The Sherwin-Williams Company Annual Report 2018

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FY2018 Annual Report · The Sherwin-Williams Company

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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.

Sherwin-Williams®, Valspar®, Dutch Boy®, HGTV HOME™ by Sherwin-

T he Company manufactures products under well-known brands such as

branded products are sold primarily through more than 5,100 company-operated

more. With global headquarters in Cleveland, Ohio, Sherwin-Williams®

Williams, Krylon®, Minwax®, Cabot®, Thompson’s® Water Seal® and many

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 paint, industrial coatings and related products across Latin

America through company-operated stores and dedicated dealers.

•

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.

Performance Coatings Group sells a wide range of industrial coatings and
finishes to general industrial, industrial wood, protective and marine, coil &

extrusion, packaging and automotive customers in more than 120 countries.

The Sherwin-Williams Company is an equal opportunity employer. As such, we will recruit, hire, train and promote in all job titles
based only on valid job requirements. All personnel actions will be administered without regard to the following “factors”: race, color,
religion, sex, sexual orientation, gender identity, national origin, protected veteran status, disability, age, pregnancy, genetic informa-
tion, creed, citizenship status, marital status, or any other consideration prohibited by law or by contract.

Contents

Our Global Footprint

1 Financial Highlights

2 Letter to Shareholders

8 At a Glance

10 The Americas Group

12 Consumer Brands Group

14 Performance Coatings Group

16 Shareholder Returns

17 Financial Performance

2 0 1 8 A N N U A L R E P O R T

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21
branches

CANADA

1
facility

241

paint stores

4
facilities

facilities

13
facilities

4,032

paint stores

223

branches

UNITED
STATES

2
facilities

paint stores

CARIBBEAN

LATIN AMERICA /
SOUTH AMERICA

19
branches

342

paint stores

10
facilities

18
facilities

West Virginia
Wisconsin
Wyoming

CANADA
Alberta
28
British Columbia 49
Manitoba
9
New Brunswick
Newfoundland
Nova Scotia
Ontario
94
Prince Edward Island 1
Quebec
39
Saskatchewan
CARIBBEAN
LATIN AMERICA
Brazil
Chile
Ecuador
Mexico
Uruguay
TOTAL

4,696

147

The Americas Group

Consumer Brands Group

Performance Coatings Group

Corporate headquarters

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

269

313

159

155

116

Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington

142

164

199

200

339

125

105

Board of

Directors

branches

9
facilities

facilities

EMEAI

ASIA-PACIFIC

3
branches

7
facilities

9
facilities

1. Christine A. Poon, 66*

Executive in Residence

5. John G. Morikis, 55

Chairman, President and

The Max M. Fisher College of Business

Chief Executive Officer

The Sherwin-Williams Company

9. Susan J. Kropf, 70

Retired, former President and

Chief Operating Officer

Avon Products, Inc.

6. Richard J. Kramer, 55*

Chairman of the Board,

10. Michael H. Thaman, 55

Chairman and Chief Executive Officer

paint stores

6
facilities

2. Steven H. Wunning, 67

Chief Executive Officer and President

Owens Corning

Retired, former Group President

The Goodyear Tire & Rubber Company

AUSTRALIA/NEW ZEALAND

3. Arthur F. Anton, 61*

Chairman and Chief Executive Officer

and Chief Executive Officer

Swagelok Company

Lincoln Electric Holdings, Inc.

7. John M. Stropki, 68

Retired, former Chairman, President

Our Global
Footprint

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, Asia-Pacific and Australia/

New Zealand.

•

The Americas Group has 4,354 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

342 stores throughout Latin America and sells through more than 700 dedicated dealer

outlets, primarily located in Brazil, Chile, Ecuador, Mexico and Uruguay.

Consumer Brands Group includes company-operated outlets in Australia and New
Zealand and a highly efficient global supply chain consisting of 95 manufacturing plants

and distribution centers.

Performance Coatings Group sells to a growing customer base in more than
120 countries around the world and has 282 company-operated general industrial,

industrial wood, protective and marine, and automotive branches.

The Ohio State University

Retired, former Vice Chairman

Johnson & Johnson

Caterpillar Inc.

4. Matthew Thornton III, 60*

Executive Vice President and

Chief Operating Officer

FedEx Freight

FedEx Corporation

*Audit Committee Member

8. David F. Hodnik, 71

Retired, former President and

Chief Executive Officer

Ace Hardware Corporation

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Financial
Highlights

(thousands of dollars except per share data)

2 018

2 017

2 016

Net sales

$ 17,534,493

$ 14,983,788

$ 11,855,602

Net income from continuing operations (1 )(2)

$ 1,108,746

$ 1,769,488

$ 1,132,703

Per share:

Diluted net income per share from continuing operations (1 )(3 )

Cash dividends

Average shares outstanding – diluted (thousands)

Return on sales (1 )

Return on assets (1 )

Return on beginning shareholders’ equity (1 )(4)

Total debt to capitalization (1 )

Interest coverage (1 )(5)

11.67

3.44

94,988

6.3%

5.8%

30.4%

71.5%

4.7x

18.64

3.40

94,927

11.8%

8.9%

94.2%

74.3%

6.6x

11.99

3.36

94,488

9.6%

16.8%

130.5%

51.0%

11.4x

Net Sales
millions of dollars

Net Income from
Continuing Operations (1)(2)
millions of dollars

Diluted Net Income
Per Share from Continuing
Operations (1)(3)

Net Operating Cash
millions of dollars

4
8
9
4
1
6 $
5
8
1
1
$

4
3
5
7
1
$

9
6
7
1
$

3
3
1
1
$

9
0
1
1
$

4
6
8
1
$

9
9
1
1
$

7
6
1
1
$

4
4
9
1
$

4
8
8
1
$

9
0
3
1
$

(1) 2017 has been adjusted for a voluntary inventory accounting change made in 2018.
(2) 2018 includes after-tax acquisition-related costs of $394.4 million, after-tax environmental expense provisions of $126.1 million, after-tax California litigation expense of $102.5 million and
after-tax pension settlement expense of $28.3 million. 2017 includes a one-time income tax benefit of $668.8 million from Deferred income tax reductions and after-tax acquisition-related
costs of $329.4 million. 2016 includes after-tax acquisition-related costs of $81.5 million.

(3) 2018 includes charges of $4.15 per share for acquisition-related costs, $1.32 per share for environmental expense provisions, $1.09 per share for California litigation expense and $.30 per
share for pension settlement expense. 2017 includes a one-time benefit of $7.04 per share from Deferred income tax reductions and a charge of $3.47 per share for acquisition-related
costs. 2016 includes a charge of $.86 per share for acquisition-related costs.

(4) Based on net income and shareholders’ equity at beginning of year.
(5) Ratio of income before income taxes and interest expense to interest expense.

