The Sherwin-Williams Company
Annual Report 2017

Plain-text annual report

The Sherwin-Williams Company 101 W. Prospect Avenue Cleveland, Ohio 44115-1075 www.sherwin-williams.com The Sherwin-Williams Company was founded by Henry Sherwin and Edward Williams in 1866. Today, we are a global leader in the manufacture, development, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers. The Company manufactures products under well-known brands such as Sherwin- Williams®, Valspar®, Dutch Boy®, HGTV HOME® by Sherwin-Williams, Krylon®, Minwax®, Cabot®, Thompson’s® Water Seal® and many more. With global headquarters in Cleveland, Ohio, Sherwin-Williams® branded products are sold exclusively through more than 5,100 company-operated stores and facilities, while the Company’s other brands are sold through leading mass merchandisers, home centers, independent paint dealers, hardware stores, automotive retailers and industrial distributors. For more information, visit www.sherwin-williams.com. The Company is comprised of three reportable segments, which together provide our customers with innovative solutions to ensure their success, no matter where they work, or what surfaces they are coating. The Americas Group operates the exclusive outlets for Sherwin-Williams® branded paints, stains, supplies, equipment and floor covering in the U.S., Canada and the Caribbean. The Group also manufactures and sells a wide range of architectural paints, industrial coatings and related products across Latin America through company-operated stores and dedicated dealers. The Consumer Brands Group sells one of the industry’s most recognized portfolios of branded and private-label products through retailers across North America and in parts of Europe, Australia, New Zealand and China, and also operates a highly efficient global supply chain for paint, coatings and related products. The Performance Coatings Group sells a wide range of coatings and finishes and sells to a growing customer base in general industrial, industrial wood, protective and marine, coil, packaging and automotive markets in more than 110 countries. C O N T E N T S Our Global Footprint Financial Highlights Letter to Shareholders At a Glance The Americas Group Consumer Brands Group Performance Coatings Group Shareholder Returns Financial Performance 1 2 8 10 12 14 16 17 2 0 1 7 A N N UA L R E P O R T The Sherwin-Williams Company is an equal opportunity employer that recruits, selects and hires on the basis of individual qualifications and prohibits unlawful discrimination based on race, color, religion, sex, national origin, protected veteran status, disability, age, sexual orientation or any other consideration made unlawful by federal, state or local laws. 53444IMPO.(PDF_D17) Cover.indd 1 2/23/18 8:50 AM The Sherwin-Williams Company 101 W. Prospect Avenue Cleveland, Ohio 44115-1075 www.sherwin-williams.com The Sherwin-Williams Company was founded by Henry Sherwin and Edward Williams in 1866. Today, we are a global leader in the manufacture, development, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers. The Company manufactures products under well-known brands such as Sherwin- Williams®, Valspar®, Dutch Boy®, HGTV HOME® by Sherwin-Williams, Krylon®, Minwax®, Cabot®, Thompson’s® Water Seal® and many more. With global headquarters in Cleveland, Ohio, Sherwin-Williams® branded products are sold exclusively through more than 5,100 company-operated stores and facilities, while the Company’s other brands are sold through leading mass merchandisers, home centers, independent paint dealers, hardware stores, automotive retailers and industrial distributors. For more information, visit www.sherwin-williams.com. The Company is comprised of three reportable segments, which together provide our customers with innovative solutions to ensure their success, no matter where they work, or what surfaces they are coating. The Americas Group operates the exclusive outlets for Sherwin-Williams® branded paints, stains, supplies, equipment and floor covering in the U.S., Canada and the Caribbean. The Group also manufactures and sells a wide range of architectural paints, industrial coatings and related products across Latin America through company-operated stores and dedicated dealers. The Consumer Brands Group sells one of the industry’s most recognized portfolios of branded and private-label products through retailers across North America and in parts of Europe, Australia, New Zealand and China, and also operates a highly efficient global supply chain for paint, coatings and related products. The Performance Coatings Group sells a wide range of coatings and finishes and sells to a growing customer base in general industrial, industrial wood, protective and marine, coil, packaging and automotive markets in more than 110 countries. C O N T E N T S Our Global Footprint Financial Highlights Letter to Shareholders At a Glance The Americas Group Consumer Brands Group Performance Coatings Group Shareholder Returns Financial Performance 1 2 8 10 12 14 16 17 2 0 1 7 A N N UA L R E P O R T The Sherwin-Williams Company is an equal opportunity employer that recruits, selects and hires on the basis of individual qualifications and prohibits unlawful discrimination based on race, color, religion, sex, national origin, protected veteran status, disability, age, sexual orientation or any other consideration made unlawful by federal, state or local laws. 53444IMPO.(PDF_D17) Cover.indd 1 2/23/18 8:50 AM 26 branches CANADA 1 facility 227 paint stores 3 facilities 2 facilities 1 branch 80 paint stores CARIBBEAN LATIN AMERICA / SOUTH AMERICA 16 branches 353 paint stores 10 facilities 18 facilities 40 facilities 11 facilities 3,960 paint stores 228 branches UNITED STATES The Americas Group’s Stores Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming 197 54 55 199 12 84 10 91 334 36 11 124 100 19 81 12 8 4 CANADA Alberta 27 British Columbia 48 Manitoba New Brunswick Newfoundland Nova Scotia Ontario 87 Prince Edward Island 1 Quebec Saskatchewan 37 6 2 7 CARIBBEAN 80 LATIN AMERICA Brazil Chile Ecuador Mexico Peru Uruguay TOTAL 103 56 32 148 3 11 4,620 UNITED STATES Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota 70 7 65 46 262 76 41 16 5 306 157 12 27 153 95 42 44 58 69 25 84 62 114 63 57 76 18 23 24 21 96 23 137 158 9 53444IMPO.(PDF_D17) Cover.indd 2 16 branches 9 facilities 28 facilities EMEAI ASIA/PACIFIC 3 branches 6 facilities 9 facilities Our Global Footprint The Americas Group Consumer Brands Group Performance Coatings Group Corporate headquarters 90 paint stores 3 facilities AUSTRALIA/NEW ZEALAND As a global leader in the development, manufacture and sale of paint, coatings and related products, Sherwin-Williams has an extensive retail presence throughout the Americas, and growing service capabilities in Europe and Asia/Pacific. The Americas Group has 4,267 company-operated specialty paint stores in the United States, Canada and the Caribbean. More than 90 percent of the U.S. population lives within a 50-mile radius of a Sherwin-Williams store. The Americas Group operates 353 stores throughout Latin America and sells through more than 700 dedicated dealer outlets, primarily located in Brazil, Chile, Ecuador, Mexico, Peru and Uruguay. The Consumer Brands Group includes company-operated outlets in Australia and New Zealand, and a highly efficient global supply chain consisting of 84 manufacturing plants and distribution centers. The Performance Coatings Group sells to a growing customer base in more than 100 countries around the world and has approximately 290 company-operated general industrial, industrial wood, protective and marine, and automotive branches. Board of Directors 1. CHRISTINE A. POON, 65* 6. RICHARD J. KRAMER, 54* Executive in Residence Chairman of the Board, The Max M. Fisher College of Business Chief Executive Officer and President The Ohio State University Retired, former Vice Chairman Johnson & Johnson 2. STEVEN H. WUNNING, 66 Retired, former Group President Caterpillar Inc. The Goodyear Tire & Rubber Company 7. JOHN M. STROPKI, 67 Retired, former Chairman, President and Chief Executive Officer Lincoln Electric Holdings, Inc. 8. DAVID F. HODNIK, 70 3. ARTHUR F. ANTON, 60* Retired, former President and Chairman and Chief Executive Officer Chief Executive Officer Swagelok Company Ace Hardware Corporation 4. MATTHEW THORNTON III, 59* 9. SUSAN J. KROPF, 69 Senior Vice President, US Operations Retired, former President and FedEx Express FedEx Corporation Chief Operating Officer Avon Products, Inc. 5. JOHN G. MORIKIS, 54 Chairman, President and Chief Executive Officer The Sherwin-Williams Company 10. MICHAEL H. THAMAN, 54 Chairman, President and Chief Executive Officer Owens Corning 2 1 3 5 8 9 6 7 4 10 *Audit Committee Member 2/23/18 8:50 AM Financial Highlights (thousands of dollars except per common share data) 2 0 1 7 2 0 1 6 2 0 1 5 Net sales(1) $ 14,983,788 $ 11,855,602 $ 11,339,304 Net income from continuing operations(2 ) $ 1,813,802 $ 1,132,703 $ 1,053,849 Per common share: Diluted net income per common share from continuing operations(3) Cash dividends Average common shares outstanding – diluted (thousands) Return on sales Return on assets Return on beginning shareholders’ equity Total debt to capitalization Interest coverage(4) $ $ 19.11 3.40 94,927 12.1% 9.1% 96.6% 74.0% 6.8x $ $ 11.99 $ 3.36 $ 11.15 2.68 94,488 94,543 9.6% 16.8% 9.3% 18.2% 130.5% 105.8% 51.0% 11.4x 69.2% 26.1x N E T SALE S ( 1) millions of dollars N E T I N COM E FROM CO NTI N U I N G O PE R ATIO N S (2) millions of dollars DI LUTE D N E T I N COM E PE R S HAR E FROM CO NTI N U I N G O PE R ATIO N S (3) N E T O PE R ATI N G C A S H millions of dollars 4 8 9 4 1 $ , 9 3 3 , 1 1 $ 6 5 8 , 1 1 $ 4 1 8 , 1 $ 3 3 1 , 1 $ 4 5 0 , 1 $ 1 1 . 9 1 $ 5 1 . 1 1 $ 9 9 . 1 1 $ 4 8 8 , 1 $ 7 4 4 , 1 $ 9 0 3 , 1 $ 15 16 17 15 16 17 15 16 17 15 16 17 (1) 2017 includes Valspar sales since June 1, 2017. (2) 2017 includes the following: (a) one-time income tax benefit of $668.8 million from Deferred income tax reductions (see Note 14), (b) after-tax acquisition- related costs and purchase accounting adjustments of $285.1 million, and (c) after-tax contribution from Valspar operations of $76.0 million. 2016 includes after-tax acquisition-related costs of $81.5 million. (3) 2017 includes the following: (a) one-time benefit of $7.04 per share from Deferred income tax reductions (see Note 14), (b) charge of $3.00 per share for acquisition-related costs and purchase accounting impacts, and (c) $0.80 per share contribution from Valspar operations. 2016 includes a charge of $0.86 per share for acquisition-related costs. (4) Ratio of income before income taxes and interest expense to interest expense. 1 Letter to Shareholders John G. Morikis, Chairman, President and Chief Executive Officer, and Allen J. Mistysyn, Senior Vice President – Finance and Chief Financial Officer The Sherwin-Williams Company described in the pages of this annual report differs in many meaningful ways from the company we reported on just one year ago. With the completion of the Valspar acquisition on June 1, 2017, we are a larger, more diversified and more global enterprise. We are also a more complex and disparate company with higher balance sheet leverage. I have heard from many institutional investors over the past year that large-scale acquisitions often fail to create significant shareholder value. Based on our experience thus far, I believe our acquisition of Valspar will prove to be a convincing exception to this rule. The successful integration of Valspar will create a faster-growing, more profitable company. Since closing the acquisition, we have invested considerable effort and energy in fortifying our customer relationships, defining the right organizational structure and building momentum in every line of business. We detail our integration progress in a special section on page 7 and throughout this annual report, and we are delighted to welcome the talented employees of Valspar to the Sherwin-Williams family. 2017 was also a year of many financial milestones, including record sales for the seventh consecutive year and record earnings for the sixth straight year. Consolidated sales increased 26.4 percent to $14.98 billion, EBITDA – or “Earnings Before Interest, Taxes, Depreciation and Amortization” – increased 17.3 percent to $2.28 billion, net income from continuing operations increased 60.1 percent to $1.81 billion, and diluted earnings per share from continuing operations increased 59.4 percent to $19.11. Cash flow from operations increased 44.0 percent to $1.88 billion. Total shareholder return for the year was 54.1 percent compared to 21.8 percent for the S&P 500 and 31.6 percent for our peer group. These full-year results include seven months of Valspar-related sales and earnings, purchase accounting adjustments, and 2 transaction and integration costs. Our reported results also include a one-time benefit from deferred income tax liabilities related to the Tax Cuts and Jobs Act enacted in December 2017 and Valspar subsidiary mergers (Deferred income tax reductions). Strength in the core Sherwin-Williams business underpins these consolidated results. If you exclude the impacts from Valspar and the Deferred income tax reductions: • Consolidated sales for the year increased 5.6 percent to $12.5 billion, • Operating Profit improved 6 percent to $1.92 billion, • • • Profit Before Tax grew 6.5 percent to $1.84 billion, EBITDA increased 5.8 percent to $2.12 billion, Comparable diluted Earnings Per Share increased 11.1 percent to $14.27 per share. Record cash generation during the year enabled us to invest in growth, increase our annual dividend for the 39th consecutive year, and pay down debt at a rapid pace. The Americas Group opened 101 net new stores, finishing the year with 4,620 stores in operation. We also paid $319.0 million in cash dividends and retired over $1 billion in debt. Given these priorities, we made no open market purchases of our common stock for treasury in 2017. With the distractions inherent in integrating two large organizations into one, it was vital to keep our teams focused on delivering the value to our customers that will drive sustained growth and profitability over the long term. Each of our three reportable segments contributed to our success in 2017. THE AMERICAS G RO UP The Americas Group segment teams in the United States, Canada, Caribbean and all of Latin America have been focused on collaboration and sharing resources and expertise. We strongly believe these efforts will result in accelerated growth across the region. In the U.S., Canada and the Caribbean, we remain the largest operator of specialty paint stores, servicing the needs of architectural and industrial painting contractors and do-it- yourself homeowners. In Latin America, we sell a variety of branded architectural paint, coatings and related products through company-operated specialty paint stores and third party retailers, dealers, licensees and other distributors. In 2017, The Americas Group net sales increased 8.8 percent compared to the prior year to $9.12 billion. The growth was driven by higher architectural paint sales volume across all segments and selling price increases. Full-year net sales by stores in the U.S., Canada and the Caribbean, open more than 12 calendar months, increased 6.3 percent, and net sales in the Latin America region increased 4.5 percent, both as compared to the prior year. Segment profit increased 10.2 percent to $1.77 billion, and segment operating margin increased 30 basis points to 19.4 percent compared to the prior year. By our estimate, our company-operated stores in the U.S. grew architectural paint sales volumes at a rate of approximately two times the rate of U.S. market growth, and our protective and marine coatings business reversed a two-year negative sales trend. During the year, we opened 87 net new stores in the U.S., Canada and the Caribbean, bringing total store count in the region to 4,267. Our customers responded favorably to multiple new product introductions, including Extreme Cover™ Interior Stain Blocking Paint and Primer in One, Emerald® Interior/Exterior Water- Based Urethane Trim Enamel, and ProMar® 200HP Zero VOC Interior Acrylic. J.D. Power recognized us for “Highest in Customer Satisfaction among Interior Paints.”* In Latin America, selling price increases enabled us to grow revenues in the full year, though underlying economic conditions in the region remained challenging. We continued to position ourselves for long-term growth, adding 14 new company-operated stores in the region, bringing our total to 353. We also added 65 new dedicated dealers, bringing our total to more than 700. We are adopting some best practices from our U.S. stores in Latin America, with initial emphasis on customer segmentation and new account development. Some high-potential new products introduced in the region during the year were ProCraft® flat interior paint, ProCraft® ceiling paint, and Krylon® Super Maxx premium fast-drying aerosol, all based on successful product platforms in the U.S. and Canada. We also released our ColorSnap® App in Spanish and Portuguese to assist consumers with the challenging process of color selection and coordination. CONSUMER BRANDS GROUP The Consumer Brands Group sells a broad portfolio of branded product lines through a variety of independent retail outlets in the United States, Canada, United Kingdom, China, Australia and New Zealand. In 2017, the Consumer Brands Group net sales increased 41.1 percent compared to the prior year to $2.15 billion, but segment profit decreased 25.0 percent year-over-year to $226.0 million and segment operating margin decreased 920 basis points to 10.5 percent compared to 2016. Segment profit and operating margin in the year include acquisition purchase accounting charges of $107.6 million that were partially offset by Valspar profit from operations of $71.7 million. Excluding the impact of Valspar, core sales for the Group decreased 8.4 percent, core segment profit decreased 13.0 percent, and core operating margin decreased 100 basis points, all compared to the prior year. The results for our core Consumer Brands Group business in 2017 were disappointing. Demand was soft across most product categories, retail channels and geographies throughout the year. This weakness was particularly acute in Europe and in smaller retail accounts across the U.S. and Canada. Many retailers responded to slower sales of architectural paint to Do-It-Yourself customers *Sherwin-Williams received the highest numerical score among Interior Paints in the J.D. Power 2017 Paint Satisfaction Study, based on 4,625 total responses from 12 companies measuring experiences and perceptions of customers, surveyed February-March 2017. Your experiences may vary. Visit jdpower.com. 3 by scaling back inventory. The impact of weak sales volumes on segment profit was exacerbated by rising raw material costs throughout the year. Although the Consumer Brands Group results fell short of expectations in 2017, we remain confident in the future prospects for this Group for many reasons. The combined portfolio of brands managed by this talented team is second to none in the paint and coatings category in terms of appeal to retailers and end users. Brands such as Valspar® and HGTV HOME® by Sherwin-Williams paints, Minwax® stains and varnishes, Purdy® applicator tools, Cabot® stains, Krylon® aerosol paint and Thompson’s® WaterSeal® waterproofing products, to name a few, rank among the best- known, most sought-after brands in their respective categories. Above all, we are excited about the category expertise and strong customer relationships the Valspar acquisition brings to this segment. The integration of Valspar sales and marketing teams is, for the most part, complete with little or no customer disruption. We are addressing the persistent raw material inflation by implementing price increases across all retail channels and customers, which we expect will benefit results for the Group in 2018. With the completion of the Valspar acquisition on June 1, 2017, we are a larger, more diversified and more global enterprise. In 2017, the Valspar paint brand was recognized by J.D. Power as the “Highest in Customer Satisfaction among Exterior Paints.”* The power of the Valspar brand and the caliber of the Valspar sales team have strengthened our relationship with key retailers and provided additional tools and expertise to help convert more shoppers into buyers. Valspar also enhances our global scale, bringing us platforms to build upon with Huarun™, a leading Chinese domestic paint brand, and Wattyl®, a leading product brand and a chain of company-operated outlets in Australia and New Zealand. The success of our reportable segments is supported by a highly efficient global supply chain and research & development organization, all managed within our Consumer Brands Group segment. Innovation remains a core competency of this organization, validated by the introduction of more than 20 new architectural products in 2017. With the addition of Valspar’s supply chain assets, we now operate 84 manufacturing and distribution facilities worldwide. While this added capacity will reduce the need for future capital investments, we see meaningful opportunities to further optimize our global footprint in support of profitable growth. In 2017, we exited three non-essential facilities and announced our intention to consolidate five others. We opened a new distribution center in Waco, Texas, and a new manufacturing site in Nantong, China, to help us capitalize on our rapid growth in both regions. Our commercial transportation fleet covered a record 74 million miles in 2017 – 7.3 percent more than in 2016 – and was awarded a SmartWay Excellence Award for superior environmental performance and reduction of freight emissions through collaborative and operational practices. Our fleet also earned the National Private Truck Council (NPTC) 2017 Fleet of the Year Safety Award. Safety and quality remain top priorities throughout the organization, and many of our facilities have experienced no recordable injuries for multiple years. At the end of 2017, we had 28 VPP Star sites, 12 OHSAS 18001 sites in the U.S. and 44 ISO 14001 sites globally – more certifications than any other paint and coatings manufacturer. PERFORMANC E COATINGS GROUP In 2017, net sales by our Performance Coatings Group increased 90.4 percent compared to the prior year to $3.71 billion. Segment profit increased 16.1 percent to $298.5 million, but segment profit margin decreased 510 basis points to 8.1 percent compared to 2016. Segment profit and operating margin for the year include Valspar profit from operations of $231.1 million partially offset by acquisition purchase accounting charges of $183.1 million. Excluding the impact of Valspar, core sales for the Group increased 3.0 percent, core segment profit decreased 2.6 percent, and core operating margin decreased 72 basis points, all compared to the prior year. The Performance Coatings Group provides differentiated product technology and value-added services to a diverse group of industrial coatings customers. We made impressive progress on the integration of Valspar operations during the year, organizing this new segment into industry-specific business units to enhance focus and competitiveness. There are significant opportunities to further optimize this structure as we aggressively pursue our value capture targets. The addition of Valspar’s coatings business significantly increases our operating scale outside North America and broadens our technology offering, both of which will enable us to create new opportunities. Geographically, Valspar adds sales volume and large-scale manufacturing and distribution to our operations in Europe and Asia, enabling us to serve more customers more profitably. The combination also results in a more complete product offering and diverse service model. For example, combining Sherwin-Williams’ local-market, small-batch blending capability with Valspar’s expertise in supplying highly customized coatings solutions to large original equipment manufacturers *Valspar received the highest numerical score among Exterior Paints in the J.D. Power 2017 Paint Satisfaction Study based on 3,139 responses from 12 companies measuring experiences and perceptions of customers surveyed February-March 2017. Your experiences may vary. Visit jdpower.com. 4 (OEMs) makes us a compelling single-source coatings provider for OEMs and their tier supplier networks. Valspar also brings us two entirely new profitable growth opportunities in packaging coatings – coating liners for food and beverage packaging – and coil & extrusion coatings – coatings used in the manufacture of appliances, HVAC equipment, metal building products and more. We’ve also begun to leverage our combined technology portfolio, which is significantly enhanced by Valspar’s waterborne formulations and resin development capabilities. Recently released examples of industrial coatings innovation include AquaGuard® low-VOC coatings for general industrial applications, the Sayerlock® HydroPlus™ family of low-VOC high-performance wood coatings, dynamic clearcoat CC200 premium coatings, DeBeer® waterborne coatings, and ValPure® V70 non-BPA epoxy coating for can coating. BOA RD AND M ANAGEMEN T CHAN G ES In April, Michael Thaman was elected to our Board of Directors and appointed to the Compensation and Management Development Committee. Mike currently serves as Chairman, President and Chief Executive Officer of Owens Corning, a Toledo, Ohio-based world leader in composite solutions and building materials systems and a market-leading innovator of glass fiber technology. He has demonstrated strong leadership in a variety of roles at Owens Corning for 25 years, and his broad financial and international experience will serve the Board and our shareholders well. We look forward to his contributions to Sherwin-Williams for many years. In December, Sean Hennessy announced his retirement after 33 years of dedicated service to the Company, including 15 years as the Company’s Senior Vice President – Finance and Chief Financial Officer. Over the last year, Sean served in the role of Senior Vice President – Corporate Planning, Development and Administration, supporting Al Mistysyn in his successful transition to Senior Vice President – Finance and Chief Financial Officer and assisting in the acquisition and integration of Valspar. Sean will be missed, and we wish him a very happy and healthy retirement. Our continued focus on internal talent development resulted in several leadership appointments during the year. Mary Garceau was promoted to Senior Vice President, General Counsel and Secretary. Mary joined Sherwin-Williams in 2014 as Associate General Counsel for our Paint Stores Group and previously served as Vice President, General Counsel and Corporate Secretary for Bob Evans Farms, Inc. and Thirty-One Gifts, LLC. Dennis Karnstein was named President & General Manager of Industrial Wood Coatings Division, Performance Coatings Group. Dennis joined Sherwin-Williams in 1989 as a Management Trainee in our Paint Stores Group. After working his way up through the ranks in our paint stores organization, Dennis joined our Global Finishes Group as Senior Vice President & General Manager for Product Finishes Europe and President & General Manager, Product Finishes Division of Global Finishes Group. Most recently, Dennis served as Senior Vice President of Global Integration for the Valspar acquisition. Bruce Irussi was promoted to the position of President & General Manager of General Industrial Coatings Division, Performance Coatings Group. Bruce joined Sherwin- Williams in 1984 as a Professional Coatings Representative, and worked his way up as Branch Manager, Sales Manager, Product Finishes Division Area Sales Manager, District Manager and Regional Facility Manager and Senior Vice President of Sales, Product Finishes Division – North America. Most recently, Bruce was President & General Manager of the Product Finishes Division of our Global Finishes Group. Robert Lynch was promoted to President & General Manager of the North America Division of our Consumer Brands Group. Rob joined the Company in 2000 and most recently served as Senior Vice President of Sales within our Performance Coatings Group. Lee Diamond was promoted to President & General Manager of Canada Division, The Americas Group. Lee joined the Company in 1991 and most recently served as Vice President of Sales for the Southeastern Division of The Americas Group. Continued growth in residential and commercial construction and remodeling across North America should benefit The Americas Group and our Consumer Brands Group, and positive momentum in many industrial end segments worldwide should benefit our Performance Coatings Group. Diana Strongosky was promoted to Senior Vice President Operations North America. Diana joined the Company in 1988 and most recently served as Senior Vice President of R&D within our Global Supply Chain organization. Kathleen Szczesniak was promoted to Senior Vice President of R&D within our Global Supply Chain organization. Kathleen joined the Company in 1998 and most recently served as Vice President for R&D within our Performance Coatings Group. I have often said the acquisition of Valspar represents the greatest one-time infusion of talent in Sherwin-Williams’ history. Shortly after closing the transaction, we announced several appointments of Valspar personnel to our senior leadership team. Aaron Erter was named President of Consumer Brands Group. Aaron joined Valspar’s consumer business in 2011 after serving 15 years with Black & Decker Corporation, where he held leadership positions in sales, global marketing, product 5 development and new business development. Bryan Young was named Vice President – Corporate Strategy & Development. Bryan joined Valspar as Vice President of Corporate Development in 2015 and previously held similar positions at Agrium and Rockwell Automation. Karl Jorgenrud was named President & General Manager of Protective & Marine Division, Performance Coatings Group. Karl joined Valspar in 1994 and most recently served as Vice President & General Manager of Valspar’s Global Functional Coatings. Sam Shoemaker was named President & General Manager of Global Packaging, Coil, and Coatings Resins & Colorants Division, Performance Coatings Group. Sam joined Valspar in 2012 and most recently served as Valspar’s Senior Vice President of Global Packaging. He previously worked for The Dow Chemical Company. Mike Bourdeau was named President & General Manager of Coil & Extrusion, Performance Coatings Group. Mike joined Valspar in 1986 and most recently served as Vice President, Global Coil & Extrusion. Colin Davie was named President & General Manager, Global Coating Resins & Colorants, Performance Coatings Group. Colin joined Valspar in 2012 and most recently served as Valspar’s Vice President, Global EPS/CCA. He previously worked for DuPont and Ciba Specialty Chemicals plc. Finally, J.R. Benites was named Regional President & General Manager of Latin America, Performance Coatings. J.R. joined Valspar in 1997 and most recently served as Senior Vice President and President of Valspar’s Latin America Region with executive responsibility for Global Coil. OUTLO OK FOR 201 8 We begin 2018 with expectations for another strong year in most of our businesses. Continued growth in residential and commercial construction and remodeling across North America should benefit The Americas Group and our Consumer Brands Group, and positive momentum in many industrial end segments worldwide should benefit our Performance Coatings Group. It is our intention to reinvest a portion of the savings from recent U.S. tax reform into growth initiatives, particularly in The Americas Group, and our expanded global footprint and technical capabilities will provide greater exposure to many new growth opportunities in emerging markets. From a profitability standpoint, we should continue to benefit from operating expense control and volume growth, both domestic and abroad, but rising raw material costs are likely to constrain gross margins, especially early in the year. Raw materials represent roughly 85 percent of the cost of goods sold for most paint and coatings products, and we anticipate inflation across the raw material basket in 2018 to average in the mid-single digits in percentage terms – perhaps higher in the first half of the year. This inflation will likely be broad-based across petrochemical feedstocks, pigments and packaging. We will continue to closely monitor the raw materials markets and are prepared to implement additional price increases if conditions so warrant. On a final note, the longer-term financial targets we presented at our Financial Community Presentation on October 3, 2017, will serve as a gauge to measure our success in managing the complexities of a large-scale integration process while maintaining a steadfast focus on the reason we are here – to help our customers be more successful. Using combined Sherwin-Williams and Valspar pro-forma 2016 results as a baseline, and 2020 as a target date, we expect to grow net sales at a compound annual rate of 4 to 6 percent, expand EBITDA margin to a range of 18.8 to 21 percent from 16.6 percent, increase adjusted free cash flow – net operating cash less capital expenditures – to a range of 10 to 10.5 percent of net sales from 8.9 percent, and grow core diluted net earnings per common share(1) at a compounded annual growth rate of 9 to 12 percent. By 2020, we expect to achieve at least $1 billion in cumulative savings from the integration of Valspar. To all employees of the new Sherwin-Williams, I offer my heartfelt thanks for all of your hard work, skill and commitment this past year; I truly believe we have the best team in the business, and that is integral to our success. On behalf of the approximately 60,000 Sherwin-Williams employees around the world, we offer our thanks and appreciation to our customers, suppliers and shareholders for your continued trust and confidence. John G. Morikis Chairman, President and Chief Executive Officer 6 (1) Excluding Acquisition Costs, Costs To Achieve, 2016 Valspar Restructuring Costs & Purchase Accounting Items. Sherwin-Williams and Valspar Better Together On June 1, 2017, Sherwin-Williams and Valspar joined together to create the global leader in paints and coatings. We are better together, with enhanced growth opportunities, a world-class brand portfolio, an expanded product range, premier technology platforms, a larger global footprint and a deeper talent pool. We expect these enhanced capabilities to benefit our customers and create sustainable long-term value for our shareholders. We made great progress on our integration efforts in 2017. Initially, we estimated annual run rate synergies by the end of the year would be $106 million. During the year, we raised that target to $160 million. Our actual full-year synergy run rate at the end of 2017 was approximately $230 million, which translated into approximately $60 million in actual savings in 2017. At the end of 2017, we raised our 2018 year-end run rate target to $320 million, up from our prior target of $280 million. We expect actual full- year savings in 2018 in the range of $140 to $160 million. In short, we are moving faster on more projects than originally anticipated. To date, we have completed or approved 497 integration projects, and identified another 147 projects that are currently being verified. New opportunities are being added to the list with each passing week. In SG&A, we’ve made great progress in organizational design and optimization, including aligning compensation and benefit programs, IT systems, and marketing and promotional programs, among many others. Better Together: In 2017, J.D. Power recognized Sherwin-Williams “Highest in Customer Satisfaction among Interior Paints” and Valspar “Highest in Customer Satisfaction among Exterior Paints.”* In cost of goods, we’ve identified opportunities for raw material cost leveling, purchase optimization and reformulation. Our leveling initiatives are active in every region of the world, and we are off to a good start on many optimization and reformulation projects, including in-house development and production of an acrylic polymer for use in some high-volume product lines. In manufacturing and distribution, our focus has been on optimizing our North American architectural manufacturing footprint. Projects are underway in the Mid-Atlantic, Midwest and West Coast regions. Logistics is also an opportunity, and we’re benefiting from reduced freight costs by synchronizing distribution routes between Sherwin-Williams and Valspar facilities. Revenue synergies are perhaps the greatest long-term opportunity. For example, our Performance Coatings Group has the ability to leverage our legacy North American blending facilities to provide color matching and small-batch production of some key Valspar industrial products, including coatings for metal extrusion customers. The ability to run high-volume and small-batch jobs is helping us to expand our share of wallet with existing accounts and attract new ones. After more than seven months together, we are even more energized by the many value-creating opportunities we continue to find. We are on track to exceed $1 billion in cumulative savings by 2020, we are increasingly confident in our long-term annual synergy run rate range of $385 to $415 million, and we expect to book most of the remaining costs to achieve these synergies in 2018. *Sherwin-Williams received the highest numerical score among Interior Paints in the J.D. Power 2017 Paint Satisfaction Study, based on 4,625 total responses from 12 companies measuring experiences and perceptions of customers, surveyed February-March 2017. Your experiences may vary. Visit jdpower.com. Valspar received the highest numerical score among Exterior Paints in the J.D. Power 2017 Paint Satisfaction Study based on 3,139 responses from 12 companies measuring experiences and perceptions of customers surveyed February-March 2017. Your experiences may vary. Visit jdpower.com. 7 At a Glance The Americas Group The Americas Group operates the exclusive outlets for Sherwin-Williams® branded paints, stains, supplies, equipment and floor covering in the United States, Canada and the Caribbean. The Group also manufactures and sells a wide range of architectural paints, industrial coatings and related products across Latin America through company-operated stores, dedicated dealers and selected retailers. 60.9% of total sales PRODUCTS SOLD Paints, stains, coatings, caulks, applicators, wallcovering, floor covering, spray equipment and related products in the United States, Canada and the Caribbean. Architectural paints, stains, coatings, varnishes, protective and marine products, wood finishing products, applicators, aerosols, OEM product finishes and related products in Latin America Consumer Brands Group Our Consumer Brands Group combines our previous Consumer Group with Valspar’s legacy Paints segment to sell one of the industry’s most recognized portfolios of branded and private-label products through retailers across North America and in parts of Europe, China, Australia and New Zealand. The Group also operates a highly efficient global supply chain for paint, coatings and related products. 14.4% of total sales Branded, private-label and licensed brand paints, stains, varnishes, industrial products, wood finishing products, wood preservatives, applicators, corrosion inhibitors, aerosols, caulks and adhesives, and related products Performance Coatings Group The Performance Coatings Group sells a broad range of coatings and finishing solutions to general industrial, industrial wood, protective and marine, automotive, packaging and coil & extrusion customers in more than 110 countries. 24.7% of total sales Asset protection products, wood finishes, powder coatings, coatings for plastic and glass, aerosols, high- performance interior and exterior coatings for the automotive, aviation, fleet, packaging, heavy truck, material handling, agriculture and construction, and building products markets 8 CUSTOMERS SERVED MAJOR BRANDS SOLD OUTLETS Do-it-yourselfers, professional painting contractors, home builders, property maintenance, healthcare, hospitality, architects, interior designers, industrial, marine, flooring and original equipment manufacturer (OEM) product finishers Sherwin-Williams®, A-100®, Cashmere®, Colorgin®, Condor®, Duracraft®, Duration Home®, Duration®, Emerald®, Harmony®, HGTV Home® by Sherwin-Williams, Kem Pro®, Kem Tone®, Krylon®, Loxon®, Marson®, Metalatex®, Minwax®, Novacor®, Paint Shield®, PrepRite®, ProClassic®, ProCraft®, ProConstructor®, ProIndustrial™, ProMar®, ProPark®, Solo®, Sumaré®, SuperDeck®, SuperPaint®, Ultra Protección®, Woodscapes® 4,267 Sherwin-Williams paint stores primarily in the United States, Canada, Jamaica, Puerto Rico, Trinidad and Tobago. 