2005 Annual Report

The Sherwin-Williams Company2005 Annual Report

FINANCIALHIGHLIGHTS

(thousands of dollars except per share data)

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1000

2000

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200520042003

6,114

5,408

7,191

NET SALES (millions of dollars)

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1.0

1.5

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2.5

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3.5

200520042003

2.72

2.26

3.28

NET INCOME PER SHARE - DILUTED

2003 2004 2005

Net sales $ 5,407,764 $ 6,113,789 $ 7,190,661

Net income $ 332,058 $ 393,254 $ 463,258

Per common share:Net Income - diluted $ 2.26 $ 2.72 $ 3.28Net income - basic $ 2.29 $ 2.79 $ 3.39Cash dividends $ .62 $ .68 $ .82Book value $ 10.17 $ 11.70 $ 12.81

Average common shares outstanding (thousands) 144,847 140,802 136,817Return on sales 6.1 % 6.4 % 6.4 %Return on beginning shareholders equity 24.7 % 27.0 % 28.1 %Total debt to capitalization 24.7 % 30.9 % 26.0 %Interest coverage (1) 14.5 x 15.5 x 14.2 xCurrent ratio 1.5 1.2 1.2Total technical expenditures (2) $ 88,369 $ 91,310 $ 95,430

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200

300

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200520042003

393

332

463

NET INCOME(millions of dollars)

(1) Ratio of income before income taxes, minority interest and interest expense to interest expense.(2) See Note 1, page 48 of this report, for a description of technical expenditures.

1The Sherwin-Williams Company is an equal opportunity employer that recruits, selects and hires on the basis of individual qualifications and prohibitsunlawful discrimination based on race, color, religion, sex, national origin, protected veteran status, disability, age, sexual orientation or any otherconsideration made unlawful by federal, state or local laws.

ON THE COVER: In 1890, the original concept for the Sherwin-WilliamsCover The Earth logo was developed foruse in advertising materials. The logo wasregistered as a trademark in 1905, and hasbeen used in various forms as the primary

trademark of The Sherwin-Williams Company for the past 100 years.

TABLE OF CONTENTS

Letter to Shareholders 2

Company Overview 6

Strength In Numbers 14

Stores Map 16

Financial Performance 17

2For the second consecutive year, we achieved strongdouble-digit growth in sales volume, revenues and earn-ings. Consolidated net sales increased by more than onebillion dollars, finishing the year at $7.19 billion. Netincome increased 17.8 percent to $463.3 million anddiluted net income per common share rose more than 20percent to a record $3.28 per share.

The combination of earnings growth, improved oper-ating efficiency and effective integration of acquiredbusinesses helped to strengthen the Companys financialposition in 2005. We reduced our working capital,defined as accounts receivable plus inventories minusaccounts payable, to 12.5 percent of sales in 2005 from13.8 percent of sales in 2004. On the strength of ourearnings performance and working capital management,we generated $717 million in net operating cash, orroughly 10 percent of sales.

Throughout the year, we used this cash to reducedebt, enhance productivity, increase manufacturingcapacity, purchase our stock for treasury and increaseour dividend. We retired $114 million in debt, reducingour total debt as a percentage of total capitalization to26.2 percent at the end of 2005 from 30.9 percent at theend of 2004. In November, Standard & Poors upgradedSherwin-Williams debt rating to A+ from A, and inDecember Moodys changed their outlook on our compa-ny to Positive from Stable. Both of these moveswere the result of our strengthening financial position,their confidence in management and their outlook on ourprospects going forward.

During the year, we invested $143.1 million in capi-tal expenditures to increase manufacturing capacity,enhance productivity of our existing facilities andbegin the construction of a new paint manufacturingplant in the western United States that will be complet-ed and operational late in 2006.

We continued our long-standing practice of returning a

EACH YEAR, WE MEASUREour success by the results we achieve andby our progress in positioning the companyfor even stronger performance in the future.By both of these measures, 2005 was a verygood year for The Sherwin-Williams Company.

Christopher M. ConnorChairman, President and Chief Executive Officer

portion of the cash we generate to shareholders throughtreasury stock purchases and dividends. In 2005, theCompany purchased 8.1 million shares of its commonstock in the open market. We increased our cash dividendfor the year by fourteen cents to $.82 per share, markingthe 27th consecutive year of dividend increas-es. In 2006, I will recommend to the Board ofDirectors that we continue our policy of pay-ing out 30 percent of prior years diluted netincome per share in the form of a cash divi-dend. Pending Board approval, this will re-sult in a quarterly dividend of $.25 per share,or $1.00 per share for the year, an increase of22 percent over 2005.

We are proud of our performance in 2005, particular-ly in light of the unrelenting raw material cost pressuresthat have plagued our industry over the past two years.Our 2005 results are a testament to the hard work anddedication of our 30,000 employees around the world.

PAINT STORES SEGMENTNet sales for our Paint Stores Segment increased 21.9

percent to $4.85 billion from $3.98 billion in 2004.Comparable store sales grew by 13.6 percent during theyear, marking the second consecutive year of double-digitgrowth. Operating profit for the Segment increased 23.4percent to $592.5 million.

Our paint stores serve three major market segmentsin the North American coatings market: architecturalpaint customers, OEM product finishers and industrialmaintenance and marine coatings users. We achievedsolid growth in all three of these segments duringthe year, and we made progress on severalinitiatives that will position us well for the future.

In 2005, we opened 98 net new stores, endingthe year with 3,081 stores in operation in NorthAmerica compared to 2,983 stores at the end of2004. In 2006, we will continue to aggressivelypursue our goal of 3 percent annual growth in storecount, opening in the range of 100-plus net newstores.

We made significant progress during the year integrat-ing Duron, Inc., which we acquired in September 2004.The 229 Duron paint stores now share a common sys-tems platform with Sherwin-Williams stores, includingorder management, inventory management and financial

reporting. These systems will further improve the pro-ductivity and efficiency of Duron stores that werealready performing well.

Our Paint Stores Segment introduced 18 new prod-ucts for the architectural, OEM product finishes and

industrial maintenance and marine markets in 2005. Thefocus of our product development effort is on formulat-ing coatings that require less labor to apply, look betterand protect longer than the generation of products theyare replacing. We are also an industry leader in the saleof coatings products that comply with increasingly strin-gent air quality regulations that limit the volume ofVolatile Organic Compound (VOC) emissions. You willfind many examples of new products featured in thisannual report.

CONSUMER SEGMENTExternal net sales in the Consumer Segment increased

7.7 percent to $1.40 billion for the year versus the sameperiod last year. Acquisitions accounted for all of thesales increase in the Consumer Segment. Operating profitfor the year declined $18.6 million, or 9.9 percent, to$169.1million. Consumer Segment operating profit for

the year was adversely affected by increased raw materialcosts and a $22.0 million goodwill impairment chargereflecting an anticipated reduction in business with amajor retail customer beginning in 2006.

Our Consumer Segment fulfills a dual mission. It sup-plies name brand and private label products to retailers

3

LETTER TOSHAREHOLDERS

THE SHERWIN-WILLIAMS COMPANYINCREASED SALES BY $1 BILLION,

SURPASSING THE $7 BILLION MARK.

GENERATED $717 MILLION IN CASH

FROM OPERATIONS.

4throughout North America. It also provides manufactur-ing, distribution and new product development supportto our Paint Stores Segment.

There are roughly 56,000 retail outlets in the U.S.that sell coatings or coatings related products. Today,about 35,000 of these outlets offer one or more productlines manufactured by our Consumer Segment and soldunder such brand names as Dutch Boy, Pratt & Lambert,Krylon, Minwax, Thompsons WaterSeal, Purdy

and various private and associate labels.Product and marketing innovation keeps our brands

strong and vital. In 2005, our revolutionary Ready ToRoll paint container was recognized as The Most Inno-vative Package of the Year by the Institute of PackagingProfessionals and received special recognition from severalof our major customers. Krylon H2O, a latex paint inaerosol form, is ideal for indoor use and cleans up withsoap and water. And the launch of our new Pratt & Lambert Never Compromise Color Color SampleSelector lets customers explore color palettes and previewcolor combinations before they paint an entire room.

AUTOMOTIVE FINISHES SEGMENTNet Sales for our Automotive Finishes Segment

increased 7.1 percent to $550.8 million for the year. Themajority of this increase came from strong internationalsales, new product line introductions and favorable cur-rency fluctuations. Operating profit for the full yeardeclined $800,000, or 1.4 percent, to $57.2 million.

During the third quarter of 2005, the AutomotiveFinishes Segment sold its majority interest in an automo-tive coatings joint venture in China, resulting in a loss of$7.9 million, which impacted operating profit. After just18 months in the joint venture, disposition was the mostpractical solution to the diverging strategic visions forthe business by the two owners. Our Automotive man-agement team realized that continuing the joint venturewould add significant risk to the venture without a com-

mensurate return for Sherwin-Williams shareholders anddecided to take the short term loss.

In 2005, the Automotive Finishes Segment openedseven new branches, bringing the total to 203 in theU.S., Canada, Jamaica, Chile and Peru. During theyear the Segment introduced a new automotive water-borne basecoat/clearcoat system called AWX that isformulated to comply with stringent European UnionVOC regulations scheduled to take effect in 2007. Wealso launched Planet Color, a collection of opticallyenhanced automotive coatings for the custom finishing market.