Letter to
Shareholders

We are pleased to report that Sherwin-Williams delivered record

performance across many measures in 2018, including sales, earnings

before interest, taxes, depreciation and amortization (EBITDA), and net

operating cash. Our success stems from our continued focus on innovative

products and services to help our customers improve their productivity,

profitability and projects.

progress on the integration of Valspar, the largest acquisition in our

W e posted these outstanding results while also making tremendous

material inflation for the second year in a row, which we responded to with selling

history. Integration synergies in 2018 exceeded the target we set at

the beginning of the year. We also faced significant and persistent raw

price increases, some of which were still flowing in as we entered 2019. Tariffs, global

trade uncertainty, interest rate hikes and other headwinds also impacted the operating

environment. Still, Sherwin-Williams employees delivered. Specific financial highlights

from 2018* include:

•

Sales increased $2.55 billion, or 17%, to a record $17.53 billion. Keeping in mind

that the Valspar transaction closed on June 1, 2017, incremental Valspar sales

from January through May 2018 increased consolidated sales by 12.4% for the

year. Organic growth for the full year was 4.7%.

EBITDA – or “Earnings Before Interest, Taxes, Depreciation and Amortization” –

increased 4.4% to a record $2.32 billion.

GAAP diluted net income per share for 2018 decreased to $11.67 per share from

$18.20 per share in 2017. The $11.67 per share includes non-operating expenses

of $2.71 per share and acquisition-related expenses of $4.15 per share. The

$18.20 per share includes a charge of $0.44 related to discontinued operations,

acquisition-related expenses of $3.47 per share and a one-time benefit of

$7.04 per share from Deferred Income Tax Reductions.

*2018 reported results include purchase accounting adjustments, acquisition transaction and integration costs, and other non-operating expenses related to environmental remediation, pension plan settlement, and
California litigation expense. Our 2017 reported results include purchase accounting adjustments, acquisition transaction and integration costs, and a one-time benefit from Deferred income tax reductions. The Com-
pany also made a voluntary inventory Accounting Change in the fourth quarter of 2018, driven by integration activities. As a result of this change, and in accordance with U.S. Generally Accepted Accounting Principles
(GAAP), a retrospective one-time expense adjustment to cost of goods sold of $58.9 million, or $.47 per share, was made, resulting in revised GAAP 2017 fourth quarter and full year amounts. This revision increased
acquisition-related costs and reduced previously reported segment profit for Performance Coatings and Consumer Brands Groups by $35.7 million and $23.2 million, respectively, for both the fourth quarter and full
year 2017 compared to what was previously reported.

John G. Morikis, Chairman, President and Chief Executive Officer, and Allen J. Mistysyn, Senior Vice President – Finance and Chief Financial Officer

• We believe investors gain a more meaningful view of our
underlying performance by excluding non-operating and

to return 1.525 million shares of common stock to

treasury and retired $1.1 billion in debt. Net debt

acquisition-related items from results in both years. On

to adjusted EBITDA at the end of the year was

this adjusted basis, 2018 diluted earnings per share from

approximately 3.3 times.

continuing operations increased 23.0% to $18.53 from

$15.07 per share in 2017.

Organic growth increased 4.7% and adjusted
diluted net income per share from continuing
operations increased 23% compared to the
prior year.

•

Net operating cash for the year increased $60 million

to a record $1.94 billion. This cash generation enabled

us to continue investing in growth and return capital

directly to our shareholders. During the year, we invested

$251 million in our business through capital expenditures,

paid $323 million in cash dividends, invested $613 million

•

Our acquisition integration effort is on track. We

delivered approximately $180 million in synergy benefits

to the income statement in 2018, about $30 million above

the midpoint of our expectations at the start of the year.

We exited the year with an annual synergy run rate of

approximately $360 million. To date, we have completed

437 value-capture projects. An additional 157 projects

are currently in progress with 53 more under evaluation.

Amid these highlights, we did receive some

disappointing news during the year, as the United States

Supreme Court declined to hear our appeal of a lower court

decision related to California lead paint abatement. This

resulted in a pre-tax charge of $136.3 million, or one-third of

the amount of an abatement fund as recalculated by the trial

court. We continue to believe the California verdict is wrong

on the facts and law, and we will vigorously defend any

potential future litigation as we have in the past.

invested in this model in 2018, opening 76 net new stores,

including 87 in North America, which was partially offset by

some store consolidation in Latin America. Total store count

at year-end was 4,696. Our service model also includes our

e-business platform, which we enhanced in 2018 and which

enables pro customers to better manage their businesses with

24/7 access to ordering, pricing, purchase history and more.

Consumer Brands Group
2018 sales for the Consumer Brands Group increased

$584.3 million, or 27.1% compared to 2017, to $2.74 billion.

Incremental Valspar sales from the five months ended May

2018 increased Group sales 26.9% in the year. Segment profit

increased 28.7% to $261.1 million due to incremental Valspar

operations profit for the first five months of $75.8 million,

increased selling prices and reduced impacts of a voluntary

inventory accounting change, partially offset by increased

raw material costs and lower sales to some of the Group’s

customers. Reported segment operating margin increased

to 9.5% in 2018 from 9.4% last year. Excluding purchase

accounting expense in both years and the voluntary inventory

accounting change adjustment to 2017, adjusted segment

operating margin decreased to 13.6% in 2018 from 15.5% in

2017. The margin decrease was driven mainly by incremental

expenses related to the launch of our new partnership

with Lowe’s and raw material inflation, not all of which

were anticipated.

Since the acquisition of Valspar in June 2017, the

Consumer Brands Group has integrated two distinct teams

into one. Evidence of the value provided by this combination

came early in 2018, as we announced an expanded partnership

with Lowe’s. The partnership positions Lowe’s as the only

national home center in the United States to offer our Valspar®

brand paints and stains, HGTV HOME™ by Sherwin-Williams

paints, Minwax®, Cabot® and Thompson’s® Water Seal® stains,

Krylon® aerosols and Purdy® applicators. We executed six

major product category resets and trained 20,000 Lowe’s

associates during the year, providing Lowe’s customers with

an improved experience throughout the paint department. We

began to see the benefits of this expanded partnership in 2018,

and our expectations for longer-term success remain high.

The Americas Group introduced 25 new
architectural products in North America,
the eighth consecutive year of double-digit
product introductions in the region.

The Americas Group
Sales for The Americas Group increased $507.9 million in 2018,

or 5.6% compared to 2017, to $9.63 billion. This growth comes

on top of a strong prior year during which sales grew 8.8%.

Currency translation rate changes reduced 2018 sales by 1%.

Comparable-store sales in the U.S., Canada and the Caribbean

– that is, sales by stores open more than 12 calendar months –

increased 5.1% in the year. Full-year segment profit increased

7.3% to $1.90 billion, and segment operating margin increased

30 basis points to 19.7% from 19.4% last year.

Sales to residential repaint contractors remained

our strongest customer end market in the year, with sales

increasing by a double-digit percentage. All other customer

categories were also positive for the year. We continued

to serve these customers by investing in innovation. We

introduced 25 new products in North America in 2018 – our

eighth consecutive year of double-digit product introductions

in the region – and 30 more in Latin America. Particularly well-

received products include Loxon® Self-Cleaning Exterior Acrylic

Coating, SuperDeck® Solid Color Stain with new Cool Feel®

Color Technology, Extreme Block® Primer/Sealer and Duration

Home® Interior Paint with Moisture Resistant Technology.