353 company-operated stores primarily in Brazil, Chile, Ecuador, Mexico, Peru and Uruguay and distribution through dedicated dealers, home centers, distributors, hardware stores, and through licensees in Argentina, El Salvador and Peru Do-it-yourselfers, professional painting contractors, industrial maintenance and flooring contractors Leading mass merchandisers, home centers, independent paint dealers, hardware stores, craft stores, fine art stores, automotive retailers and industrial distributors in the United States, Canada, Poland, United Kingdom, China, Australia and New Zealand Accurate Dispersions™, Altax™, Bestt Liebco®, Cabot®, Conco®, Duckback®, Dupli-Color®, DuraSeal®, Dutch Boy®, Geocel®, Granosite®, H&C®, HGTV HOME® by Sherwin-Williams, Huarun™, Kool Seal®, Krylon®, Martin Senour®, Mason’s Select®, Minwax®, Pratt & Lambert®, Purdy®, Ronseal™, Rubberset®, Snow Roof®, Solver®, Sprayon®, SuperDeck®, Thompson’s® WaterSeal®, Tri-Flow®, Uniflex®, Valspar®, VHT®, Wattyl®, White Lightning® Commercial construction, industrial maintenance, OEM applications in military, heavy equipment, electronics, building products, furniture, cabinetry and flooring, architects and specifiers, bridge & highway, water & waste treatment, collision repair facilities, dealerships, fleet owners and refinishers, production shops, body builders, metal packaging, manufacturers, and job shops Sherwin-Williams®, Acrolon®, AcromaPro®, Arti™, ATX™, AWX Performance Plus™, Baco®, Conely®, DeBeer®, DFL™, Dimension®, Duraspar™, Envirolastic®, Euronavy®, Excelo®, Fastline®, Finish 1™, Firetex®, Fluropon®, Genesis®, Heat-Flex®, House of Kolor®, Huarun™, Inchem®, Inver®, Kem Aqua®, Lanet™, Lazzuril®, Macropoxy®, Magnalux™, Martin Senour®, Matrix®, ML Campbell®, Oece™, PermaClad®, Planet Color®, Polane®, Powdura®, Prospray®, Sayerlack®, Sher-Wood®, Ultra- Cure®, Ultra™, USC®, ValPure® V70, Valspar®, Wattyl® Approximately 290 company-operated automotive, industrial and product finishes branches and other operations in the United States, Australia, Belarus, Belgium, Brazil, Canada, Chile, China, Czech Republic, Denmark, Finland, France, Germany, India, Ireland, Italy, Lithuania, Malaysia, Mexico, Norway, Peru, Poland, Portugal, Romania, Russia, Singapore, Spain, Sweden, Thailand, Ukraine, United Kingdom and Vietnam. Distribution in 44 other countries through wholly owned subsidiaries, joint ventures, distributors, export options, and licensees of technology, trademarks and trade names 9 The Americas Group The Americas Group segment teams in the United States, Canada, Caribbean and all of Latin America have been focused on collaboration and sharing resources and expertise. We strongly believe these efforts will result in accelerated growth across the region. In North America, we remain the leading operator of specialty paint stores. These exclusive outlets for Sherwin- Williams® branded paints, stains and supplies serve architectural and industrial painting contractors, residential and commercial builders and remodelers, property owners and managers, small OEM product finishers and do-it-yourself homeowners. In Latin America, we serve a similar set of customers through company- operated stores, dedicated dealers and selected retailers. 10 In 2017, The Americas Group net sales were $9.12 billion, an 8.8 percent increase compared with the prior year. This growth was driven by higher architectural paint sales volume across most segments and selling price increases. Net sales for the year from stores in the U.S., Canada and the Caribbean open for more than 12 calendar months increased 6.3 percent, and net sales for the Latin America region increased 4.5 percent. Group profit increased 10.2 percent to $1.77 billion. The Group opened 101 net new company-operated stores during 2017, including 87 in the U.S., Canada and Caribbean, and 14 in Latin America, bringing the total to 4,620 locations in the Americas. We also have more than 700 dedicated dealers in Latin America, enabling us to serve customers in the region through more than 1,000 Sherwin-Williams branded outlets. Innovative technology remains a differentiator for us, as we launched 21 new products through our stores and introduced 18 new products to the Latin American market this year. Highlights include: • Extreme Cover™ Interior Stain Blocking Paint and Primer in One. Aimed at property managers, it stands up to repeated washings and offers exceptional blocking against common stains like grease, food and cigarette smoke. • Emerald® Interior/Exterior Water-Based Urethane Trim Enamel. Ideal for cabinet, door and trim projects where hardness, adhesion and durability are critical, this product delivers the look and feel of an oil-based enamel with the convenience of a water-based formula. • ProMar® 200HP Zero VOC Interior Acrylic. Formulated specifically for commercial and light industrial applications, this high-performance interior latex is durable, abrasion resistant and compliant with stringent VOC requirements, including LEED® v4 emissions testing. To further assist our professional customers in the U.S., we added 24/7 online ordering capabilities through our website (sherwin-williams.com) and our PRO mobile app. Customers can now order and re-order paint and supplies from their local store, access their pricing, pay invoices and review purchase history from any device. We also continued to build momentum in Latin America, implementing and localizing best practices from our U.S. stores with a focus on customer segmentation, sales training, Latin America Divisional products and new account development. Our national and regional account program resulted in new business with South America’s largest hotel purchasing group, large retail facility owner-operators and big-box retailer store remodels. New accounts grew more than 30 percent over the prior year. Average sales per store, average sales per sales representative and total number of territories also grew over the prior year. ACHIEVEMENTS We ranked “Highest in Customer Satisfaction among Interior Paints” in the 2017 J.D. Power Paint Satisfaction Study.* We celebrated our 6th National Painting Week, giving back to communities in need. Nearly 4,500 volunteers from 3,372 stores donated 29,000 hours of painting and 8,500 gallons of paint to complete 252 community projects. In Latin America, we earned the Best Product for Dealers Award for Colorgin® Spray Paint and Novacor® Floor Paint (ARTESP: Paint Dealers Association Sao Paulo, Brazil); the Material Dealers 1st Place Award for Master® Spray Paint and Novacor® Floor Paint (ANAMACO – National Association for Building Materials – Brazil); and the Socially Responsible Company Award (Centro Mexicano para la Filantropia). *Sherwin-Williams received the highest numerical score among Interior Paints in the J.D. Power 2017 Paint Satisfaction Study, based on 4,625 total responses from 12 companies measuring experiences and perceptions of customers, surveyed February-March 2017. Your experiences may vary. Visit jdpower.com. 11 Consumer Brands Group The Consumer Brands Group combines our previous Consumer Group with the architectural paint business from Valspar’s legacy Paints segment to sell one of the industry’s most recognized portfolios of branded and private-label products to do-it-yourself, do-it-for-me and professional customers in North America, Europe, China, Australia and New Zealand. The Group also manages the Company’s Global Supply Chain, consisting of 84 manufacturing and distribution facilities, and leads our worldwide architectural coatings research and development effort. 12 In 2017, the Consumer Brands Group net sales were $2.15 billion, a 41.1 percent increase compared to the prior year. This growth consisted of a 49.4 percent increase related to the Valspar acquisition, partially offset by an 8.4 percent decrease related to lower paint sales volume in our core business. Segment profit decreased to $226 million, including $71.7 million in Valspar-related profit and $107.6 million in Valspar-related expenses for purchase accounting adjustments to inventory and increased intangible asset amortization. Through the Valspar acquisition, the Consumer Brands Group now has a broader collection of high-quality brands, a deeper management team, expanded retail distribution, and greater exposure to growth opportunities outside North America. Together, we are focused on providing our customers with a compelling value proposition and realizing synergies that will improve segment performance and drive profitable growth. Supply chain optimization in particular remains a significant opportunity for us, and we have made substantial progress in this area. We continue to invest in products that will make our customers more successful. For example, we introduced three new premium paints this year under the Pratt & Lambert® brand. Aquanamel® Waterborne Alkyd Enamel provides superb flow and leveling with a hard and durable finish. Fresh-Spec™ Zero VOC Interior professional paint is ideal for use in schools, health care facilities, commercial repaints and new construction. Accolade® Exterior Premium Paint & Primer is a 100 percent acrylic house and trim paint designed to withstand harsh winter and summer weather extremes. In the stain ACHIEVEMENTS Valspar ranked “Highest in Customer Satisfaction among Exterior Paints” in the 2017 J.D. Power Paint Satisfaction Study.* category, our Minwax® Gel Stain offers non-drip performance while protecting Our Valspar® HydroChroma® Technology and accentuating the beauty of a wide range of wood surfaces. Within the Valspar portfolio, recent innovations include an exterior paint collection formulated to withstand extreme weather conditions. Valspar® Reserve® Extreme Weather Paint + Primer with SunStopper™ Technology protects against UV damage in hot, sunny regions. Valspar® Reserve® Extreme uses three times more super-strength, concentrated paint colorants than our standard systems to ensure Color Stays True Longer™. Customers benefit from advanced fade resistance and improved Weather Paint + Primer with SeasonFlex™ Technology expands and contracts one-coat coverage. as needed for areas with both extreme heat and freezing cold. Valspar® Reserve® Extreme Weather Paint + Primer with RainRelief™ Technology features a mildew-resistant finish ideal for rainy and humid regions. Two additional consumer brands from Valspar expand our global growth opportunities. In China, the Huarun™ brand is a leading domestic Chinese paint and coatings brand. Huarun™ products are widely available in the region through branded and non-branded stores, home improvement centers and home decoration companies. In Australia and New Zealand, the Wattyl® brand has been well-known for more than 100 years and today is available through more than 90 company-operated outlets in the region. We intend to leverage expertise from The Americas Group stores to further optimize the performance of our Wattyl stores. Wattyl’s family of products covers multiple areas in the paint and coatings market and includes Solagard®, Estapol®, Killrust®, Solver® and Taubmans®. We launched our Cabot® Worry-Free Guarantee™** to simplify and take the guesswork out of the stain process, and the super-premium Cabot® Gold program to bring the look of interior hardwood floors to exterior stain projects. *Valspar received the highest numerical score among Exterior Paints in the J.D. Power 2017 Paint Satisfaction Study based on 3,139 responses from 12 companies measuring experiences and perceptions of customers surveyed February-March 2017. Your experiences may vary. Visit jdpower.com. **See https://cabotwfpg.com/terms for Worry-Free Guarantee terms and conditions. 13 Performance Coatings Group The Performance Coatings Group combines our legacy Global Finishes Group and Valspar’s previous Coatings segment to sell a broad range of coating and finishing solutions to general industrial, industrial wood, protective and marine, automotive, packaging and coil & extrusion customers. The Group serves customers in more than 110 countries and operates nearly 300 branches worldwide. 14 In 2017, the Performance Coatings Group net sales were $3.71 billion, a 90.4 percent increase compared with the prior year. This growth resulted from a 3.0 percent increase related to higher paint sales volume and selling price increases in our core business, and an 87.5 percent increase from the Valspar acquisition. The Performance Coatings Group profit increased 16.1 percent to $298.5 million, inclusive of $231.1 million in Valspar-related profit and $183.1 million in Valspar-related expense for purchase accounting adjustments to inventory and increased intangible asset amortization. The Performance Coatings Group brings Sherwin-Williams and Valspar together in an exciting new combination, resulting in greater global scale, expanded and complementary technologies, a broader range of customer solutions, and strong positions in new growth segments. Together, we have identified myriad opportunities for collaboration, synergy and profitable growth. Our general industrial business combines Valspar’s strength with OEM customers and Sherwin-Williams’ small-batch, custom formulation capabilities and relationships with component suppliers to offer greater value across the supply chain. From a technology perspective, we are responding to increasing customer demand for low-VOC coatings with innovative products such as AquaGuard®. This waterborne product offers up to 94 percent reduction in VOCs compared to alternative solvent and zinc liquid formulations, and up to 60 percent better corrosion resistance in salt spray and cyclic testing compared to e-coat and zinc formulations. We are capitalizing on this same waterborne product trend in our industrial wood business. Products include: the Sayerlack® HydroPlus™ family of low-VOC, high-performance coatings for furniture; Ultra-Cure® waterborne UV coatings for kitchen cabinetry; and Sher-Wood® Universal Primer, a fast-drying, pigmented, waterborne acrylic primer for interior woodwork applications. In automotive finishes, demand for waterborne products also represents a significant opportunity. Our recent introduction of waterborne dynamic clearcoat CC200 has been well-received, and Valspar’s DeBeer® line of premium waterborne coatings expands our product offering and gives us a presence in European and Australian markets where we had not previously participated. In protective and marine coatings, Valspar’s fusion-bonded epoxy powder coating technology is an ideal complement to our legacy liquid coatings product lines for pipe and rebar segments. Key applications for this technology include oil and gas, where our Valspar Pipeclad® 2000 powder coating protects more than 100,000 kilometers of pipeline across the globe – enough pipe to circle the world 2.5 times. ACHIEVEMENTS Designed for use over properly prepared blasted steel, Zinc Clad® 4100 is a new high-solids epoxy coating allowing users to apply subsequent coats after as little as 30 minutes. Benefits also include accelerated shop throughput, enhanced project schedules and faster field project turnarounds in bridge, highway and related structural steel applications. In addition, the coating exhibits self-healing properties if it becomes damaged. Our Industrial Wood Coatings business invested $300,000 in the Manufacturing Industry Learning Lab (MiLL), a new, 46,000-square-foot national training center in Colorado Springs, Colorado, to help prepare the next generation of wood manufacturing The Valspar acquisition also added two new product categories to our tradesmen and women. industrial portfolio. In packaging coatings, we now have world-leading technology in protective coatings for food, beverage and aerosol cans. We own 170 patents, including more than 50 for non-BPA formulations to which the industry is rapidly moving. Our ValPure® V70 non-BPA coating is the only commercial non-BPA epoxy coating in the industry. Additionally, Valspar’s coil & extrusion product line establishes us as a leading manufacturer of coatings for metal architecture applications, such as roofing, entryways, skylights and window and door framing. Our PVDF Fluropon® coating is ideal for monumental and high- end residential and commercial architecture, as it provides outstanding color and gloss retention. Our Coil & Extrusion business launched the new Fluropon® Effects Nova line to deliver innovation in color effects for commercial architects, using a patent-pending color space customizable to match color with a gold, silver or copper sparkle, while maintaining outstanding durability. 15 Shareholder Returns COM PARISON OF CUMU L ATIVE FIVE-YE AR TOTAL RE TU RN FIVE-YE AR RE TU RN $300 $250 $200 $150 $100 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 Sherwin-Williams Co. S&P 500 Index Peer Group Peer group of companies comprised of the following: Akzo Nobel N.V., BASF SE, H.B. Fuller Company, Genuine Parts Company, The Home Depot, Inc., Lowe’s Companies, Inc., Masco Corporation, Newell Brands Inc., PPG Industries, Inc., RPM International Inc., Stanley Black & Decker Inc. and USG Corporation STOCK RE PU RCHA SE (millions of shares) 12.00 9.00 6.00 3.00 0.00 2008 2009 2010 2011 2012 2013 2014 2015 2016* 2017* * No open market purchases in 2016 and 2017 118.2 114.5 108.8 105.7 103.9 103.0 98.7 94.5 94.5 94.9 Average Common Shares Outstanding (fully diluted, in millions) DIVIDE N DS PE R SHARE $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 $0.00 16 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 The graph at left compares the cumulative five-year total shareholder return on Sherwin-Williams common stock with the cumulative five-year total return of the companies listed on the Standard & Poor’s 500 Stock Index and a peer group of companies selected on a line-of- business basis. The cumulative five-year total return assumes $100 was invested on December 31, 2012, in Sherwin-Williams common stock, the S&P 500 and the peer group. The cumulative five-year total return, including reinvestment of dividends, represents the cumulative value through December 31, 2017. RE TU RNING C A SH TO SHARE HOLDE R S We have consistently returned a portion of our cash generated from operations to shareholders through cash dividends and share repurchases. In 2017, the Company increased its cash dividend 1.2 percent to $3.40 per share, marking the 39th consecutive year we increased our dividend. We also view share repurchases as an efficient way of returning cash to shareholders. Over the past two years, we have temporarily suspended share repurchases, using cash to reduce total borrowings required to finance the Valspar transaction in 2016, and reducing debt by more than $1 billion in 2017. Over the past 10 years, we have reduced our average diluted common shares outstanding by more than 24 million shares. Financial Performance FINANCIAL TABLE OF CONTENTS Financial Summary ..................................................................................................................................................................... 18 Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................... 19 Reports of Management and the Independent Registered Public Accounting Firm............................................... 36 Consolidated Financial Statements and Notes .................................................................................................................. 40 Cautionary Statement Regarding Forward-Looking Information ................................................................................. 78 Shareholder Information ........................................................................................................................................................... 79 Corporate Officers and Operating Management .............................................................................................................. 80 17 Financial Summary (millions of dollars except as noted and per share data) Operations Net sales(1) .................................................................. Cost of goods sold(1) ..................................................... Selling, general and administrative expenses(1) .................... Amortization ............................................................... Interest expense ........................................................... Income from continuing operations before income taxes(2) .... Net income from continuing operations(3) .......................... Financial Position Accounts receivable – net .............................................. Inventories .................................................................. Working capital – net .................................................... Property, plant and equipment – net ................................ Total assets ................................................................. Long-term debt ........................................................... Total debt................................................................... Shareholders’ equity ..................................................... Per Common Share Information Average shares outstanding (thousands) ........................... Book value.................................................................. Net income from continuing operations – diluted(4).............. Cash dividends ............................................................ Financial Ratios Return on sales ............................................................ Asset turnover ............................................................. Return on assets .......................................................... Return on equity(5) ........................................................ Dividend payout ratio(6) ................................................. Total debt to capitalization ............................................. Current ratio ............................................................... Interest coverage(7) ....................................................... Net working capital to sales ............................................ Effective income tax rate(8) ............................................. General Earnings before interest, taxes, depreciation and amortization ............................................................ Capital expenditures ..................................................... Total technical expenditures (see Note 1) ........................... Advertising expenditures................................................ Repairs and maintenance ............................................... Depreciation ............................................................... Shareholders of record (total count) ................................. Number of employees (total count) .................................. Sales per employee (thousands of dollars) .......................... Sales per dollar of assets ................................................ 2017 2016 2015 2014 2013 $14,984 8,203 4,785 207 263 1,528 1,814 $ 2,105 1,801 479 1,877 19,958 9,886 10,521 3,692 92,909 $ 39.33 19.11 3.40 $11,856 5,933 4,159 26 154 1,595 1,133 $ 1,231 1,068 798 1,096 6,753 1,211 1,953 1,878 91,839 $ 20.20 11.99 3.36 $11,339 5,780 3,914 28 62 1,549 1,054 $ 1,114 1,019 515 1,042 5,779 1,907 1,950 868 $ 92,197 9.41 11.15 2.68 $11,130 5,965 3,823 30 64 1,258 866 $ 1,131 1,034 (115) 1,021 5,699 1,116 1,799 996 96,190 $ 10.52 8.77 2.20 $ 10,186 5,569 3,468 29 63 1,086 753 $ 1,098 971 630 1,021 6,383 1,122 1,722 1,775 $ 100,898 17.72 7.25 2.00 12.1% 0.8x 9.1% 96.6% 28.4% 74.0% 1.1 6.8x 3.2% 25.1% 9.6% 1.8x 16.8% 130.5% 30.1% 51.0% 1.3 11.4x 6.7% 29.0% 9.3% 2.0x 18.2% 105.8% 30.6% 69.2% 1.2 26.1x 4.5% 32.0% 7.8% 2.0x 15.2% 48.8% 30.3% 64.4% 1.0 20.6x (1.0)% 31.2% 7.4% 1.6x 11.8% 42.0% 33.2% 49.2% 1.2 18.3x 6.2% 30.7% $ 2,283 223 216 383 116 285 6,470 52,695 284 0.75 $ $ 1,947 239 153 351 100 172 6,787 42,550 279 1.76 $ $ 1,809 234 150 338 99 170 6,987 40,706 279 1.96 $ $ 1,521 201 155 299 96 169 7,250 39,674 281 1.95 $ $ $ 1,336 167 144 263 87 159 7,555 37,633 271 1.60 (1) (2) (3) (4) (5) (6) (7) (8) 2017 includes Valspar results since June 1, 2017. 2017 includes acquisition and purchase accounting adjustments of $429.5 million and contribution from Valspar operations of $115.8 million. 2016 includes acquisition- related costs of $133.6 million. 2017 includes the following: (a) one-time income tax benefit of $668.8 million from Deferred income tax reductions (see Note 14), (b) after-tax acquisition-related costs and purchase accounting adjustments of $285.1 million, and (c) after-tax contribution from Valspar operations of $76.0 million. 2016 includes after-tax acquisition-related costs of $81.5 million. 2017 includes the following: (a) one-time benefit of $7.04 per share from Deferred income tax reductions, (b) charge of $3.00 per share for acquisition-related costs and purchase accounting impacts, and (c) $.80 per share contribution from Valspar operations. 2016 includes a charge of $.86 per share for acquisition-related costs. Based on net income and shareholders’ equity at beginning of year. Based on cash dividends per common share and prior year’s diluted net income per common share. Ratio of income before income taxes and interest expense to interest expense. Based on income from continuing operations before income taxes. 2017 excludes impact of one-time income tax benefit from the Deferred income tax reductions. 18 Management’s Discussion and Analysis of Financial Condition and Results of Operations SUMMARY from a cash source of $1.309 billion in 2016. Strong net operating The Sherwin-Williams Company, founded in 1866, and its cash provided the funds necessary to acquire Valspar, invest in consolidated wholly owned subsidiaries (collectively, the new stores, manufacturing and distribution facilities, return cash to Company) are engaged in the development, manufacture, shareholders through dividends, and pay down debt. distribution and sale of paint, coatings and related products to Consolidated net sales increased 26.4 percent in 2017 to professional, industrial, commercial and retail customers primarily $14.984 billion from $11.856 billion in 2016. The increase was due in North and South America with additional operations in the primarily to higher paint sales volume in The Americas Group and Caribbean region, Europe, Asia and Australia. On June 1, 2017, the the addition of Valspar sales beginning in June. Excluding sales Company completed the acquisition (Acquisition) of The Valspar from Valspar, net sales from core Sherwin–Williams operations Corporation (Valspar) (See Note 2) for a total purchase price of increased 5.6 percent during 2017. The increase in core operations $8.939 billion, which significantly affected the existing business. was primarily due to increased sales volumes and pricing in The As of the close of the Acquisition, our reporting segments changed Americas Group and Performance Coatings Group partially offset to better reflect the operations of the combined Companies. The by lower sales volumes in the Consumer Brands Group. Company is structured into three reportable segments – The Consolidated gross profit as a percent of consolidated net sales Americas Group, Consumer Brands Group and Performance decreased to 45.3 percent in 2017 compared to 50.0 percent in Coatings Group (collectively, the Reportable Segments) – and an 2016 due primarily to the Acquisition and related inventory Administrative Segment in the same way it is internally organized purchase accounting adjustments and higher raw material costs, for assessing performance and making decisions regarding partially offset by increased paint volume. Selling, general and allocation of resources. See pages 8 through 15 of this report and administrative expenses (SG&A) increased $650.9 million in 2017 Note 18, on pages 74 through 77 of this report, for more compared to 2016 and decreased as a percent of consolidated net information concerning the Reportable Segments. sales to 31.9 percent in 2017 from 34.9 percent in 2016 primarily The Company’s financial condition, liquidity and cash flow due to the impact from Valspar operations. Amortization expense continued to be strong in 2017 as net operating cash topped increased $181.4 million to $206.8 million in 2017 versus 2016 due $1.000 billion for the fifth straight year primarily due to improved primarily to the Acquisition and related purchase accounting fair operating results in The Americas Group. Net working capital value adjustments. decreased $319.5 million at December 31, 2017 compared to 2016 Interest expense increased $109.4 million in 2017 versus 2016 due to a significant increase in current liabilities partially offset by primarily due to increased debt levels to fund the Acquisition. a significant increase in current assets primarily due to the Excluding the income tax benefit of $668.8 million from the Tax Acquisition. Cash and cash equivalents decreased $685.6 million, Cuts and Jobs Act of 2017 (Tax Act) and subsidiary mergers while the current portion of long-term debt decreased (collectively, Deferred income tax reductions), the effective $699.3 million resulting from the payment of 1.35% senior notes income tax rate for income from continuing operations was maturing in 2017. On May 16, 2017, in order to fund the 25.1 percent for 2017 and 29.0 percent for 2016. See Note 14 on Acquisition, the Company issued $6.000 billion of senior notes in pages 70 through 72 for more information on Income taxes. The a public offering. In April 2016, the Company entered into Company also recorded an income tax provision of $41.5 million in agreements for a $7.300 billion Bridge Loan and a $2.000 billion the second quarter of 2017 related to the divestiture of Valspar’s Term Loan as committed financing for the Acquisition. On June 1, North American industrial wood coatings business, which is 2017, the Company terminated the agreement for the Bridge Loan reported as a discontinued operation and reduced diluted net and borrowed the full $2.000 billion on the Term Loan. As of income per common share by $.44 per share. See Notes 1 and 14 December 31, 2017, the Term Loan had an outstanding balance of for more information. Diluted net income per common share $850.0 million at an approximate interest rate of 2.62 percent. increased 55.7 percent to $18.67 per share for 2017 from $11.99 Total debt issuance costs related to all of the facilities of per share in 2016. Diluted net income per common share from $63.6 million were incurred and recorded in Long-Term Debt as a continuing operations was $19.11 per share in 2017, including a reduction to the outstanding balances. Of this amount, $8.3 million one-time benefit of $7.04 per share from the Deferred income tax was amortized and included in Interest expense for the year ended reductions. Diluted net income per common share for 2017 was December 31, 2017. The Company has been able to arrange decreased by charges of $3.00 per share from Acquisition costs, sufficient short-term borrowing capacity at reasonable rates, and including inventory purchase accounting adjustments and the Company continues to have sufficient total available borrowing increased amortization of intangible assets. Valspar operations capacity to fund its current operating needs. Net operating cash increased Diluted net income per common share by $.80 per share increased $575.4 million in 2017 to a cash source of $1.884 billion for 2017, including a $.92 per share charge from interest expense 19 Management’s Discussion and Analysis of Financial Condition and Results of Operations on new debt. Diluted net income per common share for 2016 was consolidated. For affordable housing investments entered into decreased by charges of $.86 per share from Acquisition costs. prior to the January 1, 2015 adoption of ASU No. 2014-01, the Currency translation rate changes did not have a significant impact Company uses the effective yield method to determine the on diluted net income per common share in 2017. carrying value of the investments. Under the effective yield method, the initial cost of the investments is amortized to income CRITICAL ACCOUNTING POLICIES AND ESTIMATES tax expense over the period that the tax credits are recognized. For The preparation and fair presentation of the consolidated affordable housing investments entered into on or after the financial statements, accompanying notes and related financial January 1, 2015 adoption of ASU No. 2014-01, the Company uses information included in this report are the responsibility of the proportional amortization method. Under the proportional management. The consolidated financial statements, amortization method, the initial cost of the investments is accompanying notes and related financial information included in amortized to income tax expense in proportion to the tax credits this report have been prepared in accordance with U.S. generally and other tax benefits received. The Company has no ongoing accepted accounting principles. The consolidated financial capital commitments, loan requirements or guarantees with the statements contain certain amounts that were based upon general partners that would require any future cash contributions management’s best estimates, judgments and assumptions that other than the contractually committed capital contributions that were believed to be reasonable under the circumstances. are disclosed in the contractual obligations table on page 27 of this Management considered the impact of the uncertain economic report. See Note 1, on page 46 of this report, for more information environment and utilized certain outside sources of economic on non-traded investments. information when developing the basis for their estimates and assumptions. The impact of the global economic conditions on the Accounts Receivable estimates and assumptions used by management was believed to Accounts receivable were recorded at the time of credit sales be reasonable under the circumstances. Management used net of provisions for sales returns and allowances. All provisions assumptions based on historical results, considering the current for allowances for doubtful collection of accounts are included in economic trends, and other assumptions to form the basis for Selling, general and administrative expenses and were based on determining appropriate carrying values of assets and liabilities management’s best judgment and assessment, including an that were not readily available from other sources. Actual results analysis of historical bad debts, a review of the aging of Accounts could differ from those estimates. Also, materially different receivable and a review of the current creditworthiness of amounts may result under materially different conditions, customers. Management recorded allowances for such accounts materially different economic trends or from using materially which were believed to be uncollectible, including amounts for the different assumptions. However, management believes that any resolution of potential credit and other collection issues such as materially different amounts resulting from materially different disputed invoices, customer satisfaction claims and pricing conditions or material changes in facts or circumstances are discrepancies. However, depending on how such potential issues unlikely to significantly impact the current valuation of assets and are resolved, or if the financial condition of any of the Company’s liabilities that were not readily available from other sources. customers were to deteriorate and their ability to make required All of the significant accounting policies that were followed in payments became impaired, increases in these allowances may be the preparation of the consolidated financial statements are required. At December 31, 2017, no individual customer disclosed in Note 1, on pages 46 through 50, of this report. The constituted more than 5 percent of Accounts receivable. following procedures and assumptions utilized by management directly impacted many of the reported amounts in the Inventories consolidated financial statements. Non-Traded Investments Inventories were stated at the lower of cost or market with cost determined principally on the last-in, first-out (LIFO) method based on inventory quantities and costs determined during the The Company has investments in the U.S. affordable housing fourth quarter. Inventory quantities were adjusted during the and historic renovation real estate markets and certain other fourth quarter as a result of annual physical inventory counts taken investments that have been identified as variable interest entities. at all locations. If inventories accounted for on the LIFO method The Company does not have the power to direct the day-to-day are reduced on a year-over-year basis, then liquidation of certain operations of the investments and the risk of loss is limited to the quantities carried at costs prevailing in prior years occurs. amount of contributed capital, and therefore, the Company is not Management recorded the best estimate of net realizable value for considered the primary beneficiary. In accordance with the obsolete and discontinued inventories based on historical Consolidation Topic of the ASC, the investments are not experience and current trends through reductions to inventory 20 Management’s Discussion and Analysis of Financial Condition and Results of Operations cost by recording a provision included in Cost of goods sold. availability of discrete financial information that is regularly Where management estimated that the reasonable market value reviewed by operating segment management or an aggregate of was below cost or determined that future demand was lower than component levels of an operating segment having similar current inventory levels, based on historical experience, current economic characteristics. At the time of goodwill impairment and projected market demand, current and projected volume testing (if performing a quantitative assessment), management trends and other relevant current and projected factors associated determines fair value through the use of a discounted cash flow with the current economic conditions, a reduction in inventory cost valuation model incorporating discount rates commensurate with to estimated net realizable value was made. See Note 3, on the risks involved for each reporting unit. If the calculated fair page 51 of this report, for more information regarding the impact value is less than the current carrying value, then impairment of of the LIFO inventory valuation. the reporting unit exists. The use of a discounted cash flow valuation model to determine estimated fair value is common Purchase Accounting, Goodwill and Intangible Assets practice in impairment testing. The key assumptions used in the In accordance with the Business Combinations Topic of the discounted cash flow valuation model for impairment testing ASC, the Company used the purchase method of accounting to include discount rates, growth rates, cash flow projections and allocate costs of acquired businesses to the assets acquired and terminal value rates. Discount rates are set by using the Weighted liabilities assumed based on their estimated fair values at the date Average Cost of Capital (“WACC”) methodology. The WACC of acquisition. The excess costs of acquired businesses over the methodology considers market and industry data as well as fair values of the assets acquired and liabilities assumed were Company-specific risk factors for each reporting unit in recognized as Goodwill. The valuations of the acquired assets and determining the appropriate discount rates to be used. The liabilities will impact the determination of future operating results. discount rate utilized for each reporting unit is indicative of the In addition to using management estimates and negotiated return an investor would expect to receive for investing in such a amounts, the Company used a variety of information sources to business. Operational management, considering industry and determine the estimated fair values of acquired assets and Company-specific historical and projected data, develops growth liabilities including: third-party appraisals for the estimated value rates, sales projections and cash flow projections for each and lives of identifiable intangible assets and property, plant and reporting unit. Terminal value rate determination follows common equipment; third-party actuaries for the estimated obligations of methodology of capturing the present value of perpetual cash flow defined benefit pension plans and similar benefit obligations; and estimates beyond the last projected period assuming a constant legal counsel or other experts to assess the obligations associated WACC and low long-term growth rates. As an indicator that each with legal, environmental and other contingent liabilities. The reporting unit has been valued appropriately through the use of business and technical judgment of management was used in the discounted cash flow valuation model, the aggregate of all determining which intangible assets have indefinite lives and in reporting units’ fair value is reconciled to the total market determining the useful lives of finite-lived intangible assets in capitalization of the Company. accordance with the Goodwill and Other Intangibles Topic of the The Company had six components, some of which are ASC. aggregated due to similar economic characteristics, to form three As required by the Goodwill and Other Intangibles Topic of the reporting units (also the operating segments) with goodwill as of ASC, management performs impairment tests of goodwill and October 1, 2017, the date of the annual impairment test. The indefinite-lived intangible assets on an annual basis, as well as annual impairment review performed as of October 1, 2017 did not whenever an event occurs or circumstances change that indicate result in any of the reporting units having impairment or deemed impairment has more likely than not occurred. An optional at risk for impairment. qualitative assessment allows companies to skip the annual In accordance with the Goodwill and Other Intangibles Topic of two-step quantitative test if it is not more likely than not that the ASC, management tests indefinite-lived intangible assets for impairment has occurred based on monitoring key Company impairment at the asset level, as determined by appropriate asset financial performance metrics and macroeconomic conditions. The valuations at acquisition. Management utilizes the royalty savings qualitative assessment is performed when deemed appropriate. method and valuation model to determine the estimated fair value In accordance with the Goodwill and Other Intangibles Topic of for each indefinite-lived intangible asset or trademark. In this the ASC, management tests goodwill for impairment at the method, management estimates the royalty savings arising from reporting unit level. A reporting unit is an operating segment per the ownership of the intangible asset. The key assumptions used in the Segment Reporting Topic of the ASC or one level below the estimating the royalty savings for impairment testing include operating segment (component level) as determined by the discount rates, royalty rates, growth rates, sales projections and 21 Management’s Discussion and Analysis of Financial Condition and Results of Operations terminal value rates. Discount rates used are similar to the rates information available at the time the valuation or determination developed by the WACC methodology considering any differences was performed. Actual results could differ from these in Company-specific risk factors between reporting units and assumptions. Management believes the assumptions used are trademarks. Royalty rates are established by management and reflective of what a market participant would have used in valuation experts and periodically substantiated by valuation calculating fair value or useful life considering the current