195 $ 199 $ 196 $ 199 Sales per employee (000’s) . . . . . . . . . . . . . . . . . . . $ 200 1.24 1.22 1.21 1.38 Sales per dollar of assets . . . . . . . . . . . . . . . . . . . . 1.39 (A) Based on net income before the impairment of long-lived assets charge in 2000, net of tax. See Note 2, page 28. (B) Amounts reflect adoption of Statement of Financial Accounting Standards (SFAS) No. 128 effective December 31, 1997. All average share and per share amounts shown for 1996 have been restated. (C) Based on shareholders’ equity at beginning of year and net income before impairment. (D) Ratio of income before income taxes excluding the charge for impairment in 2000 and interest expense to interest expense. (E) See Note 1, page 28, for a description of technical expenditures. 12| T h e S h e r w i n - W i l l i a m s C o m p a n y 2000 Annual Report
  15. 15. M A N A G E M E N T ' S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R A T I O N S actual return on plan assets during 2000 was primarily F I N A N C I A L CO N D I T I O N - 2 0 0 0 the result of returns on equity investments that were Net operating cash flow generated by the Company below the assumed return of 8.5 percent. during 2000 was $461.1 million, while net proceeds from short-term borrowings were $106.9 million. This Goodwill, which represents the excess of cost over the cash flow provided the funds to invest in property, plant fair value of net assets acquired in purchase business and equipment, reduce long-term debt, acquire treasury combinations, decreased $334.0 million in 2000. stock, increase the annual dividend, complete several Intangible assets, which represent items such as trademarks and patents, decreased $15.8 million in acquisitions and make other long-term investments. The 2000. These decreases were due primarily to a total Company’s current ratio increased to 1.39 at December charge for the impairment of long-lived assets of $352.0 31, 2000 from 1.38 at the end of 1999. The Company’s million, of which $342.5 million related to goodwill, as Consolidated Balance Sheets and Statements of described in Note 2 on page 28 of this report. In Consolidated Cash Flows, on pages 24 and 25 of this addition, amortization expense of $47.3 million and report, provide more detailed information on the foreign currency translation adjustments decreased Company’s financial position and cash flows. goodwill and intangible assets, offset by increases Borrowings outstanding under the Company’s resulting from acquisitions completed in 2000. An commercial paper program are included in Short-term increase in Other assets of $53.3 million was primarily borrowings on the balance sheet. Such borrowings had due to the capitalization of costs incurred, net of a weighted-average interest rate of 6.6 percent. amortization, related to designing, developing, Borrowings under the commercial paper program are obtaining and implementing internal use software in fully backed by and limited to the borrowing availability accordance with Statement of Position 98-1, under the Company’s revolving credit agreements which “Accounting for the Cost of Computer Software aggregated $768.0 million effective January 3, 2001. The Developed or Obtained for Internal Use.” Other long- current portion of long-term debt decreased $102.9 term investments, related to certain marketing programs million due primarily to the payment of 6.5% notes of the Company, also increased Other assets. totaling $100.0 million during the first quarter of 2000. Net property, plant and equipment increased $10.7 The $19.4 million balance in Current portion of long- million to $722.4 million at December 31, 2000. The term debt at December 31, 2000 related to various increase results primarily from capital expenditures of promissory notes and other obligations. Increases and $132.8 million, partially offset by depreciation expense decreases in components of net working capital were of $108.9 million and a portion of the total charge for primarily due to timing during 2000. the impairment of long-lived assets. Provisions for Deferred pension assets of $364.4 million at December disposition or retirement of certain assets and foreign 31, 2000 represent the excess of the fair market value of currency translation adjustments further offset capital the assets in the Company’s defined benefit pension expenditures. Capital expenditures in 2000 represented plans over the actuarially- determined projected benefit primarily the costs of purchasing and remodeling the obligations. The 2000 increase in deferred pension automotive technology center in Warrensville Heights, assets of $30.3 million represents primarily the Ohio, upgrading information systems equipment, the recognition of the current year net pension credit, capacity expansion or upgrade of manufacturing and described in Note 6 on pages 29 to 31 of this report. The distribution centers and costs related to opening new assumed discount rate used to compute the actuarial paint stores. Capital expenditures during 2000 in the present value of projected benefit obligations was Paint Stores Segment were primarily attributable to decreased from 7.25 percent to 7.00 percent at opening new paint stores and store relocations along December 31, 2000 due to decreased rates of high- with normal replacement and upgrading store equipment. Capital expenditures in the Consumer and quality, long-term investments. The decrease in the | 13 The Sherwin-Williams Company 2000 Annual Report

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