Our value proposition rests on combining innovative

products with premium service. We believe our company-

operated stores offer professional painting contractors and

DIYers the best service experience available. We further

We partner with other premier retailers as well, such

as Menards, Ace, Orgill, Do-It-Best and others. The Valspar

Performance Coatings Group
2018 sales for the Performance Coating Group increased

acquisition also provides us with the opportunity to grow

$1.46 billion, or 39.4% compared to 2017, to $5.17 billion.

outside of North America through the Valspar®, Huarun®

Incremental Valspar sales from the five months ended May

and Wattyl® brands in Europe, China and Australia/New

2018 increased Group sales 34.3% in the year. Segment profit

Zealand, respectively.

increased 72.0% to $452.1 million due to incremental Valspar

The success of each of our reportable segments is

operations profit for the first five months of $97.6 million,

supported by a highly efficient global supply chain and

research and development organization, all managed within

the Consumer Brands Group. This team performed admirably

in 2018, keeping pace with the incremental load-in demand

of the new Lowe’s program while also supporting what is

traditionally the peak period of architectural paint sales

We continued to innovate in the area of coatings
that reduce impacts to the environment.

volume in North America. This effort resulted in approximately

selling price increases and reduced impacts of a voluntary

$20 million in incremental costs that were not included in our

inventory accounting change, partially offset by increased raw

earnings outlook for the full year. Deep thanks goes to the many

material costs and increased purchase accounting impacts.

members of our global supply chain for their efforts in putting

Reported segment operating margin increased to 8.8% in 2018

our customers first. Their dedication is a great source of pride

from 7.1% last year. Excluding purchase accounting expense

to all of us.

in both years and a voluntary inventory accounting change

This team also remained crucial to our acquisition value-

adjustment to 2017, adjusted segment operating margin

capture efforts in 2018, especially in the area of optimizing

was essentially flat at 12.9% in 2018 compared to 13.0% in

our manufacturing and distribution footprint. We consolidated

2017. Given the level of raw material inflation this segment

four manufacturing plants and three distribution centers in

experienced in 2018, flat operating margin year over year is

2018 while completing seven capacity expansion projects to

evidence that our pricing actions have had success.

support global growth. We also began to more fully realize the

Like the Consumer Brands Group, this segment has

benefits of our new distribution center in Waco, Texas, and new

integrated distinct Sherwin-Williams and Valspar teams

manufacturing facility in Nantong, China, both of which opened

into a single global organization with a common purpose:

in 2017. Health and safety remained priorities for us as well,

delivering value to customers through differentiated products

and we had 31 U.S. VPP Star sites and 12 OHSAS 18001 and

and solutions that focus on both application performance and

45 ISO 14001 sites globally at the end of 2018.

enhancing productivity. This starts with innovation, especially

This team also operates our commercial transportation

in the area of coatings that reduce impacts to the environment,

fleet, which was honored again in 2018 with the SmartWay

Excellence Award. This annual award honors top shipping

and logistics company partners for superior environmental

performance and additional actions to reduce freight emissions

through effective collaboration and operational practices.

The fleet also earned 2nd Place for the National Private Truck

Council’s Fleet of the Year Safety Award.

segment early in 2018, with his 32 years of experience at

Sherwin-Williams preparing him extremely well for the role.

After joining the Company as a management trainee, Pete

progressed through a variety of leadership roles, most recently

as President & General Manager of the Mid Western Division of

The Americas Group.

Todd Stephenson succeeds Pete as President & General

Manager of the Mid Western Division. Todd joined Sherwin-

Williams in 1992 and most recently served as Senior Vice

President of Sales, Protective & Marine Division, Performance

Coatings Group. Tom Hablitzel was promoted to Senior Vice
President, Enterprise Strategic Accounts, succeeding Mark

Henderson, who retired after 36 years of service to the

Company. Tom joined the Company in 2005 and most recently

served as President of the Automotive Finishes Division,

Performance Coatings Group. Justin Binns succeeds Tom
as President & General Manager of the Automotive Finishes

Division. Justin joined the Company in 2001 and takes on his

new role after serving most recently as President & General

Manager of the Eastern Division within The Americas Group.

Mark Provenson succeeds Justin as President & General
Manager of the Eastern Division. Mark joined Sherwin-

Williams in 2000 and most recently served as Vice President

of Sales, Mid Western Division. Jonathan Reid was promoted
to President & General Manager of the South Western Division

in The Americas Group, succeeding Monty Griffin, who retired

after 33 years of service to the Company. Jon joined Sherwin-

Williams in 1993 and most recently served as Vice President of

Sales in the South Western Division. These seamless transitions

during the year demonstrate our thoughtful approach to

succession planning and the depth of our talent pool.

Outlook
We enter 2019 with confidence in the sustainability of demand

across most of our end markets, and we see significant

opportunities for profitable growth throughout the business.

In The Americas Group, we will continue to invest in our

store model and best-in-class products while executing on

share of wallet and new account activation initiatives. In the

Consumer Brands Group, we are excited by the exclusive

national home center relationship and shared commitment to

where the Performance Coatings Group continues to make

advancements in next-generation waterborne technology, low-

cure powder coatings, renewable bio-based raw materials, and

non-isocyanate and non-formaldehyde formulated coatings.

We’re also maximizing our large-batch/small-batch capabilities

to serve a broader range of customer needs.

All product categories managed by this Group generated

growth in the year, led by General Industrial and Packaging,

which were both up by double-digit percentages. General

Industrial’s Color Express™ program is reducing the time it

takes for powder finishers to match, receive and apply powder.

And in Packaging, our ValPure® V70 Series of non-BPA epoxy

coatings has emerged as a top choice among can coaters.

Industrial Wood customers are benefiting from our latest

flooring coatings, including Ultra-Cure® MarGuard™ Clear

Topcoat, which provides resistance to stains, scratches and

abrasion. In Automotive Finishes, our Ultra 9K™ Waterborne

System is a great example of synergy, combining basecoat

technologies from Valspar with primer and clearcoats from

Sherwin-Williams to deliver a truly differentiated offering.

For Coil & Extrusion customers, we continued to deliver

value with our Fluropon® 70% Polyvinylidene Fluoride (PVDF)

coatings for metal architecture.

In the Protective and Marine space, our patented Firetex®

FX6002 is an ultrafast-drying intumescent coating for structural

steel surfaces that provides fire resistance for up to 2 hours.

Leadership Announcements
Our continued focus on internal talent development resulted in

several leadership appointments during the year. Pete Ippolito
was promoted to President of The Americas Group, succeeding

Jay Davisson, who retired after 31 years of service to the

Company. Pete took on leadership of our largest operating

growth we have with our largest retail partner, as well as by

Historically, we have targeted dividends at about 30% of

our strong relationships with other leading retailers. And in the

prior-year GAAP earnings. At its February 2019 meeting, our

Performance Coatings Group, we are focused on maximizing the

Board of Directors approved a quarterly dividend increase of

combined capabilities of our integrated organization across the

31% to $1.13 per share, up from $0.86 last year. It is also part

various end markets and geographies we serve. We are also

of our longstanding philosophy not to hold excess cash on

confident in our team’s ability to execute on the key initiatives

the balance sheet. We expect to use this cash to make open-

that drive our success in the short and long term, and in our

market purchases of Company stock in 2019 at a level beyond

ability to continue delivering significant value to customers. We

what is necessary to offset dilution from option exercises. On

are well positioned and focused on what we can control.

December 31, 2018, we had remaining authorization to acquire

We expect 2019 sales to increase 4% to 7%
compared to 2018.

approximately 10.13 million shares. We will also continue to

evaluate acquisitions that fit our strategy.