experts. Operational management, considering industry and economic conditions. All tested long-lived assets or groups of Company-specific historical and projected data, develops growth long-lived assets had undiscounted cash flows that were rates and sales projections for each significant trademark. substantially in excess of their carrying value. See Notes 4 and 5, Terminal value rate determination follows common methodology on pages 51 through 54 of this report, for a discussion of the of capturing the present value of perpetual sales estimates beyond reductions in carrying value or useful life of long-lived assets in the last projected period assuming a constant WACC and low accordance with the Property, Plant and Equipment Topic of the long-term growth rates. The royalty savings valuation ASC. methodology and calculations used in 2017 impairment testing are consistent with prior years. The annual impairment review Exit or Disposal Activities performed as of October 1, 2017 resulted in an impairment of a Management is continually re-evaluating the Company’s trademark in The Americas Group of $2.0 million. operating facilities against its long-term strategic goals. Liabilities The discounted cash flow and royalty savings valuation associated with exit or disposal activities are recognized as methodologies require management to make certain assumptions incurred in accordance with the Exit or Disposal Cost Obligations based upon information available at the time the valuations are Topic of the ASC and property, plant and equipment is tested for performed. Actual results could differ from these assumptions. impairment in accordance with the Property, Plant and Equipment Management believes the assumptions used are reflective of what Topic of the ASC. Provisions for qualified exit costs are made at a market participant would have used in calculating fair value the time a facility is no longer operational, include amounts considering the current economic conditions. See Note 4, on estimated by management and primarily include post-closure rent pages 51 through 52 of this report, for a discussion of goodwill and expenses or costs to terminate the contract before the end of its intangible assets and the impairment tests performed in term and costs of employee terminations. Adjustments may be accordance with the Goodwill and Other Intangibles Topic of the made to liabilities accrued for qualified exit costs if information ASC. becomes available upon which more accurate amounts can be reasonably estimated. If impairment of property, plant and Property, Plant and Equipment and Impairment of Long-Lived equipment exists, then the carrying value is reduced to fair value Assets estimated by management. Additional impairment may be Property, plant and equipment was stated on the basis of cost recorded for subsequent revisions in estimated fair value. See Note and depreciated principally on a straight-line basis using industry 5, on pages 52 through 54 of this report, for information standards and historical experience to estimate useful lives. In concerning impairment of property, plant and equipment and accordance with the Property, Plant and Equipment Topic of the accrued qualified exit costs. ASC, if events or changes in circumstances indicated that the carrying value of long-lived assets may not be recoverable or the Other Liabilities useful life had changed, impairment tests were performed or the The Company retains risk for certain liabilities, primarily useful life was adjusted. Undiscounted future cash flows were worker’s compensation claims, employee medical benefits, and used to calculate the recoverable value of long-lived assets to automobile, property, general and product liability claims. determine if such assets were impaired. Where impairment was Estimated amounts were accrued for certain worker’s identified, management determined fair values for assets using a compensation, employee medical and disability benefits, discounted cash flow valuation model, incorporating discount automobile and property claims filed but unsettled and estimated rates commensurate with the risks involved for each group of claims incurred but not reported based upon management’s assets. Growth models were developed using both industry and estimated aggregate liability for claims incurred using historical Company historical results and forecasts. If the usefulness of an experience, actuarial assumptions followed in the insurance asset was determined to be impaired, then management industry and actuarially-developed models for estimating certain estimated a new useful life based on the period of time for liabilities. Certain estimated general and product liability claims projected uses of the asset. Such models and changes in useful life filed but unsettled were accrued based on management’s best required management to make certain assumptions based upon estimate of ultimate settlement or actuarial calculations of 22 Management’s Discussion and Analysis of Financial Condition and Results of Operations potential liability using industry experience and actuarial Environmental Matters assumptions developed for similar types of claims. The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned Defined Benefit Pension and Other Postretirement Benefit sites and at a number of third-party sites. The Company accrues Plans for environmental-related activities for which commitments or To determine the Company’s ultimate obligation under its clean-up plans have been developed and for which costs can be defined benefit pension plans and postretirement benefit plans reasonably estimated based on industry standards and other than pensions, management must estimate the future cost of professional judgment. All accrued amounts were recorded on an benefits and attribute that cost to the time period during which undiscounted basis. Environmental-related expenses included each covered employee works. To determine the obligations of direct costs of investigation and remediation and indirect costs such benefit plans, management uses actuaries to calculate such such as compensation and benefits for employees directly amounts using key assumptions such as discount rates, inflation, involved in the investigation and remediation activities and fees long-term investment returns, mortality, employee turnover, rate paid to outside engineering, actuarial, consulting and law firms. of compensation increases and medical and prescription drug Due to uncertainties surrounding environmental investigations and costs. Management reviews all of these assumptions on an remediation activities, the Company’s ultimate liability may result ongoing basis to ensure that the most current information in costs that are significantly higher than currently accrued. See available is being considered. An increase or decrease in the page 27 and Note 8, on pages 62 through 63 of this report, for assumptions or economic events outside management’s control information concerning the accrual for extended environmental- could have a direct impact on the Company’s results of operations related activities and a discussion concerning unaccrued future or financial condition. loss contingencies. In accordance with the Retirement Benefits Topic of the ASC, the Company recognizes each plan’s funded status as an asset for Litigation and Other Contingent Liabilities overfunded plans and as a liability for unfunded or underfunded In the course of its business, the Company is subject to a plans. Actuarial gains and losses and prior service costs are variety of claims and lawsuits, including, but not limited to, recognized and recorded in Cumulative other comprehensive loss, litigation relating to product liability and warranty, personal injury, a component of Shareholders’ equity. The amounts recorded in environmental, intellectual property, commercial, contractual and Cumulative other comprehensive loss will continue to be modified antitrust claims. Management believes that the Company has as actuarial assumptions and service costs change, and all such properly accrued for all known liabilities that existed and those amounts will be amortized to expense over a period of years where a loss was deemed probable for which a fair value was through the net pension and net periodic benefit costs. available or an amount could be reasonably estimated in Pension costs for 2018 are expected to decrease due to higher accordance with all present U.S. generally accepted accounting expected return on plan assets and decreased amortization of net principles. However, because litigation is inherently subject to actuarial losses. Postretirement benefit plan costs for 2018 are many uncertainties and the ultimate result of any present or future expected to increase primarily due to higher service and interest litigation is unpredictable, the Company’s ultimate liability may costs. See Note 6, on pages 55 through 60 of this report, for result in costs that are significantly higher than currently accrued. information concerning the Company’s defined benefit pension In the event that the Company’s loss contingency is ultimately plans and postretirement benefit plans other than pensions. determined to be significantly higher than currently accrued, the Debt recording of the liability may result in a material impact on net income for the annual or interim period during which such liability The fair values of the Company’s publicly traded long-term is accrued. Additionally, due to the uncertainties involved, any debt were based on quoted market prices. The fair values of the potential liability determined to be attributable to the Company Company’s non-traded long-term debt were estimated using arising out of such litigation may have a material adverse effect on discounted cash flow analyses, based on the Company’s current the Company’s results of operations, liquidity or financial incremental borrowing rates for similar types of borrowing condition. See Note 9 on pages 63 through 66 of this report for arrangements. See Note 1, on page 46 of this report, for the information concerning litigation. carrying amounts and fair values of the Company’s long-term debt, and Note 7, on pages 61 through 62 of this report, for a Income Taxes description of the Company’s long-term debt arrangements. The Company estimated income taxes in each jurisdiction that it operated. This involved estimating taxable earnings, specific 23 Management’s Discussion and Analysis of Financial Condition and Results of Operations taxable and deductible items, the likelihood of generating returns or exchanges, recorded as a reduction resulting in net sufficient future taxable income to utilize deferred tax assets and sales, were established in cases where the right of return existed. possible exposures related to future tax audits. To the extent these The Company offered a variety of programs, primarily to its retail estimates change, adjustments to deferred and accrued income customers, designed to promote sales of its products. Such taxes will be made in the period in which the changes occur. programs required periodic payments and allowances based on On December 22, 2017, the Tax Act was enacted. The Tax Act estimated results of specific programs and were recorded as a significantly revised the U.S. corporate income tax system by, reduction resulting in net sales. The Company accrued the among other things, lowering corporate income tax rates from 35% estimated total payments and allowances associated with each to 21%, implementing a territorial tax system and imposing a transaction at the time of sale. Additionally, the Company offered repatriation tax on deemed repatriated earnings of foreign programs directly to consumers to promote the sale of its subsidiaries. Staff Accounting Bulletin (SAB) No. 118 provides a products. Promotions that reduced the ultimate consumer sale measurement period that should not extend beyond one year from prices were recorded as a reduction resulting in net sales at the the enactment date for companies to complete the accounting time the promotional offer was made, generally using estimated under the Tax Act. In accordance with SAB No. 118, based on the redemption and participation levels. The Company continually information available as of December 31, 2017, the Company assesses the adequacy of accruals for customer and consumer recorded provisional decreases in deferred tax liabilities which promotional program costs earned but not yet paid. To the extent increased earnings for the year ended December 31, 2017. The total program payments differ from estimates, adjustments may majority of this benefit was driven by the effects of the be necessary. Historically, these total program payments and implementation of the territorial tax system and the adjustments have not been material. See Note 1 on page 50 for remeasurement of U.S. deferred tax liabilities on unremitted foreign information on the new revenue standard. earnings. The final impact of the Tax Act may differ from the provisional amounts recorded at December 31, 2017 due to FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW changes in the Company’s current interpretations and assumptions, clarification and implementation guidance that may be issued and actions the Company may take as a result of the Tax Act. See Note 14, on pages 70 through 72 of this report, for more information. Stock-Based Compensation The cost of the Company’s stock-based compensation is recorded in accordance with the Stock Compensation Topic of the ASC. The Company estimates the fair value of option rights using a Black-Scholes-Merton option pricing model which requires management to make estimates for certain assumptions. Management and a consultant continuously review the following significant assumptions: risk-free interest rate, expected life of options, expected volatility of stock and expected dividend yield of stock. An increase or decrease in the assumptions or economic events outside management’s control could have a direct impact on the Company’s results of operations. See Note 12, on pages 68 and 69 of this report, for more information on stock-based compensation. Revenue Recognition The Company’s revenue was primarily generated from the sale of products. All sales of products were recognized when shipped and title passed to unaffiliated customers. Collectibility of amounts recorded as revenue is reasonably assured at time of sale. Discounts were recorded as a reduction to sales in the same period as the sale resulting in an appropriate net sales amount for the period. Standard sales terms are final and returns or exchanges are not permitted unless expressly stated. Estimated provisions for Overview On June 1, 2017, the Company completed the Acquisition for a total purchase price of $8.939 billion. On May 16, 2017, the Company issued $6.000 billion of senior notes (New Notes) in a public offering. The net proceeds from the issuance of the New Notes were used to fund the Acquisition. In April 2016, the Company entered into a $7.300 billion bridge credit agreement (Bridge Loan) and a $2.000 billion term loan credit agreement (Term Loan) as committed financing for the Acquisition. On June 1, 2017, the Company terminated the agreement for the Bridge Loan and borrowed the full $2.000 billion on the Term Loan. The Company continues to maintain sufficient short-term borrowing capacity at reasonable rates, and the Company has sufficient cash on hand and total available borrowing capacity to fund its current operating needs. The Acquisition significantly affected the Company’s financial condition, liquidity and cash flow. See Note 2 for a table detailing the preliminary opening balance sheet. Net working capital decreased $319.5 million at December 31, 2017 compared to 2016 due to a significant increase in current liabilities partially offset by a significant increase in current assets primarily due to the Acquisition. Total debt at December 31, 2017 increased $8.568 billion to $10.521 billion from $1.953 billion at December 31, 2016 and increased as a percentage of total capitalization to 74.0 percent from 51.0 percent the prior year. At December 31, 2017, the Company had remaining short- term borrowing ability of $1.725 billion. 24 Management’s Discussion and Analysis of Financial Condition and Results of Operations Net operating cash increased $575.4 million in 2017 to a cash accounting for the Acquisition and foreign currency translation source of $1.884 billion from a cash source of $1.309 billion in rate fluctuations. 2016 due primarily to an increase in net income of $639.6 million Intangible assets increased $5.747 billion in 2017 primarily due and increased cash generated by changes in working capital to purchase accounting additions of $5.848 billion related to the partially offset by changes in non-cash items when compared to Acquisition. Decreases from amortization of finite-lived intangible 2016. Net operating cash increased as a percent to sales to assets of $206.8 million and impairments of $2.0 million were 12.6 percent in 2017 compared to 11.0 percent in 2016. During partially offset by $15.1 million of capitalized software costs. 2017, strong net operating cash continued to provide the funds Foreign currency translation rate fluctuations of necessary to invest in new stores, manufacturing and distribution $93.0 million and other adjustments accounted for the remaining facilities and return cash to shareholders through dividends. In increases. Acquired finite-lived intangible assets included 2017, the Company used a portion of Net operating cash and Cash customer relationships and intellectual property. Costs related to and cash equivalents to spend $222.8 million in capital additions designing, developing, obtaining and implementing internal use and improvements and pay $319.0 million in cash dividends to its software are capitalized and amortized in accordance with the shareholders of common stock. Net Working Capital Goodwill and Other Intangibles Topic of the ASC. See Note 4, on pages 51 through 52 of this report, for a description of goodwill, identifiable intangible assets and asset impairments recorded in Total current assets less Total current liabilities (net working accordance with the Goodwill and Other Intangibles Topic of the capital) decreased $319.5 million to a surplus of $478.7 million at ASC and summaries of the remaining carrying values of goodwill December 31, 2017 from a surplus of $798.1 million at and intangible assets. December 31, 2016. The net working capital decrease is due to a significant increase in current liabilities partially offset by a Deferred Pension and Other Assets significant increase in current assets. Cash and cash equivalents Deferred pension assets of $296.7 million at December 31, decreased $685.6 million and current portion of long-term debt 2017 represent the excess of the fair value of assets over the decreased $699.3 million resulting from the payment of 1.35% actuarially determined projected benefit obligations, primarily of senior notes becoming due in 2017 while Short-term borrowings the domestic salaried defined benefit pension plan. The increase in increased $593.0 million. Accounts payable increased Deferred pension assets during 2017 of $71.2 million, from $756.9 million and other accruals increased $394.1 million $225.5 million last year, was primarily due to a reduction in the primarily related to the Acquisition and Acquisition cost accruals. discount rate to 3.6 percent, an increase in the fair value of plan Accrued taxes increased $3.1 million and compensation, taxes assets and acquired Valspar plans. In accordance with the withheld increased $110.1 million primarily due to the Acquisition accounting prescribed by the Retirement Benefits Topic of the and timing of payments. Accounts receivable increased ASC, the increase in the value of the Deferred pension assets is $873.6 million and inventories increased $733.0 million primarily offset in Cumulative other comprehensive loss and is amortized as due to the Acquisition. As a result of the net effect of these a component of Net pension costs over a defined period of pension changes, the Company’s current ratio decreased to 1.12 at service. See Note 6, on pages 55 through 60 of this report, for December 31, 2017 from 1.28 at December 31, 2016. Accounts more information concerning the excess fair value of assets over receivable as a percent of Net sales increased to 14.0 percent in projected benefit obligations of the salaried defined benefit 2017 from 10.4 percent in 2016. Accounts receivable days pension plan and the amortization of actuarial gains or losses outstanding increased to 61 days in 2017 from 54 days in 2016. In relating to changes in the excess assets and other actuarial 2017, provisions for allowance for doubtful collection of accounts assumptions. increased $12.5 million, or 31.0 percent. Inventories as a percent of Other assets increased $80.1 million to $502.0 million at Net sales increased to 12.0 percent in 2017 from 9.0 percent in December 31, 2017 due primarily to a reclass of current deferred 2016 primarily due to the Acquisition. Inventory days outstanding tax assets to non-current due to the adoption of ASU No. 2015-17. was flat at 79 days in 2017 versus 2016. The Company has See Note 1, on pages 49 through 50 of this report, for more sufficient total available borrowing capacity to fund its current information on the impact of recently issued accounting standards. operating needs. Goodwill and Intangible Assets Net property, plant and equipment increased $781.2 million to Goodwill, which represents the excess of cost over the fair $1.877 billion at December 31, 2017 due primarily to the value of net assets acquired in purchase business combinations, Acquisition of $833.0 million, capital expenditures of increased $5.687 billion in 2017 due to the preliminary purchase $222.8 million, and currency translation and other adjustments of Property, Plant and Equipment 25 Management’s Discussion and Analysis of Financial Condition and Results of Operations $63.1 million partially offset by depreciation expense of In September 2017, the Company entered into a five-year letter $285.0 million and sale or disposition of assets with remaining net of credit agreement, subsequently amended, with an aggregate book value of $52.7 million. Capital expenditures during 2017 in The availability of $500.0 million. The credit agreement will be used Americas Group were primarily attributable to the opening of new for general corporate purposes. During the first six months of paint stores and renovation and improvements in existing stores. In 2017, the Company amended the five-year credit agreement the Consumer Brands Group, capital expenditures during 2017 were entered into in May 2016 to increase the aggregate availability to primarily attributable to improvements and normal equipment $500.0 million. The credit agreement will be used for general replacements in manufacturing and distribution facilities. Capital corporate purposes. At December 31, 2017, there was expenditures in the Performance Coatings Group were primarily $350.0 million borrowings outstanding under these credit attributable to improvements in existing manufacturing and agreements. There were no borrowings outstanding at December distribution facilities. The Administrative Segment incurred capital 31, 2016. See Note 7, on pages 61 through 62 of this report, for a expenditures primarily for information systems hardware. In 2018, detailed description of the Company’s debt outstanding and other the Company expects to spend more than 2017 for capital available financing programs. expenditures. The predominant share of the capital expenditures in 2018 is expected to be for various productivity improvement and Defined Benefit Pension and Other Postretirement Benefit maintenance projects at existing manufacturing, distribution and Plans research and development facilities, new store openings and new or In accordance with the accounting prescribed by the upgraded information systems hardware. The Company does not Retirement Benefits Topic of the ASC, the Company’s total liability anticipate the need for any specific long-term external financing to for unfunded or underfunded defined benefit pension plans support these capital expenditures. Debt increased $40.6 million to $93.8 million primarily due to the acquired Valspar plans. Postretirement benefits other than pensions increased $25.7 million to $290.8 million at On June 2, 2017, the Company closed its previously announced December 31, 2017 due primarily to the Acquisition and changes in exchange offers and consent solicitations (Exchange Offer) for the the actuarial assumptions. outstanding senior notes of Valspar. Pursuant to the Exchange The assumed discount rate used to determine the actuarial Offer, the Company issued an aggregate principal amount of present value of projected defined benefit pension and other approximately $1.478 billion (Exchange Notes). On May 16, 2017, postretirement benefit obligations for domestic plans was the Company issued $6.0 billion of New Notes in a public offering. decreased from 4.2 percent to 3.6 percent at December 31, 2017 The net proceeds from the issuance of the New Notes were used due to decreased rates of high-quality, long-term investments and to fund the Acquisition. The interest rate locks entered into during foreign defined benefit pension plans had similar discount rate 2016 settled in March 2017 resulting in a pretax gain of decreases for the same reasons. The rate of compensation $87.6 million recognized in Cumulative other comprehensive other increases used to determine the projected benefit obligations loss. This gain is being amortized from Cumulative other increased to 3.3 percent in 2017 from 3.4 percent for domestic comprehensive loss to a reduction of interest expense over the pension plans and similar increases on most foreign plans. In terms of the New Notes. For 2017, the amortization of the deciding on the rate of compensation increases, management unrealized gain reduced interest expense by $5.2 million. considered historical Company increases as well as expectations In April 2016, the Company entered into a $7.3 billion Bridge for future increases. The expected long-term rate of return on Loan and a $2.0 billion Term Loan as committed financing for the assets decreased from 6.0 percent to 5.0 percent at December 31, Acquisition, as disclosed in Note 2. On June 1, 2017, the Company 2017 for domestic pension plans and was slightly lower for most terminated the agreement for the Bridge Loan and borrowed the foreign plans. In establishing the expected long-term rate of return full $2.0 billion on the Term Loan. As of December 31, 2017, the on plan assets for 2017, management considered the historical Term Loan had an outstanding balance of $850.0 million. rates of return, the nature of investments and an expectation for In August 2017, the Company entered into a floating rate loan future investment strategies. The assumed health care cost trend of €225.0 million and a fixed rate loan of €20.0 million. The floating rate loan agreement bears interest at the six-month Euro rates used to determine the net periodic benefit cost of postretirement benefits other than pensions for 2017 were Interbank Offered Rate plus a margin. The fixed rate loan bears 5.5 percent and 10.5 percent, respectively, for medical and interest at 0.92%. The proceeds will be used for general corporate prescription drug cost increases, both decreasing gradually to purposes, including repaying a portion of outstanding short-term 4.5 percent in 2026. In developing the assumed health care cost borrowings. The loans mature on August 23, 2021. trend rates, management considered industry data, historical 26 Management’s Discussion and Analysis of Financial Condition and Results of Operations Company experience and expectations for future health care Environmental-Related Liabilities costs. The operations of the Company, like those of other companies For 2018 Net pension cost and Net periodic benefit cost in the same industry, are subject to various federal, state and local recognition for domestic plans, the Company will use a discount environmental laws and regulations. These laws and regulations rate of 3.60 percent, an expected long-term rate of return on not only govern current operations and products, but also impose assets of 5.0 percent and a rate of compensation increase of potential liability on the Company for past operations. 3.3 percent. Lower discount rates and expected long-term rates of Management expects environmental laws and regulations to return on plan assets will be used for most foreign plans. Use of impose increasingly stringent requirements upon the Company these assumptions and amortization of actuarial losses will result and the industry in the future. Management believes that the in a domestic Net pension cost in 2018 that is expected to be Company conducts its operations in compliance with applicable approximately $1.5 million lower than in 2017. Net periodic benefit environmental laws and regulations and has implemented various costs for postretirement benefits other than pensions is expected programs designed to protect the environment and promote to increase $10.2 million in 2018 due to 2017 expense including a continued compliance. settlement gain of $9.3 million related to the termination of a life Depreciation of capital expenditures and other expenses insurance benefit plan. See Note 6, on pages 55 through 60 of this related to ongoing environmental compliance measures were report, for more information on the Company’s obligations and included in the normal operating expenses of conducting business. funded status of its defined benefit pension plans and The Company’s capital expenditures, depreciation and other postretirement benefits other than pensions. expenses related to ongoing environmental compliance measures Deferred Income Taxes were not material to the Company’s financial condition, liquidity, cash flow or results of operations during 2017. Management does Deferred income taxes at December 31, 2017 increased not expect that such capital expenditures, depreciation and other $1.360 billion from a year ago primarily due to increased deferred expenses will be material to the Company’s financial condition, tax liabilities related to intangible assets recorded in purchase liquidity, cash flow or results of operations in 2018. See Note 8, on accounting for the Acquisition, partially offset by the Deferred pages 62 through 63 of this report, for further information on income tax reductions. See Note 2 on page 50 and 51 and Note 14 environmental-related long-term liabilities. on pages 70 through 72 of this report for more information. Other Long-Term Liabilities Other long-term liabilities increased $175.1 million during 2017 due primarily to acquired liabilities from the Acquisition. Contractual Obligations and Commercial Commitments The Company has certain obligations and commitments to make future payments under contractual obligations and commercial commitments. The following tables summarize such obligations and commitments as of December 31, 2017. (thousands of dollars) Contractual Obligations Long-term debt .......................................................... Operating leases ........................................................ Short-term borrowings ............................................... Interest on Long-term debt ......................................... Purchase obligations(1) ................................................ Other contractual obligations(2) .................................. Payments Due by Period Total $ 9,917,040 1,855,528 633,731 4,225,057 81,876 214,443 Less than 1 Year $ 1,179 391,009 633,731 341,319 81,876 107,084 1–3 Years 3–5 Years More than 5 Years $ 1,922,807 645,826 $2,669,434 416,013 $ 5,323,620 402,680 630,641 512,690 2,740,407 65,369 30,360 11,630 Total contractual cash obligations .............................. $16,927,675 $1,556,198 $3,264,643 $3,628,497 $ 8,478,337 (1) (2) Relate to open purchase orders for raw materials at December 31, 2017. Relate primarily to estimated future capital contributions to investments in the U.S. affordable housing and historic renovation real estate partnerships and various other contractual obligations. 27 Management’s Discussion and Analysis of Financial Condition and Results of Operations Commercial Commitments Standby letters of credit ............................................................... Surety bonds ................................................................................ Other commercial commitments .................................................. Total $ 75,272 71,645 8,777 Less than 1 Year $ 75,272 71,645 8,777 1–3 Years 3–5 Years More than 5 Years Total commercial commitments ................................................... $155,694 $155,694 $ — $ — $ — Amount of Commitment Expiration Per Period Warranties The Company did not make any open market purchases of its The Company offers product warranties for certain products. common stock for treasury during 2017. The Company acquires its The specific terms and conditions of such warranties vary common stock for general corporate purposes, and depending on depending on the product or customer contract requirements. its cash position and market conditions, it may acquire shares in Management estimated the costs of unsettled product warranty the future. The Company had remaining authorization from its claims based on historical results and experience. Management Board of Directors at December 31, 2017 to purchase 11.65 million periodically assesses the adequacy of the accrual for product shares of its common stock. warranty claims and adjusts the accrual as necessary. Warranty The Company’s 2017 annual cash dividend of $3.40 per accruals were acquired in connection with the Acquisition. This common share represented 28.4 percent of 2016 diluted net amount primarily includes warranties for certain products under income per common share. The 2017 annual dividend represented extended furniture protection plans along with product warranties the thirty-ninth consecutive year of dividend payments since the for other products. In the U.S., revenue related to furniture dividend was suspended in 1978. The Company is temporarily protection plans is deferred and recognized over the contract life. modifying its practice of paying 30.0 percent of the prior year’s Changes in the Company’s accrual for product warranty claims diluted net income per common share in cash dividend. At a during 2017, 2016 and 2015, including customer satisfaction meeting held on February 14, 2018, the Board of Directors settlements during the year, were as follows: increased the quarterly cash dividend to $.86 per common share. (thousands of dollars) 2017 2016 2015 Balance at January 1 ........... Charges to expense ............ Settlements........................ Acquisition Liabilities ......... $ 34,419 39,707 (53,143) 130,442 $ 31,878 38,954 (36,413) $ 27,723 43,484 (39,329) Balance at December 31 ..... $ 151,425 $ 34,419 $ 31,878 Shareholders’ Equity Shareholders’ equity increased $1.814 billion to $3.692 billion at December 31, 2017 from $1.878 billion last year primarily due to an increase in retained earnings of $1.453 billion and an increase in Other capital of $234.6 million. Retained earnings increased $1.453 billion during 2017 due to net income of $1.772 billion partially offset by $319.0 million in cash dividends paid. The increase in Other capital of $234.6 million was due primarily to the recognition of stock-based compensation expense and stock option exercises. Cumulative other comprehensive loss decreased $155.5 million due primarily to favorable foreign currency translation effects of $147.9 million attributable to the strengthening of most foreign operations’ functional currencies against the U.S. dollar and $40.2 million in net actuarial gains and prior service costs of defined benefit pension and other postretirement benefit plans net of amortization partially offset by a $34.0 million reduction in the unrealized gain on the interest rate locks. This quarterly dividend, if approved in each of the remaining quarters of 2018, would result in an annual dividend for 2018 of $3.44 per common share or an 18.4 percent payout of 2017 diluted net income per common share. See the Statements of Consolidated Shareholders’ Equity, on page 44 of this report, and Notes 10, 11 and 12, on pages 67 through 69 of this report, for more information concerning Shareholders’ equity. Cash Flow Net operating cash increased $575.4 million to $1.884 billion in 2017 from $1.309 billion in 2016 due primarily to an increase in net income of $639.6 million and increased cash generated by changes in working capital, partially offset by changes in deferred income tax liabilities and other non-cash items when compared to 2016. Strong net operating cash provided the funds necessary to invest in new stores, manufacturing and distribution facilities, return cash to shareholders through dividends, and pay down debt from the Acquisition. Net investing cash usage increased $8.744 billion to a usage of $9.047 billion in 2017 from a usage of $303.8 million in 2016 due primarily to cash paid for the Acquisition of $8.810 billion, partially offset by decreases in cash used for other investments of $41.7 million and capital expenditures of $16.3 million and increased proceeds from sale of assets of $8.8 million. Net financing cash increased $6.821 billion to a source of $6.514 billion in 2017 from a usage of $307.4 million in 2016 due primarily to increased Net Proceeds from long-term debt of $6.422 billion, increased short-term 28 Management’s Discussion and Analysis of Financial Condition and Results of Operations borrowings of $357.2 million and higher proceeds from stock options The Company entered into foreign currency option and forward exercised of $56.7 million, partially offset by increased payments of currency exchange contracts with maturity dates of less than cash dividends of $6.9 million and increased cash used in all other twelve months in 2017, 2016 and 2015, primarily to hedge against financing activities of $24.3 million. In 2017, the Company used Net value changes in foreign currency. There were no material foreign operating cash and Cash and cash equivalents on hand to spend currency option and forward contracts outstanding at $222.8 million in capital additions and improvements, pay December 31, 2017, 2016 and 2015. The Company believes it may $319.0 million in cash dividends to its shareholders of common stock, be exposed to continuing market risk from foreign currency fund the Acquisition and pay down long-term debt of $1.853 billion. exchange rate and commodity price fluctuations. However, the Management considers a measurement of cash flow that is not Company does not expect that foreign currency exchange rate and in accordance with U.S. generally accepted accounting principles commodity price fluctuations or hedging contract losses will have to be a useful tool in its determination of appropriate uses of the a material adverse effect on the Company’s financial condition, Company’s Net operating cash. Management reduces Net results of operations or cash flows. See Notes 1 and 13 on pages 46 operating cash, as shown in the Statements of Consolidated Cash and 70 of this report. Flows, by the amount reinvested in the business for Capital expenditures and the return of investment to its shareholders by Financial Covenant the payments of cash dividends. The resulting value is referred to Certain borrowings contain a consolidated leverage covenant. by management as “Free Cash Flow” which may not be The covenant states the Company’s leverage ratio is not to exceed comparable to values considered by other entities using the same 5.25 to 1.00. The leverage ratio is defined as the ratio of total terminology. The reader is cautioned that the Free Cash Flow indebtedness (the sum of Short-term borrowings, Current portion measure should not be compared to other entities unknowingly, of long-term debt and Long-term debt) at the reporting date to and it does not consider certain non-discretionary cash flows, such consolidated “Earnings Before Interest, Taxes, Depreciation and as mandatory debt and interest payments. The amount shown Amortization” (EBITDA) for the 12-month period ended on the below should not be considered an alternative to Net operating same date. Refer to the “Results of Operations” caption below for cash or other cash flow amounts provided in accordance with U.S. a reconciliation of EBITDA to Net income. At December 31, 2017, generally accepted accounting principles disclosed in the the Company was in compliance with the covenant. The Statements of Consolidated Cash Flows, on page 43 of this report. Company’s Notes, Debentures and revolving credit agreement Free Cash Flow as defined and used by management is determined contain various default and cross-default provisions. In the event as follows: (thousands of dollars) Year Ended December 31, 2016 2015 2017 Net operating cash........ $1,883,968 $1,308,572 $1,447,463 (234,340) (222,767) Capital expenditures ..... (249,647) (319,029) Cash dividends ............. (239,026) (312,082) Free cash flow ............... $ 1,342,172 $ 757,464 $ 963,476 Litigation See page 23 of this report and Note 9 on pages 63 through 66 for more information concerning litigation. Market Risk The Company is exposed to market risk associated with interest rate, foreign currency and commodity fluctuations. The Company occasionally utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes. of default under any one of these arrangements, acceleration of the maturity of any one or more of these borrowings may result. See Note 7 on pages 61 through 62 of this report. Employee Stock Ownership Plan (ESOP) Participants in the Company’s ESOP are allowed to contribute up to the lesser of twenty percent of their annual compensation or the maximum dollar amount allowed under the Internal Revenue Code. The Company matches six percent of eligible employee contributions. The Company’s matching contributions to the ESOP charged to operations were $90.7 million in 2017 compared to $85.5 million in 2016. At December 31, 2017, there were 10,033,576 shares of the Company’s common stock being held by the ESOP, representing 10.7 percent of the total number of voting shares outstanding. See Note 11, on page 67 of this report, for more information concerning the Company’s ESOP. 29 Management’s Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS—2017 vs. 2016 paint is not pertinent due to the wide assortment of general Shown below are net sales and segment profit and the percentage merchandise sold. change for the current period by segment for 2017 and 2016: Net sales of the Consumer Brands Group increased in 2017 (thousands of dollars) 2017 2016 Change offset by lower volume sales to some of the Group’s retail Year Ended December 31, primarily due to the inclusion of Valspar sales since June, partially Net Sales: The Americas Group ...... Consumer Brands $ 9,117,279 $ 8,377,083 8.8% in the year. In 2018, the Consumer Brands Group plans to continue customers. Valspar sales increased Group net sales 49.4 percent Group......................... 