INTERNATIONAL COATINGS SEGMENTNet sales for the International Coatings Segment grew

21.8 percent to $388.0 million in 2005. Favorable cur-rency fluctuations increased sales for the Segment by 9.8percent in the year.

Operating profit in this segment for the year grew to$23.6 million from $18.0 million in 2004an increaseof 30.6 percent. This was primarily the result of highersales volumes, operating efficiencies resulting from man-ufacturing volume increases and tight expense control.

International Coatings Segment made great stridesduring the year in strengthening our brand identity andexpanding distribution outside North America. InBrazil, we completed an extensive overhaul of ourpackaging to better align the images of our variousbrands and strengthen their association with Sherwin-Williams. In Argentina, we were listed among the top60 companies to work for based on an annual surveyby Great Places to Work Institute published in the Clarin Newspaper. And in Italy, we partnered with anestablished distributor to re-launch our Ronseal

brand wood care coatings line.

MANAGEMENT CHANGESIn July, David F. Hodnik, retired President and

Chief Executive Officer of Ace Hardware Corporation,was elected to our Board of Directors. Dave brings awealth of financial and management experience in aretail environment to the Board, and we look forwardto receiving many years of his valuable insight andcounsel. This appointment brings the total number ofboard members to 11 and the number of independentdirectors to 10.

27 CONSECUTIVEYEARS OF DIVIDENDGROWTH.

5This past year, we realigned our management struc-ture and elevated three key executives to overseesignificant portions of our business, reporting to theChief Executive Officer. John Morkis will continue in hisrole as Group President, Paint Stores Segment. As GroupPresident, Consumer Segment, Tom Seitz has assumedresponsibility for the entire Consumer business, includ-ing Diversified Brands and Wood Care Divisions. TimKnight has been promoted to the new position of GroupPresident, Global Group,overseeing all divisions of thecompany whose activitiesextend beyond the boundariesof North America. These gen-tlemen have proventhemselves to be savvy busi-ness managers andoutstanding leaders over there long tenures with thecompany. Each brings an impressive record of accom-plishment to their new role.

LEAD PIGMENT LITIGATIONGiven the heightened publicity that lead pigment

litigation has received over the past year, I feel it isappropriate to offer some perspective.

The historical record is clear that the industry, andspecifically Sherwin-Williams, has always acted respon-sibly and within the law. The industry played animportant role in funding research that identified therisks associated with poorly maintained lead paint andin disseminating that information to health officials. In1955, these efforts resulted in the adoption of a volun-tary standard by hundreds of paint companies, whichessentially removed lead from interior residential paint.Over twenty years later, in 1978, the federal governmentbanned the use of lead pigments in paint for residentialand most commercial purposes.

We are joined in most of these lead pigment caseswith several other defendants with whom we havemaintained an excellent working relationship. Ourarguments, and more importantly our actions, are solidand on the right side of the law, and we will continueto vigorously defend the Company against these mis-guided attacks.

Because we recognize that elevated blood leadlevels in children is an important public health issue,

we are working with various community-basedorganizations to help address it. Most of theseorganizations concentrate their efforts on publiceducation, training and lead hazard control througheffective property maintenance.

OUTLOOK FOR 2006We are encouraged by the strength of our business

throughout 2005. Strong demand for architectural

products coupled with positive trends in the globalOEM finishes, industrial maintenance and automotiverefinish markets give us good reason to be optimistic aswe enter 2006.

Raw material cost pressures remain a concern, but amanageable one. Recent improvements in the availabilityof oil, natural gas and petrochemicals have somewhattempered the sharp rise in raw material pricing we sawin 2004 and 2005. Barring an unforeseen political ornatural disaster we would expect this trend to continuein 2006, resulting in a more stable raw material costenvironment as the year unfolds.

Once again, FORTUNE Magazine named Sherwin-Williams to their list of the 100 Best Companies toWork for. We are committed to the values and princi-ples that helped us gain this recognition, and we willcontinue to foster a work environment that recognizesand rewards hard work and innovative thinking.

On behalf of the men and women of The Sherwin-Williams Company around the world, we offer ourthanks and appreciation to our customers, suppliers andshareholders for their continued trust and confidence.

Christopher M. ConnorChairman, President and Chief Executive Officer

AGAIN NAMED AS ONE OF THEBEST 100 COMPANIES TO WORK

FOR BY FORTUNE MAGAZINE.

6Sherwin-Williams paint stores are theexclusive outlets for Sherwin-Williams

branded architectural and industrial coatingsand related products. We serve a diverse cus-tomer base, which includes architectural andindustrial painting contractors, residentialand commercial builders, property ownersand managers, OEM product finishers anddo-it-yourself homeowners.

Many companies aspire to be guided bythe voice of the customer. We hear that

voice first hand through literally tens of mil-lions of direct customer interactions eachyear in our stores and through our field salesorganization. The intimate, consultative salesrelationships we build through this directinteraction enable us to be highly responsiveto customer needs and provide us with con-stant input and feedback from the end-usersof our products.

Each year, the new products we introduceapply the latest technological advancements

SURPASSING THE $4 BILLION MARK IN SALESfor the first time, the Paint Stores Segment again led the way to a record yearfor Sherwin-Williams. We opened our 3,000th store in April and ended theyear with a total of 3,081, solidifying our position as the largest operator ofspecialty paint stores in North America.

to maximize coatings appearance, perform-ance and ease of use for specific marketapplications. For example, the patented tech-nology in Duration Home Interior Paintactually prevents stains from penetrating andenables easy cleaning with a damp sponge. Asingle coat of our new ProMar 200 XP

Paint is equal to two coats of traditional eg-shel and flat finishes, saving contractors timeand labor cost. Builders Solution InteriorPaint is a two-coat system that starts with ahigh-build surfacer that masks drywall imper-fections and establishes a smooth, even surfacefor topcoat. Loxon XP WaterproofingMasonry Coating applies directly to con-crete, eliminating the need for primer.

In the paint business, superior colormatching and color delivery are importantcompetitive advantages. Our exclusive Sher-Color computerized color match tech-nology sets a new standard for speed andaccuracy in custom color matching. With ourColor To Go Paint Samples, customers cantake home samples of custom tinted paint topreview virtually any color for their decorat-ing project. In 2005, we launched an upgradedwebsite with a Color Visualizer that allows theuser to experiment with various color combi-nations in room settings.

We made significant progress during the year on the integration of Duron, Inc.,which we acquired in September 2004. AllDuron paint stores now share a commonsystems platform with Sherwin-Williams

stores, including order management, finan-cial reporting and inventory management.Our recent acquisition of Purdy has enabledus to offer the brand of brushes and rollersmost preferred by professional painters.

INDUSTRIAL MAINTENANCE AND MARINEcoatings are formulated to protect steel and ma-sonry infrastructures in the harshest of corrosiveenvironments. Once dominated by solvent-basedcoatings, this market is rapidly shifting to low-VOC, environmentally friendly waterborne prod-ucts that are often required by governmental andpublicly financed projects. Sherwin-Williams is atthe forefront of waterborne technologies formu-lated to deliver equal or better performance thantheir solvent-based predecessors. We are takingthe lead in customer support by equipping ourcorrosion specialists with Site Survey, a propri-etary software program used by facility managersto better plan their maintenance painting throughlong-term budgetary analysis based on a databaseof on-site coatings performance survey data.

CHEMICAL COATINGS product finishes are usedin a variety of wood, plastic and metal applica-tions. In 2005, we completed the firstdivision-wide customer survey, which resulted in a96 percent satisfaction rating. We introduced sev-eral new technologically advanced products in2005, including Sher-Wood BAC Wiping Stainfor wood finishing, Polane SP PolyurethaneEnamel for heavy equipment, Sher-Nar PVDFFluorocarbon Paint for coil and extrusions, Sher-Wood KemVar Varnish LF for kitchencabinets, Waterborne CARC for military equip-ment and Ultra-Cure Waterborne UV formultiple wood markets. In addition to a strongperformance in North America, we saw dramaticsales growth in Asia during the past year. To sup-

port this growth, we recently broke ground on amain distribution center in Shanghai where wealready have a manufacturing plant. We alsoopened new facilities in the Texas cities of El Paso,San Antonio and Longview.

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PAINT STORESSEGMENT

PRODUCTS SOLD: Paints,stains, coatings, caulks,applicators, wallcoverings,floorcoverings, spray equipmentand related products

MARKETS SERVED: Do-It-Yourselfers, professional paintingcontractors, home builders,property managers, architects,interior designers, industrial,marine, flooring and originalequipment manufacturer (OEM)product finishes

MAJOR BRANDS SOLD:Sherwin-Williams, ProMar,SuperPaint, A-100, PrepRite,Classic 99, Duration, MasterHide, Sher-Wood, Powdura,Polane, ExpressTech andDuron

OUTLETS: 3,081 Sherwin-Williamsstores in the United States, Canada,Mexico, Puerto Rico, the VirginIslands and China

8Trusted brand names like Dutch Boy,Minwax, Krylon, Thompsons

WaterSeal, Pratt & Lambert and Purdy

continue to provide consumers with innova-tive products that provide long-lastingbeauty and durability to their decoratingprojects. These brands are widely distributedthrough leading retail outlets, includinghome centers, mass merchandisers, hardwarestores, independent paint stores and homeimprovement stores.

