2005 Annual Report - Investor Relations - Sherwin-Williams

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (thousands of dollars unless otherwise indicated) NOTE 6 – HEALTH CARE, PENSION AND OTHER BENEFITS The Company provides pension benefits to substantially all employees through noncontributory defined contribution or defined benefit plans. In connection with the acquisition of Duron, the Company acquired a domestic defined benefit pension plan (Duron Plan). The Duron Plan covered all employees who met certain eligibility requirements based primarily on age, length of service and hours worked per year. The Company operated the Duron Plan independently from the date of acquisition until December 31, 2004, at which time it was frozen and merged into the Company’s domestic salaried defined benefit pension plan. The decision to freeze the Duron Plan and merge it with the Company’s domestic salaried defined benefit pension plan effective December 31, 2004 was made at the acquisition date. Accrued benefits and vesting service under the Duron Plan were credited under the Company’s domestic salaried defined benefit pension plan. At December 31, 2004, the Duron Plan was under-funded by $2,574 with a projected benefit obligation and an accumulated benefit obligation of $18,307 and a fair value of plan assets of $15,733. The Company made contributions of $1,175 to the Duron Plan in 2004. Effective January 1, 2002, the domestic salaried defined benefit pension plan was revised. All participants in the domestic salaried defined benefit pension plan prior to the revision retain the previous defined benefit formula for computing benefits with certain modifications for active employees. Eligible domestic salaried employees hired or re-hired on or after January 1, 2002 become participants in the revised domestic salaried defined benefit pension plan upon completion of six months of service. All employees who become participants subsequent to the plan’s revision will be credited with certain contribution credits that range from two percent to seven percent based on hire date or a combination of age and service with the Company. Contribution credits will be converted into units to account for each participant’s benefits. These participants will receive a variable annuity benefit upon retirement or a distribution upon termination (if vested). The variable annuity benefit is subject to the hypothetical returns achieved on each participant’s allocation of units from investments in various mutual funds as directed by the participant. Contribution credits to the revised domestic salaried defined benefit pension plan will be initially funded through the existing excess plan assets. The Company employs a total return investment approach for the domestic and foreign defined benefit pension plan assets. A mix of equities and fixed income investments are used to maximize the long-term return of assets for a prudent level of risk. In determining the expected long-term rate of return on defined benefit pension plan assets, management considers the historical rates of return, the nature of investments and an expectation of future investment strategies. At December 31, 2005, defined benefit pension plan assets were invested as follows: Domestic Foreign Plans Plans Equity investments .................. 66% 66% Fixed income investments ........ 31% 26% Cash and other investments .... 3% 8% Included as equity investments in the domestic defined benefit pension plan at December 31, 2005 were 1,255,000 shares of the Company’s common stock with a market value of $57,002, which was 9.3 percent of total domestic defined benefit pension plan assets. During 2005, no shares of the Company’s common stock were sold and dividends received on the Company’s common stock were $1,029. At December 31, 2005, one of the Company’s domestic defined benefit pension plans was underfunded by $4,786 with a projected benefit obligation and an accumulated benefit obligation of $98,999 and a fair value of plan assets of $94,213. A foreign defined benefit pension plan was also under-funded by $7,480 with a projected benefit obligation of $48,394, an accumulated benefit obligation of $34,076, and a fair value of plan assets of $26,596. In addition, the Company has one unfunded foreign defined benefit pension plan with an accumulated benefit obligation of $672. Contributions to the foreign defined benefit pension plans are expected to be $3,240 in 2006. The Company expects to make the following benefit payments for all domestic and foreign defined benefit pension plans: $17,822 in 2006; $19,570 in 2007; $22,031 in 2008; $24,557 in 2009; $25,360 in 2010; and $140,016 in 2011 through 2015. The following table summarizes the obligations and assets of the defined benefit pension plans, which are all measured as of December 31. 