2,154,729 1,527,515 41.1% Performance Coatings Group......................... Administrative ............... 3,706,134 5,646 1,946,004 5,000 90.4% 12.9% Net sales........................ $14,983,788 $11,855,602 26.4% (thousands of dollars) 2017 2016 Change Year Ended December 31, Income Before Income Taxes: The Americas Group ......... Consumer Brands Group ............................ 226,001 301,041 -24.9% Performance Coatings Group ............................ Administrative .................. Income before income 298,503 (765,751) 257,187 (568,301) 16.1% -34.7% taxes ............................. $ 1,528,219 $ 1,595,233 -4.2% promotions of new and existing products and expand of its customer base and product assortment at existing customers. The Performance Coatings Group’s net sales in 2017 increased due primarily to the inclusion of Valspar sales and selling price increases. Currency translation rate changes increased net sales 1.5 percent for 2017. In 2017, the Performance Coatings Group opened 4 new branches and closed 2 locations increasing the total from 288 to 290 branches open in the United States, Canada, Mexico, South America, Europe and Asia at year-end. In 2018, the worldwide presence and improving its customer base. Net sales in the Administrative segment, which primarily consist of external leasing revenue of excess headquarters space and leasing of facilities no longer used by the Company in its primary business, decreased by an insignificant amount in 2017. Consolidated gross profit increased $858.5 million in 2017 due primarily to Valspar sales since June and higher paint sales volume, $1,769,466 $1,605,306 10.2% Performance Coatings Group plans to continue expanding its Consolidated net sales for 2017 increased due primarily to the partially offset by raw material cost increases. Consolidated gross addition of Valspar sales beginning in June and higher paint sales profit as a percent to net sales decreased to 45.3 percent from volume in The Americas Group. Excluding Valspar net sales, net 50.0 percent in 2016 due primarily to Valspar sales, Acquisition- sales increased 5.6 percent in the year. Currency translation rate related inventory purchase accounting adjustments and raw material changes increased 2017 consolidated net sales by 0.3 percent. Net cost increases, partially offset by higher paint sales volume. The sales of all consolidated foreign subsidiaries increased Americas Group’s gross profit for 2017 increased $297.7 million 71.9 percent to $2.960 billion for 2017 versus $1.722 billion for compared to 2016 due primarily to higher paint sales volume and 2016 due primarily to the addition of Valspar sales since June. Net selling price increases, partially offset by higher raw material costs. sales of all operations other than consolidated foreign subsidiaries The Americas Group’s gross profit margins declined primarily due to increased 18.7 percent to $12.024 billion for 2017 versus increased raw material costs, partially offset by higher paint sales $10.133 billion for 2016. volume and selling price increases. The Consumer Brands Group’s Net sales in the The Americas Group increased in 2017 due gross profit increased $146.9 million due primarily to the inclusion of primarily to higher architectural paint sales volume across all end Valspar sales, partially offset by increased raw material costs, market segments and selling price increases. Net sales from stores Acquisition-related inventory purchase accounting adjustments and in the U.S., Canada and Latin America open for more than twelve lower sales volumes at certain customers compared to 2016. The calendar months increased 6.3 percent for the full year. During Performance Coatings Group’s gross profit for 2017 increased 2017, The Americas Group opened 114 new stores and closed 13 $422.9 million due primarily to inclusion of Valspar sales and redundant locations for a net increase of 101 stores, increasing the favorable currency translation rate changes, partially offset by higher total number of stores in operation at December 31, 2017 to 4,620 raw material costs and Acquisition-related inventory purchase in the United States, Canada, Latin America and the Caribbean. accounting adjustments. Acquisition-related purchase accounting The Americas Group’s objective is to expand its store base an adjustments decreased Consumer Brands and Performance Coatings average of 2.5 percent each year, primarily through internal Groups’ gross profit by $49.2 million and $39.2 million, respectively, growth. Sales of products other than paint increased for 2017. Both Consumer Brands and Performance Coatings Groups’ approximately 14.3 percent for the year over 2016. A discussion of gross profit margins were lower due to inclusion of Valspar sales, changes in volume versus pricing for sales of products other than higher raw material costs and Acquisition-related inventory purchase 30 Management’s Discussion and Analysis of Financial Condition and Results of Operations accounting adjustments to inventory, partially offset by selling price foreign currency related transaction losses of $6.9 million in 2017, increases. primarily in The Americas Group and Consumer Brands Group. SG&A increased by $650.9 million due primarily to the inclusion There were no other items within Other income or Other expense of Valspar SG&A, increased expenses to support higher sales levels that were individually significant at December 31, 2017. See Note and net new store openings, as well as increased Acquisition 13 on page 70 of this report for more information concerning Other expenses in the Administrative segment. Acquisition expenses in the (income) expense – net. Administrative segment were $131.2 million and $58.4 million in 2017 Consolidated Income before income taxes in 2017 decreased and 2016, respectively. SG&A decreased as a percent of sales to $67.0 million resulting from an increase of $650.9 million in 31.9 percent in 2017 from 34.9 percent in 2016 primarily due to the SG&A, an increase of $172.7 million in amortization and addition of Valspar sales beginning in June. Excluding Valspar SG&A impairment expenses in total, and an increase of $109.4 million in and Acquisition expenses, SG&A as a percent of sales was interest expense, partially offset by an increase of $858.5 million in 33.6 percent and 34.4 percent in 2017 and 2016, respectively. In The gross profit. Income before income taxes increased $164.2 million Americas Group, SG&A increased $144.6 million for the year due in The Americas Group and $41.3 million in the Performance primarily to increased spending due to the number of new store Coatings Group, but decreased $75.0 million in the Consumer openings and general comparable store expenses to support higher Brands Group, when compared to 2016. The Administrative sales levels. The Consumer Brands Group’s SG&A increased by segment expenses decreased Income before income taxes $168.3 million for the year from inclusion of Valspar SG&A, partially $197.5 million more than in 2016 resulting primarily from offset by improved expense control and integration synergies. The Acquisition expenses and increased Interest expense. Performance Coatings Group’s SG&A increased by $253.2 million for Net income increased in 2017 primarily due to the one-time the year primarily due to inclusion of Valspar SG&A, partially offset benefit of $668.8 million from Deferred income tax reductions, by improved expense control and integration synergies. The which resulted in a consolidated effective income tax rate of (18.7) Administrative segment’s SG&A increased $84.8 million primarily percent, improved operating results in The Americas Group and due to increased Acquisition-related costs. the inclusion of Valspar operating results, partially offset by Amortization and impairment expenses in total increased Acquisition costs. $172.7 million in 2017 primarily due to amortization of Acquisition- Excluding the impact of the Deferred income tax reductions, the related intangibles. Amortization of Acquisition-related intangibles effective income tax rate for continuing operations was 25.1 percent was $127.8 million and $54.4 million for the Performance Coatings for 2017 and 29.0 percent for 2016, primarily due to the year over and Consumer Brands Groups, respectively. Impairment of year impacts of Employee share-based payments. Diluted net income goodwill and intangibles expenses decreased $8.7 million in 2017. per common share increased 55.7 percent to $18.67 per share for Other general expense – net increased $8.5 million in 2017 2017 from $11.99 per share in 2016. Diluted net income per common compared to 2016. The increase was mainly caused by an increase of share from continuing operations was $19.11 per share in 2017, $10.5 million of expense in the Administrative segment, primarily due including a one-time benefit of $7.04 per share from the Deferred to a year-over-year decrease in gain on sale of assets of $38.0 million income tax reductions. Diluted net income per common share for partially offset by a decrease in provisions for environmental matters 2017 was decreased by charges of $3.00 per share from Acquisition of $27.5 million. See Note 13, on pages 69 and 70 of this report, for costs, including inventory purchase accounting adjustments and more information concerning Other general expense – net. increased amortization of intangible assets. Valspar operations As required by the Goodwill and Other Intangibles Topic of the increased Diluted net income per common share by $.80 per share ASC, management performed an annual impairment test of goodwill for 2017, including a $.92 per share charge from interest expense on and indefinite-lived intangible assets as of October 1, 2017. The new debt. Diluted net income per common share for 2016 was impairment tests in 2017 resulted in $2.0 million impairment of decreased by charges of $.86 per share from Acquisition costs. trademarks recorded in The Americas Group. The impairment tests in Currency translation rate changes did not have a significant impact on 2016, resulted in $10.7 million impairment in goodwill from the same diluted net income per common share in 2017. reporting unit. See Note 4, on pages 51 and 52 of this report, for more Management considers a measurement that is not in information concerning the impairment of intangible assets. accordance with U.S. generally accepted accounting principles a Interest expense increased $109.4 million in 2017 primarily due useful measurement of the operational profitability of the to Acquisition-related debt incurred. Company. Some investment professionals also utilize such a Other (income) expense – net increased $12.4 million in 2017 measurement as an indicator of the value of profits and cash that compared to 2016. This increase was mainly due to an increase in are generated strictly from operating activities, putting aside working capital and certain other balance sheet changes. For this 31 Management’s Discussion and Analysis of Financial Condition and Results of Operations measurement, management increases Net income for significant non-operating and non-cash expense items to arrive at an amount known as EBITDA. The reader is cautioned that the following value for EBITDA should not be compared to other entities unknowingly. EBITDA should not be considered an alternative to Net income or (thousands of dollars) 2016 2015 Change Year Ended December 31, Income Before Income Taxes: The Americas Group ......... Consumer Brands $1,605,306 $ 1,451,998 10.6% Net operating cash as an indicator of operating performance or as Group............................ 301,041 308,833 -2.5% a measure of liquidity. The reader should refer to the determination of Net income and Net operating cash in accordance with U.S. generally accepted accounting principles disclosed in the Statements of Consolidated Income and Statements of Consolidated Cash Flows, on pages 40 and 43 of Performance Coatings Group............................ Administrative .................. Income before income 257,187 (568,301) 201,881 (413,746) 27.4% -37.4% taxes ............................. $ 1,595,233 $1,548,966 3.0% this report. EBITDA as used by management is calculated as Consolidated net sales for 2016 increased due primarily to follows: (thousands of dollars) Year Ended December 31, 2016 2015 2017 Net income from continuing operations................ $ 1,813,802 $ 1,132,703 $1,053,849 61,791 495,117 170,323 28,237 Interest Expense .......... Income Taxes .............. Depreciation ................ Amortization ............... 263,471 (285,583) 284,997 206,764 154,088 462,530 172,074 25,404 EBITDA from continuing operations................ Valspar EBITDA* .......... 2,283,451 160,563 1,946,799 (60,630) 1,809,317 EBITDA from continuing operations without Valspar .................... $2,122,888 $2,007,429 $ 1,809,317 * Valspar EBITDA for 2017 includes Valspar operations since June 1, 2017, purchase accounting items and acquisition costs. Valspar EBITDA for 2016 includes acquisition costs only. RESULTS OF OPERATIONS – 2016 VS. 2015 Shown below are net sales and segment profit and the percentage change for the current period by segment for 2016 and 2015: higher paint sales volume in The Americas Group and the impact of the Revenue reclassification beginning in the third quarter related to grossing up third-party service revenue and related costs which were previously netted and immaterial in prior periods. The Revenue reclassification increased sales in the year 1.1 percent. This prospective change primarily impacts The Americas and the Performance Coatings Groups. This change had no impact on segment profit, but reduced segment profit as a percent to net sales of the affected groups. Unfavorable currency translation rate changes decreased 2016 consolidated net sales 1.4 percent. Net sales of all consolidated foreign subsidiaries were down 3.7 percent to $1.722 billion for 2016 versus $1.789 billion for 2015 due primarily to unfavorable foreign currency translation rates. Net sales of all operations other than consolidated foreign subsidiaries were up 6.1 percent to $10.133 billion for 2016 versus $9.550 billion for 2015. Net sales in The Americas Group in 2016 increased primarily due to higher architectural paint sales volume across all end market segments. Net sales from stores open for more than twelve calendar months increased 5.3 percent for the full year. During 2016, The Americas Group opened 158 new stores and closed 16 redundant locations for a net increase of 142 stores, increasing the total number of stores in operation at December 31, 2016 to 4,519 in the United States, Canada, Latin America and the Caribbean. The Americas Group’s objective is to expand its store base an (thousands of dollars) 2016 2015 Change internal growth. Sales of products other than paint increased Year Ended December 31, average of two and a half percent each year, primarily through Net Sales: The Americas Group ....... Consumer Brands $ 8,377,083 $ 7,839,966 6.9% Group ......................... 1,527,515 1,577,955 -3.2% Performance Coatings Group ......................... Administrative ................ 1,946,004 5,000 1,916,300 5,083 Net sales......................... $11,855,602 $11,339,304 1.6% -1.6% 4.6% approximately 7.0 percent for the year over 2015. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold. Net sales of the Consumer Brands Group increased primarily due to higher volume sales to most of the Group’s retail customers, partially offset by unfavorable currency translation rate changes decreased net sales 1.1 percent in the year. Sales of wood care coatings, brushes, rollers, caulk and other paint related products, were all up at least mid to high-single digits as compared 32 Management’s Discussion and Analysis of Financial Condition and Results of Operations to 2015 while sales of aerosol products were down slightly. A decreased by $22.1 million for the year relating primarily to foreign discussion of changes in volume versus pricing for sales of currency translation rate fluctuations reducing SG&A by products other than paint is not pertinent due to the wide $16.0 million. The Administrative segment’s SG&A increased assortment of paint-related merchandise sold. $83.8 million primarily due to Acquisition expenses and incentive The Performance Coatings Group’s net sales in 2016, when compensation. stated in U.S. dollars, decreased due primarily to unfavorable Other general expense – net decreased $17.9 million in 2016 currency translation rate changes. Unfavorable currency compared to 2015. The decrease was mainly caused by a decrease translation rate changes in the year decreased net sales by of $19.2 million of expense in the Administrative segment, 2.6 percent for 2016. In 2016, the Performance Coatings Group primarily due to a year-over-year increase in gain on sale of assets opened 5 new branches and closed 13 locations decreasing the of $29.8 million partially offset by an increase in provisions for total from 296 to 288 branches open in the United States, Canada, environmental matters of $11.9 million. See Note 13, on page 69 Mexico, South America, Europe and Asia at year-end. and 70 of this report, for more information concerning Other Net sales in the Administrative segment, which primarily general expense – net. consist of external leasing revenue of excess headquarters space As required by the Goodwill and Other Intangibles Topic of the and leasing of facilities no longer used by the Company in its ASC, management performed an annual impairment test of primary business, decreased by an insignificant amount in 2016. goodwill and indefinite-lived intangible assets as of October 1, Consolidated gross profit increased $363.0 million in 2016 and 2016. The impairment tests in 2016 resulted in $10.7 million improved as a percent to net sales to 50.0 percent from impairment of goodwill and trademarks recorded in The Americas 49.0 percent in 2015 due primarily to higher paint sales volume and Group for the Latin America operating unit. See Note 4, on pages improved operating efficiencies partially offset by unfavorable 51 and 52 of this report, for more information concerning the currency translation rate changes. Excluding the effect of the impairment of intangible assets. Revenue reclassification, consolidated gross profit percent to net Amortization of credit facility costs incurred in early 2016 and sales was 50.4 percent for 2016. The Americas Group’s gross profit interest on debt issued in July 2015 increased interest expense for 2016 increased $338.9 million compared to 2015 due primarily $92.3 million in 2016. to higher paint sales volume. The Americas Group’s gross profit Other (income) expense – net increased to $4.6 million income margins increased primarily due to higher paint sales volume from $6.1 million expense in 2015. This was primarily due to partially offset by the effect of the Revenue reclassification. The decreased net expense from banking activities of $2.4 million and Consumer Brands Group’s gross profit increased $19.8 million due decreased miscellaneous net expenses of $5.2 million both primarily to improved operating efficiency and increased paint sales primarily recorded in the Administrative segment. Additionally, volume. The Consumer Brands Group’s gross profit margins foreign currency related transaction losses of $7.3 million in 2016 increased for those same reasons. The Performance Coatings compared to $9.5 million in 2015, primarily in The Americas Group Group’s gross profit for 2016 increased $8.8 million due primarily to and the Performance Coatings Group. See Note 13, on page 70 of improved operating efficiencies and decreasing raw material costs this report, for more information concerning Other expense partially offset by unfavorable currency translation rate changes. (income) – net. The Performance Coatings Group’s gross profit increased as a Consolidated Income before income taxes in 2016 increased percent of sales for those same reasons. Foreign currency $46.3 million due primarily to an increase of $363.0 million in translation rate fluctuations decreased Performance Coatings gross profit partially offset by an increase of $245.9 million in Group’s gross profit by $15.7 million for 2016. The Administrative SG&A and an increase of $60.2 million in interest expense, segment’s gross profit decreased by $4.4 million. interest and net investment income and other expenses. Income SG&A increased by $245.9 million due primarily to increased before income taxes increased $153.3 million in The Americas expenses to support higher sales levels and net new store openings Group, $10.4 million in the Consumer Brands Group, and as well as the impact of Acquisition expenses of $58.4 million $37.1 million in the Performance Coatings Group when compared recorded in the Administrative segment. SG&A increased as a to 2015. The Administrative segment had a decreased impact on percent of sales to 35.1 percent in 2016 from 34.5 percent in 2015 Income before income taxes of $154.6 million when compared to primarily due to those same reasons. In The Americas Group, 2015 resulting primarily from Acquisition expenses and increased SG&A increased $177.7 million for the year due primarily to the interest expense. Segment profit of all consolidated foreign number of new store openings and general comparable store subsidiaries decreased 20.7 percent to $60.1 million for 2016 expenses to support higher sales levels. The Consumer Brands versus $75.8 million for 2015. Segment profit of all operations Group’s SG&A increased by $6.5 million for the year in support of other than consolidated foreign subsidiaries increased 4.2 percent increased sales levels. The Performance Coatings Group’s SG&A to $1.535 billion for 2016 versus $1.473 billion for 2015. 33 Management’s Discussion and Analysis of Financial Condition and Results of Operations Net income increased $78.9 million in 2016 primarily due to income tax rate was 32.3 percent for 2016. Diluted net income per the increase in Income before income taxes and the Income tax common share increased 7.5 percent to $11.99 per share for 2016, accounting change. including an $.86 per share charge for expenses associated with The effective income tax rate was 29.0 percent for 2016 and the Acquisition partially offset by an increase of $.40 per share 32.0 percent for 2015. The decrease in the effective tax rate in related to the Income tax accounting change, from $11.15 per share 2016 compared to 2015 was primarily due to the Income tax a year ago. Unfavorable currency translation rate changes accounting change. Excluding the impact of Acquisition expense decreased diluted net income per common share by $.14 per share tax benefits and the adoption of ASU No. 2016-09, the effective for the year. 34 [THIS PAGE INTENTIONALLY LEFT BLANK] 35 Report of Management on Internal Control Over Financial Reporting Shareholders of The Sherwin-Williams Company We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. We recognize that internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and is subject to the possibility of human error or the circumvention or the overriding of internal control. Therefore, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, we believe we have designed into the process safeguards to reduce, though not eliminate, this risk. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In order to ensure that the Company’s internal control over financial reporting was effective as of December 31, 2017, we conducted an assessment of its effectiveness under the supervision and with the participation of our management group, including our principal executive officer and principal financial officer. This assessment was based on the criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. On June 1, 2017, the Company completed the acquisition of the Valspar Corporation (Valspar). As permitted by the Securities and Exchange Commission, management excluded the Valspar operations from its assessment of internal control over financial reporting as of December 31, 2017. Valspar operations constituted 13 percent and 36 percent of total assets and net assets, respectively, as of December 31, 2017, and 16 percent of sales and 3 percent of net income for the year then ended. Valspar operations will be included in the Company’s assessment as of December 31, 2018. Based on our assessment of internal control over financial reporting under the criteria established in Internal Control – Integrated Framework, we have concluded that, as of December 31, 2017, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting as of December 31, 2017 has been audited by Ernst & Young LLP, an independent registered public accounting firm, and their report on the effectiveness of our internal control over financial reporting is included on page 37 of this report. J. G. Morikis Chairman, President and Chief Executive Officer A. J. Mistysyn Senior Vice President – Finance and Chief Financial Officer J. M. Cronin Senior Vice President – Corporate Controller 36 Report of the Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting The Board of Directors and Shareholders of The Sherwin-Williams Company Opinion on Internal Control over Financial Reporting We have audited The Sherwin-Williams Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, The Sherwin-Williams Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria. As indicated in the accompanying Report of Management on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Valspar, which is included in the 2017 consolidated financial statements of the Company and constituted 13 percent and 36 percent of total and net assets, respectively, as of December 31, 2017 and 16 percent and 3 percent of total revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Valspar. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of The Sherwin-Williams Company as of December 31, 2017, 2016, and 2015, and the related consolidated statements of income and comprehensive income, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2017, and the related notes and our report dated February 23, 2018 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Cleveland, Ohio February 23, 2018 37 Report of Management on the Consolidated Financial Statements Shareholders of The Sherwin-Williams Company We are responsible for the preparation and fair presentation of the consolidated financial statements, accompanying notes and related financial information included in this report of The Sherwin-Williams Company and its consolidated subsidiaries (collectively, the “Company”) as of December 31, 2017, 2016 and 2015 and for the years then ended in accordance with U.S. generally accepted accounting principles. The consolidated financial information included in this report contains certain amounts that were based upon our best estimates, judgments and assumptions that we believe were reasonable under the circumstances. We have conducted an assessment of the effectiveness of internal control over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As discussed in the Report of Management on Internal Control Over Financial Reporting on page 36 of this report, we concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017. The Board of Directors pursues its responsibility for the oversight of the Company’s accounting policies and procedures, financial statement preparation and internal control over financial reporting through the Audit Committee, comprised exclusively of independent directors. The Audit Committee is responsible for the appointment and compensation of the independent registered public accounting firm. The Audit Committee meets at least quarterly with financial management, internal auditors and the independent registered public accounting firm to review the adequacy of financial controls, the effectiveness of the Company’s internal control over financial reporting and the nature, extent and results of the audit effort. Both the internal auditors and the independent registered public accounting firm have private and confidential access to the Audit Committee at all times. We believe that the consolidated financial statements, accompanying notes and related financial information included in this report fairly reflect the form and substance of all material financial transactions and fairly present, in all material respects, the consolidated financial position, results of operations and cash flows as of and for the periods presented. J. G. Morikis Chairman, President and Chief Executive Officer A. J. Mistysyn Senior Vice President – Finance and Chief Financial Officer J. M. Cronin Senior Vice President – Corporate Controller 38 Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements To the Board of Directors and Shareholders of The Sherwin-Williams Company Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The Sherwin-Williams Company (the Company) as of December 31, 2017, 2016 and 2015, and the related consolidated statements of income and comprehensive income, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Sherwin-Williams Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2018 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company‘s auditor since 1908. Cleveland, Ohio February 23, 2018 39 Statements of Consolidated Income and Comprehensive Income (thousands of dollars except per common share data) Net sales ............................................................................................. Cost of goods sold ................................................................................ Gross profit ......................................................................................... Percent to net sales ........................................................................... Selling, general and administrative expenses ........................................... Percent to net sales ........................................................................... Other general expense - net................................................................... Amortization........................................................................................ Impairment of goodwill and trademarks .................................................. Interest expense................................................................................... Interest and net investment income........................................................ Other (income) expense - net ................................................................ Income from continuing operations before income taxes .......................... Income tax (credit) expense .................................................................. Net income from continuing operations .................................................. Loss from discontinued operations Income taxes........................................................................................ Net loss from discontinued operations .................................................... 6,781,211 45.3% 4,785,415 31.9% 20,865 206,764 2,022 263,471 (8,571) (16,974) 1,528,219 (285,583) 1,813,802 41,540 (41,540) 2017 $14,983,788 8,202,577 Year Ended December 31, 2016 $11,855,602 5,932,851 5,922,751 2015 $11,339,304 5,779,691 5,559,613 50.0% 49.0% 4,134,517 3,885,668 34.9% 12,368 25,404 10,688 154,088 (4,960) (4,587) 1,595,233 462,530 1,132,703 34.3% 30,268 28,237 61,791 (1,399) 6,082 1,548,966 495,117 1,053,849 Net income .......................................................................................... $ 1,772,262 $ 1,132,703 $ 1,053,849 Basic net income per common share: Continuing operations .................................................................... Discontinued operations ................................................................ Net income per common share ................................................... Diluted net income per common share Continuing operations .................................................................... Discontinued operations ................................................................ Net income per common share ................................................... $ $ $ $ 19.52 (.44) 19.08 19.11 (.44) 18.67 $ $ $ $ 12.33 12.33 11.99 11.99 $ $ $ $ 11.43 11.43 11.15 11.15 See notes to consolidated financial statements. 40 Statements of Consolidated Income and Comprehensive Income (thousands of dollars except per common share data) Net income................................................................................................ Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ................................................. Pension and other postretirement benefit adjustments: Amounts recognized in Other comprehensive loss(1) ............................... Amounts reclassified from Other comprehensive loss(2) .......................... Unrealized net gains (losses) on available-for-sale securities: Amounts recognized in Other comprehensive loss(3)............................... Amounts reclassified from Other comprehensive loss(4).......................... Unrealized net gains on cash flow hedges: Amounts recognized in Other comprehensive loss(5)............................... Amounts reclassified from Other comprehensive loss(6) .......................... Other comprehensive income (loss) ............................................................ Year Ended December 31, 2016 2015 2017 $1,772,262 $1,132,703 $1,053,849 147,930 (18,648) (128,245) 47,995 (7,762) 40,233 2,026 (720) 1,306 (30,765) (3,223) (33,988) 155,481 (28,385) 7,635 (20,750) 1,046 89 1,135 85,007 85,007 46,744 7,974 5,847 13,821 (1,191) 478 (713) — (115,137) Comprehensive income .............................................................................. $1,927,743 $1,179,447 $ 938,712 (1) Net of taxes of $(19,313), $17,200 and $(3,399), in 2017, 2016 and 2015, respectively. (2) Net of taxes of $4,764, $(4,691) and $(1,647), in 2017, 2016 and 2015, respectively. (3) Net of taxes of $(1,244), $(643) and $736, in 2017, 2016 and 2015, respectively. (4) Net of taxes of $442, $(55) and $(296) in 2017, 2016 and 2015, respectively. (5) Net of taxes of $18,884 and $(52,226) in 2017 and 2016, respectively. (6) Net of taxes of $1,978 in 2017. See notes to consolidated financial statements. 41 Consolidated Balance Sheets (thousands of dollars) Assets Current assets: Cash and cash equivalents .................................................................. Accounts receivable, less allowance..................................................... Inventories: Finished goods ............................................................................... Work in process and raw materials................................................... Deferred income taxes ....................................................................... Other current assets .......................................................................... Total current assets ........................................................................ Goodwill............................................................................................... Intangible assets ................................................................................... Deferred pension assets......................................................................... Other assets ......................................................................................... Property, plant and equipment: Land ................................................................................................. Buildings ........................................................................................... Machinery and equipment .................................................................. Construction in progress..................................................................... Less allowances for depreciation ......................................................... 2017 December 31, 2016 2015 $ 204,213 2,104,555 $ 889,793 1,230,987 $ 205,744 1,114,275 1,415,339 386,036 1,801,375 355,697 4,465,840 6,814,345 6,002,361 296,743 502,023 254,676 962,094 2,572,963 177,056 3,966,789 2,089,674 1,877,115 898,627 169,699 1,068,326 57,162 381,030 3,627,298 1,126,892 255,010 225,529 421,904 115,555 714,815 2,153,437 117,126 3,100,933 2,005,045 1,095,888 840,603 177,927 1,018,530 87,883 230,748 2,657,180 1,143,333 255,371 244,882 436,309 119,530 696,202 2,026,617 81,082 2,923,431 1,881,569 1,041,862 Total Assets ......................................................................................... $19,958,427 $ 6,752,521 $ 5,778,937 Liabilities and Shareholders’ Equity Current liabilities: Short-term borrowings ....................................................................... Accounts payable .............................................................................. Compensation and taxes withheld ....................................................... Accrued taxes ................................................................................... Current portion of long-term debt ........................................................ Other accruals ................................................................................... Total current liabilities .................................................................... Long-term debt ..................................................................................... Postretirement benefits other than pensions ............................................ Deferred income taxes ........................................................................... Other long-term liabilities ...................................................................... Shareholders’ equity: Common stock – $1.00 par value: 93,883,645, 93,013,031, and 92,246,525 shares outstanding at December 31, 2017, 2016 and 2015, respectively ............................... Other capital ..................................................................................... Retained earnings .............................................................................. Treasury stock, at cost ....................................................................... Cumulative other comprehensive loss .................................................. Total shareholders’ equity ............................................................... $ 633,731 1,791,552 508,166 79,901 1,179 972,651 3,987,180 9,885,745 274,675 1,434,196 684,443 $ 40,739 1,034,608 398,045 76,765 700,475 578,547 2,829,179 1,211,326 250,397 73,833 509,345 $ 39,462 1,157,561 338,256 81,146 3,154 522,280 2,141,859 1,907,278 248,523 138,709 474,658 117,561 2,723,183 5,502,730 (4,266,416) (384,870) 3,692,188 116,563 2,488,564 4,049,497 (4,235,832) (540,351) 1,878,441 115,761 2,330,426 3,228,876 (4,220,058) (587,095) 867,910 Total Liabilities and Shareholders’ Equity ................................................. $19,958,427 $ 6,752,521 $ 5,778,937 See notes to consolidated financial statements. 42 Statements of Consolidated Cash Flows (thousands of dollars) Operating Activities Net income............................................................................................... Adjustments to reconcile net income to net operating cash: Loss from discontinued operations .......................................................... Depreciation ......................................................................................... Amortization of intangible assets ............................................................ Amortization of inventory purchase accounting adjustments ..................... Impairment of goodwill and trademarks ................................................... Amortization of credit facility and debt issuance costs .............................. Provisions for environmental-related matters........................................... Provisions for qualified exit costs ............................................................ Deferred income taxes ........................................................................... Defined benefit pension plans net cost..................................................... Stock-based compensation expense ........................................................ Net decrease in postretirement liability ................................................... Decrease in non-traded investments ....................................................... Loss (gain) on sale or disposition of assets ............................................... Other ................................................................................................... Change in working capital accounts: (Increase) in accounts receivable ............................................................ (Increase) in inventories ........................................................................ Increase (decrease) in accounts payable .................................................. (Decrease) increase in accrued taxes ...................................................... Increase (decrease) in accrued compensation and taxes withheld .............. (Increase) decrease in refundable income taxes ....................................... Other ................................................................................................... Costs incurred for environmental-related matters ........................................ Costs incurred for qualified exit costs ......................................................... Other....................................................................................................... Year Ended December 31, 2016 2017 2015 $ 1,772,262 $ 1,132,703 $ 1,053,849 41,540 284,997 206,764 54,924 2,022 8,313 15,443 50,503 (606,135) 18,153 90,292 (17,865) 65,703 5,422 1,051 (49,850) (89,959) 166,687 (20,878) 11,286 (15,520) 16,270 (13,792) (45,422) (68,243) 172,074 25,404 10,688 63,759 42,932 3,038 (68,241) 14,851 72,109 (12,373) 64,689 (30,564) 5,334 (113,855) (52,577) (118,893) (2,159) 60,632 (1,343) 56,215 (15,178) (6,267) 5,594 170,323 28,237 3,096 31,071 9,761 4,976 6,491 72,342 (6,645) 65,144 (803) 3,617 (56,873) (40,733) 160,111 4,606 (13,128) 19,230 (955) (11,995) (11,200) (43,059) Net operating cash ................................................................................ 1,883,968 1,308,572 1,447,463 Investing Activities Capital expenditures ................................................................................. Acquisitions of businesses, net of cash acquired .......................................... Proceeds from sale of assets ...................................................................... Increase in other investments .................................................................... (222,767) (8,810,315) 47,246 (61,526) Net investing cash ................................................................................. (9,047,362) Financing Activities Net increase (decrease) in short-term borrowings........................................ Proceeds from long-term debt .................................................................... Payments of long-term debt ....................................................................... Payments for credit facility and debt issuance costs ..................................... Payments of cash dividends ....................................................................... Proceeds from stock options exercised........................................................ Income tax effect of stock-based compensation exercises and vesting............ Treasury stock purchased .......................................................................... Other....................................................................................................... Net financing cash ................................................................................. Effect of exchange rate changes on cash ...................................................... Net (decrease) increase in cash and cash equivalents ................................... Cash and cash equivalents at beginning of year ............................................ Cash and cash equivalents at end of year ..................................................... Taxes paid on income ................................................................................ Interest paid on debt ................................................................................. 356,320 8,275,169 (1,852,812) (49,376) (319,029) 143,579 (39,761) 6,514,090 (36,276) (685,580) 889,793 $ $ 204,213 419,695 220,630 (239,026) (234,340) 38,434 (103,182) (303,774) (899) 500 (1,111) (65,119) (312,082) 86,831 (15,473) (307,353) (13,396) 684,049 205,744 $ 889,793 $ 477,786 153,850 11,300 (65,593) (288,633) (630,226) 797,514 (249,647) 89,990 89,691 (1,035,291) (42,384) (980,353) (13,465) 165,012 40,732 $ 205,744 $ 335,119 48,644 See notes to consolidated financial statements. 43 Statements of Consolidated Shareholders’ Equity (thousands of dollars except per common share data) Balance at January 1, 2015 ............................. Net income ................................................... Other comprehensive loss............................. Treasury stock purchased ............................. Stock-based compensation activity ............... Income tax effect of stock compensation ...... Cash dividends – $2.68 per common share ... Balance at December 31, 2015 ....................... Net income ................................................... Other comprehensive income ....................... Stock-based compensation activity ............... Cash dividends – $3.36 per common share.... Balance at December 31, 2016....................... Net income ................................................... Other comprehensive income ....................... Stock-based compensation activity ............... Acquired noncontrolling interest ................... Cash dividends – $3.40 per common share ... Common Stock Other Capital Retained Earnings Treasury Stock Cumulative Other Comprehensive Loss $114,525 $2,079,639 $ 2,424,674 $ (3,150,410) $ (471,958) 1,236 161,096 89,691 115,761 2,330,426 1,053,849 (249,647) 3,228,876 1,132,703 (115,137) (1,035,291) (34,357) (4,220,058) (587,095) 46,744 802 158,138 (15,774) 116,563 2,488,564 998 232,351 2,268 (312,082) 4,049,497 1,772,262 (319,029) (4,235,832) (540,351) 155,481 (30,584) Total $ 996,470 1,053,849 (115,137) (1,035,291) 127,975 89,691 (249,647) 867,910 1,132,703 46,744 143,166 (312,082) 1,878,441 1,772,262 155,481 202,765 2,268 (319,029) Balance at December 31, 2017 ....................... $ 117,561 $ 2,723,183 $ 5,502,730 $ (4,266,416) $(384,870) $ 3,692,188 See notes to consolidated financial statements. 44 [THIS PAGE INTENTIONALLY LEFT BLANK] 45 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES that have been identified as variable interest entities. Consolidation. The consolidated financial statements include However, because the Company does not have the power to the accounts of The Sherwin-Williams Company and its wholly direct the day-to-day operations of the investments and the owned subsidiaries (collectively, the Company). Intercompany risk of loss is limited to the amount of contributed capital, accounts and transactions have been eliminated. In order to the Company is not considered the primary beneficiary. In facilitate our year-end closing process, Valspar foreign accordance with the Consolidation Topic of the Financial subsidiaries’ financial results are included in our consolidated Accounting Standards Board (FASB) Accounting Standards financial statements on a one-month lag. Codification (ASC), the investments are not consolidated. Use of estimates. The preparation of consolidated financial For affordable housing investments entered into prior to the statements in conformity with U.S. generally accepted accounting January 1, 2015 adoption of Accounting Standard Update principles requires management to make estimates, judgments (ASU) No. 2014-01, the Company uses the effective yield and assumptions that affect the amounts reported in the method to determine the carrying value of the investments. consolidated financial statements and accompanying notes. Under the effective yield method, the initial cost of the Actual results could differ from those amounts. investments is amortized to income tax expense over the Nature of operations. The Company is engaged in the period that the tax credits are recognized. For affordable development, manufacture, distribution and sale of paint, housing investments entered into on or after the January 1, coatings and related products to professional, industrial, 2015 adoption of ASU No. 2014-01, the Company uses the commercial and retail customers primarily in North and South proportional amortization method. Under the proportional America, with additional operations in the Caribbean region, amortization method, the initial cost of the investments is Europe, Asia and Australia. amortized to income tax expense in proportion to the tax Reportable segments. See Note 18 for further details. credits and other tax benefits received. The carrying Cash flows. Management considers all highly liquid amounts of the investments, included in Other assets, were investments with a maturity of three months or less when $189,386, $193,413 and $189,484 at December 31, 2017, purchased to be cash equivalents. 2016 and 2015, respectively. The liabilities recorded on the Fair value of financial instruments. The following methods balance sheets for estimated future capital contributions to and assumptions were used by the Company in estimating its fair the investments were $179,026, $178,584 and $172,899 at value disclosures for financial instruments: December 31, 2017, 2016 and 2015, respectively. Cash and cash equivalents: The carrying amounts Short-term borrowings: The carrying amounts reported reported for Cash and cash equivalents approximate fair for Short-term borrowings approximate fair value. value. Long-term debt (including current portion): The fair Short-term investments: The carrying amounts values of the Company’s publicly traded debt, shown below, reported for Short-term investments approximate fair value. are based on quoted market prices. The fair values of the Investments in securities: Investments classified as Company’s non-traded debt, also shown below, are available-for-sale are carried at market value. See the estimated using discounted cash flow analyses, based on the recurring fair value measurement table on page 47. Company’s current incremental borrowing rates for similar Non-traded investments: The Company has types of borrowing arrangements. The Company’s publicly investments in the U.S. affordable housing and historic traded debt and non-traded debt are classified as level 1 and renovation real estate markets and certain other investments level 2, respectively, in the fair value hierarchy. See Note 7. 2017 Carrying Amount $8,742,739 1,144,185 Fair Value $9,054,277 1,088,630 December 31, 2016 Carrying Amount $1,907,704 4,097 2015 Fair Value $1,912,646 3,783 Carrying Amount $1,905,650 4,782 Fair Value $1,960,169 4,555 Publicly traded debt ....... Non-traded debt ............ Derivative instruments: The Company utilizes derivative less than twelve months in 2017, 2016, and 2015, primarily to instruments as part of its overall financial risk management hedge against value changes in foreign currency. See Note 13. policy. The Company entered into foreign currency option and There were no material foreign currency option and forward forward currency exchange contracts with maturity dates of contracts outstanding at December 31, 2017, 2016 and 2015. 46 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) In 2016, the Company entered into a series of interest Fair value measurements. The following tables summarize the rate lock agreements which were designated as cash flow Company’s assets and liabilities measured on a recurring and hedges. The interest rate locks settled during 2017. See non-recurring basis in accordance with the Fair Value Note 7. Measurements and Disclosures Topic of the ASC: Assets and Liabilities Reported at Fair Value on a Recurring Basis Fair Value at December 31, 2017 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Deferred compensation plan assets(1) .......................... Liabilities: Deferred compensation plan liabilities(2)...................... $ 61,097 $ 34,433 $26,664 $70,850 $70,850 (1) The deferred compensation plan assets consists of the investment funds maintained for the future payments under the Company’s executive deferred compensation plans, which are structured as rabbi trusts. The investments are marketable securities accounted for under the Debt and Equity Securities Topic of the ASC. The level 1 investments are valued using quoted market prices multiplied by the number of shares. The level 2 investments are valued based on vendor or broker models. The cost basis of the investment funds is $56,326. (2) The deferred compensation plan liabilities are the Company’s liabilities under its deferred compensation plans. The liabilities represent the fair value of the participant shadow accounts, and the value is based on quoted market prices in active markets for identical assets. Assets and Liabilities Reported at Fair Value on a Intangible assets. Intangible assets include indefinite- lived Nonrecurring Basis. As a result of the 2017 annual trademark trademarks, customer relationships and intellectual property. As impairment test performed in accordance with the Intangibles required by the Goodwill and Other Intangibles Topic of the ASC, Topic of the ASC, a trademark with a carrying value of $2,022 was indefinite-lived trademarks are not amortized, but instead are written off. See Note 4. Except for this trademark measurement tested annually for impairment, and between annual tests and the acquisition-related fair value measurements described in whenever an event occurs or circumstances indicate potential Note 2, there were no assets and liabilities measured at fair value impairment. See Note 4. The costs of finite-lived intangible assets on a nonrecurring basis in 2017. These fair value measurements are amortized on a straight-line basis over the expected period of qualify as level 3 measurements. benefit, which ranges primarily from 15 to 20 years. Accounts receivable and allowance for doubtful accounts. Impairment of long-lived assets. In accordance with the Accounts receivable were recorded at the time of credit sales net Property, Plant and Equipment Topic of the ASC, management of provisions for sales returns and allowances. The Company evaluates the recoverability and estimated remaining lives of long- recorded an allowance for doubtful accounts of $52,997, $40,450 lived assets whenever events or changes in circumstances indicate and $49,420 at December 31, 2017, 2016 and 2015, respectively, that the carrying amount may not be recoverable or the useful life to reduce Accounts receivable to their estimated net realizable has changed. See Notes 4 and 5. value. The allowance was based on an analysis of historical bad Property, plant and equipment. Property, plant and equipment debts, a review of the aging of Accounts receivable and the current is stated on the basis of cost. Depreciation is provided by the creditworthiness of customers. Accounts receivable balances are straight-line method. Depreciation and amortization are included written-off against the allowance if a final determination of in the appropriate Cost of goods sold or Selling, general and uncollectibility is made. All provisions for allowances for doubtful administrative expense caption on the Statements of Consolidated collection of accounts are related to the creditworthiness of Income. Included in Property, plant and equipment are leasehold accounts and are included in Selling, general and administrative improvements. The major classes of assets and ranges of annual expenses. depreciation rates are: Reserve for obsolescence. The Company recorded a reserve for obsolescence of $103,698, $87,715 and $91,217 at December 31, 2017, 2016 and 2015, respectively, to reduce Inventories to their estimated net realizable value. Goodwill. Goodwill represents the cost in excess of fair value of net assets acquired in business combinations accounted for by the purchase method. In accordance with the Intangibles Topic of the ASC, goodwill is tested for impairment on an annual basis and in between annual tests if events or circumstances indicate potential impairment. See Note 4. Buildings.................................................... Machinery and equipment ......................... Furniture and fixtures ................................ Automobiles and trucks ............................. 4.0% – 20.0% 10.0% – 20.0% 6.7% – 33.3% 10.0% – 33.3% Standby letters of credit. The Company occasionally enters into standby letter of credit agreements to guarantee various operating activities. These agreements provide credit availability to the various beneficiaries if certain contractual events occur. Amounts 47 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) outstanding under these agreements totaled $75,272, $43,658 and Defined benefit pension and other postretirement benefit $45,407 at December 31, 2017, 2016 and 2015, respectively. plans. The Company accounts for its defined benefit pension and Product warranties. The Company offers product warranties other postretirement benefit plans in accordance with the for certain products. The specific terms and conditions of such Retirement Benefits Topic of the ASC, which requires the warranties vary depending on the product or customer contract recognition of a plan’s funded status as an asset for overfunded requirements. Management estimated the costs of unsettled plans and as a liability for unfunded or underfunded plans. See product warranty claims based on historical results and Note 6. experience and included an amount in Other accruals. Stock-based compensation. The cost of the Company’s stock- Management periodically assesses the adequacy of the accrual for based compensation is recorded in accordance with the Stock product warranty claims and adjusts the accrual as necessary. Compensation Topic of the ASC. See Note 12. Changes in the Company’s accrual for product warranty claims Foreign currency translation. All consolidated non- highly during 2017, 2016 and 2015, including customer satisfaction inflationary foreign operations use the local currency of the settlements during the year, were as follows: country of operation as the functional currency and translated the 2017 2016 2015 Balance at January 1 ......... Charges to expense .......... Settlements ...................... Acquisition ....................... $ 34,419 39,707 (53,143) 130,442 $ 31,878 38,954 (36,413) $ 27,723 43,484 (39,329) Balance at December 31 ... $ 151,425 $ 34,419 $ 31,878 Warranty accruals of $130,442 were acquired in connection with the Valspar acquisition. This amount includes warranties from certain products under extended furniture protection plans along with other general customer warranties. Revenue related to the furniture protection plans is deferred and recognized over the contract life. Environmental matters. Capital expenditures for ongoing environmental compliance measures were recorded in Property, plant and equipment, and related expenses were included in the normal operating expenses of conducting business. The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned sites and at a number of third-party sites. The Company accrued for environmental-related activities for which commitments or clean-up plans have been developed and when such costs could be reasonably estimated based on industry standards and professional judgment. All accrued amounts were recorded on an undiscounted basis. Environmental-related expenses included direct costs of investigation and remediation and indirect costs such as compensation and benefits for employees directly involved in the investigation and remediation activities and fees paid to outside engineering, consulting and law firms. See Notes 8 and 13. Employee Stock Purchase and Savings Plan. The Company accounts for the Employee Stock Purchase and Savings Plan (ESOP) in accordance with the Employee Stock Ownership Plans Subtopic of the Compensation – Stock Ownership Topic of the ASC. The Company recognized compensation expense for amounts contributed to the ESOP. See Note 11. local currency asset and liability accounts at year- end exchange rates while income and expense accounts were translated at average exchange rates. The resulting translation adjustments were included in Cumulative other comprehensive loss, a component of Shareholders’ equity. Cumulative other comprehensive loss. At December 31, 2017, the ending balance of Cumulative other comprehensive loss included adjustments for foreign currency translation of $353,346, net prior service costs and net actuarial losses related to pension and other postretirement benefit plans of $84,863, unrealized net gains on marketable equity securities of $2,320 and unrealized net gains on interest rate lock cash flow hedges of $51,019. At December 31, 2016 and 2015, the ending balance of Cumulative other comprehensive loss included adjustments for foreign currency translation of $501,277 and $482,629, respectively, net prior service costs and net actuarial losses related to pension and other postretirement benefit plans of $125,096 and $104,346, respectively, and unrealized gains and losses on marketable equity securities of $1,015 and $120, respectively. Revenue recognition. The Company recognized revenue when products were shipped and title passed to unaffiliated customers. Collectibility of amounts recorded as revenue was reasonably assured at the time of recognition. Third-party service revenue. The Company uses subcontractors to provide installation services for customers. Under these arrangements, the Company invoices the customer for both the product and installation and remitted payment to the subcontractor for the installation. Starting in the third quarter of 2016, the Company recorded the installation revenue in Net sales and the payments to subcontractors in Cost of goods sold. Prior to the third quarter of 2016, these amounts were netted and immaterial. Customer and vendor consideration. The Company offered certain customers rebate and sales incentive programs which were classified as reductions in Net sales. Such programs were in the form of volume rebates, rebates that constituted a percentage of 48 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) sales or rebates for attaining certain sales goals. The Company adoption of this ASU does not have a material effect on the received consideration from certain suppliers of raw materials in Company’s results of operations, financial condition or liquidity. the form of volume rebates or rebates that constituted a In March 2017, the FASB issued ASU No. 2017-07, “Improving percentage of purchases. These rebates were recognized on an the Presentation of Net Periodic Pension Cost and Net Periodic accrual basis by the Company as a reduction of the purchase price Postretirement Benefit Costs.” The standard requires the service of the raw materials and a subsequent reduction of Cost of goods component of pension and other postretirement benefit expense sold when the related product was sold. to be presented in the same income statement lines as other Costs of goods sold. Included in Costs of goods sold were employee compensation costs, however, the other components costs for materials, manufacturing, distribution and related will be presented outside of operating income. In addition, only the support. Distribution costs included expenses related to the service cost component will be eligible for capitalization in assets. distribution of products including inbound freight charges, The standard is effective starting in 2018, with early adoption purchase and receiving costs, warehousing costs, internal transfer permitted. Retrospective application is required for the guidance costs and other costs incurred to ship products. Also included in on the income statement presentation. Prospective application is Costs of goods sold were total technical expenditures, which required for the guidance on the cost capitalization in assets. The included research and development costs, quality control, product standard is not expected to have a material effect on the formulation expenditures and other similar items. Research and Company’s results of operations, financial condition or liquidity. development costs included in technical expenditures were In January 2017, the FASB issued ASU No. 2017-04, $58,474, $58,041 and $57,667 for 2017, 2016 and 2015, “Simplifying the Test for Goodwill Impairment.” This standard respectively. See Note 9. simplifies the accounting for goodwill impairment by eliminating Selling, general and administrative expenses. Selling costs the Step 2 requirement to calculate the implied fair value of included advertising expenses, marketing costs, employee and goodwill. Instead, if a reporting unit’s carrying amount exceeds its store costs and sales commissions. The cost of advertising was fair value, an impairment charge will be recorded based on that expensed as incurred. The Company incurred $374,059, $351,002 difference. The impairment charge will be limited to the amount of and $338,188 in advertising costs during 2017, 2016 and 2015, goodwill allocated to that reporting unit. The standard will be respectively. General and administrative expenses included human applied prospectively and is effective for impairment tests resources, legal, finance and other support and administrative performed after December 15, 2019, with early adoption functions. permitted. The standard is not expected to have a material effect Earnings per share. Common stock held in a revocable trust on the Company’s results of operations, financial condition or (see Note 10) was not included in outstanding shares for basic or liquidity. diluted income per common share calculations. All references to In February 2016, the FASB issued ASU No. 2016-02, “Leases,” “shares” or “per share” information throughout this report relate to which consists of a comprehensive lease accounting standard. common shares and are stated on a diluted per common share Under the new standard, assets and liabilities arising from most basis, unless otherwise indicated. Basic and diluted net income per leases will be recognized on the balance sheet. Leases will be common share were calculated using the treasury stock method in classified as either operating or financing, and the lease accordance with the Earnings Per Common Share Topic of the classification will determine whether expense is recognized on a ASC. Basic net income per common share amounts were straight line basis (operating leases) or based on an effective computed based on the weighted-average number of common interest method (financing leases). The new standard is effective shares outstanding during the year. Diluted net income per for interim and annual periods starting in 2019. A modified common share amounts were computed based on the weighted- retrospective transition approach is required with certain practical average number of common shares outstanding plus all dilutive expedients available. The Company has made significant progress securities potentially outstanding during the year. See Note 15. with its assessment process, and anticipates this standard will Impact of recently issued accounting standards. Effective have a material impact on its consolidated balance sheet. While January 1, 2017, the Company adopted ASU No. 2015-17, “Balance the Company continues to assess all potential impacts of the Sheet Classification of Deferred Taxes,” which eliminates the standard, it currently believes the most significant impact relates requirement for separate presentation of current and non-current to recording lease assets and related liabilities on the balance portions of deferred tax. Subsequent to adoption, all deferred tax sheet for its retail operations in The Americas Group. assets and deferred tax liabilities are presented as non-current on In January 2016, the FASB issued ASU No. 2016-01, the balance sheet. The changes have been applied prospectively as “Recognition and Measurement of Financial Assets and Financial permitted by the ASU and prior years have not been restated. The Liabilities,” which amends the guidance for certain aspects of 49 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) recognition, measurement and disclosure of financial instruments. reduced basic and diluted net income per common share by $.44 The standard is effective for interim and annual periods starting in and $.44, respectively, for the year ended December 31, 2017. The 2018, and early adoption is not permitted. Although the Company Acquisition expands the Company’s diversified array of brands and continues to assess the potential impacts of the standard, it technologies, expands its global platform and adds new capabilities currently believes that the main impact will be that changes in fair in its packaging and coil businesses. value of marketable securities currently classified as The preliminary allocation of the fair value of the Acquisition is available-for-sale will be recognized in earnings rather than in summarized in the following table. Allocations are based on the other comprehensive income. The standard is not expected to acquisition method of accounting and in-process third-party have a material effect on the Company’s results of operations, valuation appraisals. The allocation of the fair value will be financial condition or liquidity. finalized within the allowable measurement period. In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which consists of a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard is effective for interim and annual periods beginning after December 15, 2017. The Company will adopt the standard using the modified retrospective method. The Company has completed its determination of the expanded disclosures regarding revenue, as well as any impacts on the timing of recognition in some arrangements or contracts for the sale of goods or services. Management’s assessment identified certain revenue components within the Consumer Brands Group that are recorded as Selling, general and administrative expenses of approximately $60.0 million as of December 31, 2017, which upon adoption of the new standard would be recorded as a contra revenue in Net sales on the Statements of Consolidated Income. In addition, the Company has made enhancements to its information systems and internal controls in response to the new rule requirements. The Company is prepared to provide expanded disclosures in the consolidated financial statements upon adoption and it is expected that the adoption of this standard will not materially impact Net income or the Company’s liquidity. Reclassification. Certain amounts in the notes to the consolidated financial statements for 2015 and 2016 have been reclassified to conform to the 2017 presentation. NOTE 2 – ACQUISITIONS On June 1, 2017, the Company completed the acquisition of The Valspar Corporation (Valspar) at $113 per share in an all cash transaction for a total purchase price of $8.9 billion, net of divestiture proceeds of $431.0 million (Acquisition). On April 11, 2017, the Company and Valspar entered into a definitive agreement with Axalta Coating Systems Ltd. to divest the assets related to Valspar’s North American industrial wood coatings business. The divestiture was also completed on June 1, 2017, and is reported as a discontinued operation with no pre-tax gain or loss, but includes the tax expense effect of this separate transaction. Proceeds of $431.0 million were received for the divested assets sold. The divestiture resulted in a tax provision of $41.5 million, which (millions of dollars) Cash ...................................................................... Accounts receivable .............................................. Inventories............................................................. Indefinite-lived trademarks .................................... Finite-lived intangible assets .................................. Goodwill ................................................................ Property, plant and equipment ............................... All other assets ...................................................... Accounts payable .................................................. Long-term debt ...................................................... Deferred taxes ....................................................... All other liabilities .................................................. $ 129.1 817.5 684.5 775.9 5,071.8 5,675.2 833.0 231.1 (553.2) (1,603.5) (2,028.9) (1,093.1) Total ...................................................................... Total, net of cash ................................................... $ 8,939.4 $ 8,810.3 Finite-lived intangible assets include customer relationships of $3.3 billion and intellectual property and technology of $1.8 billion, which are being amortized over weighted average amortization periods ranging from 15 to 20 years. Based on the preliminary purchase accounting, goodwill of $2.3 billion, $1.9 billion and $1.5 billion was recorded in The Americas Group, Performance Coatings Group and Consumer Brands Group, respectively, and relates primarily to expected synergies. The Company’s Net sales and Net income for the year ended December 31, 2017 include sales of $2.464 billion and a profit before tax of $115.8 million related to the Acquisition. Net income for the year ended December 31, 2017 includes $183.1 million of intangibles amortization expense. During the year ended December 31, 2017, the Company incurred transaction and integration related SG&A expense of $126.8 million and interest expense of $179.3 million related to the Acquisition. During the year ended December 31, 2016, the Company incurred transaction and integration related SG&A expense of $58.4 million and interest expense of $72.8 million related to the anticipated acquisition of Valspar. The following pro forma information presents consolidated financial information as if Valspar had been acquired at the 50 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) beginning of 2016. Pro forma adjustments have been made to exclude Valspar’s North American industrial wood coatings NOTE 4 – GOODWILL, INTANGIBLE AND LONG-LIVED ASSETS business results and certain transaction and integration costs from In accordance with the Property, Plant and Equipment Topic of all periods presented. Interest expense has been adjusted as the ASC, whenever events or changes in circumstances indicate though total debt related to the Acquisition had been outstanding that the carrying value of long-lived assets may not be recoverable at January 1, 2016. Amortization of acquired intangibles and fixed or the useful life may have changed, impairment tests are to be asset step-ups has been adjusted as though the amortization performed. Undiscounted cash flows are to be used to calculate period started January 1, 2016. The $54.9 million amortization of the recoverable value of long-lived assets to determine if such inventory cost increases resulting from the preliminary purchase assets are impaired. Where impairment is identified, a discounted accounting has been included in 2016 to reflect the pro forma cash flow valuation model, incorporating discount rates transaction date of January 1, 2016, and thus this amount has been commensurate with the risks involved for each group of assets, is excluded for the year ended December 31, 2017. The unaudited to be used to determine the fair value for the assets to measure pro forma consolidated financial information does not necessarily any potential impairment. No material impairments were recorded reflect the actual results that would have occurred had the in 2016, 2015 and 2014. Acquisition taken place on January 1, 2016, nor is it meant to be During 2017, the Company recorded preliminary goodwill of indicative of future results of operations of the combined $5,675,244, finite-lived intangibles of $5,071,800 and indefinite- companies under the ownership and operation of the Company. lived trademarks of $775,900 in connection with the Acquisition. Net sales .......................................... $16,634,913 $15,861,367 Net income from continuing 2017 2016 1,854,613 1,008,138 operations .................................... Net income per common share from continuing operations Basic ............................................. $ Diluted.......................................... $ See Note 2. In accordance with the Goodwill and Other Intangibles Topic of the ASC, goodwill and indefinite-lived intangible assets are tested for impairment annually, and interim impairment tests are performed whenever an event occurs or circumstances change that indicate an impairment has more likely than not occurred. 19.96 $ 19.54 $ 10.98 10.67 October 1 has been established for the annual impairment review. At the time of impairment testing, values are estimated separately for goodwill and trademarks with indefinite lives using a discounted cash flow valuation model, incorporating discount rates commensurate with the risks involved for each group of assets. An optional qualitative assessment may alleviate the need to perform the quantitative goodwill impairment test when impairment is unlikely. The annual impairment review performed as of October 1, 2017 resulted in trademark impairment of $2,022 in The Americas Group related to lower than anticipated sales of an acquired brand and no goodwill impairment. The annual impairment review performed as of October 1, 2016 resulted in goodwill and trademark impairment in The Americas Group of $10,455 and $233, respectively. The annual impairment review performed as of October 1, 2015 did not result in any goodwill or trademark impairment. NOTE 3 – INVENTORIES Inventories were principally stated at the lower of cost or market with cost determined on the last-in, first-out (LIFO) method. The following presents the effect on inventories, net income and net income per common share had the Company used the first-in, first-out (FIFO) inventory valuation method adjusted for income taxes at the statutory rate in effect at each reporting date and assuming no other adjustments. Management believes that the use of LIFO results in a better matching of costs and revenues. This information is presented to enable the reader to make comparisons with companies using the FIFO method of inventory valuation. The decrease in percentage of total inventories on LIFO in 2017 was due to the Acquisition which only carried approximately 40 percent of its inventory on the LIFO method. Percentage of total 2017 2016 2015 inventories on LIFO .......... 66% 79% 78% Excess of FIFO over LIFO ..... $286,961 (Decrease) increase in net $253,353 $251,060 income due to LIFO.......... (20,669) (1,421) 49,658 (Decrease) increase in net income per common share due to LIFO............. (.22) (.02) .53 51 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) A summary of changes in the Company’s carrying value of goodwill by Reportable Segment is as follows: Goodwill The Americas Group Consumer Brands Group Performance Coatings Group Balance at January 1, 2015(1) .............................................................. Currency and other adjustments ................................................... $ 295,129 (77) $ 702,206 (1,135) $ Balance at December 31, 2015(1)........................................................ Impairment charged to operations ................................................ Currency and other adjustments ................................................... Balance at December 31, 2016(2) ....................................................... Acquisition ................................................................................... Currency and other adjustments ................................................... 295,052 (10,455) 813 285,410 2,276,127 (5,928) 161,011 (13,801) 147,210 701,071 (1,197) (5,602) 699,874 1,473,239 60,128 141,608 1,925,878 (41,991) Consolidated Totals $ 1,158,346 (15,013) 1,143,333 (10,455) (5,986) 1,126,892 5,675,244 12,209 Balance at December 31, 2017(2) ....................................................... $2,555,609 $2,233,241 $2,025,495 $ 6,814,345 (1) Net of accumulated impairment losses of $8,904 ($8,113 in the Consumer Brands Group and $791 in the Performance Coatings Group). (2) Net of accumulated impairment losses of $19,359 ($8,113 in the Consumer Brands Group, $791 in the Performance Coatings Group and $10,455 in The Americas Group). A summary of the Company’s carrying value of intangible assets is as follows: Finite-Lived Intangible Assets Intellectual Property Customer Relationships All Other Software Trademarks With Indefinite Lives Total Intangible Assets Subtotal December 31, 2017 Weighted-average amortization period ............................................ Gross ................................................ Accumulated amortization ................ 7 years $ 165,019 (116,621) 15 years $3,361,675 (129,568) 13 years 20 years 17 years $1,774,000 $ 329,440 $ 5,630,134 (555,437) (257,506) (51,742) Net value ....................................... $ 48,398 $3,232,107 $ 1,722,258 $ 71,934 $5,074,697 $927,664 $6,002,361 December 31, 2016 Weighted-average amortization period ............................................ Gross ................................................ Accumulated amortization ................ 7 years $ 144,557 (103,735) 11 years 10 years $ 313,613 $ 458,170 (343,952) (240,217) Net value ....................................... $ 40,822 $ 73,396 $ 114,218 $ 140,792 $ 255,010 December 31, 2015 Weighted-average amortization period ............................................ Gross ................................................ Accumulated amortization ................ 