Let me close this letter by thanking the more than

60,000 employees of Sherwin-Williams for their hard work

and dedication. There is no better team in the industry, and

I am continually inspired by your passion for our company

There are a number of economic, political and social

and our customers. I also offer my sincere thanks to you, our

variables that are beyond our control, including government

shareholders, for your continued trust and confidence in us.

shutdowns, federal interest rate hikes, tariffs, global trade

We expect to deliver strong performance in 2019 and in the

uncertainty, immigration and security, among others. While it

years to come.

is our job to focus on those things we can control, and adapt

to those things we cannot, these factors have the potential to

affect our business and expand the range of potential outcomes

in our results.

Against this backdrop, we expect 2019 net sales to

John G. Morikis

increase 4% to 7% compared to 2018. In terms of profitability,

Chairman, President and Chief Executive Officer

we should continue to benefit from operating expense control,

volume growth and acquisition synergies. One key assumption

embedded in this outlook is that raw material inflation for 2019

will be in the low single digits compared to 2018. We expect

the rate of year-over-year inflation will be highest in the first

quarter, and, assuming stable petrochemical feedstocks and

no supply disruptions, it should diminish as we go through the

second half of 2019.

Over the past two years, we allocated a significant share

of capital generated to debt reduction, retiring approximately

$1 billion in both 2017 and 2018. In 2019, we expect to begin

moving back toward our more traditional capital allocation

philosophy. Capital expenditures will remain modest, at

approximately 1.7% of sales. We still expect to reduce debt

by $600 million in 2019, which should reduce our net debt-

to-EBITDA ratio to below 3 times by the end of the year.

2018
At a Glance

The Americas
Group

55%

of total sales

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.

PRODUCTS SOLD: Paints, stains, aerosols, applicators, caulks,
varnishes, protective and marine coatings, spray equipment and related
products in the United States, Canada, the Caribbean and Latin America.
Wall covering and floor covering in the United States, Canada and the
Caribbean. OEM product finishes in Latin America

CUSTOMERS SERVED: 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

MAJOR BRANDS SOLD: 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®

OUTLETS: 4,354 Sherwin-Williams paint stores in the United States,
Canada and the Caribbean, and 342 in Brazil, Chile, Ecuador, Mexico and
Uruguay. Dedicated dealers, home centers, distributors and hardware
stores in Argentina, Brazil, Chile, Ecuador, Mexico and Uruguay.
Licensee in El Salvador serves Central America

Consumer Brands
Group

Performance Coatings
Group

16%

of total sales

29%

of total sales

Our Consumer Brands Group sells one of the industry’s

The Performance Coatings Group sells a broad range

most recognized portfolios of branded and private-label

of coatings and finishing solutions to general industrial,

products through retailers across North America and in

industrial wood, protective and marine, automotive, packaging

parts of Europe, China, Australia and New Zealand. The

and coil & extrusion customers in more than 120 countries.

Group also operates a highly efficient global supply chain

for paint, coatings and related products.

PRODUCTS SOLD: 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

CUSTOMERS SERVED: Do-it-yourselfers, professional painting
contractors, industrial maintenance and flooring contractors

MAJOR BRANDS SOLD: 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®, Minwax®, Pratt & Lambert®, Purdy®, Ronseal®,
Rubberset®, Solver®, Sprayon®, SuperDeck®, Thompson’s® WaterSeal®,
Tri-Flow®, Uniflex®, Valspar®, VHT®, Wattyl®, White Lightning®

OUTLETS: Over 10,000 points of distribution with 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

PRODUCTS SOLD: 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 segments

CUSTOMERS SERVED: Coatings for commercial construction, industrial
maintenance, protective and marine, OEM coatings for military, heavy
equipment, appliances, electronics, building products, furniture, cabinetry
and flooring, architects and specifiers, bridge & highway, water
& waste water treatment, collision repair facilities, dealerships, auto
interior, fleet owners, auto refinishers, production shops, metal packaging
and manufacturers

MAJOR BRANDS SOLD: Sherwin-Williams®, Acrolon®, AcromaPro®,
Arti™, ATX™, AWX Performance Plus™, Baco®, Conely®, DeBeer®,
DFL™, Dimension®, Duraspar®, EcoDex®, Envirolastic®, Euronavy®,
Excelo®, EzDex®, 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® Valspar®, Wattyl®

OUTLETS: 282 company-operated branches serving automotive, general
industrial, industrial wood and coil customers in the United States,
Australia, Belarus, Belgium, Brazil, Canada, Chile, China, Czech Republic,
Denmark, Finland, France, Germany, India, Indonesia, 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 operates specialty stores that serve

as the exclusive outlets for Sherwin-Willams® branded

paints, stains, supplies, equipment and floor covering

in the U.S., Canada and the Caribbean. The Group

also serves Latin America through company-operated

stores, dedicated dealers and selected retailers. In 2018,

the Group delivered record performance as net sales

increased 5.6% to $9.63 billion and segment profit

grew 7.3% to $1.90 billion.

and field reps are trained to understand their

T hroughout the Americas, our store employees

business service and support programs to offer highly

products, color expertise, application know-how,

customers’ needs. We then combine our innovative

customized solutions that meet and exceed customer needs.

This time-tested approach led to another strong year for

•

Extreme Block® Primer/Sealer reduces the need for
repaints by sealing off stubborn stains such as smoke, fire

and nicotine, making it ideal for quickly restoring a property

to fresh condition. Its fast-drying formula helps contractors

keep tight timelines and stay on schedule.

Duration Home® Interior Paint with Moisture-Resistant
Technology provides enhanced protection in damp
environments and defends against unsightly water spotting.

It is ideal for kitchens, bathrooms and laundry rooms.

ProCraft® is a comprehensive mid-tier product line
designed to meet the needs of painting professionals across

our business. We opened 76 net new stores in 2018, bringing

a variety of segments. We expanded our offering with new

our total to 4,696 throughout the Americas. We also have more

elastomeric, ceiling and texture paints.

than 700 Sherwin-Williams dedicated dealers in Latin America,

enabling us to further serve that region. We launched 25 new

products in the U.S., Canada and the Caribbean and 30 in Latin

America during the year. Among the highlights:

Loxon® Self-Cleaning Exterior Acrylic Coating easily
sheds dirt to keep properties looking fresh. Designed for

Innovation extends beyond our products, too. For example,

pro customers continued to adopt mysw.com, our e-business

platform, enabling them to better manage their businesses with

24/7 access to ordering, pricing, purchase history and more.

Our new ColorSnap™ Match tool lets users scan colors from

any item, including paint, textiles, carpet, tile and accessories,

exterior above-grade masonry, the self-cleaning formula

then instantly find the closest Sherwin-Williams paint color and

provides advanced durability, water shedding and wind-

palette. We’ve also embraced augmented reality, as the new

driven rain and dirt pickup resistance.

Instant Paint feature in our ColorSnap® app allows customers

SuperDeck® Solid Color Stain with Cool Feel® Color
Technology can reduce deck surface temperatures by up
to 20ºF compared to conventional technology, making

to use their smartphone cameras to “try on and see” any of

Sherwin-Williams 1,500 colors on their walls in real time. As we

begin 2019, we’ll continue to invest in products and services that

these spaces cooler and more enjoyable for homeowners

help make our customers more successful.

and their guests.