CONSUMER BRANDS With our innovativePratt & Lambert Never Compromise Color

Color Sample Selector, customers can now seethe actual paint color as it will appear in itsintended environment. This wet paint sam-pling system is a simple, inexpensive way toexplore color palettes and color combinationsbefore committing to the time and expense ofpainting an entire room. The convenient two-ounce containers can accommodate a fulltwo-inch brush for ease of application andare available in 288 colors of our highestquality Accolade Interior Velvet Finishpaint. The sampling system is our newestaddition to the Never Compromise Color

Color System, which also includes the

THE POWERFUL BRANDS that comprise our Consumer Segmentfaithfully keep their promise of superior product and service performance.

Williamsburg Color Collection showcasing184 historically accurate colors and Ovation

Faux Finishes.Our revolutionary new Dutch Boy Ready

To Roll a project-sized paint container witha built-in roller tray received additionalindustry recognition by winning The MostInnovative Package of the Year award present-ed by the Institute of Packaging Professionals.Dutch Boy Ceiling Solutions Color Trans-forming Ceiling Paint applies in a violet shade toensure complete coverage by revealing missedspots and dries to a bright white in 30 minutes.

WOOD CARE PRODUCTS The Minwaxbrand is synonymous with making and keep-ing wood beautiful. We are the recognizedleader in the interior wood finish categorywith our complete line of wood stains andclear protective finishes. In 2005, we intro-duced two new Minwax Wood Finish colors,Red Chestnut and Gunstock. Our new Minwax

High-Build Polyurethane is designed for useon all interior wood surfaces and provideslong-lasting protection and beauty with onlytwo coats. The Minwax brand is highly visi-ble through television and print advertisingand our support of The New Yankee Work-shop, hosted by television personality NormAbram. In addition, DIY Network host andauthor, Bruce Johnson, continues to be theMinwax spokesperson.

Thompsons WaterSeal has long been theleading brand of exterior waterproofing prod-ucts and continues to define the category withinnovative new products and technologies.

Our new Thompsons WaterSeal No DripExterior Gel Stain is formulated for more con-trol and ease of use, fast dry time and lessmess for smaller size exterior projects. We alsointroduced the Thompsons WaterSeal

Certified Contractor Program to help profes-sional applicators build added trust with theircustomers. A regular on Home & GardenTelevision (HGTV) and the DIY Network, Jeff Wilson has been added to the ThompsonsWaterSeal team as a brand spokesperson.

DIVERSIFIED BRANDS The introduction ofour Krylon H2O Latex Aerosol Paint marksanother breakthrough in paint technology. Wehave developed a true latex formulation inaerosol paint, which means that it can be usedindoors, is exceptionally low-odor and cleansup with soap and water. It is also the onlyaerosol paint that is safe for use on Styrofoam.We are also benefiting from the strong growthof the scrapbook market with the introductionof Krylon Paper Finishes. These products cantransform ordinary paper into unique presen-tations and are designed to protect, adhere,add color and add texture. All are acid-freeformulas for optimal performance and protec-tion and are packaged in three-ounce sizes forproject size use.

Many of the nations leading automotiveaftermarket retailers offer our Dupli-Color

High Performance Finishes. This collection

of unique products targets specific market seg-ments and features finishes that are night-timereflective and light absorbing and present bril-liant glitter and shimmering metallic effects.

9

CONSUMERSEGMENT

PRODUCTS SOLD: Branded,private label and licensed brandpaints, stains, varnishes,industrial products, woodfinishing products, woodpreservatives, applicators,corrosion inhibitors, aerosols andrelated products

MARKETS SERVED: Do-It-Yourselfers, professional paintingcontractors, industrial maintenanceand flooring contractors

MAJOR BRANDS SOLD: DutchBoy, Krylon, Minwax,Cuprinol, Thompsons

WaterSeal, Pratt & Lambert,Martin Senour, H&C, WhiteLightning, Dupli-Color,Rubberset, Purdy, BesttLiebco, Accurate Dispersions,Kool Seal and Snow Roof

OUTLETS: Leading massmerchandisers, home centers,independent paint dealers,hardware stores, automotiveretailers and industrialdistributors in the United States,Canada and Mexico

10

Our automotive finishing customer baseis diverse. However, customers in all of ourmarkets, from passenger car to commercialvehicle to aircraft, share common goals speeding up production time, improving fin-ish quality and satisfying their customers.Our line-up of new and existing products isformulated with those goals in mind. A newwaterborne basecoat/clearcoat system calledAWX was introduced in 2005, and

already complies with European UnionVOC legislation scheduled to take effectJanuary 1, 2007, and new California regulations to be effective January 1, 2009.Extensive testing in five European countrieshas confirmed that AWX WaterborneCoatings achieve faster drying times, easierapplication, superior hiding, coverage andcolor matching, and improve shop productivity.

IN THE WORLD OF NASCAR AND CHAMP CAR RACING, speed and finish mean everything. For that reason, its not surprising thatSherwin-Williams is the coatings supplier of choice for a majority of NASCARteams and the official automotive finishes of the Champ Car Series. Speed andfinish also determine success in the collision repair and vehicle refinish markets.

The launch of Planet Color, an innova-tive collection of optically enhancedautomotive coatings, targets the growingcustom finishing market where craftspeopleare creating edgy, one-of-a-kind paint jobs.The dramatic colors available in the PlanetColor Coating system have inspired thedescription, Where Art And ScienceCollide. For added durability, PlanetColor Coatings are based upon our OEM-approved Ultra 7000 Coatings technology.

We take these technologically advancedproducts to market through our diverse andconstantly expanding distribution platform.In 2005, we opened seven new branches,bringing our total to 172 in North America.Including our branches in the Caribbean andSouth America, we have over 200 company-operated facilities. This is the largest suchnetwork in the automotive finishes industry.As part of our commitment to improve ouroperations and maximize the customerexperience, we are beginning to remodel allof our North American branches to complywith a uniform standard. Additionally, ourproducts are distributed by automotivejobbers, independent distributors andthrough foreign licensing agreements andsubsidiaries.

Sherwin-Williams Automotive Mexicoand Volkswagen of Mexico have signed anagreement to offer Volkswagen and Audilicensee networks a solution to their collisionrepair and automotive paint needs on a

national level. This means that we will sup-ply the network of Volkswagen and Audilicensees with the ULTRA 7000

Basecoat/Clearcoat System. In addition, Sherwin-Williams Automotive Mexico willprovide ongoing training and support toensure that we continue to meet the qualityrequirements of these two car companies onboth a national and international level.

We continue to be the paint of choice fora majority of the most well-known NASCARteams and currently enjoy partnerships withmore than 30 cars in the Nextel Cup Series.In 2005, we were recognized as the officialautomotive finishes of the Champ Car WorldSeries. This is a multi-year agreement thatwill provide us with an opportunity to show-case our new Planet Color Coating systemin a high-profile environment.

Our FormulaExpress Internet Scale is aninnovative system that enables customersaround the world to select color formulas inreal time from the database at our WorldAutomotive Center in Warrensville Heights,Ohio. Currently, there are more than 800scales in place, and more than 200,000 for-mulas are viewed each month.

Breakthrough systems and product technologies like these, which are sold

through our diverse distributionchannels and industry alliances, give ourcustomers the speed and finish quality theyneed to succeed in the highly competitivevehicle refinish industry.

11

AUTOMOTIVEFINISHESSEGMENT

PRODUCTS SOLD: Highperformance interior and exterior coatings for theautomotive, aviation, fleet andheavy truck markets, as well asassociated products

MARKETS SERVED:Automotive jobbers, wholesaledistributors, collision repairfacilities, dealerships, fleetowners and refinishers,production shops, body builders, aviation and OEMproduct finishers

MAJOR BRANDS SOLD:Sherwin-Williams, MartinSenour, Western, Lazzuril,Excelo, Baco and Planet Color

OUTLETS: 203 company-operated branches in the UnitedStates, Canada, Jamaica, Chileand Peru, and other operationsthroughout North and SouthAmerica, the Caribbean Islands,Europe and China

12

In 2005, we opened three new stores for atotal of 74 company-operated stores in Chile,Brazil, Uruguay and Argentina. We distributethe Sherwin-Williams brand, as well asother well-known regional brands, in 26countries through wholly-owned subsidiaries,joint ventures, licensing agreements and inde-pendent distributors.

BRAZIL An extensive overhaul of our pack-aging in Brazil was initiated to modernize and

unify our brand image at point-of-sale andfacilitate the decision-making process for theconsumer, while maintaining a strong connec-tion to the Sherwin-Williams heritage. Therollout began with the unveiling of our leadingbrands Metalatex, Kem Tone,Acquacryl and Novacor at the premierenational trade show. Metalatex was recog-nized as the fastest growing brand of acrylicpaint in Brazil in 2005. In addition to the newpackaging, three new products were launched

SALES IN OUR INTERNATIONAL COATINGS SEGMENTgrew by more than 20 percent in 2005 as we expanded our offering ofinnovative coatings products, broadened our distribution, strengthened ourmarket share and built our brands. As a result, profits in this Segment posteda gain of more than 30 percent for the year.

to the construction market. Expanding on thestrong consumer acceptance of our revolution-ary Twist and Pour containers in the U.S., weintroduced the concept in Brazil.