8 years $ 123,863 (95,008) 12 years 11 years $ 312,119 $ 435,982 (323,929) (228,921) Net value ....................................... $ 28,855 $ 83,198 $ 112,053 $ 143,318 $ 255,371 Amortization of finite-lived intangible assets based on the the Exit or Disposal Cost Obligations Topic of the ASC. Provisions in-process third-party valuation appraisals is as follows for the for qualified exit costs are made at the time a facility is no longer next five years: $330,029 in 2018, $330,045 in 2019, $326,992 in operational. Qualified exit costs primarily include post-closure rent 2020, $325,215 in 2021 and $322,245 in 2022. expenses or costs to terminate the contract before the end of its NOTE 5 – EXIT OR DISPOSAL ACTIVITIES term and costs of employee terminations. Adjustments may be made to liabilities accrued for qualified exit costs if information Management is continually re-evaluating the Company’s becomes available upon which more accurate amounts can be operating facilities, including acquired operating facilities, against reasonably estimated. Concurrently, property, plant and its long-term strategic goals. Liabilities associated with exit or equipment is tested for impairment in accordance with the disposal activities are recognized as incurred in accordance with Property, Plant and Equipment Topic of the ASC, and if impairment 52 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) exists, the carrying value of the related assets is reduced to Provisions for severance and other qualified exit costs of $1,020 estimated fair value. Additional impairment may be recorded for and $505 were charged to the Consumer Brands Group and subsequent revisions in estimated fair value. Adjustments to prior Performance Coatings Group, respectively. Provisions for provisions and additional impairment charges for property, plant severance and other qualified exit costs related to manufacturing and equipment of closed sites being held for disposal are recorded facilities, distribution facilities, stores and branches closed prior to in Other general expense – net. 2016 of $1,513 were recorded. During 2017, 13 stores in The Americas Group and 2 branches During 2015, 32 stores in The Americas Group and 7 branches in the Performance Coatings Group were closed due to lower in the Performance Coatings Group were closed due to lower demand or redundancy. Accruals for exit and disposal activities of demand or redundancy. In addition, the Performance Coatings $4,456 were acquired in connection with the Acquisition. The Group exited a business in Europe. Provisions for severance and Company is currently evaluating all legacy operations in response other qualified exit cost of $168 and $8,329 were charged to The to the Acquisition in order to optimize operations. These Americas Group and Performance Coatings Group, respectively. Acquisition-related restructuring charges are recorded in the Provisions for severance and other qualified exit costs related to Administrative segment as presented in the table below. manufacturing facilities, distribution facilities, stores and branches Provisions of $47,308 and $143 for severance and other qualified closed prior to 2015 of $1,264 were recorded. exit costs related to the Acquisition and other 2017 activity were At December 31, 2017, a portion of the remaining accrual for charged to the Administrative Segment and Performance Coatings qualified exit costs relating to facilities shutdown prior to 2015 is Group, respectively. Provisions for severance and other qualified expected to be incurred by the end of 2018. The remaining portion exit costs related to manufacturing facilities, distribution facilities, of the ending accrual for facilities shutdown prior to 2015 primarily stores and branches closed prior to 2017 of $3,052 were recorded. represented post-closure contractual expenses related to certain During 2016, 16 stores in The Americas Group, 13 branches in owned facilities which are closed and being held for disposal. The the Performance Coatings Group and 2 facilities in Consumer Company cannot reasonably estimate when such matters will be Brands Group were closed due to lower demand or redundancy. concluded to permit disposition. The following tables summarize the activity and remaining liabilities associated with qualified exit costs: Severance and related costs ......................................... $ 907 2,910 (3,796) (Thousands of dollars) Exit Plan Administrative segment Acquisition-related restructuring in 2017: Severance and related costs ......................................... Other qualified exit costs ............................................. Performance Coatings Group stores shutdown in 2017: Severance and related costs ......................................... Other qualified exit costs ............................................. Consumer Brands Group facilities shutdown in 2016: Performance Coatings Group stores shutdown in 2016: Severance and related costs ......................................... Other qualified exit costs ............................................. The Americas Group stores shutdown in 2015: Other qualified exit costs ............................................. Performance Coatings Group stores shutdown in 2015: Other qualified exit costs ................................................. Severance and other qualified exit costs for facilities shutdown prior to 2015 ................................................ Totals .......................................................................... 136 269 195 433 1,908 $3,848 Balance at December 31, 2016 Acquired Balances Provisions in Cost of goods sold or SG&A Actual expenditures charged to accrual Balance at December 31, 2017 $ 3,303 1,153 $ 38,739 8,569 $(36,023) (4,181) $ 6,019 5,541 14 129 (8) 97 20 25 (136) (255) (215) (446) 14 121 21 111 12 $4,456 $50,503 $(45,422) $13,385 (362) 1,546 53 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) (Thousands of dollars) Exit Plan Consumer Brands Group facilities shutdown in 2016: Balance at December 31, 2015 Provisions in Cost of goods sold or SG&A Actual expenditures charged to accrual Balance at December 31, 2016 Severance and related costs...................................................... $ 1,020 $ (113) $ 907 Performance Coatings Group stores shutdown in 2016: Severance and related costs...................................................... Other qualified exit costs .......................................................... The Americas Group stores shutdown in 2015: Other qualified exit costs .......................................................... $ 12 Performance Coatings Group stores shutdown in 2015: Severance and related costs...................................................... Other qualified exit costs .......................................................... 1,096 2,750 The Americas Group stores shutdown in 2014: Other qualified exit costs .......................................................... Consumer Brands Group facilities shutdown in 2014: Severance and related costs...................................................... Other qualified exit costs .......................................................... Performance Coatings Group exit of business in 2014: Severance and related costs...................................................... Other qualified exit costs .......................................................... Severance and other qualified exit costs for facilities shutdown prior to 2014 ............................................................................. Totals ....................................................................................... 184 445 52 430 353 1,755 $7,077 136 369 481 499 430 103 $3,038 (100) (298) (1,096) (2,816) (81) (46) (39) (430) (600) 136 269 195 433 103 399 13 183 (648) $(6,267) 1,210 $3,848 (Thousands of dollars) Exit Plan The Americas Group stores shutdown in 2015: Balance at December 31, 2014 Provisions in Cost of goods sold or SG&A Actual expenditures charged to accrual Balance at December 31, 2015 Other qualified exit costs .......................................................... $ 168 $ (156) $ 12 Performance Coatings Group stores shutdown in 2015: Severance and related costs...................................................... Other qualified exit costs .......................................................... The Americas Group stores shutdown in 2014: Other qualified exit costs .......................................................... $ 280 Consumer Brands Group facilities shutdown in 2014: Severance and related costs...................................................... Other qualified exit costs .......................................................... Performance Coatings Group exit of business in 2014: Severance and related costs...................................................... Other qualified exit costs .......................................................... The Americas Group facility shutdown in 2013: Severance and related costs...................................................... Other qualified exit costs .......................................................... Performance Coatings Group stores shutdown in 2013: Severance and related costs...................................................... Other qualified exit costs .......................................................... Severance and other qualified exit costs for facilities shutdown prior to 2013 ............................................................................. Totals ....................................................................................... 2,732 781 104 1,080 654 1,205 28 138 1,514 $ 8,516 1,341 6,988 142 466 6 326 324 (245) (4,238) (238) (2,753) (735) (1,051) (654) (411) (28) (138) (553) $ 9,761 $(11,200) 1,096 2,750 184 445 52 430 353 794 961 $7,077 54 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) NOTE 6 – PENSION, HEALTH CARE AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS respectively. Assets in employee accounts of the foreign defined contribution pension plans are invested in various investment The Company provides pension benefits to substantially all funds. These investment funds did not own a significant number of employees through primarily noncontributory defined contribution shares of the Company’s common stock for any year presented. or defined benefit plans and certain health care and life insurance Defined benefit pension plans. Prior to December 31, 2017, the benefits to domestic active employees and eligible retirees. In Company had one salaried and one hourly domestic defined accordance with the Retirement Benefits Topic of the ASC, the benefit pension plan. In connection with the Acquisition, the Company recognizes an asset for overfunded defined benefit Company acquired Valspar’s domestic defined benefit pension pension or other postretirement benefit plans and a liability for plan. Effective December 31, 2017, the three domestic defined unfunded or underfunded plans. In addition, actuarial gains and benefit pension plans were merged into one plan. The Company losses and prior service costs of such plans are recorded in also has thirty-one foreign defined benefit pension plans, twelve of Cumulative other comprehensive loss, a component of which were acquired through the Acquisition. Shareholders’ equity. The amounts recorded in Cumulative other At December 31, 2017, the domestic defined benefit pension comprehensive loss will continue to be modified as actuarial plan was overfunded, with a projected benefit obligation of assumptions and service costs change, and all such amounts will $916,175, fair value of plan assets of $1,188,638 and excess plan be amortized to expense over a period of years through the net assets of $272,463. The plan is funded in accordance with all pension cost (credit) and net periodic benefit cost. applicable regulations at December 31, 2017 and no funding will be Health care plans. The Company provides certain domestic required in 2018. At December 31, 2016, the domestic salaried and health care plans that are contributory and contain cost-sharing hourly defined benefit pension plans were overfunded, with a features such as deductibles and coinsurance. There were 26,565, projected benefit obligation of $632,797, fair value of plan assets 22,708 and 21,918 active employees entitled to receive benefits of $847,013 and excess plan assets of $214,216. At December 31, under these plans at December 31, 2017, 2016 and 2015, 2015, the domestic salaried and hourly defined benefit pension respectively. The cost of these benefits for active employees, plan were overfunded, with a projected benefit obligation of which includes claims incurred and claims incurred but not $624,791, fair value of plan assets of $858,605 and excess plan reported, amounted to $281,158, $220,589 and $217,781 for 2017, assets of $233,814. 2016 and 2015, respectively. At December 31, 2017, twenty-six of the Company’s foreign Defined contribution pension plans. The Company’s annual defined benefit pension plans were unfunded or underfunded, with contribution for its domestic defined contribution pension plan combined accumulated benefit obligations, projected benefit was $38,426, $36,731 and $35,435 for 2017, 2016 and 2015, obligations, fair values of net assets and deficiencies of plan assets respectively. The contribution percentage ranges from two percent of $190,241, $230,479, $136,674 and $93,805, respectively. The to seven percent of compensation for covered employees based $142,725 increase in the combined projected benefit obligations of on an age and service formula. Assets in employee accounts of the all foreign defined benefit pension plans from 2016 was primarily domestic defined contribution pension plan are invested in various due to the acquired Valspar plans. investment funds as directed by the participants. These The Company expects to make the following benefit payments investment funds did not own a significant number of shares of the for all domestic and foreign defined benefit pension plans: $75,782 Company’s common stock for any year presented. In connection in 2018; $72,174 in 2019; $74,673 in 2020; $75,322 in 2021; with the Acquisition, the Company acquired two defined $75,864 in 2022; and $375,592 in 2022 through 2026. The contribution plans. Company expects to contribute $6,131 to the foreign plans in 2018. The Company’s annual contributions for its foreign defined The estimated net actuarial losses and prior service costs for contribution pension plans, which are based on various the defined benefit pension plans that are expected to be percentages of compensation for covered employees up to certain amortized from Cumulative other comprehensive loss into the net limits, were $10,480, $6,676 and $5,888 for 2017, 2016 and 2015, pension costs in 2018 are $1,532 and $1,458, respectively. 55 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) The following table summarizes the components of the net pension costs and Cumulative other comprehensive loss related to the defined benefit pension plans: Domestic Defined Benefit Pension Plans 2016 2017 2015 Foreign Defined Benefit Pension Plans 2016 2017 2015 Net pension costs (credits): Service costs ........................................................... Interest costs .......................................................... Expected returns on plan assets .............................. Amortization of prior service costs.......................... Amortization of actuarial losses .............................. Ongoing pension costs (credits).......................... Settlement costs (credits)....................................... Net pension costs (credits) ................................. Other changes in plan assets and projected benefit obligation recognized in Cumulative other comprehensive loss (before taxes): Net actuarial (gains) losses arising during the year .................................................... Prior service costs arising during the year................ Amortization of actuarial losses .............................. Amortization of prior service costs.......................... Exchange rate loss recognized during year .............. Total recognized in Cumulative other $ 21,711 31,085 (48,275) 1,362 6,210 12,093 (1,990) 10,103 $ 22,291 26,498 (50,197) 1,205 4,532 $ 21,120 24,535 (52,095) 1,310 1,962 4,329 (3,168) 4,329 (3,168) $ 7,039 8,177 (9,070) $ 4,225 7,441 (6,915) $ 5,071 8,719 (9,296) 1,833 7,979 71 8,050 1,540 6,291 4,231 10,522 1,910 6,404 3,255 9,659 (65,829) 844 (4,220) (1,362) 18,926 2,081 (4,532) (1,205) 15,359 (13,960) 17,030 1,907 (1,962) (1,310) (1,904) (1,540) (1,910) 4,133 (11,627) (5,830) comprehensive loss ......................................... (70,567) 15,270 12,087 (11,731) 3,863 (5,833) Total recognized in net pension costs (credits) and Cumulative other comprehensive loss ....... $(60,464) $ 19,599 $ 8,919 $ (3,681) $ 14,385 $ 3,826 The Company employs a total return investment approach for rates of return, the nature of investments and an expectation of the domestic and foreign defined benefit pension plan assets. A future investment strategies. The target allocations for plan assets mix of equities and fixed income investments are used to are 35 – 65 percent equity securities and 35 – 55 percent fixed maximize the long-term return of assets for a prudent level of risk. income securities. In determining the expected long-term rate of return on defined benefit pension plan assets, management considers the historical 56 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) The following tables summarize the fair value of the defined benefit pension plan assets at December 31, 2017, 2016 and 2015. The presentation is in accordance with the Retirement Benefits Topic of the ASC, as updated by ASU No. 2015-07 (see Note 1). Investments at fair value: Equity investments(1) ..................................................... Fixed income investments(2) .......................................... Other assets(3)............................................................... Total investments in fair value hierarchy ........................... Investments measured at NAV or its equivalent(4) ............ Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ 409,911 146,816 $556,727 $ 105,072 234,086 39,196 $ 378,354 Fair value at December 31, 2017 $ 514,983 380,902 39,196 935,081 533,561 Total investments ............................................................. $1,468,642 Investments at fair value: Equity investments(1) ..................................................... Fixed income investments(2) .......................................... Other assets(3)............................................................... Total investments in fair value hierarchy ........................... Investments measured at NAV or its equivalent(4) ............ Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ 321,152 144,668 $465,820 $ 71,893 149,435 14,643 $ 235,971 Fair value at December 31, 2016 $ 393,045 294,103 14,643 701,791 310,230 Total investments ............................................................. $1,012,021 Investments at fair value: Equity investments(1) ..................................................... Fixed income investments(2) .......................................... Other assets(3)............................................................... Total investments in fair value hierarchy ........................... Investments measured at NAV or its equivalent(4) ............ Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $372,033 141,448 $ 513,481 $ 63,657 149,022 16,361 $229,040 Fair value at December 31, 2015 $ 435,690 290,470 16,361 742,521 278,423 Total investments ............................................................. $1,020,944 (1) This category includes actively managed equity assets that track primarily to the S&P 500. (2) This category includes government and corporate bonds that track primarily to the Barclays Capital Aggregate Bond Index. (3) This category includes real estate and pooled investment funds. (4) This category includes pooled investment funds and private equity funds that are measured at NAV or its equivalent using the practical expedient. Therefore, these investments are not classified in the fair value hierarchy. Included as equity investments in the domestic defined benefit representing 10.3 percent of total domestic plan assets. Dividends pension plan assets at December 31, 2017 were 300,000 shares of received on the Company’s common stock during 2017 totaled the Company’s common stock with a market value of $123,012, $1,020. 57 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) The following table summarizes the obligations, plan assets and assumptions used for the defined benefit pension plans, which are all measured as of December 31: Domestic Defined Benefit Pension Plans 2016 2017 2015 Foreign Defined Benefit Pension Plans 2016 2017 2015 Accumulated benefit obligations at end of year .......... $ 913,363 $ 630,159 $ 621,873 $ 308,164 $ 172,047 $ 172,426 Projected benefit obligations: Balances at beginning of year .................................. Service costs .......................................................... Interest costs.......................................................... Actuarial losses (gains) .......................................... Acquisition ............................................................. Contributions and other .......................................... Settlements ............................................................ Effect of foreign exchange....................................... Benefits paid ........................................................... $ 632,797 21,711 31,085 67,945 246,894 844 (43,381) $ 624,791 22,291 26,498 8,132 $ 653,338 21,120 24,535 (40,602) 2,081 (41,720) (50,996) (33,600) $ 206,873 7,039 8,177 (4,002) 115,045 1,397 (758) 22,938 (7,112) $ 201,854 $234,524 5,071 8,719 (3,045) 4,225 7,441 43,736 947 (14,862) (30,360) (6,108) 1,072 (18,707) (17,211) (8,569) Balances at end of year ........................................... 916,175 632,797 624,791 349,597 206,873 201,854 Plan assets: Balances at beginning of year .................................. Actual returns on plan assets .................................. Acquisition ............................................................. Contributions and other .......................................... Settlements ............................................................ Effect of foreign exchange....................................... Benefits paid ........................................................... 858,605 39,404 896,071 (3,866) 847,013 182,049 244,677 (43,381) (41,720) (50,996) (33,600) 165,008 16,282 82,314 6,048 (758) 18,222 (7,112) 162,339 33,569 187,645 4,844 15,019 (14,862) (24,949) (6,108) 11,424 (18,707) (14,298) (8,569) Balances at end of year ........................................... 1,188,638 847,013 858,605 280,004 165,008 162,339 Excess (deficient) plan assets over projected benefit obligations .................................................. $ 272,463 $ 214,216 $ 233,814 $ (69,593) $ (41,865) $ (39,515) Assets and liabilities recognized in the Consolidated Balance Sheets: Deferred pension assets ......................................... Other accruals ........................................................ Other long-term liabilities ....................................... Amounts recognized in Cumulative other comprehensive loss: Net actuarial losses ................................................ Prior service costs................................................... Weighted-average assumptions used to determine projected benefit obligations: Discount rate .......................................................... Rate of compensation increase ............................... Weighted-average assumptions used to determine net pension costs: Discount rate .......................................................... Expected long-term rate of return on assets............ Rate of compensation increase ............................... $ 272,463 $ 214,216 $ 233,814 $ 24,280 (2,523) (91,350) $ 11,313 (1,522) (51,656) $ 11,068 (1,442) (49,141) $ 272,463 $ 214,216 $ 233,814 $ (69,593) $ (41,865) $ (39,515) $ (64,799) (5,496) $(134,847) $(120,454) (5,138) (6,015) $ (33,873) $(45,604) $ (41,741) $ (70,295) $(140,862) $ (125,592) $ (33,873) $(45,604) $ (41,741) 3.60% 3.33% 4.20% 3.38% 4.40% 3.14% 2.73% 3.69% 3.21% 4.43% 4.20% 4.00% 4.15% 5.00% 3.30% 4.40% 6.00% 3.14% 3.95% 6.00% 4.00% 3.88% 4.75% 4.33% 4.20% 4.70% 4.00% 3.92% 4.84% 3.70% 58 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) Postretirement Benefits Other Than Pensions. Employees of health care and life insurance benefits upon retirement, subject to the Company hired in the United States prior to January 1, 1993 the terms of the unfunded plans. There were 3,486, 4,524 and who are not members of a collective bargaining unit, and certain 4,442 retired employees entitled to receive such postretirement groups of employees added through acquisitions, are eligible for benefits at December 31, 2017, 2016 and 2015, respectively. The following table summarizes the obligation and the assumptions used for postretirement benefits other than pensions: Postretirement Benefits Other than Pensions 2016 2015 2017 Benefit obligation: Balance at beginning of year – unfunded .................................................................. Service cost ............................................................................................................. Interest cost ............................................................................................................ Acquisition .............................................................................................................. Actuarial loss (gain)................................................................................................. Plan amendments .................................................................................................... Benefits paid ............................................................................................................ $ 265,137 2,105 10,749 17,010 11,637 $ 263,383 2,244 11,009 7,548 (15,815) (19,047) $ 295,149 2,485 11,182 (19,370) (9,269) (16,794) Balance at end of year – unfunded ............................................................................ $ 290,823 $ 265,137 $ 263,383 Liabilities recognized in the Consolidated Balance Sheets: Postretirement benefits other than pensions ............................................................ Other accruals ......................................................................................................... $(274,675) (16,148) $(250,397) (14,740) $(248,523) (14,860) $(290,823) $ (265,137) $(263,383) Amounts recognized in Cumulative other comprehensive loss: Net actuarial losses.................................................................................................. Prior service credits ................................................................................................. $ (44,147) 12,625 $ (23,211) 19,205 $ (15,664) 25,784 Weighted-average assumptions used to determine benefit obligation: Discount rate ........................................................................................................... Health care cost trend rate – pre-65......................................................................... Health care cost trend rate – post-65 ....................................................................... Prescription drug cost increases............................................................................... Employer Group Waiver Plan (EGWP) trend rate ..................................................... Weighted-average assumptions used to determine net periodic benefit cost: Discount rate ........................................................................................................... Health care cost trend rate – pre-65......................................................................... Health care cost trend rate – post-65 ....................................................................... Prescription drug cost increases............................................................................... $ (31,522) $ (4,006) $ 10,120 3.61% 7.00% 5.00% 11.00% 11.00% 4.10% 6.00% 5.50% 10.50% 4.10% 6.00% 5.50% 10.50% 10.60% 4.30% 6.00% 5.00% 11.50% 4.30% 6.00% 5.00% 11.50% 11.50% 3.90% 7.00% 6.50% 6.50% 59 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) The following table summarizes the components of the net periodic benefit cost and Cumulative other comprehensive loss related to postretirement benefits other than pensions: Postretirement Benefits Other than Pensions 2016 2015 2017 Net periodic benefit cost: Service cost ............................................................................................................... Interest cost .............................................................................................................. Amortization of actuarial losses ................................................................................. Amortization of prior service credit............................................................................ Ongoing pension costs (credits) ............................................................................ Settlement (credits) costs ......................................................................................... Net pension (credits) costs .................................................................................... Other changes in projected benefit obligation recognized in Cumulative other comprehensive loss (before taxes): Net actuarial loss (gain) arising during the year ......................................................... Prior service credit arising during the year.................................................................. Amortization of actuarial losses ................................................................................. Settlement costs........................................................................................................ Amortization of prior service credit............................................................................ Total recognized in Cumulative other comprehensive loss ..................................... Total recognized in net periodic benefit cost and Cumulative other $ 2,105 10,749 32 (6,579) 6,307 (9,332) (3,025) $ 2,244 11,009 (6,578) 6,675 $ 2,485 11,182 1,011 (4,529) 10,149 6,675 10,149 11,637 7,548 (32) 9,332 6,579 27,516 6,578 14,126 (19,370) (9,269) (1,011) 4,529 (25,121) comprehensive loss............................................................................................ $24,491 $20,801 $(14,972) The estimated net actuarial losses and prior service (credits) The Company expects to make retiree health care benefit cash for postretirement benefits other than pensions that are expected payments as follows: 2018 ............................................................... 2019 ............................................................... 2020 .............................................................. 2021 ............................................................... 2022 ............................................................... 2023 through 2027 ......................................... Total expected benefit cash payments ............ Expected Cash Payments $ 17,192 18,139 19,058 19,541 19,816 98,270 $192,016 to be amortized from Cumulative other comprehensive loss into net periodic benefit cost in 2018 are $2,326 and $(6,569), respectively. The assumed health care cost trend rate and prescription drug cost increases used to determine the net periodic benefit cost for postretirement health care benefits for 2018 both decrease in each successive year until reaching 4.5 percent in 2026. The assumed health care and prescription drug cost trend rates have a significant effect on the amounts reported for the postretirement health care benefit obligation. A one-percentage-point change in assumed health care and prescription drug cost trend rates would have had the following effects at December 31, 2017: Effect on total of service and interest cost components ............ Effect on the postretirement benefit obligation .................................... One-Percentage Point Increase (Decrease) $ 104 $ (124) $2,655 $(2,794) 60 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) NOTE 7 – DEBT Long-term debt Due Date 2017 2016 2015 2.25% Senior Notes(1) .............................................................. 3.45% Senior Notes(1) .............................................................. 2.75% Senior Notes(1) .............................................................. 4.50% Senior Notes(1) ............................................................. Term Loan ............................................................................... 3.125% Senior Notes(1)............................................................. 4.20% Senior Notes(2) ............................................................. 3.45% Senior Notes................................................................. 4.55% Senior Notes................................................................. 3.95% Senior Notes(2) ............................................................. 7.25% Senior Notes(2).............................................................. 4.00% Senior Notes ................................................................ Floating Rate Loan ................................................................... 3.30% Senior Notes(2) ............................................................. 4.40% Senior Notes(2) ............................................................. 7.375% Debentures................................................................. 0.92% Fixed Rate Loan ............................................................ 7.45% Debentures .................................................................. 2.00% to 8.0% Promissory Notes ........................................... 1.35% Senior Notes ................................................................. 2020 2027 2022 2047 2022 2024 2022 2025 2045 2026 2019 2042 2021 2025 2045 2027 2021 2097 Through 2027 2017 $ 1,493,106 1,483,244 1,240,758 1,228,647 847,337 495,602 422,370 397,260 393,859 362,381 319,394 296,094 269,247 249,207 238,334 118,982 23,933 3,500 2,490 $396,898 393,637 $ 396,536 393,414 295,938 295,781 118,936 118,889 3,500 2,417 3,500 1,628 697,530 $9,885,745 $1,211,326 $1,907,278 (1) (2) Senior notes issued in 2017 to fund the Acquisition Senior notes acquired in 2017 through the Acquisition Maturities of long-term debt are as follows for the next five On June 2, 2017 the Company closed its previously announced years: $1,179 in 2018; $297,740 in 2019; $1,625,067 in 2020, exchange offers and consent solicitations (Exchange Offer) for the $869,161 in 2021 and $1,800,273 in 2022. Interest expense on outstanding senior notes of Valspar. Pursuant to the Exchange long-term debt was $257,350, $75,509 and $54,634 for 2017, Offer, the Company issued an aggregate principal amount of 2016 and 2015, respectively. approximately $1.478 billion (Exchange Notes). The Exchange Among other restrictions, the Company’s notes, debentures Notes are unsecured senior obligations of the Company. The and revolving credit agreement contain certain covenants relating Company did not receive any cash proceeds from the issuance of to liens, ratings changes, merger and sale of assets, consolidated the Exchange Notes. leverage and change of control, as defined in the agreements. In In August 2017, the Company entered into a floating rate loan the event of default under any one of these arrangements, acceleration of the maturity of any one or more of these of €225.0 million and a fixed rate loan of €20.0 million. The floating rate loan agreement bears interest at the six-month Euro borrowings may result. The Company was in compliance with all Interbank Offered Rate plus a margin. The fixed rate loan bears covenants for all years presented. interest at 0.92%. The proceeds are being used for general On May 16, 2017, the Company issued $6.0 billion of senior corporate purposes. The loans mature on August 23, 2021. notes (collectively the “New Notes”) in a public offering. The net In April 2016, the Company entered into agreements for a proceeds from the issuance of the New Notes were used to fund $7.3 billion Bridge Loan and a $2.0 billion Term Loan as committed the Acquisition. See Note 2. The interest rate locks entered into in financing for the Acquisition. On June 1, 2017, the Company 2016 settled in March 2017 resulting in a pretax gain of terminated the agreement for the Bridge Loan and borrowed the $87.6 million recognized in Cumulative other comprehensive loss. full $2.0 billion on the Term Loan. The Term Loan is pre-payable This gain is being amortized from Cumulative other without penalty and carries a 5-year maturity with a variable comprehensive loss to a reduction of interest expense over the interest rate of London Interbank Offered Rate plus an additional terms of the New Notes. For the year ended December 31, 2017, 1.25%. As of December 31, 2017, the term loan had an outstanding the amortization of the unrealized gain reduced interest expense principal balance of $850.0 million at an approximate interest rate by $5.2 million. of 2.62%. 61 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) On July 28, 2015, the Company issued $400,000 of 3.45% Management expects environmental laws and regulations to Senior Notes due 2025 and $400,000 of 4.55% Senior Notes due impose increasingly stringent requirements upon the Company 2045. The notes are covered under a shelf registration filed with and the industry in the future. Management believes that the the Securities and Exchange Commission (SEC) on July 28, 2015. Company conducts its operations in compliance with applicable The proceeds were used for general corporate purposes, including environmental laws and regulations and has implemented various repayment of a portion of the Company’s outstanding short-term programs designed to protect the environment and promote borrowings. continued compliance. Short-term borrowings. In September 2017, the Company The Company is involved with environmental investigation and entered into a five-year letter of credit agreement, subsequently remediation activities at some of its currently and formerly owned amended, with an aggregate availability of $500.0 million. On sites (including sites which were previously owned and/or May 6, 2016, the Company entered into a five-year credit operated by businesses acquired by the Company). In addition, the agreement, subsequently amended on multiple dates. The credit Company, together with other parties, has been designated a agreement gives the Company the right to borrow and to obtain potentially responsible party under federal and state the issuance, renewal, extension and increase of a letter of credit environmental protection laws for the investigation and up to an aggregate availability of $500.0 million. The credit remediation of environmental contamination and hazardous waste agreements are being used for general corporate purposes. At at a number of third-party sites, primarily Superfund sites. In December 31, 2017, there was $350.0 million borrowings general, these laws provide that potentially responsible parties outstanding under these credit agreements. There were no may be held jointly and severally liable for investigation and borrowings outstanding at December 31, 2016 and 2015. remediation costs regardless of fault. The Company may be On July 16, 2015, the Company and three of its wholly owned similarly designated with respect to additional third-party sites in subsidiaries, Sherwin-Williams Canada, Inc. (SW Canada), the future. Sherwin-Williams Luxembourg S.