•

Achievements

We were recognized for Outstanding Customer
Satisfaction with Paint Retailers and Exterior Paint in
the 2018 J.D. Power Paint Satisfaction Study.*

We demonstrated “The Power of Paint” during our

7th Annual National Painting Week as more than 4,000
Sherwin-Williams employees donated 34,000 hours

of their time to transform more than 200 community

spaces in the U.S., Canada and the Caribbean, using

Sherwin-Williams paint and supplies.

Our new Paint Your Path™ initiative aims to help
our professional customers create a stronger, more

skilled painting workforce. Our long-term commitment

supports employers and potential painters through

career advocacy, education and recruitment resources.

The National Association of Building Materials in

Brazil (ANAMACO) awarded Colorgin® Spray Paint the

Master Award for the best overall evaluation and best
spraying ability. It also awarded Novacor™ Piso Floor
Paint with First Place for best overall coverage.

*Sherwin-Williams received the highest score with exterior paints and second
highest score among paint retailers in the J.D. Power 2018 Paint Satisfaction Study of
customers’ satisfaction with purchased and applied paint. Visit jdpower.com/awards

Consumer
Brands Group

The Consumer Brands Group offers one of the industry’s

most recognized portfolios of branded and private-label

products through retailers across North America, parts

of Europe, China, Australia and New Zealand. It also

operates a highly efficient and productive global supply

chain. In 2018, the Group delivered record performance

as net sales increased 27.1% to $2.74 billion and segment

profit grew 28.7% to $261.1 million.

channel partners with access to a portfolio of

T he Consumer Brands Group provides strategic

of this value proposition in 2018 than the announcement of

high-touch service. There was no better illustration

industry-leading brands supported by best-in-class,

our expanded partnership with Lowe’s. Lowe’s is now the

exclusive national home center in the United States to offer

Valspar® paints, stains and applicators, HGTV HOME™ by

Sherwin-Williams paints, Minwax®, Cabot® and Thompson’s®

Water Seal® stains, Krylon® aerosols and Purdy® applicators.

Both partners executed on significant enhancements to

staffing, training, merchandising, advertising, product

assortment and supply chain. We began to see the benefits of

this expanded partnership in 2018, and our expectations for

long-term profitable growth remain high.

We also partner with other premier retailers such as

Throughout the year, we continued to invest in new products to

make our customers more successful, including:

•

Valspar® exterior stain comes in a range of nature-inspired
colors to help consumers tap their creativity and enjoy their

best life outdoors. It provides all-weather protection in one coat

and is available in transparent, semi-transparent and solid color

formulations, as well as a clear finish.

Dutch Boy® Forever™ paint + primer is a new line of stain-
blocking interior and ceiling paints featuring Arm & Hammer™

Odor Eliminating technology. It is specially formulated to

cover and block stubborn stains such as coffee, tea, ketchup,

crayon and lipstick. Additionally, Forever™ paint has advanced

washability, is stain and mildew resistant and is GREENGUARD®

Gold certified.

•

Krylon® Fusion All-In-One™ is a premium product that bonds
to difficult surfaces such as plastics and ready-to-assemble

furniture without sanding or priming. The product provides

maximum rust protection for all outdoor projects and offers

a broad color palette with multiple finishes and sheens for

indoors and out.

Menards, Ace, Orgill, Do-It-Best and others. Outside of North

We also completed important organizational work in 2018 that

America, we have established niches in Europe, China and

leaves us well positioned for future success. Since the acquisition

Australia/New Zealand through our Valspar®, Huarun® and

of Valspar in June 2017, we have integrated two distinct teams into

Wattyl® brands, respectively. We continue to assess the most

one. A leaner, more effective organizational structure is in place with

promising opportunities for us to deliver value to customers in

a deepened focus on employee communication, engagement and

these regions.

alignment. Our value proposition is clear, and we are winning with

key strategic partners. We are achieving our value-capture targets,

and we will continue to execute on our initiatives in the areas of

simplification, merchandising excellence, SKU reduction, brand

rationalization, productivity enhancement and talent development.

Achievements

The Valspar Championship drives brand affinity,
engages key customers and suppliers, and supports

community and charitable partners. The 2018 event

in Palm Harbor, Florida, was the highest-rated

PGA Tour non-major Sunday telecast since 2013

and reached 27.4 million viewers with 150,000 fans

in attendance.

Our “Made with Love” campaign reinforced the
Minwax® brand's position as “America’s No.1 Selling

Interior Stain.” When shoppers buy applicators,

we encourage them to “Make it Perfect. Make Sure

it’s Purdy. The No. 1 Brand Preferred by Pros.”

And a robust media campaign for Valspar® paint,

inclusive of television, online video, programmatic

display, paid search and social marketing, resulted

in millions of impressions, views, clicks and

incremental store visits.

Performance
Coatings Group

The Performance Coatings Group sells a broad range

of coatings and finishing solutions through nearly

300 branches to general industrial, industrial wood,

automotive, protective and marine, packaging and coil

& extrusion customers throughout the world. In 2018,

the Group delivered record performance as net sales

increased 39.4% to $5.17 billion and segment profit

grew 72.0% to $452.1 million.

Performance Coatings Group shares a common

T he diverse set of businesses that makes up the

goal: delivering value to customers through

differentiated products and solutions that focus

on both application performance and enhancing productivity.

Topcoat, a high-performance, UV-cure clearcoat, which provides

advanced durability and resistance to chemicals, stains, scratches,

scuffs and abrasions. We also introduced our Virtual Panel Studio,

an online inspiration tool that provides furniture, kitchen cabinet and

other wood product designers with access to a complete library of

high-resolution images of finished wood panels. These panel images

can be saved, downloaded, used in renderings and shared with

customers or fellow collaborators to inspire future projects using

innovative Sherwin-Williams® coatings.

In the general industrial division, we’re reducing the time it

Through an array of technologies and capabilities, we help our

takes for powder finishers to match, receive and apply powder. The

customers grow their businesses faster and more profitably.

Color Express™ program uses an affordable handheld reader to

This begins with innovation, especially in the area of coatings

match color against powder products stocked at distribution centers

that reduce impacts to the environment, where we continue to

and available at Sherwin-Williams locations across North America.

make advancements in next-generation waterborne technology,

The combination of digital technology and locally stocked products

low-cure powder coatings, products made with bio-based

can reduce the matching process from weeks down to a few days.

raw materials and non-isocyanate and non-formaldehyde

Technology continues to drive rapid growth in our packaging

formulated coatings.

coatings offering. Our ValPure® V70 Series of non-BPA epoxy

In automotive finishes, we continue to be at the forefront

coatings has emerged as a top choice among can makers. It offers

of the shift to waterborne coatings. The Ultra 9K™ Waterborne

the performance benefits of epoxy coatings for food safety and

Basecoat System combines basecoat technologies from Valspar

preservation, answers the need for choices in the marketplace and

with Sherwin-Williams primer and clearcoats. Designed to

delivers on consumer preferences.

drive productivity and efficiency in the shop, the Ultra 9K™

In the protective and marine space, our patented Firetex®

system comes with an all-new color retrieval experience, a

FX6002 is an ultrafast-drying intumescent coating for structural

spectrophotometer and global color box – making even the

steel surfaces that provides fire resistance for up to 2 hours. The

most difficult color match easy. Our technology in this division

ultrafast cure removes drying bottlenecks in the paint shop, and

extends beyond the road and into the sky with new offerings

also means rapid weather resistance for site-applied material.

for aerospace customers. Jet Suede™, a new two-component

For coil & extrusion customers, we continued to deliver value

urethane topcoat, delivers an upscale, textured feel to

with our Fluropon® 70% Polyvinylidene Fluoride (PVDF) coatings for

aircraft interiors.

metal architecture. These coatings offer extremely strong bonding

For industrial wood customers, we launched a new line

properties. They are most appropriate for monumental and high-end

of flooring coatings, including Ultra-Cure® MarGuard™ Clear

residential and commercial architecture as they provide excellent

color and gloss retention.