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (thousands of dollars unless otherwise indicated) Domestic Defined Benefit Pension Plans Foreign Defined Benefit Pension Plans 2005 2004 2003 2005 2004 2003 Accumulated benefit obligation at end of year ..................................... $ 254,103 $ 230,912 $ 218,804 $ 40,136 $ 36,437 $ 32,323 Projected benefit obligation: Balance at beginning of year ............... $ 246,639 $ 224,265 $ 190,711 $ 51,873 $ 40,182 $ 30,089 Service cost ......................................... 15,207 10,992 7,036 2,340 1,520 1,358 Interest cost......................................... 14,164 12,777 12,066 2,689 2,354 1,959 Actuarial loss (gain) ............................ 15,220 (2,295) 30,276 7,048 5,123 (368) Plan amendments, merger and other ... 1,275 18,026 493 487 4,646 Effect of foreign exchange................... (5,183) 3,074 3,373 Benefits paid........................................ (15,518) (17,126) (15,824) (1,740) (866) (875) Balance at end of year......................... 276,987 246,639 224,265 57,520 51,874 40,182 Plan assets: Balance at beginning of year ............... 596,097 533,340 464,110 28,524 23,133 15,732 Actual return on plan assets................ 34,228 67,612 88,023 5,342 2,179 4,765 Plan merger and other - net ................ (2,136) 12,271 (2,969) 2,966 2,354 1,842 Effect of foreign exchange................... (2,905) 1,724 1,669 Benefits paid........................................ (15,518) (17,126) (15,824) (1,740) (866) (875) Balance at end of year......................... 612,671 596,097 533,340 32,187 28,524 23,133 Excess (deficiency) of plan assets over projected benefit obligation: Balance at end of year ...................... 335,684 349,458 309,075 (25,333) (23,350) (17,049) Unrecognized actuarial loss .............. 98,142 74,290 108,297 24,202 24,602 18,922 Unrecognized prior service cost ........ 2,168 1,506 1,726 283 328 388 Excess (deficit) recognized in the Consolidated Balance Sheets .............. $ 435,994 $ 425,254 $ 419,098 $ (848) $ 1,580 $ 2,261 Excess (deficit) recognized in the Consolidated Balance Sheets: Deferred pension assets .................... $ 407,895 $ 428,714 $ 419,098 $ 1,413 $ 1,524 $ 1,069 Unrecognized prior service costs included in Other assets................. 1,995 Benefit liability included in Other accruals ........................... (7,465) (6,235) (6,982) Benefit liability included in Other long-term liabilities.......... (4,786) (3,460) (3,194) (3,507) (3,615) Cumulative other comprehensive loss ........................ 30,890 8,398 9,798 11,789 $ 435,994 $ 425,254 $ 419,098 $ (848) $ 1,580 $ 2,261 Weighted-average assumptions used to determine projected benefit obligation: Discount rate.................................... 5.50% 5.75% 6.00% 4.91% 5.49% 5.73% Rate of compensation increase ......... 4.00% 4.00% 4.00% 3.97% 3.98% 3.67% Weighted-average assumptions used to determine net pension (credit) cost: Discount rate.................................... 5.75% 5.98% 6.55% 5.49% 5.73% 5.50% Expected long-term rate of return on assets ........................................ 7.50% 7.50% 8.00% 7.18% 8.00% 8.00% Rate of compensation increase ......... 4.00% 4.00% 4.00% 3.98% 3.67% 3.50% Net pension (credit) cost: Service cost ......................................... $ 15,207 $ 10,992 $ 7,036 $ 2,340 $ 1,520 $ 1,358 Interest cost......................................... 14,164 12,777 12,066 2,689 2,354 1,959 Expected return on assets.................... (44,054) (39,695) (36,485) (1,987) (1,934) (1,465) Recognition of: Unrecognized prior service cost ........ 612 788 958 61 59 294 Unrecognized actuarial loss .............. 3,337 6,047 11,100 1,209 1,100 1,107 Net pension (credit) cost..................... $ (10,734) $ (9,091) $ (5,325) $ 4,312 $ 3,099 $ 3,253 57
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The Sherwin-Williams Company 2005 A
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ON THE COVER: In 1890, the original
Page 5 and 6:
LETTER TO SHAREHOLDERS portion of t
Page 7 and 8: This past year, we realigned our ma
Page 9 and 10: PAINT STORES SEGMENT to maximize co
Page 11 and 12: CONSUMER SEGMENT Williamsburg Color
Page 13 and 14: AUTOMOTIVE FINISHES SEGMENT The lau
Page 15 and 16: INTERNATIONAL COATINGS SEGMENT to t
Page 17 and 18: STRENGTH IN NUMBERS IN ADDITION TO
Page 19 and 20: COMMITTED TO FINANCIAL EXCELLENCE F
Page 21 and 22: FINANCIAL SUMMARY (millions of doll
Page 23 and 24: MANAGEMENT’S DISCUSSION AND ANALY
Page 39 and 40: REPORT OF MANAGEMENT ON THE CONSOLI
Page 41 and 42: REPORT OF THE INDEPENDENT REGISTERE
Page 43 and 44: REPORT OF THE INDEPENDENT REGISTERE
Page 45 and 46: STATEMENTS OF CONSOLIDATED INCOME (
Page 47 and 48: STATEMENTS OF CONSOLIDATED SHAREHOL
Page 49 and 50: NOTES TO CONSOLIDATED FINANCIAL STA
Page 57: NOTES TO CONSOLIDATED FINANCIAL STA
Page 75 and 76: SHAREHOLDER INFORMATION Annual Meet
Page 77 and 78: 2005 BOARD OF DIRECTORS 1 SUSAN J.
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2005 Annual Report - Investor Relations - Sherwin-Williams

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