à r.l. (SW Lux) and Sherwin- The Company initially provides for estimated costs of Williams UK Holding Limited, entered into a multi-currency five- environmental-related activities relating to its past operations and year $1.350 billion credit agreement (multi-currency credit third-party sites for which commitments or clean-up plans have agreement). The multi-currency credit agreement is being used for been developed and when such costs can be reasonably estimated general corporate purposes, including the financing of working based on industry standards and professional judgment. These capital requirements. The multi-currency credit agreement allows estimated costs are determined based on currently available facts the Company to extend the maturity of the facility with two regarding each site. If the best estimate of costs can only be one-year extension options and to increase the aggregate amount identified as a range and no specific amount within that range can of the facility to $1.850 billion, both of which are subject to the be determined more likely than any other amount within the range, discretion of each lender. The multi-currency credit agreement the minimum of the range is provided. The Company continuously replaced the previous credit agreements for the Company, SW assesses its potential liability for investigation and remediation- Canada and SW Lux in the amounts of $1.050 billion, CAD 150,000 and €95,000 (Euro), respectively. At December 31, 2017, there were no short-term borrowings under the multi-currency related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting credit agreement. Borrowings outstanding under various other guidelines are issued. Included in Other long-term liabilities at foreign programs were $8,967 at December 31, 2017 with a December 31, 2017, 2016 and 2015 were accruals for extended weighted average interest rate of 3.2%. environmental-related activities of $179,593, $163,847 and There were $274.8 million borrowings outstanding under the $129,856, respectively. Included in Other accruals at December 31, Company’s domestic commercial paper program at December 31, 2017, 2016 and 2015 were accruals for estimated costs of current 2017. There were no borrowings outstanding at December 31, investigation and remediation activities of $28,556, $19,969 and 2016 and 2015. $22,493, respectively. NOTE 8 – OTHER LONG-TERM LIABILITIES Actual costs incurred may vary from the accrued estimates due to the inherent uncertainties involved including, among others, The operations of the Company, like those of other companies the number and financial condition of parties involved with respect in our industry, are subject to various domestic and foreign to any given site, the volumetric contribution which may be environmental laws and regulations. These laws and regulations attributed to the Company relative to that attributed to other not only govern current operations and products, but also impose parties, the nature and magnitude of the wastes involved, the potential liability on the Company for past operations. various technologies that can be used for remediation and the 62 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) determination of acceptable remediation with respect to a obligations at various current and closed manufacturing, particular site. If the Company’s future loss contingency is distribution and store facilities. These obligations relate primarily ultimately determined to be at the unaccrued maximum of the to asbestos abatement, hazardous waste Resource Conservation estimated range of possible outcomes for every site for which and Recovery Act (RCRA) closures, well abandonment, costs can be reasonably estimated, the Company’s accrual for transformers and used oil disposals and underground storage tank environmental-related activities would be $98,751 higher than the closures. Using investigative, remediation and disposal methods minimum accruals at December 31, 2017. that are currently available to the Company, the estimated costs of Four of the Company’s currently and formerly owned these obligations were accrued and are not significant. The manufacturing sites account for the majority of the accrual for recording of additional liabilities for future conditional asset environmental-related activities and the unaccrued maximum of retirement obligations may result in a material impact on net the estimated range of possible outcomes at December 31, 2017. income for the annual or interim period during which the costs are At December 31, 2017, $162,378, or 78.0 percent of the total accrued. Management does not believe that any potential liability accrual, related directly to these four sites. In the aggregate ultimately attributed to the Company for its conditional asset unaccrued maximum of $98,751 at December 31, 2017, $77,762, retirement obligations will have a material adverse effect on the or 87.6 percent, related to the four manufacturing sites. While Company’s financial condition, liquidity, or cash flow due to the environmental investigations and remedial actions are in different extended period of time over which sufficient information may stages at these sites, additional investigations, remedial actions become available regarding the closure or modification of any one and monitoring will likely be required at each site. Management or group of the Company’s facilities. cannot presently estimate the ultimate potential loss An estimate of the potential impact on the Company’s contingencies related to these sites or other less significant sites operations cannot be made due to the aforementioned until such time as a substantial portion of the investigation at the uncertainties. sites is completed and remedial action plans are developed. In the event any future loss contingency significantly exceeds the current NOTE 9 – LITIGATION amount accrued, the recording of the ultimate liability may result In the course of its business, the Company is subject to a in a material impact on net income for the annual or interim period variety of claims and lawsuits, including, but not limited to, during which the additional costs are accrued. Management does litigation relating to product liability and warranty, personal injury, not believe that any potential liability ultimately attributed to the environmental, intellectual property, commercial, contractual and Company for its environmental-related matters will have a antitrust claims that are inherently subject to many uncertainties material adverse effect on the Company’s financial condition, regarding the possibility of a loss to the Company. These liquidity, or cash flow due to the extended period of time during uncertainties will ultimately be resolved when one or more future which environmental investigation and remediation takes place. events occur or fail to occur confirming the incurrence of a liability An estimate of the potential impact on the Company’s operations or the reduction of a liability. In accordance with the Contingencies cannot be made due to the aforementioned uncertainties. Topic of the ASC, the Company accrues for these contingencies by Management expects these contingent environmental-related a charge to income when it is both probable that one or more liabilities to be resolved over an extended period of time. future events will occur confirming the fact of a loss and the Management is unable to provide a more specific time frame due amount of the loss can be reasonably estimated. In the event that to the indefinite amount of time to conduct investigation activities the Company’s loss contingency is ultimately determined to be at any site, the indefinite amount of time to obtain environmental significantly higher than currently accrued, the recording of the agency approval, as necessary, with respect to investigation and additional liability may result in a material impact on the remediation activities, and the indefinite amount of time necessary Company’s results of operations, liquidity or financial condition for to conduct remediation activities. the annual or interim period during which such additional liability The Asset Retirement and Environmental Obligations Topic of is accrued. In those cases where no accrual is recorded because it the ASC requires a liability to be recognized for the fair value of a is not probable that a liability has been incurred and the amount of conditional asset retirement obligation if a settlement date and fair any such loss cannot be reasonably estimated, any potential value can be reasonably estimated. The Company recognizes a liability ultimately determined to be attributable to the Company liability for any conditional asset retirement obligation when may result in a material impact on the Company’s results of sufficient information is available to reasonably estimate a operations, liquidity or financial condition for the annual or interim settlement date to determine the fair value of such a liability. The period during which such liability is accrued. In those cases where Company has identified certain conditional asset retirement no accrual is recorded or exposure to loss exists in excess of the 63 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) amount accrued, the Contingencies Topic of the ASC requires Due to the uncertainties involved, management is unable to disclosure of the contingency when there is a reasonable predict the outcome of the lead pigment and lead-based paint possibility that a loss or additional loss may have been incurred. litigation, the number or nature of possible future claims and Lead pigment and lead-based paint litigation. The Company’s proceedings or the effect that any legislation and/or past operations included the manufacture and sale of lead administrative regulations may have on the litigation or against the pigments and lead-based paints. The Company, along with other Company. In addition, management cannot reasonably determine companies, is and has been a defendant in a number of legal the scope or amount of the potential costs and liabilities related to proceedings, including individual personal injury actions, such litigation, or resulting from any such legislation and purported class actions, and actions brought by various counties, regulations. The Company has not accrued any amounts for such cities, school districts and other government-related entities, litigation. With respect to such litigation, with the exception of the arising from the manufacture and sale of lead pigments and lead- public nuisance litigation in California discussed below, the based paints. The plaintiffs’ claims have been based upon various Company does not believe that it is probable that a loss has legal theories, including negligence, strict liability, breach of occurred, and it is not possible to estimate the range of potential warranty, negligent misrepresentations and omissions, fraudulent losses as there is no prior history of a loss of this nature and there misrepresentations and omissions, concert of action, civil is no substantive information upon which an estimate could be conspiracy, violations of unfair trade practice and consumer based. In addition, any potential liability that may result from any protection laws, enterprise liability, market share liability, public changes to legislation and regulations cannot reasonably be nuisance, unjust enrichment and other theories. The plaintiffs seek estimated. In the event any significant liability is determined to be various damages and relief, including personal injury and property attributable to the Company relating to such litigation, the damage, costs relating to the detection and abatement of lead- recording of the liability may result in a material impact on net based paint from buildings, costs associated with a public income for the annual or interim period during which such liability education campaign, medical monitoring costs and others. The is accrued. Additionally, due to the uncertainties associated with Company has also been a defendant in legal proceedings arising the amount of any such liability and/or the nature of any other from the manufacture and sale of non-lead-based paints that seek remedy which may be imposed in such litigation, any potential recovery based upon various legal theories, including the failure to liability determined to be attributable to the Company arising out adequately warn of potential exposure to lead during surface of such litigation may have a material adverse effect on the preparation when using non-lead-based paint on surfaces Company’s results of operations, liquidity or financial condition. previously painted with lead-based paint. The Company believes An estimate of the potential impact on the Company’s results of that the litigation brought to date is without merit or subject to operations, liquidity or financial condition cannot be made due to meritorious defenses and is vigorously defending such litigation. the aforementioned uncertainties. The Company has not settled any material lead pigment or lead- Publicnuisanceclaimlitigation.The Company and other based paint litigation. The Company expects that additional lead companies are or were defendants in legal proceedings seeking pigment and lead-based paint litigation may be filed against the recovery based on public nuisance liability theories, among other Company in the future asserting similar or different legal theories theories, brought by the State of Rhode Island, the City of St. Louis, and seeking similar or different types of damages and relief. Missouri, various cities and counties in the State of New Jersey, Notwithstanding the Company’s views on the merits, litigation various cities in the State of Ohio and the State of Ohio, the City of is inherently subject to many uncertainties, and the Company Chicago, Illinois, the City of Milwaukee, Wisconsin and the County ultimately may not prevail. Adverse court rulings or of Santa Clara, California and other public entities in the State of determinations of liability, among other factors, could affect the California. Except for the Santa Clara County, California lead pigment and lead-based paint litigation against the Company proceeding, all of these legal proceedings have been concluded in and encourage an increase in the number and nature of future favor of the Company and other defendants at various stages in claims and proceedings. In addition, from time to time, various the proceedings. legislation and administrative regulations have been enacted, The proceedings initiated by the State of Rhode Island included promulgated or proposed to impose obligations on present and two jury trials. At the conclusion of the second trial, the jury former manufacturers of lead pigments and lead-based paints returned a verdict finding that (i) the cumulative presence of lead respecting asserted health concerns associated with such pigment in paints and coatings on buildings in the State of Rhode products or to overturn the effect of court decisions in which the Island constitutes a public nuisance, (ii) the Company, along with Company and other manufacturers have been successful. two other defendants, caused or substantially contributed to the creation of the public nuisance and (iii) the Company and two 64 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) other defendants should be ordered to abate the public nuisance. (ii) hold an evidentiary hearing to appoint a suitable receiver. On The Company and two other defendants appealed and, on July 1, November 29, 2017, the Company and the two other defendants 2008, the Rhode Island Supreme Court, among other filed separate Petitions for Rehearing, which the Sixth District determinations, reversed the judgment of abatement with respect Court of Appeal denied on December 6, 2017. The Sixth District to the Company and two other defendants. The Rhode Island Court of Appeal’s decision became final on December 14, 2017. On Supreme Court’s decision reversed the public nuisance liability December 22, 2017, the Company and the two other defendants judgment against the Company on the basis that the complaint submitted separate Petitions for Review to the California Supreme failed to state a public nuisance claim as a matter of law. Court. On February 14, 2018, the California Supreme Court issued The Santa Clara County, California proceeding was initiated in an order denying the Petitions for Review. The Company believes March 2000 in the Superior Court of the State of California, that the judgment conflicts with established principles of law and County of Santa Clara. In the original complaint, the plaintiffs is unsupported by the evidence. The Company intends to file a asserted various claims including fraud and concealment, strict Petition for Writ of Certiorari with the Supreme Court of the product liability/failure to warn, strict product liability/design United States seeking discretionary review. The Company also defect, negligence, negligent breach of a special duty, public intends to file a motion to stay the Santa Clara County, California nuisance, private nuisance, and violations of California’s Business proceeding while the Petition for Writ of Certiorari is pending. and Professions Code. A number of the asserted claims were Although the Company believes it is probable that a loss has resolved in favor of the defendants through pre-trial proceedings. occurred, the Company has concluded that it is not possible to The named plaintiffs in the Fourth Amended Complaint, filed on reasonably estimate the range of potential loss due to the March 16, 2011, are the Counties of Santa Clara, Alameda, Los numerous possible outcomes and uncertainties, including, but not Angeles, Monterey, San Mateo, Solano and Ventura, the Cities of limited to, (i) the final amount of the abatement fund necessary to Oakland and San Diego and the City and County of San Francisco. cover the cost of inspecting and remediating pre-1951 residences, The Fourth Amended Complaint asserted a sole claim for public as recalculated by the trial court, and (ii) the portion of the nuisance, alleging that the presence of lead pigments for use in abatement fund for which the Company, the two other defendants paint and coatings in, on and around residences in the plaintiffs’ and others are determined to be responsible. If the Company jurisdictions constitutes a public nuisance. The plaintiffs sought concludes that it is possible to reasonably estimate the range of the abatement of the alleged public nuisance that exists within the potential loss once more definitive information becomes available, plaintiffs’ jurisdictions. A trial commenced on July 15, 2013 and the Company will recognize the loss and disclose such ended on August 22, 2013. The court entered final judgment on information. Because of joint and several liability, it is possible the January 27, 2014, finding in favor of the plaintiffs and against the Company could ultimately be liable for the total amount of the Company and two other defendants (ConAgra Grocery Products abatement fund. In the event any significant liability is determined Company and NL Industries, Inc.). The final judgment held the to be attributable to the Company relating to such litigation, the Company jointly and severally liable with the other two defendants recording of any liability may result in a material impact on the to pay $1.15 billion into a fund to abate the public nuisance. The Company’s results of operations, liquidity or financial condition for Company strongly disagrees with the judgment. the annual or interim period during which such liability is accrued. On February 18, 2014, the Company filed a motion for new trial Litigation seeking damages from alleged personal injury. The and a motion to vacate the judgment. The court denied these Company and other companies are defendants in a number of motions on March 24, 2014. On March 28, 2014, the Company legal proceedings seeking monetary damages and other relief from filed a notice of appeal to the Sixth District Court of Appeal for the alleged personal injuries. These proceedings include claims by State of California. The filing of the notice of appeal effects an children allegedly injured from ingestion of lead pigment or lead- automatic stay of the judgment without the requirement to post a containing paint and claims for damages allegedly incurred by the bond. Oral argument before the Sixth District Court of Appeal was children’s parents or guardians. These proceedings generally seek held on August 24, 2017. On November 14, 2017, the Sixth District compensatory and punitive damages, and seek other relief Court of Appeal entered its decision, which affirmed the trial including medical monitoring costs. These proceedings include court’s judgment of liability with respect to residences built before purported claims by individuals, groups of individuals and class 1951 and reversed and vacated the trial court’s judgment with actions. respect to residences built after 1950. The Sixth District Court of The plaintiff in Thomas v. Lead Industries Association, et al., Appeal directed the trial court to: (i) recalculate the amount of the initiated an action in state court against the Company, other abatement fund to limit the fund to the amount necessary to cover alleged former lead pigment manufacturers and the Lead the cost of inspecting and remediating pre-1951 residences; and Industries Association in September 1999. The claims against the 65 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) Company and the other defendants included strict liability, Insurancecoveragelitigation.The Company and its liability negligence, negligent misrepresentation and omissions, fraudulent insurers, including certain underwriters at Lloyd’s of London, misrepresentation and omissions, concert of action, civil initiated legal proceedings against each other to primarily conspiracy and enterprise liability. Implicit within these claims is determine, among other things, whether the costs and liabilities the theory of “risk contribution” liability (Wisconsin’s theory which associated with the abatement of lead pigment are covered under is similar to market share liability, except that liability can be joint certain insurance policies issued to the Company. The Company’s and several) due to the plaintiff’s inability to identify the action, filed on March 3, 2006 in the Common Pleas Court, manufacturer of any product that allegedly injured the plaintiff. Cuyahoga County, Ohio, is currently stayed and inactive. The The case ultimately proceeded to trial and, on November 5, 2007, liability insurers’ action, which was filed on February 23, 2006 in the jury returned a defense verdict, finding that the plaintiff had the Supreme Court of the State of New York, County of New York, ingested white lead carbonate, but was not brain damaged or has been dismissed. An ultimate loss in the insurance coverage injured as a result. The plaintiff appealed and, on December 16, litigation would mean that insurance proceeds could be 2010, the Wisconsin Court of Appeals affirmed the final judgment unavailable under the policies at issue to mitigate any ultimate in favor of the Company and other defendants. abatement related costs and liabilities. The Company has not Wisconsin is the only jurisdiction to date to apply a theory of recorded any assets related to these insurance policies or liability with respect to alleged personal injury (i.e., risk otherwise assumed that proceeds from these insurance policies contribution/market share liability) that does not require the would be received in estimating any contingent liability accrual. plaintiff to identify the manufacturer of the product that allegedly Therefore, an ultimate loss in the insurance coverage litigation injured the plaintiff in the lead pigment and lead-based paint without a determination of liability against the Company in the litigation. Although the risk contribution liability theory was lead pigment or lead-based paint litigation will have no impact on applied during the Thomas trial, the constitutionality of this theory the Company’s results of operation, liquidity or financial condition. as applied to the lead pigment cases has not been judicially As previously stated, however, the Company has not accrued any determined by the Wisconsin state courts. However, in an amounts for the lead pigment or lead-based paint litigation and unrelated action filed in the United States District Court for the any significant liability ultimately determined to be attributable to Eastern District of Wisconsin, Gibson v. American Cyanamid, et the Company relating to such litigation may result in a material al., on November 15, 2010, the District Court held that Wisconsin’s impact on the Company’s results of operations, liquidity or risk contribution theory as applied in that case violated the financial condition for the annual or interim period during which defendants’ right to substantive due process and is such liability is accrued. unconstitutionally retroactive. The District Court’s decision in Gibson v. American Cyanamid, et al., was appealed by the plaintiff to the United States Court of Appeals for the Seventh Circuit. On July 24, 2014, the United States Court of Appeals for the Seventh Circuit reversed the judgment and remanded the case back to the District Court for further proceedings. On January 16, 2015, the defendants filed a petition for certiorari in the United States Supreme Court seeking that Court’s review of the Seventh Circuit’s decision, and on May 18, 2015, the United States Supreme Court denied the defendants’ petition. The case is currently pending in the District Court. Three cases also are pending in the United States District Court for the Eastern District of Wisconsin (Ravon Owens v. American Cyanamid, et al., Cesar Sifuentes v. American Cyanamid, et al., and Glenn Burton, Jr. v. American Cyanamid, et al.) in which dispositive motions have been filed and are currently pending. No trial dates have been set by the District Court. In Maniya Allen, et al. v. American Cyanamid, et al., also pending in the United States District Court for the Eastern District of Wisconsin, cases involving seven of the 166 plaintiffs have been selected for discovery, although no trial dates have been set by the District Court. 66 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) NOTE 10 – CAPITAL STOCK and future grants of restricted stock and restricted stock units. See At December 31, 2017, there were 300,000,000 shares of Note 12. Common shares outstanding shown in the following table common stock and 30,000,000 shares of serial preferred stock included 489,260, 488,714 and 487,900 shares of common stock authorized for issuance. Of the authorized serial preferred stock, held in a revocable trust at December 31, 2017, 2016 and 2015, 3,000,000 shares are designated as cumulative redeemable serial respectively. The revocable trust is used to accumulate assets for preferred and 1,000,000 shares are designated as convertible the purpose of funding the ultimate obligation of certain serial preferred stock. See Note 11. Under the 2006 Equity and non-qualified benefit plans. Transactions between the Company Performance Incentive Plan (2006 Employee Plan), 23,700,000 and the trust are accounted for in accordance with the Deferred common shares may be issued or transferred. See Note 12. An Compensation – Rabbi Trusts Subtopic of the Compensation Topic aggregate of 10,715,939, 7,720,815 and 8,824,943 shares of of the ASC, which requires the assets held by the trust be common stock at December 31, 2017, 2016 and 2015, respectively, consolidated with the Company’s accounts. were reserved for the exercise and future grants of option rights Common Shares in Treasury Common Shares Outstanding Balance at January 1, 2015 ............................................................................................................. Shares tendered as payment for option rights exercised ............................................................. Shares issued for exercise of option rights.................................................................................. Shares tendered in connection with grants of restricted stock .................................................... Net shares issued for grants of restricted stock .......................................................................... Treasury stock purchased .......................................................................................................... Balance at December 31, 2015 ....................................................................................................... Shares tendered as payment for option rights exercised ............................................................. Shares issued for exercise of option rights.................................................................................. Shares tendered in connection with grants of restricted stock .................................................... Net shares issued for grants of restricted stock .......................................................................... Balance at December 31, 2016 ....................................................................................................... Shares tendered as payment for option rights exercised ............................................................. Shares issued for exercise of option rights.................................................................................. Shares tendered in connection with grants of restricted stock .................................................... Net shares issued for grants of restricted stock .......................................................................... 19,813,079 14,542 111,433 3,575,000 23,514,054 3,441 59,916 23,577,411 16,545 82,777 94,704,173 (14,542) 1,133,050 (111,433) 110,277 (3,575,000) 92,246,525 (3,441) 733,876 (59,916) 95,987 93,013,031 (16,545) 1,152,015 (82,777) (182,079) Balance at December 31, 2017 ....................................................................................................... 23,676,733 93,883,645 NOTE 11 – STOCK PURCHASE PLAN The Company made contributions to the ESOP on behalf of As of December 31, 2017, 36,584 employees contributed to the participating employees, representing amounts authorized by Company’s ESOP, a voluntary defined contribution plan available employees to be withheld from their earnings, of $138,731, to all eligible salaried employees. Participants are allowed to $127,697 and $120,514 in 2017, 2016 and 2015, respectively. The contribute, on a pretax or after-tax basis, up to the lesser of twenty Company’s matching contributions to the ESOP charged to percent of their annual compensation or the maximum dollar operations were $90,682, $85,525 and $80,356 for 2017, 2016 amount allowed under the Internal Revenue Code. The Company and 2015, respectively. matches one hundred percent of all contributions up to six percent At December 31, 2017, there were 10,033,576 shares of the of eligible employee contributions. Such participant contributions Company’s common stock being held by the ESOP, representing may be invested in a variety of investment funds or a Company 10.7 percent of the total number of voting shares outstanding. common stock fund and may be exchanged between investments Shares of Company common stock credited to each member’s as directed by the participant. Participants are permitted to account under the ESOP are voted by the trustee under diversify both future and prior Company matching contributions instructions from each individual plan member. Shares for which previously allocated to the Company common stock fund into a no instructions are received are voted by the trustee in the same variety of investment funds. proportion as those for which instructions are received. 67 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) NOTE 12 – STOCK-BASED COMPENSATION Option rights. The fair value of the Company’s option rights The 2006 Employee Plan authorizes the Board of Directors, or was estimated at the date of grant using a Black-Scholes- Merton a committee of the Board of Directors, to issue or transfer up to an option-pricing model with the following weighted- average aggregate of 23,700,000 shares of common stock, plus any assumptions for all options granted: shares relating to awards that expire, are forfeited or canceled. The Company issues new shares upon exercise of option rights and vesting of RSUs. The Employee Plan permits the granting of option rights, appreciation rights, restricted stock, restricted stock units (RSUs), performance shares and performance units to 2017 2016 2015 Risk-free interest rate .......................... Expected life of option rights ....................... 1.97% 1.24% 1.37% 5.05 years 5.05 years 5.05 years eligible employees. At December 31, 2017, no appreciation rights, Expected dividend performance shares or performance units had been granted under yield of stock............ 0.85% 1.06% 1.13% the 2006 Employee Plan. The 2006 Stock Plan for Nonemployee Directors (Nonemployee Director Plan) authorizes the Board of Directors, or a committee of the Board of Directors, to issue or transfer up to an aggregate of 200,000 shares of common stock, plus any shares relating to awards that expire, are forfeited or are canceled. The Nonemployee Director Plan permits the granting of option rights, appreciation rights, restricted stock and RSUs to members of the Board of Directors who are not employees of the Company. At December 31, 2017, no option rights or appreciation rights had been granted under the Nonemployee Director Plan. In connection with the Acquisition (see Note 2), the Company assumed certain outstanding RSUs of Valspar granted under the Amended and Restated 2015 Omnibus Equity Plan. Upon close of the Acquisition, the Valspar RSUs were converted into RSUs relating to common stock of the Company. The cost of the Company’s stock-based compensation is recorded in accordance with the Stock Compensation Topic of the ASC. At December 31, 2017, the Company had total unrecognized stock-based compensation expense of $127,222 that is expected to be recognized over a weighted-average period of 1.07 years. Stock-based compensation expense during 2017, 2016 and 2015 was $90,292, $72,109 and $72,342, respectively. The related tax benefit was $34,343, $27,442 and $27,634 during 2017, 2016 and 2015, respectively. Subsequent to the adoption of ASU No. 2016-09 in 2016, excess tax benefits from share-based payments are recognized in the income tax provision rather than in other capital. For the years ended December 31, 2017 and 2016, the Company’s tax benefit from options exercised reduced the income tax provision by $86,540 and $44,233, respectively. Expected volatility of stock........................ .213 .212 .245 The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant. The expected life of option rights was calculated using a scenario analysis model. Historical data was used to aggregate the holding period from actual exercises, post- vesting cancellations and hypothetical assumed exercises on all outstanding option rights. The expected dividend yield of stock is the Company’s best estimate of the expected future dividend yield. Expected volatility of stock was calculated using historical and implied volatilities. The Company applied an estimated forfeiture rate of 2.00 percent to the 2017 grants. This rate was calculated based upon historical activity and is an estimate of granted shares not expected to vest. If actual forfeitures differ from the expected rate, the Company may be required to make additional adjustments to compensation expense in future periods. Grants of option rights for non-qualified and incentive stock options have been awarded to certain officers and key employees under the 2006 Employee Plan and the 2003 Stock Plan. The option rights generally become exercisable to the extent of one-third of the optioned shares for each full year following the date of grant and generally expire ten years after the date of grant. Unrecognized compensation expense with respect to option rights granted to eligible employees amounted to $56,986 at December 31, 2017. The unrecognized compensation expense is being amortized on a straight-line basis over the three-year vesting period and is expected to be recognized over a weighted- average period of 1.10 years. The weighted-average per share grant date fair value of options granted during 2017, 2016 and 2015 was $77.14, $49.36 and $50.73, respectively. The total intrinsic value of option rights exercised during 2017, 2016, and 2015 was $255,482, $129,230 and $223,417, respectively. The total fair value of options vested during 2017, 2016 and 2015 was $31,292, $32,476 and $32,655, respectively. There were no outstanding option rights for nonemployee directors at December 31, 2017, 2016 and 2015. 68 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) A summary of the Company’s non-qualified and incentive stock option right activity is shown in the following table: 2017 Weighted- Average Exercise Price Per Share Optioned Shares Aggregate Intrinsic Value Optioned Shares 2016 Weighted- Average Exercise Price Per Share Aggregate Intrinsic Value Optioned Shares 2015 Weighted- Average Exercise Price Per Share Aggregate Intrinsic Value Outstanding beginning of year .................................... Granted.................................. Exercised................................ Forfeited ................................ Expired ................................... 5,163,709 $ 163.61 377.84 689,506 123.16 (1,154,698) (49,977) 267.02 (2,227) 236.97 712,967 (733,876) 5,219,506 $ 141.58 271.46 108.81 (26,653) 232.83 176.28 (8,235) 5,699,892 $ 117.31 241.84 79.41 193.60 87.59 697,423 (1,133,287) (43,632) (890) Outstanding end of year ......... 4,646,313 $204.33 $955,810 5,163,709 $ 163.61 $545,531 5,219,506 $ 141.58 $ 616,866 Exercisable at end of year ....... 3,288,237 $ 156.43 $833,938 3,783,755 $130.59 $522,921 3,807,351 $ 110.96 $565,934 The weighted-average remaining term for options outstanding over the three-year vesting period and is expected to be at the end of 2017, 2016 and 2015 was 6.28, 6.25 and 6.44 years, recognized over a weighted-average period of 0.94 years. respectively. The weighted-average remaining term for options A summary of the Company’s RSU activity for the years ended exercisable at the end of 2017, 2016 and 2015 was 5.11, 5.20 and December 31 is shown in the following table: 5.47 years, respectively. Shares reserved for future grants of option rights, restricted stock and RSUs were 6,041,092, 2,557,106 and 3,605,437 at December 31, 2017, 2016 and 2015, respectively. Restricted stock and RSUs. Grants of RSUs, which generally require three years of continuous employment from the date of grant before vesting and receiving the stock without restriction, have been awarded to certain officers and key employees under the 2006 Employee Plan. The February 2017 and 2016 grants consisted of performance-based awards that vest at the end of a three-year period based on the Company’s achievement of specified financial goals relating to earnings per share and return Outstanding at beginning of year .... Granted...................... Exchanged Valspar awards (net of forfeitures) ............. Vested ....................... Forfeited .................... Outstanding at end 2017 2016 2015 397,326 112,647 467,744 99,662 655,276 112,494 51,009 (215,433) (9,753) (166,405) (3,675) (290,901) (9,125) of year .................... 335,796 397,326 467,744 on net assets employed. The February 2015 grant consisted of a The weighted-average per share fair value of RSUs granted combination of performance-based awards and time-based during 2017, 2016 and 2015 was $313.88, $257.99 and $285.88, awards. The performance based awards vest at the end of a three- respectively. year period based on the Company’s achievement of specified financial goals relating to earnings per share. The time-based NOTE 13 – OTHER awards vest at the end of a three-year period based on continuous Other general expense - net. Included in Other general employment. expense - net were the following: Unrecognized compensation expense with respect to grants of RSUs to eligible employees amounted to $68,540 at December 31, 2017 and is being amortized on a straight-line basis over the vesting period and is expected to be recognized over a weighted- average period of 0.94 years. Grants of RSUs have been awarded to nonemployee directors under the Nonemployee Director Plan. These grants generally vest Provisions for environmental matters - net............ Loss (gain) on sale or disposition of assets ...................... 2017 2016 2015 $ 15,443 $ 42,932 $ 31,071 5,422 (30,564) (803) and stock is received without restriction to the extent of one-third Total ........................... $20,865 $ 12,368 $30,268 of the RSUs for each year following the date of grant. Unrecognized compensation expense with respect to grants of RSUs to nonemployee directors amounted to $1,697 at December 31, 2017 and is being amortized on a straight-line basis Provisions for environmental matters–net represent initial provisions for site-specific estimated costs of environmental investigation or remediation and increases or decreases to 69 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) environmental-related accruals as information becomes available Other income or Other expense that were individually significant upon which more accurate costs can be reasonably estimated and at December 31, 2017, 2016 and 2015. as additional accounting guidelines are issued. Environmental- related accruals are not recorded net of insurance proceeds in NOTE 14 – INCOME TAXES accordance with the Offsetting Subtopic of the Balance Sheet On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) Topic of the ASC. See Note 8 for further details on the Company’s was enacted. The Tax Act significantly revised the U.S. corporate environmental-related activities. income tax system by, among other things, lowering corporate The loss (gain) on sale or disposition of assets represents the income tax rates from 35% to 21%, implementing a territorial tax net realized loss (gain) associated with the sale or disposal of system and imposing a repatriation tax on deemed repatriated property, plant and equipment and intangible assets previously earnings of foreign subsidiaries. Staff Accounting Bulletin (SAB) used in the conduct of the primary business of the Company. The No. 118 provides a measurement period that should not extend 2016 gain primarily relates to the sale of a closed domestic facility. beyond one year from the enactment date for companies to Other (income) expense - net. Included in Other (income) complete the accounting under the Tax Act. expense - net were the following: 9,843 8,667 11,091 system and the remeasurement of U.S. deferred tax liabilities on In accordance with SAB No. 118, based on the information available as of December 31, 2017 the Company recorded a provisional reduction of income taxes of $607,919 as a result of the Tax Act. The Company’s deferred tax liabilities were reduced by $560,198 due to the lower income tax rate. The remaining $47,721 is the effects of the implementation of the territorial tax unremitted foreign earnings. The final impact of the Tax Act may differ from the provisional amounts recorded at December 31, 2017, due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Act. During the fourth quarter of 2017, the Company merged certain Valspar domestic subsidiaries that were acquired in a stock acquisition on June 1, 2017 into The Sherwin-Williams Company (Subsidiary mergers). As a result, the Company released $93,630 of deferred state income tax liabilities, which had a net income tax benefit of $60,860. The Subsidiary mergers along with the Tax Act reduced deferred income taxes by $668,779 in total in the fourth quarter 2017 (Deferred income tax reductions). 2017 2016 2015 $ (7,648) $ (4,573) $ (3,668) Dividend and royalty income .................. Net expense from financing activities................ Foreign currency transaction related losses .................... Other income ............ Other expense .......... 450 (32,570) 12,951 7,335 (25,279) 9,263 9,503 (23,880) 13,036 Total ......................... $ (16,974) $ (4,587) $ 6,082 The Net expense from financing activities includes the net expense relating to changes in the Company’s financing fees. Foreign currency transaction related losses represent net realized losses on U.S. dollar-denominated liabilities of foreign subsidiaries and net realized and unrealized losses from foreign currency option and forward contracts. There were no material foreign currency option and forward contracts outstanding at December 31, 2017, 2016 and 2015. Other income and Other expense included items of revenue, gains, expenses and losses that were unrelated to the primary business purpose of the Company. There were no items within 70 and 2015 were as follows: Deferred tax assets: Exit costs, environ- mental and other similar items ......... Employee related and benefit items .................... Other items .............. Total deferred tax assets ............... Deferred tax liabilities: Depreciation and amortization ......... LIFO inventories ....... Other items .............. Total deferred tax liabilities............ Net deferred tax Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) Deferred income taxes reflect the net tax effects of temporary reserves resulted from the uncertainty as to the realization of the differences between the carrying amounts of assets and liabilities tax benefits from foreign net operating losses and other foreign for financial reporting purposes and the amounts used for income assets. The Company has $25,095 of domestic net operating loss tax purposes using the enacted tax rates and laws that are carryforwards acquired through acquisitions that have expiration currently in effect. Significant components of the Company’s dates through the tax year 2037 and foreign net operating losses deferred tax assets and liabilities as of December 31, 2017, 2016 of $250,461, which includes $138,746 of losses acquired as a part 2017 2016 2015 of the Acquisition. The foreign net operating losses are related to various jurisdictions that provide for both indefinite carryforward periods and others with carryforward periods that range from the tax years 2017 to 2037. Significant components of the provisions for income taxes were $ 50,193 $ 74,535 $ 63,851 as follows: 104,098 110,960 166,313 148,910 141,974 116,302 265,251 389,758 322,127 1,506,650 78,952 49,670 254,430 83,659 59,746 241,101 89,330 33,433 1,635,272 397,835 363,864 2017 2016 2015 Current: Federal .............. Foreign.............. State and local .. $ 269,330 53,442 39,320 $438,244 31,125 61,402 $399,677 30,145 60,319 Total current ...... 