At a popular national trade show for hob-byists, we launched several new products inour market-leading Colorgin aerosol brandgeared towards the do-it-yourself customer. Inthe industrial maintenance category, ourSumar brand remains the market leader andis sold through our company-operated storesand direct to end-users. The Sumar brandwas recognized by sugar producers as the lead-ing supplier of protective coatings in Brazil.

CHILE In addition to our existing solid distri-bution platform, the Sherwin-Williams brandwas launched in the Chilean retail channel,which includes home centers, mass retailersand hardware stores. This important event hassignificantly increased our national retailopportunity and adds to our current retail,wholesale and direct sales mix of architectural,aerosol, industrial and marine, wood andchemical coatings products. In support of thislaunch, a completely new product line withdistinctive new labeling was developed, as wellas innovative point-of-purchase displaysintended to enhance our image and leverageSherwin-Williams awareness and perception.

In Valparaso City, the most importantport in Chile, we have partnered with thelocal municipality to paint 83,000 residenceswith Sherwin-Williams paint and restore

this historic seaport city to its late 19th cen-tury splendor.

ARGENTINA For the second consecutiveyear, Clarn Newspaper listed Sherwin-Williams among its annual top 60 of The

Best Companies to Work For survey. Thesurvey rankings are compiled by Great Placesto Work Institute Inc., and the results arepublished in 20 countries.

The award winning design of our Twistand Pour container has been modified forlocal use and is now available in our Loxon

product line. This launch is consistent withour desire to penetrate the do-it-yourselfhome market, where we also introducedSherwinMana, an integrated color con-cept designed to connect with end-users.

In Rosario City, we opened a new colorstudio, which attracted more than 600 atten-dees to its grand opening, includingarchitects, designers, engineers, contractors,painters and consumers.

UNITED KINGDOM During 2005, Ronsealreceived accreditation as an Investor inPeople, a UK quality standard that estab-lishes a set of best practices for improving anorganizations performance through itsemployees.

In the U.K., Ronseal grew market sharelevels to all-time highs and experiencedgrowth in 16 of the 17 product categories inwhich it competes. We also successfullyintroduced a new product called 5 MinuteFence Finish. The creation of a 90,000-square-foot warehousing and distributioncenter will consolidate our U.K. operationsand facilitate our continued growth.

As part of its international business devel-

opment strategy, Ronseal Limited isre-launching its line of wood care coatingsinto the Italian market. We have partneredwith a strong distributor in Italy and havealready established a solid distribution plat-form for our products.

13

INTERNATIONALCOATINGSSEGMENT

PRODUCTS SOLD:Architectural paints, stains,varnishes, industrialmaintenance products, aerosols,product finishes, wood finishingproducts and related products

MARKETS SERVED: Do-It-Your-selfers, professional paintingcontractors, independent deal-ers, industrial maintenance andOEM product finishes

MAJOR BRANDS SOLD:Sherwin-Williams, Dutch Boy,Krylon, Kem Tone, MartinSenour, Pratt & Lambert,Minwax, Sumar, Ronseal,Pulverlack, Colorgin, Andina,Tri-Flow, Thompsons

WaterSeal, Marson,Metalatex, Novacorand Loxon

OUTLETS: Distribution in 26countries through wholly-ownedsubsidiaries, joint ventures andlicensees of technology,trademarks and tradenames,including 74 company-operatedarchitectural and industrial storesin Chile, Brazil, Uruguay andArgentina

14

0

100,000

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400,000

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800,000

20052004200320022001

558,917 558,929 544,681561,646

716,702

NET OPERATING CASH(in thousands $)

0

3

6

9

12

15

20052004200320022001

11.511.0

13.813.9

12.5

WORKING CAPITAL TO SALES(percent)

0

5

10

15

20

25

30

35

20052004200320022001

28.026.0

30.929.3

26.4

TOTAL DEBT TO CAPITALIZATION(percent)

NET OPERATING CASH In 2005,we increased net operating cash bymore than $172 million to $717million. This cash helped addmanufacturing capacity, enhanceproductivity, strengthen ourfinancial condition, support theCompanys continued growth andreturn additional cash to ourshareholders.

WORKING CAPITAL TO SALES Working capital, defined as accountsreceivables plus inventories minusaccounts payable, improved to 12.5%of sales in 2005, a reduction of 1.3%from the previous year. Reducingworking capital favorably impacts netoperating cash. Management believesthe Companys optimal working capi-tal level is approximately 11% of sales.

TOTAL DEBT TO CAPITALIZATION By retiring $114 million in debt in2005, we reduced our total debt asa percentage of total capitalizationto 26.2%. This low level of debt asa percentage of total capitalizationprovides the Company financialflexibility to grow through capitalexpansion or acquisitions.

15

STRENGTH INNUMBERS

IN ADDITION TO GROWING SALES VOLUMEand net income in 2005, we are also pleased with our overallperformance as measured by certain key financial indicators. Thesuccess we achieved in these areas reflects our continued focus ondemonstrating good stewardship of the cash we generate andmaximizing shareholder return.

0.00

0.20

0.40

0.60

0.80

1.00

20052004200320022001

.60 .62.68

.58

.82

DIVIDENDS PAID(per common share $)

0

2000

4000

6000

8000

10000

20052004200320022001

6,700

7,977

6,6006,700

8,076

STOCK PURCHASE(shares in thousands)

0

5

10

15

20

25

30

20052004200320022001

20.9

24.727.0

17.9

28.1

RETURN ON EQUITY(percent)

DIVIDENDS PAID For the 27thyear in a row, we increased cashdividends on common stock paid toour shareholders. In 2005, weincreased our cash dividend by four-teen cents to $.82 per share a20.6% increase in the amount ofnet operating cash returned to ourshareholders through dividends.

STOCK PURCHASE We believe thatSherwin-Williams stock is a goodinvestment, and in 2005, again sup-ported that belief by purchasing 8.1million shares on the open market.This stock purchase strategy benefitsshareholders by returning their invest-ment at market value and maximizesthe ownership value of the remainingoutstanding shares.

RETURN ON EQUITY Return onequity is based on income beforecumulative effect of change inaccounting principle divided by share-holders equity at the start of the year.As a measure of our profitabilityachieved for each dollar invested byshareholders, increasing return onequity is indicative of the Companysability to maximize shareholder return.

16

Alaska

40

29 1 10

10

7

7

7

19 139

96 371

89

183

45 3

4

8

4

4

1

52

71 1

24

5 3

17 1

156 6

90 4

1017

22

46 4

9235357

251

24 7 6

7

1

2 1

584

234

109

12

46 2 41 6

33940 314 1

16

18

31 16 1

4 1

4

1

2 65

Hawaii

81

Jamaica

1

2

6

30

36

14

15

5

13

578 3

1

4134

72

3

3

235

134

16

259

75 6

52

D.C.

Puerto RicoVirgin Islands2

30

115

PAINT STORES

AUTOMOTIVE BRANCHES

EASTERN DIVISION

SOUTHEASTERN DIVISION

MID WESTERN DIVISION

SOUTHWESTERN DIVISION

INTERNATIONAL COATINGS

Today, Sherwin-Williams has 3,357 paint stores andautomotive branches worldwide. More than 90% of theU.S. population lives within a 50-mile radius of a Sherwin-Williams paint store.

STORES MAP/SUBSIDIARIES

SUBSIDIARIESFOREIGNCoatings S.R.L.

Compaia Sherwin-Williams, S.A. de C.V.

Eurofinish S.r.l.

Productos Quimicos y Pinturas, S.A. de C.V.

Quetzal Pinturas, S.A. de C.V.

Ronseal (Ireland) Limited

Ronseal Limited

Sherwin-Williams (Caribbean) N.V.

Sherwin-Williams (West Indies) Limited

Sherwin-Williams Argentina I.y C.S.A.

Sherwin-Williams Automotive Europe S.P.A.

Sherwin-Williams Automotive France S.r.l.

Sherwin-Williams Automotive Mexico S. de R.L. de D.V.

Sherwin-Williams Canada Inc.

Sherwin-Williams Cayman Islands Limited

Sherwin-Williams Chile S.A.

Sherwin-Williams do Brasil Industria e Comercio Ltda.

Sherwin-Williams Japan Co., Ltd.

Sherwin-Williams Paints LLC

Sherwin-Williams Paints (Dongguan) Company Limited

Sherwin-Williams Pinturas de Venezuela S.R.L.

Sherwin-Williams (Shanghai) Paints Company Limited

Sherwin-Williams Uruguay S.A.

The Sherwin-Williams Company Resources Limited

DOMESTICContract Transportation Systems Co.

Omega Specialty Products & Services LLC

Sherwin-Williams Automotive Finishes Corp.

Sherwin-Williams Realty Holdings, Inc.

SWIMC, Inc.

The Sherwin-Williams Acceptance Corporation

Thompson Minwax International Corp.