Achievements

We earned the SSPC (Society for Protective Coatings)
Military Coatings Project Award of Excellence
for coatings used in overhauling the USS George

Washington (CVN-73), a thousand-foot U.S. Navy

aircraft carrier. Using new coatings and technologies,

innovative collaborations and solutions with less

impact on the environment, we helped preserve and

recoat critical areas, from topside to ballast tanks to

interior fuel tanks.

We earned the SSPC George Campbell Award for
coatings used on the suspension spans and towers of

the Walt Whitman Bridge, which spans the Delaware

River from Pennsylvania to New Jersey. The Award

recognizes a single outstanding achievement in the

completion of a difficult or complex industrial

coatings project.

Shareholder
Returns

Comparison of Cumulative Five-Year Total Return

Five-Year Return

$250

$200

$150

$100

2 013

2 014

2 015

2 016

2 017

2 018

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 Repurchase (millions of shares)

12.00

9.00

6.00

3.00

0.00

2 0 0 9

2 010

2 011

2 012

2 013

2 014

2 015

2 016*

2 017 *

2 018

* No open market purchases in 2016 and 2017

114.5

108.8

105.7

103.9

103.0

98.7

94.5

94.9

95.0

Average Common Shares Outstanding (fully diluted, in millions)

Dividends Per 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 18

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,

2013 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, 2018.

Returning Cash to Shareholders

We have consistently returned a portion

of our cash generated from operations to

shareholders through cash dividends and

share repurchases. In 2018, the Company

increased its cash dividend 1.2 percent
to $3.44 per share, marking the 40th
consecutive year we increased our dividend.

Share repurchases are also an efficient way

of returning cash to shareholders in that they

return sellers’ investment at market value

and maximize the value of the remaining

shares outstanding. We temporarily

suspended share repurchases in 2016 and

2017, using cash to reduce total borrowings

required to finance the Valspar transaction

in 2016 and reducing debt by $1 billion in

2017. We returned to share repurchases

in 2018, buying 1.53 million shares on the

open market while also reducing debt by

$1.1 billion. Over the past 10 years, we have

reduced our average diluted common shares
outstanding by more than 19 million shares.

Financial Performance

Financial Table of Contents

Financial Summary

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Reports of Management and the Independent Registered Public Accounting Firm

Consolidated Financial Statements and Notes

Cautionary Statement Regarding Forward-Looking Information

Shareholder Information

Corporate Officers and Operating Management

(cid:31) 17

Financial Summary
(millions of dollars except as noted and per share data)

Operations
Net sales ..................................................................
Cost of goods sold(2), (3) ..............................................
Selling, general and administrative expenses(2) ............
Amortization ............................................................
Interest expense .......................................................
Income from continuing operations before income

taxes(3), (4) .............................................................
Net income from continuing operations(3), (5) ................

Financial Position
Accounts receivable – net ..........................................
Inventories(3) ............................................................
Working capital – net(3) .............................................
Property, plant and equipment – net ...........................
Total assets(3) ...........................................................
Long-term debt ........................................................
Total debt .................................................................
Shareholders’ equity(3) ..............................................

Per Share Information
Average shares outstanding – diluted (thousands) .......
Book value(3) ............................................................
Net income from continuing operations –

diluted(3), (6) ...........................................................
Cash dividends ..........................................................

Financial Ratios
Return on sales(3) ......................................................
Asset turnover ..........................................................
Return on assets(3) ....................................................
Return on equity(3), (7) ................................................
Dividend payout ratio(8) ............................................
Total debt to capitalization(3) .....................................
Current ratio .............................................................
Interest coverage(3), (9) ...............................................
Net working capital to sales(3) ....................................
Effective income tax rate(10) .......................................

General
Earnings before interest, taxes, depreciation and

amortization(3) ......................................................
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 ............................................

2018

2017(1)

2016

2015

2014

17,534
10,116
5,034
318
367

1,360
1,109

2,019
1,815
47
1,777
19,134
8,708
9,344
3,731

14,984
8,265
4,798
207
263

1,469
1,769

2,105
1,742
420
1,877
19,900
9,886
10,521
3,648

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

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

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

94,988
40.07

94,927
38.86

94,488
20.20

94,543
9.41

98,075
10.52

11.67
3.44

6.3%
0.9x
5.8%
30.4%
18.5%
71.5%
1.0
4.7x
0.3%
18.5%

2,323
251
254
358
132
278
6,244
53,368
329
0.92

18.64
3.40

11.8%
0.8x
8.9%
94.2%
28.4%
74.3%
1.1
6.6x
2.8%
25.1%

2,225
223
216
374
116
285
6,470
52,695
284
0.75

11.99
3.36

9.6%
1.8x
16.8%
130.5%
30.1%
51.0%
1.3
11.4x
6.7%
29.0%

1,947
239
153
351
100
172
6,787
42,550
279
1.76

11.15
2.68

9.3%
2.0x
18.2%
105.8%
30.6%
69.2%
1.2
26.1x
4.5%
32.0%

1,809
234
150
338
99
170
6,987
40,706
279
1.96

8.77
2.20

7.8%
2.0x
15.2%
48.8%
30.3%
64.4%
1.0
20.6x
(1.0)%
31.2%

1,521
201
155
299
96
169
7,250
39,674
281
1.95

(1) 2017 includes Valspar financial results since June 1, 2017.
(2) 2017 has been adjusted for the adoption of ASU No. 2017-07. See Note 1.
(3) 2017 has been adjusted for an inventory accounting change made in 2018. See Note 1.
(4) 2018 includes acquisition-related costs of $484.4 million, environmental expense provisions of $167.6 million, California litigation expense of $136.3 million and pension

plan settlement expense of $37.6 million. 2017 includes acquisition-related costs of $488.6 million. 2016 includes acquisition-related costs of $133.6 million.

(5) 2018 includes after-tax acquisition-related costs of $394.4 million, after-tax environmental expense provisions of $126.1 million, after-tax California litigation expense of

$102.5 million and after-tax pension settlement expense of $28.3 million. 2017 includes a one-time income tax benefit of $668.8 million from Deferred income tax
reductions (see Note 15) and after-tax acquisition related costs of $329.4 million. 2016 includes after-tax acquisition-related costs of $81.5 million.

(6) 2018 includes charges of $4.15 per share for acquisition-related costs, $1.32 per share for environmental expense provisions, $1.09 per share for California litigation

expense and $0.30 per share for pension settlement expense. 2017 includes a one-time benefit of $7.04 per share from Deferred income tax reductions (see Note 15)
and a charge of $3.47 per share for acquisition-related costs. 2016 includes a charge of $0.86 per share for acquisition-related costs.