362,092 530,771 490,141 Deferred: Federal .............. Foreign.............. State and local .. Total (474,889) (42,292) (88,954) (56,891) (2,121) (9,229) 13,505 (10,752) 2,223 deferred..... (606,135) (68,241) 4,976 Total (credits) provisions for income taxes..... $(244,043) $462,530 $ 495,117 liabilities ................... $ 1,370,021 $ 8,077 $ 41,737 As of December 31, 2017, the Company’s deferred income tax liability recorded related to the preliminary purchase price The provisions for income taxes included the tax benefit from accounting for Valspar was approximately $1,966,000. This the Deferred income tax reductions and estimated taxes payable amount is preliminary and is subject to measurement period on that portion of undistributed earnings of foreign subsidiaries adjustments. Included in this amount are deferred tax liabilities expected to be repatriated. The 2017 provision for income taxes recorded for intangible assets of $1,761,866, estimated taxes included a $41,540 income tax expense related to discontinued payable of $47,963 on undistributed earnings of certain foreign operations. subsidiaries expected to be repatriated by the Company and a Significant components of income before income taxes as used $30,500 valuation allowance related to foreign tax credits. for income tax purposes, were as follows: Netted against the Company’s other deferred tax assets were valuation allowances of $44,101, $17,292 and $14,663 at December 31, 2017, 2016 and 2015, respectively. The increase in the valuation allowance in 2017 can be attributed to the Acquisition, which increased the reserve by $20,784. These 2017 2016 2015 Domestic ......... Foreign ............ $1,474,481 53,738 $1,504,990 90,243 $ 1,440,511 108,455 $ 1,528,219 $ 1,595,233 $1,548,966 71 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) A reconciliation of the statutory federal income tax rate to the A reconciliation of the beginning and ending amount of effective tax rate follows: unrecognized tax benefits is as follows: Statutory federal income tax rate ... 35.0% 35.0% 35.0% Balance at beginning of 2017 2016 2015 2017 2016 2015 Effect of: State and local income taxes .................................. Investment vehicles ............... Domestic production 2.2 (1.4) 2.3 (1.5) 2.6 (1.6) activities............................. (3.0) (2.9) (2.2) Employee share-based payments ........................... Other - net ............................. (5.6) (2.1) (2.8) (1.1) (1.8) Subtotal......................................... 25.1% 29.0% 32.0% Effect of: Tax Act .................................. Subsidiary mergers ................ (39.8) (4.0) Reported effective tax rate............. (18.7)% 29.0% 32.0% The 2017 state and local income taxes, investment vehicles and domestic production activities components of the effective tax rate were consistent with the 2016 tax year. The tax benefit related to employee share based payments increased in 2017 compared to 2016 due to a significant increase in the excess tax benefit related to Company stock options exercised by current and former employees of the Company. The Company began receiving a tax benefit in 2016 by adopting ASU No. 2016-09. The impact of the Tax Cuts and Jobs Act legislation and the merger of the Valspar domestic subsidiaries is reflected in the reconciliation above. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The IRS is currently auditing the Company’s 2014 and 2015 income tax returns as well as the 2014 and 2015 tax years of a Valspar subsidiary. There has been no significant adjustments proposed by the IRS at this point of the audits. The IRS concluded the refund claim audits for the 2010, 2011 and 2012 tax years and has approved the refunds and submitted them to the Joint Committee of Taxation for approval. As of December 31, 2017, the federal statute of limitations has not expired for the 2013, 2014, 2015 and 2016 tax years. As of December 31, 2017, the Company is subject to non-U.S. income tax examinations for the tax years of 2010 through 2016. In addition, the Company is subject to state and local income tax examinations for the tax years 2005 through 2016. year............................ $32,805 $ 33,873 $31,560 Additions from the Acquisition ................. 18,928 Additions based on tax positions related to the current year.......... Additions for tax positions of prior years .......................... Reductions for tax positions of prior years .......................... Settlements ................... Lapses of statutes of 6,780 5,674 4,228 4,033 3,890 8,450 (1,168) (368) (5,901) (3,763) (4,862) (968) limitations .................. (2,009) (968) (4,535) Balance at end of year .... $59,001 $32,805 $33,873 The $18,928 in unrecognized tax benefits included in the balance of unrecognized tax benefits at December 31, 2017 were recorded as a part of the Acquisition. Included in the balance of unrecognized tax benefits at December 31, 2017, 2016 and 2015 is $49,520, $27,686 and $30,007 in unrecognized tax benefits, the recognition of which would have an effect on the effective tax rate. Included in the balance of unrecognized tax benefits at December 31, 2017 is $5,184 related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised primarily of items related to federal audits of partnership investments and expiring statutes in federal, foreign and state jurisdictions. The Company classifies all income tax related interest and penalties as income tax expense. During the year ended December 31, 2017, there was a decrease in income tax interest and penalties of $790. There was an increase in income tax interest and penalties of $1,410 and $2,918 for the years ended December 31, 2016 and 2015, respectively. At December 31, 2017, 2016 and 2015, the Company accrued $14,592, $9,275 and $8,550, respectively, for the potential payment of interest and penalties. 72 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) NOTE 15 – NET INCOME PER COMMON SHARE 2017 2016 2015 Basic Average common shares outstanding ............................................................... 92,908,638 91,838,603 92,197,207 Net income Continuing operations ................................................................................... Discontinued operations ............................................................................... $ 1,813,802 (41,540) Net income................................................................................................ $ 1,772,262 Basic net income per common share Continuing operations ................................................................................... Discontinued operations ............................................................................... Net income per common share .................................................................. $ $ 19.52 (.44) 19.08 $ $ $ $ 1,132,703 $ 1,053,849 1,132,703 $ 1,053,849 12.33 12.33 $ $ 11.43 11.43 Diluted Average common shares outstanding ............................................................... Stock options and other contingently issuable shares(1) ..................................... Non-vested restricted stock grants ................................................................... 92,908,638 1,931,157 87,418 91,838,603 2,089,921 559,562 92,197,207 1,826,885 519,451 Average common shares outstanding assuming dilution ................................... 94,927,213 94,488,086 94,543,543 Net income Continuing operations ................................................................................... Discontinued operations ............................................................................... $ 1,813,802 (41,540) Net income................................................................................................ $ 1,772,262 Diluted net income per common share Continuing operations ................................................................................... Discontinued operations ............................................................................... Net income per common share .................................................................. $ $ 19.11 (.44) 18.67 $ $ $ $ 1,132,703 $ 1,053,849 1,132,703 $ 1,053,849 11.99 11.99 $ $ 11.15 11.15 (1) Stock options and other contingently issuable shares excludes 638,795, 62,935 and 34,463 shares at December 31, 2017, 2016 and 2015, respectively, due to their anti- dilutive effect. Basic and diluted net income per common share are calculated using the treasury stock method. 73 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) NOTE 16 – SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Net sales ................................................................... Gross profit ............................................................... Net income................................................................ Net income per common share—basic ...................... Net income per common share—diluted.................... Net sales .................................................................... Gross profit ................................................................ Net income ................................................................ Net income per common share—basic ....................... Net income per common share—diluted .................... 1st Quarter 2nd Quarter $2,761,387 1,343,274 239,152 2.58 2.53 $3,735,817 1,737,056 319,111 3.44 3.36 1st Quarter 2nd Quarter $2,574,024 1,261,845 164,876 1.80 1.75 $3,219,525 1,635,901 378,064 4.12 3.99 2017 3rd Quarter $4,507,020 1,902,142 316,606 3.40 3.33 2016 3rd Quarter $3,279,462 1,636,425 386,733 4.20 4.08 4th Quarter Full Year $3,979,564 1,798,739 897,393 9.62 9.39 $14,983,788 6,781,211 1,772,262 19.08 18.67 4th Quarter Full Year $ 2,782,591 1,388,580 203,030 2.20 2.15 $11,855,602 5,922,751 1,132,703 12.33 11.99 Net income for the three months and year ended December 31, NOTE 18 – REPORTABLE SEGMENT INFORMATION 2017 included a tax benefit of $668,779 related to the Deferred The Company reports its segment information in the same way income tax reductions. See Note 14. that management internally organizes its business for assessing Net income in the fourth quarter of 2016 included a gain on performance and making decisions regarding allocation of sale of assets of $30,916, increased provisions for environmental resources in accordance with the Segment Reporting Topic of the matters of $9,330 and impairment of goodwill and trademarks of ASC. Upon completion of the Acquisition in the second quarter of $10,688. NOTE 17 – OPERATING LEASES 2017, the Company made important changes to its organizational and reporting structure that resulted in establishing three reportable operating segments: The Americas Group, Consumer The Company leases certain stores, warehouses, Brands Group and Performance Coatings Group (individually, a manufacturing facilities, office space and equipment. Renewal Reportable Segment and collectively, the Reportable Segments). options are available on the majority of leases and, under certain Prior period segment reporting has been adjusted to reflect the conditions, options exist to purchase certain properties. Rental updated reportable segments. Factors considered in determining expense for operating leases, recognized on a straight-line basis the three Reportable Segments of the Company include the nature over the lease term in accordance with the Leases Topic of the of business activities, the management structure directly ASC was $464,616, $417,549 and $394,359 for 2017, 2016 and accountable to the Company’s chief operating decision maker 2015, respectively. Certain store leases require the payment of (CODM) for operating and administrative activities, availability of contingent rentals based on sales in excess of specified minimums. discrete financial information and information presented to the Contingent rentals included in rent expense were $63,300, Board of Directors. The Company reports all other business $58,865 and $55,890 in 2017, 2016 and 2015, respectively. Rental activities and immaterial operating segments that are not income, as lessor, from real estate leasing activities and sublease reportable in the Administrative segment. See pages 8 through 15 rental income for all years presented was not significant. The of this report for more information about the Reportable following schedule summarizes the future minimum lease Segments. payments under noncancellable operating leases having initial or The Company’s CODM has been identified as the Chief remaining terms in excess of one year at December 31, 2017: Executive Officer because he has final authority over performance 2018 .................................................................... 2019 .................................................................... 2020.................................................................... 2021..................................................................... 2022 .................................................................... Later years ........................................................... Total minimum lease payments............................ $ 391,009 347,321 298,505 237,999 178,014 402,680 $1,855,528 assessment and resource allocation decisions. Because of the diverse operations of the Company, the CODM regularly receives discrete financial information about each Reportable Segment as well as a significant amount of additional financial information about certain divisions, business units or subsidiaries of the Company. The CODM uses all such financial information for performance assessment and resource allocation decisions. The CODM evaluates the performance of and allocates resources to 74 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) the Reportable Segments based on segment profit or loss and cash finishes products, wood preservatives, applicators, corrosion generated from operations. The accounting policies of the inhibitors, aerosols, caulks and adhesives to retailers and Reportable Segments are the same as those described in Note 1 of distributors throughout North America, as well as in Australia, this report. China and Europe. The Consumer Brands Group also supports the The Americas Group Reportable Segment includes the Company’s other businesses around the world with new product Company’s previous Paint Stores Group and Latin America research and development, manufacturing, distribution and Coatings Group, along with a specialty retail business of Valspar. logistics. Approximately 59.47% of the total sales of the The Americas Group consisted of 4,620 company-operated Consumer Brands Group in 2017 were intersegment transfers of specialty paint stores in the United States, Canada, Latin America products primarily sold through The Americas Group. At and the Caribbean region at December 31, 2017. Each store in this December 31, 2017, the Consumer Brands Group consisted of segment is engaged in servicing the needs of architectural and operations in the United States and subsidiaries in 6 foreign industrial paint contractors and do-it-yourself homeowners. The countries. Sales and marketing of certain controlled brand and Americas Group company-owned stores market and sell Sherwin- private labeled products is performed by a direct sales staff. The Williams® and other controlled brand architectural paint and products distributed through third-party customers are intended coatings, protective and marine products, OEM product finishes for resale to the ultimate end-user of the product. The Consumer and related products. The majority of these products are produced Brands Group had sales to certain customers that, individually, by manufacturing facilities in the Consumer Brands Group. In may be a significant portion of the sales of the segment. However, addition, each store sells select purchased associated products. the loss of any single customer would not have a material adverse The Americas Group sells a variety of architectural paints, effect on the overall profitability of the segment. This segment coatings and related products through dedicated dealers, home incurred most of the Company’s capital expenditures related to centers, distributors, hardware stores and other retailers ongoing environmental compliance measures at sites currently in throughout Latin America. The Americas Group meets regional operation. The CODM uses discrete financial information about customer demands through developing, licensing, manufacturing, the Consumer Brands Group, supplemented with information by distributing and selling a variety of architectural paints, coatings product type and customer type, to assess performance of and and related products in North and South America. The loss of any allocate resources to the Consumer Brands Group as a whole. In single customer would not have a material adverse effect on the accordance with ASC 280-10-50-9, the Consumer Brands Group business of this segment. At December 31, 2017, The Americas as a whole is considered the operating segment, and because it Group consisted of operations from subsidiaries in 9 foreign meets the criteria in ASC 280-10-50-10, it is also considered a countries. During 2017, this segment opened 101 net new stores, Reportable Segment. consisting of 114 new stores opened (76 in the United States, 15 in The Performance Coatings Group Reportable Segment Canada, 1 in Curacao, 14 in South America and 8 in Mexico) and 13 includes the Company’s previous Global Finishes Group and stores closed (4 in the United States, 1 in Canada, 6 in South Valspar’s previous Coatings Group segment. The Performance America and 2 in Mexico). In 2016 and 2015, this segment opened Coatings Group also includes Valspar’s automotive refinishes 142 and 98 net new stores, respectively. A map on the cover flap products business, which was previously reported under Valspar’s of this report shows the number of paint stores and their Consumer Paints segment. Valspar’s North American industrial geographic location. The CODM uses discrete financial wood coatings business, which was previously reported under the information about The Americas Group, supplemented with Valspar’s Coatings Group segment, was divested. The information by geographic region, product type and customer Performance Coatings Group develops and sells industrial type, to assess performance of and allocate resources to The coatings for wood finishing and general industrial (metal and Americas Group as a whole. In accordance with ASC plastic) applications, automotive refinish, protective and marine 280-10-50-9, The Americas Group as a whole is considered the coatings, coil coatings, packaging coatings and performance- operating segment, and because it meets the criteria in ASC based resins and colorants worldwide. In addition, a specialty 280-10-50-10, it is also considered a Reportable Segment. coatings business previously in the Company’s Consumer Group is The Consumer Brands Group Reportable Segment includes the now included in the Performance Coatings Group. This segment Company’s previous Consumer Group along with Valspar’s previous Consumer Paints segment, excluding Valspar’s licenses certain technology and trade names worldwide. Sherwin- Williams® and other controlled brand products are distributed automotive refinishes products business. The Consumer Brands through The Americas Group and this segment’s 290 company- Group supplies a broad portfolio of branded and private-label operated branches and by a direct sales staff and outside sales architectural paints, stains, varnishes, industrial products, wood representatives to retailers, dealers, jobbers, licensees and other 75 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) third-party distributors. The Performance Coatings Group had Net external sales of all consolidated foreign subsidiaries were sales to certain customers that, individually, may be a significant $2,959,785, $1,722,246 and $1,788,955 for 2017, 2016 and 2015, portion of the sales of the segment. However, the loss of any single respectively. Long-lived assets consisted of Property, plant and customer would not have a material adverse effect on the overall equipment, Goodwill, Intangible assets, Deferred pension assets profitability of the segment. During 2017, this segment opened 4 and Other assets. The aggregate total of long-lived assets for the new branches and closed 2 branches for a net increase of 2 Company was $15,492,586, $3,125,222 and, $3,132,981 at branches. At December 31, 2017, the Performance Coatings Group December 31, 2017, 2016 and 2015, respectively. Long-lived assets consisted of operations in the United States and subsidiaries in 44 of consolidated foreign subsidiaries totaled $3,691,035, $477,889 foreign countries. The CODM uses discrete financial information and $497,528 at December 31, 2017, 2016 and 2015, respectively. about the Performance Coatings Group reportable segment, Total Assets of the Company were $19,958,427, $6,752,521 supplemented with information about geographic divisions, and $5,778,937 at December 31, 2017, 2016 and 2015, business units and subsidiaries, to assess performance of and respectively. Total assets of consolidated foreign subsidiaries were allocate resources to the Performance Coatings Group as a whole. $5,253,995, $1,233,666 and $1,172,064, which represented In accordance with ASC 280-10-50-9, the Performance Coatings 26.3 percent, 18.3 percent and 20.3 percent of the Company’s Group as a whole is considered the operating segment, and total assets at December 31, 2017, 2016 and 2015, respectively. because it meets the criteria in ASC 280-10-50-10, it is also The increase in net external sales and long- lived assets was considered a Reportable Segment. A map on the cover flap of this primarily due to the Acquisition. Domestic operations accounted report shows the number of branches and their geographic for the remaining net external sales and long-lived assets. No locations. single geographic area outside the United States was significant The Administrative segment includes the administrative relative to consolidated net external sales or consolidated long- expenses of the Company’s corporate headquarters site. Also lived assets. Export sales and sales to any individual customer included in the Administrative segment is interest expense, were each less than 10 percent of consolidated sales to unaffiliated interest and investment income, certain expenses related to closed customers during all years presented. facilities and environmental-related matters, and other expenses In the reportable segment financial information that follows, which are not directly associated with the Reportable Segments. Segment profit was total net sales and intersegment transfers less The Administrative segment does not include any significant operating costs and expenses. Identifiable assets were those foreign operations. Also included in the Administrative segment is directly identified with each reportable segment. The a real estate management unit that is responsible for the Administrative segment assets consisted primarily of cash and ownership, management and leasing of non-retail properties held cash equivalents, investments, deferred pension assets and primarily for use by the Company, including the Company’s headquarters property, plant and equipment. The margin for each headquarters site, and disposal of idle facilities. Sales of this reportable segment was based upon total net sales and segment represents external leasing revenue of excess intersegment transfers. Domestic intersegment transfers were headquarters space or leasing of facilities no longer used by the primarily accounted for at the approximate fully absorbed Company in its primary businesses. Material gains and losses from manufactured cost, based on normal capacity volumes, plus the sale of property are infrequent and not a significant operating customary distribution costs for paint products. Non-paint factor in determining the performance of the Administrative domestic and all international intersegment transfers were segment. accounted for at values comparable to normal unaffiliated customer sales. All intersegment transfers are eliminated within the Administrative segment. 76 Notes to Consolidated Financial Statements (thousands of dollars unless otherwise indicated) (millions of dollars) Net external sales............................................... Intersegment transfers ....................................... Total net sales and intersegment transfers ......... Segment profit ................................................... Interest expense................................................. Administrative expenses and other .................... Income from continuing operations before The Americas Group $ 9,117 6 $ 9,123 $ 1,769 Consumer Brands Group $ 2,155 3,162 $ 5,317 $ 226 2017 Performance Coatings Group $3,706 22 $ 3,728 $ 299 Administrative $ 6 (3,190) $(3,184) $ (263) (503) Consolidated Totals $14,984 $14,984 $ 2,294 (263) (503) income taxes .................................................. $ 1,769 $ 226 $ 299 $ (766) $ 1,528 Reportable segment margins .............................. Identifiable assets .............................................. Capital expenditures .......................................... Depreciation ...................................................... 19.4% 4.3% 8.0% $4,359 69 75 $5,839 95 92 $8,300 37 69 $ 1,460 22 49 $19,958 223 285 Net external sales............................................... Intersegment transfers ....................................... Total net sales and intersegment transfers ......... Segment profit ................................................... Interest expense................................................. Administrative expenses and other .................... Income from continuing operations before The Americas Group $8,377 39 $8,416 $1,606 Consumer Brands Group $ 1,528 2,775 $4,303 $ 301 2016 Performance Coatings Group $1,946 15 $ 1,961 $ 257 Administrative $ 5 (2,829) $(2,824) $ (154) (415) Consolidated Totals $11,856 $11,856 $ 2,164 (154) (415) income taxes .................................................. $1,606 $ 301 $ 257 $ (569) $ 1,595 Reportable segment margins .............................. Identifiable assets .............................................. Capital expenditures .......................................... Depreciation ...................................................... 19.1% 7.0% 13.1% $2,148 100 76 $2,005 99 47 $ 818 19 20 $ 1,782 21 $ 29 $ $ 6,753 239 172 Net external sales............................................... Intersegment transfers ....................................... Total net sales and intersegment transfers ......... Segment profit ................................................... Interest expense................................................. Administrative expenses and other .................... Income from continuing operations before The Americas Group $7,840 40 $7,880 $ 1,452 Consumer Brands Group $ 1,578 2,736 $4,314 $ 309 2015 Performance Coatings Group $1,916 5 $1,921 $ 202 Administrative $ 5 (2,781) $(2,776) $ (62) (352) Consolidated Totals $11,339 $11,339 $ 1,963 (62) (352) income taxes .................................................. $ 1,452 $ 309 $ 202 $ (414) $ 1,549 Reportable segment margins .............................. Identifiable assets .............................................. Capital expenditures .......................................... Depreciation ...................................................... 18.4% 7.2% 10.5% $ 2,037 132 72 $ 1,925 60 47 $ 814 21 25 $ 1,003 21 26 $ 5,779 234 170 77 Cautionary Statement Regarding Forward-Looking Information Certain statements contained in “Management’s Discussion the achievement of anticipated cost synergies resulting from the and Analysis of Financial Condition and Results of Operations,” Acquisition and the timing thereof; (g) competitive factors, “Letter to Shareholders” and elsewhere in this report constitute including pricing pressures and product innovation and quality; “forward-looking statements” within the meaning of the federal (h) our ability to attain cost savings from productivity initiatives; securities laws. These forward-looking statements are based upon (i) risks and uncertainties associated with our expansion into and management’s current expectations, estimates, assumptions and our operations in Asia, Europe, South America and other foreign beliefs concerning future events and conditions and may discuss, markets, including general economic conditions, inflation rates, among other things, anticipated future performance (including recessions, foreign currency exchange rates, foreign investment sales and earnings), expected growth, future business plans and and repatriation restrictions, legal and regulatory constraints, civil the costs and potential liability for environmental-related matters unrest and other external economic and political factors; (j) the and the lead pigment and lead-based paint litigation. Any achievement of growth in foreign markets, such as Asia, Europe statement that is not historical in nature is a forward-looking and South America; (k) increasingly stringent domestic and statement and may be identified by the use of words and phrases foreign governmental regulations, including those affecting health, such as “believe,” “expect,” “may,” “will,” “should,” “project,” safety and the environment; (l) inherent uncertainties involved in “could,” “plan,” “goal,” “potential,” “seek,” “intend” or “anticipate” assessing our potential liability for environmental-related or the negative thereof or comparable terminology. activities; (m) other changes in governmental policies, laws and Readers are cautioned not to place undue reliance on any regulations, including changes in accounting policies and forward-looking statements. Forward-looking statements are standards and taxation requirements (such as new tax laws and necessarily subject to risks, uncertainties and other factors, many new or revised tax law interpretations); (n) the nature, cost, of which are outside our control, that could cause actual results to quantity and outcome of pending and future litigation and other differ materially from such statements and from our historical claims, including the lead pigment and lead-based paint litigation, results and experience. These risks, uncertainties and other factors and the effect of any legislation and administrative regulations include such things as: (a) general business conditions, strengths relating thereto; and (o) adverse weather conditions and natural of retail and manufacturing economies and the growth in the disasters. coatings industry; (b) changes in general domestic economic Readers are cautioned that it is not possible to predict or conditions such as inflation rates, interest rates, tax rates, identify all of the risks, uncertainties and other factors that may unemployment rates, higher labor and healthcare costs, affect future results and that the above list should not be recessions, and changing government policies, laws and considered to be a complete list. Any forward-looking statement regulations; (c) changes in raw material and energy supplies and speaks only as of the date on which such statement is made, and pricing; (d) changes in our relationships with customers and we undertake no obligation to update or revise any forward- suppliers; (e) our ability to successfully integrate past and future looking statement, whether as a result of new information, future acquisitions into our existing operations, including Valspar, as well events or otherwise except as otherwise required by law. as the performance of the businesses acquired; (f) risks inherent in 78 Shareholder Information ANNUAL MEETING The annual meeting of shareholders will INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM be held in the Landmark Conference Ernst & Young LLP Center, 927 Midland Building, Cleveland, Ohio 101 W. Prospect Avenue, Cleveland, Ohio on Wednesday, April 18, 2018 at STOCK TRADING TRANSFER AGENT & REGISTRAR Our transfer agent, EQ Shareowner Services (formerly Wells Fargo Shareowner Services), maintains the records for our registered shareholders and can help with a wide variety of 9:00 A.M., local time. Sherwin-Williams Common Stock – shareholder related services, including HEADQUARTERS 101 W. Prospect Avenue Cleveland, Ohio 44115-1075 (216) 566-2000 www.sherwin.com INVESTOR RELATIONS Robert J. Wells Senior Vice President – Corporate Communications and Public Affairs The Sherwin-Williams Company 101 W. Prospect Avenue Cleveland, Ohio 44115-1075 Symbol, SHW – is traded on the New York Stock Exchange. the direct deposit of dividends and online access to your account. Contact: EQ Shareowner Services P.O. Box 64874 St. Paul, MN 55164-0874 www.shareowneronline.com 1-800-468-9716 Toll-free 651-450-4064 outside the United States DIVIDEND REINVESTMENT PROGRAM A dividend reinvestment program is available to shareholders of common stock. For information, contact Equiniti Trust Company. FORM 10-K The Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission, is available without charge. To obtain a copy, contact Investor Relations. COMMON STOCK TRADING STATISTICS High .................................................................... Low ..................................................................... Close December 31 ............................................. Shareholders of record ........................................ Shares traded (thousands) .................................. 2017 $ 414.34 274.54 410.04 6,488 154,970 2016 $ 312.10 239.35 268.74 6,787 212,100 2015 $ 292.44 218.94 259.60 6,996 195,560 2014 $ 266.25 174.29 263.04 7,250 152,913 2013 $ 195.32 153.94 183.50 7,555 186,854 QUARTERLY STOCK PRICES AND DIVIDENDS 2017 Quarter 1st................. 2nd ............... 3rd................ 4th ............... High $ 315.36 361.03 359.72 414.34 Low Dividend Quarter $274.54 308.35 328.97 359.43 $.850 .850 .850 .850 1st................. 2nd ............... 3rd................ 4th ............... 2016 High $288.69 300.12 312.10 277.88 Low Dividend $ 239.35 280.32 273.53 240.63 $.840 .840 .840 .840 79 Corporate Officers and Operating Management CORPORATE OFFICERS OPERATING MANAGEMENT John G. Morikis, 54* Chairman, President and Chief Executive Officer Allen J. Mistysyn, 49* Joel D. Baxter, 57* President & General Manager Global Supply Chain Division Consumer Brands Group Karl J. Jorgenrud, 41 President & General Manager Protective & Marine Division Performance Coatings Group Senior Vice President - Finance Justin T. Binns, 42 Dennis H. Karnstein, 51 and Chief Financial Officer President & General Manager President & General Manager Jane M. Cronin, 50* Senior Vice President - Corporate Controller Mary L. Garceau, 45* Senior Vice President, General Counsel and Secretary Thomas P. Gilligan, 57* Senior Vice President - Human Resources Sean P. Hennessy, 60* Senior Vice President - Corporate Planning, Development and Administration Robert J. Wells, 60* Senior Vice President - Corporate Communications and Public Affairs Eastern Division The Americas Group Industrial Wood Coatings Division Performance Coatings Group Lee B. Diamond, 48 Robert F. Lynch, 57 President & General Manager President & General Manager Canada Division The Americas Group Aaron M. Erter, 44* President Retail - North America Consumer Brands Group David B. Sewell, 49* President Consumer Brands Group Performance Coatings Group Monty J. Griffin, 57 Samuel W. Shoemaker, 56 President & General Manager President & General Manager South Western Division The Americas Group Thomas C. Hablitzel, 55 President & General Manager Automotive Finishes Division Performance Coatings Group Global Packaging, Coil, and Coatings Resins & Colorants Division Performance Coatings Group Todd A. Stephenson, 48 President & General Manager Mid Western Division The Americas Group Todd V. Wipf, 53 President & General Manager Southeastern Division The Americas Group Lawrence J. Boron, 59 Vice President - Taxes and Assistant Secretary Peter J. Ippolito, 53* President The Americas Group John D. Hullibarger, 37 Bruce G. Irussi, 57 Vice President - Corporate Audit President & General Manager General Industrial Coatings Division Performance Coatings Group and Loss Prevention Jeffrey J. Miklich, 43 Vice President and Treasurer Stephen J. Perisutti, 55 Vice President, Deputy General Counsel and Assistant Secretary Bryan J. Young, 42 Vice President - Corporate Strategy & Development * Executive Officer as defined by the Securities Exchange Act of 1934 80 26 branches CANADA 1 facility 227 paint stores 3 facilities 40 facilities 11 facilities 3,960 paint stores 228 branches UNITED STATES 2 facilities 1 branch 80 paint stores CARIBBEAN LATIN AMERICA / SOUTH AMERICA 16 branches 18 facilities 353 paint stores 10 facilities The Americas Group’s Stores UNITED STATES Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota 70 7 65 46 76 41 16 262 5 306 157 12 27 153 95 42 44 58 69 25 84 62 114 63 57 76 18 23 24 21 96 23 137 158 9 197 54 55 199 12 84 10 91 334 36 11 124 100 19 81 12 27 8 4 2 6 87 37 7 80 Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming CANADA Alberta British Columbia 48 Manitoba New Brunswick Newfoundland Nova Scotia Ontario Prince Edward Island 1 Quebec Saskatchewan CARIBBEAN LATIN AMERICA Brazil Chile Ecuador Mexico Peru Uruguay TOTAL 103 56 32 148 3 11 4,620 16 branches 9 facilities 28 facilities EMEAI ASIA/PACIFIC 3 branches 6 facilities 9 facilities Our Global Footprint The Americas Group Consumer Brands Group Performance Coatings Group Corporate headquarters 90 3 paint stores facilities AUSTRALIA/NEW ZEALAND As a global leader in the development, manufacture and sale of paint, coatings and related products, Sherwin-Williams has an extensive retail presence throughout the Americas, and growing service capabilities in Europe and Asia/Pacific. The Americas Group has 4,267 company-operated specialty paint stores in the United States, Canada and the Caribbean. More than 90 percent of the U.S. population lives within a 50-mile radius of a Sherwin-Williams store. The Americas Group operates 353 stores throughout Latin America and sells through more than 700 dedicated dealer outlets, primarily located in Brazil, Chile, Ecuador, Mexico, Peru and Uruguay. The Consumer Brands Group includes company-operated outlets in Australia and New Zealand, and a highly efficient global supply chain consisting of 84 manufacturing plants and distribution centers. The Performance Coatings Group sells to a growing customer base in more than 100 countries around the world and has approximately 290 company-operated general industrial, industrial wood, protective and marine, and automotive branches. Board of Directors 1. CHRISTINE A. POON, 65* Executive in Residence The Max M. Fisher College of Business The Ohio State University Retired, former Vice Chairman Johnson & Johnson 2. STEVEN H. WUNNING, 66 Retired, former Group President Caterpillar Inc. 3. ARTHUR F. ANTON, 60* Chairman and Chief Executive Officer Swagelok Company 6. RICHARD J. KRAMER, 54* Chairman of the Board, Chief Executive Officer and President The Goodyear Tire & Rubber Company 7. JOHN M. STROPKI, 67 Retired, former Chairman, President and Chief Executive Officer Lincoln Electric Holdings, Inc. 8. DAVID F. HODNIK, 70 Retired, former President and Chief Executive Officer Ace Hardware Corporation 4. MATTHEW THORNTON III, 59* 9. SUSAN J. KROPF, 69 Senior Vice President, US Operations FedEx Express FedEx Corporation Retired, former President and Chief Operating Officer Avon Products, Inc. 5. JOHN G. MORIKIS, 54 Chairman, President and Chief Executive Officer The Sherwin-Williams Company 10. MICHAEL H. THAMAN, 54 Chairman, President and Chief Executive Officer Owens Corning 2 1 3 5 4 6 7 8 9 *Audit Committee Member 10 53444IMPO.(PDF_D17) Cover.indd 2 2/23/18 8:50 AM The Sherwin-Williams Company was founded by Henry Sherwin and Edward Williams in 1866. Today, we are a global leader in the manufacture, development, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers. The Company manufactures products under well-known brands such as Sherwin- Williams®, Valspar®, Dutch Boy®, HGTV HOME® by Sherwin-Williams, Krylon®, Minwax®, Cabot®, Thompson’s® Water Seal® and many more. With global headquarters in Cleveland, Ohio, Sherwin-Williams® branded products are sold exclusively through more than 5,100 company-operated stores and facilities, while the Company’s other brands are sold through leading mass merchandisers, home centers, independent paint dealers, hardware stores, automotive retailers and industrial distributors. For more information, visit www.sherwin-williams.com. The Company is comprised of three reportable segments, which together provide our customers with innovative solutions to ensure their success, no matter where they work, or what surfaces they are coating. The Americas Group operates the exclusive outlets for Sherwin-Williams® branded paints, stains, supplies, equipment and floor covering in the U.S., Canada and the Caribbean. The Group also manufactures and sells a wide range of architectural paints, industrial coatings and related products across Latin America through company-operated stores and dedicated dealers. The Consumer Brands Group sells one of the industry’s most recognized portfolios of branded and private-label products through retailers across North America and in parts of Europe, Australia, New Zealand and China, and also operates a highly efficient global supply chain for paint, coatings and related products. The Performance Coatings Group sells a wide range of coatings and finishes and sells to a growing customer base in general industrial, industrial wood, protective and marine, coil, packaging and automotive markets in more than 110 countries. C O N T E N T S Our Global Footprint Financial Highlights Letter to Shareholders At a Glance The Americas Group Consumer Brands Group Performance Coatings Group Shareholder Returns Financial Performance 1 2 8 10 12 14 16 17 2 0 1 7 A N N UA L R E P O R T The Sherwin-Williams Company is an equal opportunity employer that recruits, selects and hires on the basis of individual qualifications and prohibits unlawful discrimination based on race, color, religion, sex, national origin, protected veteran status, disability, age, sexual orientation or any other consideration made unlawful by federal, state or local laws. The Sherwin-Williams Company 101 W. Prospect Avenue Cleveland, Ohio 44115-1075 www.sherwin-williams.com 53444IMPO.(PDF_D17) Cover.indd 1 2/23/18 8:50 AM 

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