17

FINANCIALPERFORMANCE

FINANCIAL TABLE OF CONTENTS

Cautionary Statement Regarding Forward-Looking Information18

Financial Summary19

Managements Discussion and Analysis of Financial Condition and Results of Operations20

Reports of Management37

Reports of the Independent Registered Public Accounting Firm39

Consolidated Financial Statements and Notes42

Shareholder Information73

Corporate Officers and Operating Presidents74

COMMITTED TO FINANCIAL EXCELLENCE

18

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained in ManagementsDiscussion and Analysis of Financial Condition andResults of Operations, Business and elsewhere inthis report constitute forward-looking statementswithin the meaning of Section 27A of the Securities Actof 1933 and Section 21E of the Securities Exchange Actof 1934. These forward-looking statements are basedupon managements current expectations, estimates,assumptions and beliefs concerning future events andconditions and may discuss, among other things, antici-pated future performance (including sales and earnings),expected growth, future business plans and the costsand potential liability for environmental-related mattersand the lead pigment and lead-based paint litigation.Any statement that is not historical in nature is a for-ward-looking statement and may be identified by the useof words and phrases such as expects, anticipates,believes, will, will likely result, will continue,plans to and similar expressions. Readers are cau-tioned not to place undue reliance on any forward-looking statements. Forward-looking statements arenecessarily subject to risks, uncertainties and other fac-tors, many of which are outside the control of the Com-pany, that could cause actual results to differ materiallyfrom such statements and from the Companys historicalresults and experience.

These risks, uncertainties and other factors includesuch things as: (a) general business conditions, strengthsof retail and manufacturing economies and the growthin the coatings industry; (b) competitive factors, includ-ing pricing pressures and product innovation and quali-ty; (c) changes in raw material and energy supplies andpricing; (d) changes in the Companys relationships withcustomers and suppliers; (e) the ability of the Companyto attain cost savings from productivity initiatives; (f)the ability of the Company to successfully integrate pastand future acquisitions into its existing operations, aswell as the performance of the businesses acquired,

including the acquisitions of KST Coatings Manufactur-ing, Inc., KST Coatings LLC, Uniflex LLC, Duron, Inc.and Paint Sundry Brands Corporation; (g) changes ingeneral domestic economic conditions such as inflationrates, interest rates, tax rates, unemployment rates,higher labor and healthcare costs, recessions, and chang-ing government policies, laws and regulations; (h) risksand uncertainties associated with the Companys expan-sion into and its operations in China, South Americaand other foreign markets, including general economicconditions, inflation rates, recessions, foreign currencyexchange rates, foreign investment and repatriationrestrictions, legal and regulatory constraints, civil unrestand other external economic and political factors; (i) theachievement of growth in developing markets, such asChina, Mexico and South America; (j) increasingly strin-gent domestic and foreign governmental regulationsincluding those affecting the environment; (k) inherentuncertainties involved in assessing the Companys poten-tial liability for environmental-related activities; (l) otherchanges in governmental policies, laws and regulations,including changes in accounting policies and standardsand taxation requirements (such as new tax laws andnew or revised tax law interpretations); (m) the nature,cost, quantity and outcome of pending and future litiga-tion and other claims, including the lead pigment andlead-based paint litigation and the affect of any legisla-tion and administrative regulations relating thereto; and(n) unusual weather conditions.

Readers are cautioned that it is not possible to pre-dict or identify all of the risks, uncertainties and otherfactors that may affect future results and that the abovelist should not be considered to be a complete list. Anyforward-looking statement speaks only as of the date onwhich such statement is made, and the Company under-takes no obligation to update or revise any forward-looking statement, whether as a result of newinformation, future events or otherwise.

19

FINANCIAL SUMMARY(mil l ions of dol lars except as noted and per common share data)

2005 2004 2003 2002 2001

OperationsNet sales .................................................................... $ 7,191 $ 6,114 $ 5,408 $ 5,185 $ 5,066Cost of goods sold .................................................... 4,110 3,412 2,952 2,846 2,846Selling, general and administrative expenses .............. 2,326 2,069 1,882 1,785 1,730Goodwill impairment ................................................ 22Interest expense.......................................................... 50 40 39 40 55Income before income taxes, minority interest and

cumulative effect of change in accounting principle 656 580 523 497 424Income before cumulative effect of change in

accounting principle .............................................. 463 393 332 311 263Net income ................................................................ 463 393 332 128 263Financial PositionInventories ................................................................ $ 809 $ 773 $ 638 $ 625 $ 633Accounts receivable - net .......................................... 809 724 544 494 523Working capital - net ................................................ 340 262 561 422 366Property, plant and equipment - net .......................... 745 720 650 665 673Total assets ................................................................ 4,369 4,274 3,683 3,432 3,628Long-term debt .......................................................... 487 488 503 507 504Total debt .................................................................. 621 738 514 522 615Shareholders equity .................................................. 1,731 1,647 1,459 1,342 1,488Per Common Share InformationAverage shares outstanding (thousands) .................... 136,817 140,802 144,847 150,438 155,557Book value ................................................................ $ 12.81 $ 11.70 $ 10.17 $ 9.01 $ 9.66Income before cumulative effect of change in

accounting principle - diluted ................................ 3.28 2.72 2.26 2.04 1.68Income before cumulative effect of change in

accounting principle - basic .................................... 3.39 2.79 2.29 2.07 1.69Net income - diluted .................................................. 3.28 2.72 2.26 .84 1.68Net income - basic .................................................... 3.39 2.79 2.29 .85 1.69Cash dividends .......................................................... .82 .68 .62 .60 .58Financial RatiosReturn on sales (1) .................................................... 6.4% 6.4% 6.1% 6.0% 5.2%Asset turnover............................................................ 1.6 1.4 1.5 1.5 1.4Return on assets (1) .................................................. 10.6% 9.2% 9.0 % 9.1% 7.3%Return on equity (2) .................................................. 28.1% 27.0% 24.7% 20.9% 17.9%Dividend payout ratio (1) .......................................... 24.5% 24.6% 27.3% 29.3% 34.6%Total debt to capitalization ........................................ 26.4% 30.9% 26.0% 28.0% 29.3%Current ratio ............................................................ 1.2 1.2 1.5 1.4 1.3Interest coverage (3) .................................................. 14.2 15.5 14.5 13.3 8.8Net working capital to sales ...................................... 4.7% 4.3% 10.4% 8.1% 7.2%Effective income tax rate (4) ...................................... 29.2% 32.0% 36.5% 37.5% 38.0%GeneralCapital expenditures .................................................. $ 143 $ 107 $ 117 $ 127 $ 83Total technical expenditures (5) ................................ 95 91 88 89 86Advertising expenditures............................................ 257 240 239 222 236Repairs and maintenance .......................................... 62 55 52 52 48Depreciation .............................................................. 120 109 105 104 109Amortization of intangible assets .............................. 23 17 12 12 39Shareholders of record (total count) .......................... 10,625 11,056 11,472 11,936 12,687Number of employees (total count)............................ 29,434 28,690 25,777 25,752 25,789Sales per employee (thousands of dollars) .................. $ 244 $ 213 $ 210 $ 201 $ 196Sales per dollar of assets ............................................ 1.65 1.43 1.47 1.51 1.40

(1) Based on income before cumulative effect of change in accounting principle.(2) Based on income before cumulative effect of change in accounting principle and shareholders' equity at beginning of year.(3) Ratio of income before income taxes, minority interest, cumulative effect of change in accounting principle and interest expense to interest expense.(4) Based on income before income taxes, minority interest and cumulative effect of change in accounting principle.(5) See Note 1, page 48 of this report, for a description of technical expenditures.

20

MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

SUMMARYThe Sherwin-Williams Company, founded in 1866,

and its consolidated subsidiaries (collectively, the Com-pany) are engaged in the manufacture, distribution andsale of paint, coatings and related products to profes-sional, industrial, commercial and retail customers pri-marily in North and South America. The Company isstructured into five reportable segments Paint Stores,Consumer, Automotive Finishes, International Coatings(collectively, the Operating Segments) and Adminis-trative in the same way that management internallyorganizes its business for assessing performance andmaking decisions regarding allocation of resources. Seepages 6 through 13 of this report and Note 17, on pages69 through 71 of this report, for more information con-cerning the Companys reportable segments.

The Companys financial condition, liquidity andcash flow remained strong in 2005 and continued toimprove in many areas. The Companys current ratioimproved to 1.22 at December 31, 2005 from 1.17 atDecember 31, 2004. Total debt decreased to $621.2million at December 31, 2005 and decreased as a per-centage of total capitalization to 26.4 percent from 30.9percent at the end of 2004. Net operating cash increasedto $716.7 million in 2005 versus $544.7 million in2004. Net operating cash in 2005 provided the fundsnecessary to support the Companys continued growth.In 2005, the Company extinguished $114.4 million oftotal debt, invested $23.3 million in acquisitions,increased annual capital expenditures to $143.1 million,purchased treasury stock for $356.5 million and paid$113.6 million in cash dividends.

