The Sherwin-Williams Company Annual Report 2017

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FY2017 Annual Report · The Sherwin-Williams Company

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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

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

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26
branches

CANADA

1
facility

227

paint stores

3
facilities

2
facilities

1
branch

paint stores

CARIBBEAN

LATIN AMERICA /
SOUTH AMERICA

branches

353

paint stores

10
facilities

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

199

334

124

100

CANADA
Alberta
27
British Columbia 48
Manitoba
New Brunswick
Newfoundland
Nova Scotia
Ontario
87
Prince Edward Island 1
Quebec
Saskatchewan

CARIBBEAN

LATIN AMERICA
Brazil
Chile
Ecuador
Mexico
Peru
Uruguay
TOTAL

103

148

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

262

306

157

153

114

137

158

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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

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

*Audit Committee Member

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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

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(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.

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

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

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.

(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

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

(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.

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

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

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.

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).

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.

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.

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.

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.

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

94.9

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

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

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.

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

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

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

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

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

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.

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

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

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.

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

—

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

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.

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

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

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

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.

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.

[THIS PAGE INTENTIONALLY LEFT BLANK]

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

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

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

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

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

11.99

11.43

11.15

See notes to consolidated financial statements.

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

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.

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.

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.

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.

[THIS PAGE INTENTIONALLY LEFT BLANK]

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.

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

(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

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

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

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

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

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

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

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)

(136)
(255)

(215)

(446)

14
121

111

$4,456

$50,503

$(45,422)

$13,385

(362)

1,546

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 ..........................................................

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)

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

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.

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

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:

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:

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.

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%

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:

$ (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%

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)

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%.

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

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

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

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

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.

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.

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.

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

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

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

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.

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

Net income per common share ..................................................................

19.52
(.44)

19.08

1,132,703

$ 1,053,849

1,132,703

$ 1,053,849

12.33

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

$ 1,813,802
(41,540)

Net income................................................................................................

$ 1,772,262

Diluted net income per common share

Net income per common share ..................................................................

19.11
(.44)

18.67

1,132,703

$ 1,053,849

1,132,703

$ 1,053,849

11.99

11.15

(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.

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

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

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.

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

$ 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

$ 2,164
(154)
(415)

income taxes ..................................................

$1,606

$ 301

$ 257

$ (569)

$ 1,595

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

$ 1,963
(62)
(352)

income taxes ..................................................

$ 1,452

$ 309

$ 202

$ (414)

$ 1,549

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

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

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

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

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

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

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

branches

CANADA

facility

227

paint stores

facilities

3,960

paint stores

228

branches

UNITED

STATES

facilities

branch

paint stores

CARIBBEAN

LATIN AMERICA /

SOUTH AMERICA

branches

facilities

353

paint stores

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

262

306

157

153

114

137

158

197

199

334

124

100

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

148

4,620

branches

facilities

EMEAI

ASIA/PACIFIC

branches

facilities

Our Global

Footprint