(7) Based on net income and shareholders’ equity at beginning of year.
(8) Based on cash dividends per common share and prior year’s diluted net income per common share.
(9) Ratio of income before income taxes and interest expense to interest expense.
(10) Based on income from continuing operations before income taxes. 2017 excludes impact of one-time income tax benefit primarily related to Tax Cuts and Jobs Act.

(cid:31) 18

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Summary

A voluntary inventory accounting change was made in the

The Sherwin-Williams Company, founded in 1866, and its

fourth quarter of 2018 driven by the Company’s integration

consolidated wholly owned subsidiaries (collectively, the

activities that impacted the application of last-in, first-out (LIFO)

Company) are engaged in the development, manufacture,

accounting method (Inventory Accounting Change) (See Note 1).

distribution and sale of paint, coatings and related products to

As a result of the Inventory Accounting Change in accordance with

professional, industrial, commercial and retail customers primarily

U.S. generally accepted accounting principles, a retrospective

in North and South America with additional operations in the

one-time adjustment was made to increase cost of goods sold

Caribbean region, Europe, Asia and Australia. On June 1, 2017, the

$58.9 million and related income tax credit $14.6 million which

Company completed the acquisition (Acquisition) of The Valspar

decreased net income $44.3 million and diluted net income per

Corporation (Valspar) (See Note 4) for a total purchase price of

share $.47 for the year ended December 31, 2017. Also, the

$8.939 billion, which significantly affected the existing business.

Inventory Accounting Change increased acquisition-related costs

As of the close of the Acquisition, our reporting segments changed

and decreased previously reported segment profit for

to better reflect the operations of the combined companies. The

Performance Coatings and Consumer Brands Groups by

Company is structured into three reportable segments – The

$35.7 million and $23.2 million, respectively, for the year ended

Americas Group, Consumer Brands Group and Performance

December 31, 2017. All impacted amounts have been adjusted in

Coatings Group (collectively, the Reportable Segments) – and an

this report for the Inventory Accounting Change for the year

Administrative Segment in the same way it is internally organized

ended December 31, 2017.

for assessing performance and making decisions regarding

Consolidated net sales increased 17.0 percent in 2018 to

allocation of resources. See pages 8 through 15 of this report and

$17.534 billion from $14.984 billion in 2017. The increase was due

Note 19, on pages 75 through 77 of this report, for more

primarily to incremental Valspar sales from the five months ended

information concerning the Reportable Segments.

May 2018 (Incremental Valspar), higher paint sales volume in The

The Company’s financial condition, liquidity and cash flow

Americas Group and selling price increases. Incremental Valspar sales

continued to be strong in 2018 as net operating cash was a record

increased net sales 12.4 percent for the year ended December 31,

$1.944 billion primarily due to improved operating results from all

2018. As a result of the new revenue standard (ASC 606) adopted in

three Reportable Segments. Net working capital decreased

the first quarter of 2018, certain advertising support that was

$373.0 million at December 31, 2018 compared to 2017 due to a

previously classified as selling, general and administrative expenses is

significant increase in other accruals included in current liabilities

now classified as a reduction of revenue with no effect on net income.

and a decrease in current assets. Cash and cash equivalents

The new revenue standard decreased consolidated net sales less than

decreased $48.7 million, while Other accruals and the California

one percent in 2018. Consolidated gross profit as a percent of

litigation accrual increased $168.4 million and $136.3 million,

consolidated net sales decreased to 42.3 percent in 2018 compared

respectively. On May 16, 2017, in order to fund the Acquisition, the

to 44.8 percent in 2017 due primarily to the Acquisition and higher

Company issued $6.000 billion of senior notes in a public offering.

raw material costs, partially offset by price increases. Selling, general

In April 2016, the Company entered into agreements for a

and administrative expenses (SG&A) increased $236.1 million in 2018

$7.300 billion Bridge Loan and a $2.000 billion Term Loan as

compared to 2017 and decreased as a percent of consolidated net

committed financing for the Acquisition. On June 1, 2017, the

sales to 28.7 percent in 2018 from 32.0 percent in 2017 primarily due

Company terminated the agreement for the Bridge Loan and

to the impact from Valspar operations. Amortization expense

borrowed the full $2.000 billion on the Term Loan. The remaining

increased $111.3 million to $318.1 million in 2018 versus 2017 due

balance of the Term Loan was paid off in 2018 and the agreement

primarily to the Acquisition and related purchase accounting

was terminated. The Company has been able to arrange sufficient

intangible amortization of twelve months in 2018 versus seven

short-term borrowing capacity at reasonable rates, and the

months in 2017. Other general expense-net increased $168.3 million in

Company continues to have sufficient total available borrowing

2018 versus 2017 primarily due to a significant increase in

capacity to fund its current operating needs. Net operating cash

environmental provisions.

increased $59.7 million in 2018 to a cash source of $1.944 billion

Interest expense increased $103.3 million in 2018 versus 2017

from a cash source of $1.884 billion in 2017.

primarily due to higher average annual debt levels related to the

Strong net operating cash provided the funds necessary to

Acquisition. The California litigation expense recorded in 2018 was

invest in new stores and manufacturing and distribution facilities,

$136.3 million. The effective income tax rate for 2018 was

return cash to shareholders through dividends and treasury stock

18.5 percent. Excluding the income tax benefit of $668.8 million

purchases, and pay down debt.

from the Tax Cuts and Jobs Act of 2017 (Tax Act) and subsidiary

(cid:31) 19

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

mergers (collectively, Deferred income tax reductions), the

unlikely to significantly impact the current valuation of assets and

effective income tax rate for income from continuing operations

liabilities that were not readily available from other sources.

was 25.1 percent for 2017. See Note 15 on pages 71 through 73 for

All of the significant accounting policies that were followed in

more information on Income taxes. The Company also recorded an

the preparation of the consolidated financial statements are

income tax provision of $41.5 million in the second quarter of 2017

disclosed in Note 1, on pages 45 through 49, of this report. The

related to the divestiture of Valspar’s North American industrial

following procedures and assumptions utilized by management

wood coatings business, which is reported as a discontinued

directly impacted many of the reported amounts in the

operation and reduced diluted net income per share by $.44 per

consolidated financial statements.

share. See Notes 1 and 15 for more information. Diluted net income

per share for 2018 decreased to $11.67 per share from $18.20 per

share for 2017. Diluted net income per share in 2018 included per

share charges for acquisition-related costs of $4.15 and other

non-operating expenses totaling $2.71. Other non-operating

expenses included environmental provisions of $1.32, California

litigation of $1.09 and pension plan settlement expense of $.30 per

share. Currency translation rate changes decreased diluted net

income per share in the year by $.21 per share. Diluted net income

per share in 2017 included a one-time benefit of $7.04 per share

from Deferred income tax reductions, a one-time charge of $.44

per share for discontinued operations and a charge of $3.47 per

share for acquisition-related costs.