Results of operations for the Company were alsostrong and improved in many areas in 2005. Consoli-dated net sales increased 17.6 percent in 2005 to $7.19billion from $6.11 billion in 2004. Acquisitions, prima-rily Duron, Inc. (Duron) and Paint Sundry Brands Cor-poration (PSB) acquired in September 2004, increasedconsolidated net sales 6.0 percent in 2005. During 2005,sales volume increases in the Paint Stores Segment pri-marily came from continuing strong domestic architec-tural paint sales to contractor and do-it-yourself (DIY)customers. Sales from acquisitions contributed to salesincreases in the Paint Stores and Consumer Segments.Strong international automotive refinish sales and newproduct introductions improved sales in the AutomotiveFinishes Segment. Favorable foreign currency exchangerates and pricing improvements in most South Americancountries contributed to improved International Coat-

ings Segment sales. Gross profit as a percent ofconsolidated net sales declined in 2005 from 2004 levelsprimarily due to raw material cost increases that werepartially offset by price increases and better factoryutilization resulting from higher volume. Selling, generaland administrative expenses decreased as a percent ofconsolidated net sales in 2005 as compared to 2004 dueprimarily to good expense control. Diluted net incomeper common share increased 20.6 percent to $3.28 pershare for 2005 from $2.72 per share a year ago.Acquisitions increased diluted net income per commonshare approximately $.14 per share in 2005.

CRITICAL ACCOUNTING POLICIES AND ESTIMATESThe preparation and fair presentation of the consoli-

dated financial statements, accompanying notes andrelated financial information included in this report arethe responsibility of management. The consolidatedfinancial statements, notes and related information havebeen prepared in accordance with accounting principlesgenerally accepted in the United States and includeamounts that were based upon managements bestestimates and judgments that were believed to bereasonable under the circumstances. Management used assumptions based on historical results and otherassumptions to form the basis for determining appropri-ate carrying values of assets and liabilities that were notreadily available from other sources. Actual resultscould differ from those estimates. Also, materiallydifferent amounts may result under materially differentconditions or from using materially different assump-tions. However, management believes that any material-ly different amounts resulting from materially differentconditions or material changes in facts or circumstancesare unlikely.

All of the significant accounting policies that werefollowed in the preparation of the consolidated financialstatements are disclosed in Note 1, on pages 46 through 51 of this report. The following procedures andassumptions utilized by management directly impactedmany of the reported amounts in the consolidatedfinancial statements.

Revenue RecognitionThe Companys revenue was primarily generated

from the sale of products. All revenues were recognizedwhen products were shipped and title had passed tounaffiliated customers. Collectibility of amounts record-ed as revenue is reasonably assured. Discounts were

21


recorded as a reduction of net sales in the same periodas the sale. Standard sales terms are final and returns orexchanges are not permitted unless expressly stated;estimated provisions for returns or exchanges, recordedas a reduction of net sales, were established in caseswhere the right of return existed. The Company offereda variety of programs, primarily to its retail customers,designed to promote sales of its products. Such pro-grams required periodic payments and allowances basedon estimated results of specific programs and wererecorded as a reduction to net sales. The Companyaccrued the estimated total payments and allowancesassociated with each transaction at the time of sale.Additionally, the Company offered programs directly toconsumers to promote the sale of its products. Promo-tions that reduced the ultimate consumer sale priceswere recorded as a reduction of net sales at the time thepromotional offer was made, generally using estimatedredemption and participation levels. The Company con-tinually assesses the adequacy of accruals for customerand consumer promotional program costs earned butnot yet paid. To the extent total program paymentsdiffer from estimates, adjustments may be necessary.Historically, these total program payments and adjust-ments have not been material.

Accounts ReceivableThe Company recorded accounts receivable net of

provisions for sales returns and allowances, and net ofprovisions for doubtful accounts that were included inSelling, general and administrative expenses. Provisionsfor doubtful accounts were accrued based on manage-ments assessment of accounts receivable. Judgment wasrequired in order to make this assessment including ananalysis of historical bad debts, a review of the aging ofaccounts receivable and a review of the current credit-worthiness of customers. Management recordedallowances for receivables which were believed to beuncollectible, including amounts for the resolution ofpotential credit and other collection issues such as dis-puted invoices, customer satisfaction claims and pricingdiscrepancies. However, depending on how such poten-tial issues are resolved, or if the financial condition ofany of our customers were to deteriorate and their abili-ty to make required payments became impaired, increas-es in these allowances may be required. As of December31, 2005, no individual customer constituted more than5 percent of accounts receivable.

InventoriesInventories were stated at the lower of cost or market

with cost determined principally on the last-in, first-outmethod. Inventory quantities were adjusted during thefourth quarter of 2005 as a result of annual physicalinventory counts taken at all locations. Managementrecorded the best estimate of net realizable value forobsolete and discontinued inventories based on histori-cal experience and current trends through reductions toinventory cost by recording a provision included in Costof goods sold. Where management determined thatfuture demand was lower than current inventory levels,a reduction in inventory cost to estimated net realizablevalue was made.

Goodwill and Intangible AssetsThe business and technical judgment of management

was used in determining which intangible assets haveindefinite lives and in determining the useful lives offinite-lived intangible assets in accordance with State-ment of Financial Accounting Standards (FAS) No. 142,Goodwill and Other Intangible Assets. As required byFAS No. 142, management performed annual impair-ment testing of goodwill and indefinite-lived intangibleassets during the fourth quarters of 2005, 2004 and2003. Management estimated the fair values of goodwilland indefinite-lived intangible assets using a discountedcash flow valuation model, incorporating discount ratescommensurate with the risks involved for each reportingunit. Growth models were developed using both indus-try and Company historical results and forecasts. Suchmodels required management to make certain assump-tions based upon information available at the time thevaluation was performed, which could differ from actu-al results. See Notes 2 and 3, pages 51 through 54 ofthis report, for a discussion of the reductions in carryingvalue of goodwill and indefinite-lived intangible assetsrecorded in accordance with FAS No. 142.

Property, Plant and Equipment and Impairment of Long Lived Assets

Property, plant and equipment was stated on the basisof cost and depreciated principally on a straight-linebasis using industry standards and historical experienceto estimate useful lives. In accordance with FAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, if events or changes in circumstances indi-cated that the carrying value of long-lived assets may notbe recoverable or the useful life has changed, impairment

22


tests were performed. Undiscounted future cash flowswere used to calculate the recoverable value of long-livedassets to determine if such assets were impaired. Whereimpairment was identified, management determined fairvalues for assets using a discounted cash flow valuationmodel, incorporating discount rates commensurate withthe risks involved for each group of assets. Growth mod-els were developed using both industry and Companyhistorical results and forecasts. Such models requiredmanagement to make certain assumptions based uponinformation available at the time the valuation was per-formed, which could differ from actual results. See Note3, pages 52 and 54 of this report, for a discussion of thereductions in carrying value of long-lived assets in accor-dance with FAS No. 144.

Pension and Other Postretirement BenefitsTo determine the Companys ultimate obligation

under its defined benefit pension plans and other postre-tirement benefit plans, management must estimate thefuture cost of benefits and attribute that cost to the timeperiod during which each covered employee works. Torecord the related net assets and obligations of such ben-efit plans, management relied upon third-party actuariesto determine such amounts using key assumptions suchas discount rates, inflation, investment returns, mortali-ty, employee turnover, rate of compensation increasesand medical and prescription drug costs. Management,along with third-party actuaries, reviews all of theseassumptions on an ongoing basis to ensure that the mostreasonable information available is being considered. Anincrease or decrease in the assumptions or economicevents outside managements control could have a directimpact on reported results of operations. In determiningthe expected long-term rate of return on defined benefitpension plan assets, management considered the histori-cal rates of return, the nature of investments and anexpectation for future investment strategies. For 2006expense recognition, the Company will use a discountrate of 5.5 percent, an expected rate of return on definedbenefit pension plan assets of 7.5 percent and a rate ofcompensation increase of 4.0 percent. Use of theseassumptions will result in a net pension credit in 2006that is expected to be lower than 2005. See Note 6,pages 56 through 59 of this report, for information con-cerning the Companys defined benefit pension plansand other postretirement benefit plans.

Environmental MattersThe Company is involved with environmental inves-

tigation and remediation activities at some of its currentand former sites and at a number of third-party sites.The Company accrues for environmental-related activi-ties for which commitments or clean-up plans have beendeveloped and for which costs can be reasonably esti-mated based on industry standards and historical expe-rience. All accrued amounts were recorded on anundiscounted basis. Environmental-related expensesincluded direct costs of investigation and remediationand indirect costs such as compensation and benefits foremployees directly involved in the investigation andremediation activities and fees paid to outside engineer-ing, actuarial, consulting and law firms. See Note 8, onpages 61 and 62 of this report, for information concern-ing the accrual for extended environmental-relatedactivities. Due to uncertainties surrounding environmen-tal investigations and remediation activities, the Compa-nys ultimate liability may result in costs that aresignificantly higher than currently accrued. See pages 26through 28 of this report for a discussion concerningunaccrued future loss contingencies.

Exit or Disposal ActivitiesManagement is continually re-evaluating the Compa-

nys operating facilities against its long-term strategicgoals. Liabilities associated with exit or disposal activi-ties are recognized as incurred in accordance with FASNo. 146, Accounting for Costs from Exit or DisposalActivities. Provisions for qualified exit costs includeamounts estimated by management and primarily repre-sent post-closure rent expenses, incremental post-closurecosts and costs of employee terminations. Adjustmentsmay be made to accrued qualified exit costs if informa-tion becomes available upon which more accurateamounts can be reasonably estimated. Long-lived assetsare tested for impairment in accordance with FAS No.144 and, if impairment exists, the remaining useful lifeor the carrying value of the long-lived assets is reducedto a useful life or fair value estimated by management.Additional impairment may be recorded for subsequentrevisions in estimated useful life or fair value. See Note5, pages 54 and 55 of this report, for information con-cerning accrued qualified exit costs and impairments oflong-lived assets.

23


Purchase AccountingIn accordance with FAS No. 141, Business Combi-

nations, the Company used the purchase method ofaccounting to allocate costs of acquired businesses tothe assets acquired and liabilities assumed based on theirestimated fair values at the dates of acquisition. Theexcess costs of acquired businesses over the fair valuesof the assets acquired and liabilities assumed were rec-ognized as goodwill. The valuations of the acquiredassets and liabilities will impact the determination offuture operating results. In addition to using manage-ment estimates and negotiated amounts, the Companyused a variety of information sources to determine theestimated values of acquired assets and liabilities includ-ing: third-party appraisals for the estimated value andlives of identifiable intangible assets and property, plantand equipment; third-party actuaries for the estimatedobligations of defined benefit pension plans; and legalcounsel or other experts to assess the obligations associ-ated with legal, environmental and other contingentliabilities.

Income TaxesThe Company estimated income taxes in each juris-

diction that it operated. This involved estimating tax-able earnings, specific taxable and deductible items, thelikelihood of generating sufficient future taxable incometo utilize deferred tax assets and possible exposuresrelated to future tax audits. To the extent these estimateschange, adjustments to deferred and accrued incometaxes will be made in the period in which the changesoccur.

Other Investments and LiabilitiesThe Company was invested in the United States

affordable housing and historic renovation real estatemarkets. These investments have been identified as vari-able interest entities. However, the Company is not theprimary beneficiary and did not consolidate the opera-tions of the investments. The carrying amounts of thesenon-traded investments, which approximate marketvalue, were determined based on cost less relatedincome tax credits determined by the effective yieldmethod. See Note 1, on page 46 of this report, for moreinformation on non-traded investments. The Companysrisk of loss from the partnership interests is limited tothe amount of its investment. The Company has no

ongoing capital commitments, loan requirements orguarantees with the general partners that would requireany future cash contributions other than the contractu-ally committed capital contributions that are disclosedin the contractual obligations table on page 28 of this report.

The Company is self-insured for certain liabilities,primarily workers compensation claims, employee med-ical and disability benefits, and automobile, propertyand general liability claims. Estimated amounts for self-insured liabilities are accrued for claims filed but unset-tled and estimated claims incurred but not reportedbased upon managements estimated aggregate liabilityfor claims incurred using historical experience and actu-arial assumptions followed in the insurance industry.Certain estimated general liability claims filed but unset-tled and estimated claims incurred but not reportedwere accrued based on third-party actuarial calculationsof potential liability using industry experience and actu-arial assumptions developed for similar types of claims.

Accounting for Stock-Based CompensationAt December 31, 2005, the Company had two stock-

based compensation plans accounted for under therecognition and measurement principles of AccountingPrinciples Board Opinion No. 25, Accounting for StockIssued to Employees, and related interpretations. Effec-tive January 1, 2006, FAS No. 123R, Share-Based Pay-ments must be adopted by the Company. The Companyexpects to utilize the modified prospective method asdescribed in FAS No. 123R. In the modified prospec-tive method, compensation cost is recognized for allshare-based payments granted after the effective date andfor all unvested awards granted prior to the effectivedate. The adoption of FAS No. 123R will have an impacton the Companys results of operations and financialcondition although it will have no impact on the Compa-nys cash flow. The impact on the results of operations ofadoption of FAS No. 123R cannot be predicted with cer-tainty at this time because it will depend on levels ofshare-based payments granted in the future. However,had the Company adopted FAS No. 123R in prior peri-ods, the impact would have approximated the effect ofFAS No. 123 reflected in the disclosure of pro-forma netincome and net income per common share in the Stock-based compensation section of Note 1 on page 49 of this report.

24


FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

OverviewThe Companys financial condition, liquidity and

cash flow remained strong in 2005 and continued toimprove in many areas. The Companys current ratioimproved to 1.22 at December 31, 2005 from 1.17 atDecember 31, 2004. The growth in current assets out-paced current liabilities due primarily to a reduction inshort-term borrowings. Total debt decreased to $621.2million at December 31, 2005 and decreased as a per-centage of total capitalization to 26.4 percent at the end of 2005 from 30.9 percent at the end of 2004. Theimprovement in the current ratio and reduction in totaldebt in 2005 was primarily related to the cash flowassociated with and the assimilation of Duron and PSBacquired in September 2004. Net operating cashincreased to $716.7 million in 2005 versus $544.7million in 2004. The increase in net operating cashrelated primarily to higher net income and a reductionof working capital relating primarily to the improve-ment in working capital ratios of the acquired business-es. Net operating cash in 2005 provided the fundsnecessary to support the Companys continued growth.In 2005, the Company extinguished $114.4 million oftotal debt, invested $23.3 million in acquisitions,increased annual capital expenditures to $143.1 million,purchased treasury stock for $356.5 million and paid$113.6 million in cash dividends. The Consolidated Bal-ance Sheets and Statements of Consolidated Cash Flows,on pages 42 and 44 of this report, provide more infor-mation concerning the Companys financial condition,liquidity and cash flow.

Net Working CapitalTotal current assets less total current liabilities (net

working capital) increased $78.2 million to $340.0million at December 31, 2005 from $261.8 million atDecember 31, 2004. The majority of the increase in networking capital related to a reduction in short-termborrowings of $115.1 million that was partially offsetby increases in accounts receivable, inventories andother current assets and liabilities. Account receivable asa percent of annual net sales for 2005 improved to 11.3percent from 11.8 percent in 2004. Inventories alsoimproved as a percent of annual net sales, declining to11.2 percent in 2005 from 12.6 percent in 2004. Daysreceivable outstanding and days inventory outstandingboth improved in 2005 compared to 2004.

On February 1, 2006, the Company sold or con-tributed certain of its accounts receivable to SWCReceivables Funding LLC (SWC), a consolidatedwholly-owned subsidiary. SWC entered into an accountsreceivable securitization borrowing facility with a third-party program agent. Under this program, SWC mayborrow up to $500.0 million and will secure such bor-rowings by granting a security interest in the accountsreceivable, related security and the cash collections andproceeds of the receivables. SWC currently has noborrowings outstanding under this program.

Goodwill and Intangible AssetsGoodwill, which represents the excess of cost over

the fair value of net assets acquired in purchase businesscombinations, decreased by a net $13.1 million during2005. The majority of the decrease was caused by a$22.0 million impairment charge recognized in the Con-sumer Segment due to lower-than-anticipated projectedsales of certain acquired domestic brands and relating tobusiness with a major retailer starting in 2006. Theimpairment was recorded in accordance with FAS No.142 and reported as a separate line item in the Consoli-dated Statement of Income. Further reducing goodwillin 2005 by $4.9 million was the sale of the Companysmajority interest in a Chinese joint venture, Sherwin-Williams Kinlita Co., Ltd (Kinlita). Partially offsettingthese reductions was the addition of $14.5 million ingoodwill resulting from the acquisition of KST CoatingsManufacturing, Inc., KST Coatings LLC and UniflexLLC (collectively KST).

Intangible assets decreased by a net $17.0 millionduring 2005 primarily attributable to amortization of$23.3 million and an impairment of $1.0 million asrequired by FAS No. 142 and FAS No. 144. Thisdecrease was partially offset by $2.8 million of intangi-ble assets recognized in the acquisition of KST. Intangi-ble assets with finite lives include costs related todesigning, developing, obtaining and implementinginternal use software that are capitalized and amortizedin accordance with Statement of Position (SOP) 98-1,Accounting for the Cost of Computer Software Devel-oped or Obtained for Internal Use. See Note 3, pages52 through 54 of this report, for a description of theasset impairments recorded in accordance with FAS No.142 and FAS No. 144 during 2005 and a summary ofthe carrying values of goodwill and intangible assets.

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Deferred Pension AssetsDeferred pension assets recognized in the Consolidat-

ed Balance Sheets of $409.3 million at December 31,2005, which represent the recognized excess of the fairmarket value of assets over the actuarially-determinedprojected benefit obligations of certain defined benefitpension plans, declined $20.9 million. This decline wasdue primarily to the recognition of a minimum pensionliability in one of the Companys domestic defined bene-fit pension plans as the actuarially-determined accumu-lated pension obligations exceeded the fair value of thatplans assets at December 31, 2005. The amount of theexcess pension obligations over the fair value of planassets was $4.8 million at December 31, 2005. In accor-dance with FAS No. 87, Employers Accounting forPensions, deferred pension assets relating to the under-funded plan representing previously unrecognized actu-arial losses were removed, a $4.8 million benefit liabilitywas recorded and a minimum pension liability of $18.8million (net of taxes of $12.1 million) was included inCumulative other comprehensive loss. Actuarial lossesrelating to the Companys domestic and foreign definedbenefit pension plans of $122.3 million at December 31,2005 will be amortized to expense over future periods.These unrecognized actuarial losses related primarily tolower actual returns on defined benefit pension planassets compared to the expected returns and the effectsof changes in actuarial assumptions used in determiningpension benefit obligations. The expected long-term rateof return on assets remained at 7.5 percent in 2005 and2004 for domestic plans and was slightly lower on mostforeign plans in 2005. The assumed discount rate usedto compute the actuarial present value of projected ben-efit obligations was decreased from 5.75 percent to 5.50percent at December 31, 2005 for domestic plans due toreduced rates of high-quality, long-term investments andwas slightly lower for foreign plans. The combined netpension credit is expected to decrease in 2006 due to theimpact of decreasing the assumed discount rates andamortization of defined benefit pension plan assetreturns that did not meet the expected returns on planassets in 2005 and prior years. See Note 6, on pages 56through 59 of this report, for a detailed description ofthe defined benefit pension plans and for more financialinformation concerning the domestic and foreigndefined benefit pension plans obligations, assets and net pension credit.

Property, Plant and EquipmentNet property, plant and equipment increased $24.8

million to $745.1 million at December 31, 2005. Theincrease was due primarily to capital expenditures of$143.1 million and $3.5 million related to an acquisi-tion that were partially offset by depreciation expense of$120.2 million. Capital expenditures during 2005 in thePaint Stores Segment were primarily attributable to theopening of new paint stores, the purchase of new auto-mated color matching equipment, the relocation of cer-tain stores and the normal replacement and upgradingof store equipment. In the Consumer, AutomotiveFinishes and International Coatings Segments, capitalexpenditures during 2005 were primarily related toefficiency improvements in production and distributionfacilities, construction of a new emulsion plant in thewestern United States and the purchase of informationsystems hardware. The Administrative Segment incurredcapital expenditures primarily for upgrading the Com-panys headquarters building and information systemshardware. In 2006, the Company expects to spendapproximately 10 percent more for capital expendituresthan in 2005. The predominant share of the capitalexpenditures will be due to the completion of the newemulsion plant, various capacity and productivityimprovement projects at existing manufacturing and dis-tribution facilities, new store openings, additional point-of-sale devices in paint stores and automotive branchesand new or upgraded information systems hardware.The Company does not anticipate the need for anyspecific long-term external financing to support thesecapital expenditures.

DebtAt December 31, 2005, borrowings outstanding

under the domestic commercial paper program totaled$74.7 million. The weighted-average interest rate relatedto these borrowings was 4.2 percent at December 31,2005. Borrowings outstanding under the domesticcommercial paper program were $231.2 million with aweighed-average interest rate of 2.3 percent at Decem-ber 31, 2004. There were no borrowings outstandingunder the Companys commercial paper program atDecember 31, 2003. Borrowings outstanding undervarious foreign programs at December 31, 2005 were$49.0 million with a weighted-average interest rate of5.4 percent and at December 31, 2004 were $7.6 mil-lion with a weighted-average interest rate of 5.0 percent.Long-term debt, including the current portion,

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decreased $2.0 million during 2005 due primarily to thepayment of various promissory notes and other obliga-tions during the year. During 2005, Standard & PoorsRatings Services upgraded the Companys credit ratingfrom A to A+.

Effective July 19, 2005, the Company amended itsfive-year senior unsecured revolving credit agreementincreasing the amount to $910.0 million. The Compa-nys commercial paper program was increased to $910.0million effective September 26, 2005. Effective Decem-ber 8, 2005, a $500.0 million letter of credit subfacilityamendment was added to the revolving credit agree-ment. The Company uses the revolving credit agreementto satisfy its commercial paper programs dollar for dol-lar liquidity requirement. Due to the seasonality of theCompanys business and the need for available cashprior to the primary selling season and collectingaccounts receivable, the Company expects to continueto borrow under the commercial paper program during2006. See Note 7, on pages 60 and 61 of this report, fora detailed description of the Companys debt outstand-ing and other available financing programs.

Other Postretirement BenefitsThe Companys long-term liability for postretirement

benefits other than pensions increased $4.5 million to$226.5 million at December 31, 2005 from $222.0million due to the excess of the actuarially-determinedpostretirement benefit obligation over benefit payments.The assumed discount rate used to calculate the actuari-al present value of the obligation for postretirement ben-efits other than pensions was decreased from 5.75percent to 5.50 percent at December 31, 2005 due tothe reduced rates of high-quality, long-term investments.The assumed health care cost trend rates for 2006through 2015 reflect health care cost increase assump-tions established in 2003. Separate assumptions are uti-lized for prescription drug costs. The assumed rates usedfor 2005 were 9.0 percent for heath care and 12.0 per-cent for prescription drugs, both decreasing gradually to4.0 percent in 2016. See Note 6, on pages 58 and 59 ofthis report, for further information on the Companysobligation for postretirement benefits other thanpensions.

Other Long-Term LiabilitiesOther long-term liabilities decreased $22.2 million

during 2005 due primarily to a reduction in generalproduct liabilities and settlements of certain tax liabili-

ties during 2005 that were partially offset by an increaseof $8.8 million in long-term environmental-related lia-bilities discussed below. See Note 8, on pages 61 and 62of this report, for further information on the Companyslong-term liabilities.

Environmental-Related LiabilitiesThe operations of the Company, like those of other

companies in the same industry, are subject to variousfederal, state and local environmental laws and regula-tions. These laws and regulations not only govern cur-rent operations and products, but also impose potentialliability on the Company for past operations. Manage-ment expects environmental laws and regulations toimpose increasingly stringent requirements upon theCompany and the industry in the future. Managementbelieves that the Company conducts its operations incompliance with applicable environmental laws andregulations and has implemented various programsdesigned to protect the environment and promotecontinued compliance.

Depreciation of capital expenditures and otherexpenses related to ongoing environmental compliancemeasures were included in the normal operating expens-es of conducting business. The Companys capitalexpenditures, depreciation and other expenses related toongoing environmental compliance measures were notmaterial to the Companys financial condition, liquidity,cash flow or results of operations during 2005. Manage-ment does not expect that such capital expenditures,depreciation and other expenses will be material to theCompanys financial condition, liquidity, cash flow orresults of operations in 2006.

The Company is involved with environmental inves-tigation and remediation activities at some of its currentand former sites (including sites which were previouslyowned and/or operated by businesses acquired by theCompany). In addition, the Company, together withother parties, has been designated a potentially responsi-ble party under federal and state environmental protec-tion laws for the investigation and remediation ofenvironmental contamination and hazardous waste at anumber of third-party sites, primarily Superfund sites.The Company may be similarly designated with respectto additional third-party sites in the future.

The Company accrues for estimated costs of investi-gation and remediation activities at its current, formerand third party sites for which commitments or clean-upplans have been developed and when such costs can be

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reasonably estimated based on industry standards andprofessional judgment. These estimated costs are basedon currently available facts regarding each site. TheCompany accrues a specific estimated amount whensuch an amount and a time frame in which the costs willbe incurred can be reasonably determined. If the bestestimate of costs can only be identified as a range andno specific amount within that range can be determinedmore likely than any other amount within the range, theminimum of the range is accrued by the Company inaccordance with applicable accounting rules and inter-pretations. The Company continuously assesses itspotential liability for investigation and remediationactivities and adjusts its environmental-related accrualsas information becomes available upon which moreaccurate costs can be reasonably estimated. At Decem-ber 31, 2005, 2004 and 2003, the Company had accru-als for environmental-related activities of $158.9million, $141.5 million and $133.4 million, respectively.

Due to the uncertainties surrounding environmentalinvestigation and remediation activities, the Companysultimate liability may result in costs that are significantlyhigher than currently accrued. If the Companys futureloss contingency is ultimately determined to be at themaximum of the range of possible outcomes for everysite for which costs can be reasonably estimated, theCompanys aggregate accruals for environmental-relatedactivities would be $139.5 million higher than theaccruals at December 31, 2005.

Four of the Companys current and former manufac-turing sites, described below, accounted for the majorityof the accruals for environmental-related activities andthe unaccrued maximum of the estimated range of pos-sible outcomes at December 31, 2005. Included in theaccruals of $158.8 million at December 31, 2005 was$103.6 million related directly to these four sites. Of the aggregate unaccrued exposure of $139.5 million atDecember 31, 2005, $71.5 million related to the fourmanufacturing sites. While environmental investigationsand remedial actions are in different stages at these sites,additional investigations, remedial actions and monitor-ing will likely be required at each site.

The first of the four sites is a former manufacturingfacility in New Jersey that is in the early investigativestage of the environmental-related process. Althoughcontamination exists at the site and adjacent areas, theextent and magnitude of the contamination has not yetbeen fully quantified. Due to the uncertainties of thescope and magnitude of contamination and the degree

of remediation that may be necessary relating to thissite, it is reasonably likely that further extensive investi-gation may be required and that extensive remedialactions may be necessary not only at the former manu-facturing site but along an adjacent waterway. Depend-ing on the extent of the additional investigation andremedial actions necessary, the ultimate liability for thissite may exceed the amount currently accrued and themaximum of the range of reasonably possible outcomescurrently estimated by management.

Two additional sites relate to a current manufactur-ing facility located in Illinois and a contiguous property.The environmental issues at these sites have b

2005 Annual Report

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