Critical Accounting Policies and Estimates

The preparation and fair presentation of the consolidated

financial statements, accompanying notes and related financial

information included in this report are the responsibility of

management. The consolidated financial statements,

accompanying notes and related financial information included in

this report have been prepared in accordance with U.S. generally

accepted accounting principles. The consolidated financial

statements contain certain amounts that were based upon

management’s best estimates, judgments and assumptions that

were believed to be reasonable under the circumstances.

Management considered the impact of the uncertain economic

environment and utilized certain outside sources of economic

information when developing the basis for their estimates and

assumptions. The impact of the global economic conditions on the

estimates and assumptions used by management was believed to

be reasonable under the circumstances. Management used

assumptions based on historical results, considering the current

economic trends, and other assumptions to form the basis for

determining appropriate carrying values of assets and liabilities

that were not readily available from other sources. Actual results

could differ from those estimates. Also, materially different

amounts may result under materially different conditions,

materially different economic trends or from using materially

different assumptions. However, management believes that any

materially different amounts resulting from materially different

conditions or material changes in facts or circumstances are

Non-Traded Investments

The Company has investments in the U.S. affordable housing

and historic renovation real estate markets and certain other

investments that have been identified as variable interest entities.

The Company does not have the power to direct the day-to-day

operations of the investments and the risk of loss is limited to the

amount of contributed capital, and therefore, the Company is not

considered the primary beneficiary. In accordance with the

Consolidation Topic of the ASC, the investments are not

consolidated. For affordable housing investments entered into

prior to the January 1, 2015 adoption of ASU No. 2014-01, the

Company uses the effective yield method to determine the

carrying value of the investments. Under the effective yield

method, the initial cost of the investments is amortized to income

tax expense over the period that the tax credits are recognized.

For affordable housing investments entered into on or after the

January 1, 2015 adoption of ASU No. 2014-01, the Company uses

the proportional amortization method. Under the proportional

amortization method, the initial cost of the investments is

amortized to income tax expense in proportion to the tax credits

and other tax benefits received. The Company has no ongoing

capital commitments, loan requirements or guarantees with the

general partners that would require any future cash contributions

other than the contractually committed capital contributions that

are disclosed in the contractual obligations table on page 28 of

this report. See Note 1, on page 45 of this report, for more

information on non-traded investments.

Accounts Receivable

Accounts receivable were recorded at the time of credit sales

net of provisions for sales returns and allowances. All provisions

for allowances for doubtful collection of accounts are included in

Selling, general and administrative expenses and were based on

management’s best judgment and assessment, including an

analysis of historical bad debts, a review of the aging of Accounts

receivable and a review of the current creditworthiness of

customers. Management recorded allowances for such accounts

which were believed to be uncollectible, including amounts for the

resolution of potential credit and other collection issues such as

disputed invoices, customer satisfaction claims and pricing

discrepancies. However, depending on how such potential issues

(cid:31) 20

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

are resolved, or if the financial condition of any of the Company’s

useful lives of finite-lived intangible assets in accordance with the

customers were to deteriorate and their ability to make required

Goodwill and Other Intangibles Topic of the ASC.

payments became impaired, increases in these allowances may be

As required by the Goodwill and Other Intangibles Topic of the

required. At December 31, 2018, no individual customer

ASC, management performs impairment tests of goodwill and

constituted more than 5 percent of Accounts receivable.

indefinite-lived intangible assets on an annual basis, as well as

Inventories

Inventories were stated at the lower of cost or market with

cost determined principally on the LIFO method based on

inventory quantities and costs determined during the fourth

quarter. Inventory quantities were adjusted during the fourth

quarter as a result of annual physical inventory counts taken at all

locations. If inventories accounted for on the LIFO method are

reduced on a year-over-year basis, then liquidation of certain

quantities carried at costs prevailing in prior years occurs.

Management recorded the best estimate of net realizable value for

obsolete and discontinued inventories based on historical

experience and current trends through reductions to inventory

cost by recording a provision included in Cost of goods sold.

Where management estimated that the reasonable market value

was below cost or determined that future demand was lower than

current inventory levels, based on historical experience, current

and projected market demand, current and projected volume

trends and other relevant current and projected factors associated

with the current economic conditions, a reduction in inventory

cost to estimated net realizable value was made. See Note 3, on

page 51 of this report, for more information regarding the impact

of the LIFO inventory valuation.

Purchase Accounting, Goodwill and Intangible Assets

In accordance with the Business Combinations Topic of the

ASC, the Company used the purchase method of accounting to

allocate costs of acquired businesses to the assets acquired and

liabilities assumed based on their estimated fair values at the date

of acquisition. The excess costs of acquired businesses over the fair

values of the assets acquired and liabilities assumed were

recognized as Goodwill. The valuations of the acquired assets and

liabilities will impact the determination of future operating results.

In addition to using management estimates and negotiated

amounts, the Company used a variety of information sources to

determine the estimated fair values of acquired assets and liabilities

including: third-party appraisals for the estimated value and lives of

identifiable intangible assets and property, plant and equipment;

third-party actuaries for the estimated obligations of defined

benefit pension plans and similar benefit obligations; and legal

counsel or other experts to assess the obligations associated with

legal, environmental and other contingent liabilities. The business

and technical judgment of management was used in determining

which intangible assets have indefinite lives and in determining the

whenever an event occurs or circumstances change that indicate

impairment has more likely than not occurred. An optional

qualitative assessment allows companies to skip the annual

quantitative test if it is not more likely than not that impairment

has occurred based on monitoring key Company financial

performance metrics and macroeconomic conditions. The

qualitative assessment is performed when deemed appropriate.

In accordance with the Goodwill and Other Intangibles Topic of

the ASC, management tests goodwill for impairment at the

reporting unit level. A reporting unit is an operating segment per

the Segment Reporting Topic of the ASC or one level below the

operating segment (component level) as determined by the

availability of discrete financial information that is regularly

reviewed by operating segment management or an aggregate of

component levels of an operating segment having similar

economic characteristics. At the time of goodwill impairment

testing (if performing a quantitative assessment), management

determines fair value through the use of a discounted cash flow

valuation model incorporating discount rates commensurate with

the risks involved for each reporting unit. If the calculated fair

value is less than the current carrying value, then impairment of

the reporting unit exists. The use of a discounted cash flow

valuation model to determine estimated fair value is common

practice in impairment testing. The key assumptions used in the

discounted cash flow valuation model for impairment testing

include discount rates, growth rates, cash flow projections and

terminal value rates. Discount rates are set by using the Weighted

Average Cost of Capital (“WACC”) methodology. The WACC

methodology considers market and industry data as well as

Company-specific risk factors for each reporting unit in

determining the appropriate discount rates to be used. The

discount rate utilized for each reporting unit is indicative of the

return an investor would expect to receive for investing in such a

business. Operational management, considering industry and

Company-specific historical and projected data, develops growth

rates, sales projections and cash flow projections for each

reporting unit. Terminal value rate determination follows common

methodology of capturing the present value of perpetual cash

flow estimates beyond the last projected period assuming a

constant WACC and low long-term growth rates. As an indicator

that each reporting unit has been valued appropriately through

the use of the discounted cash flow valuation model, the

aggregate of all reporting units’ fair value is reconciled to the total

market capitalization of the Company.

(cid:31) 21

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

The Company had six components, some of which are

aggregated due to similar economic characteristics, to form three

reporting units (also the operating segments) with goodwill as of

October 1, 2018, the date of the annual impairment test. The annual

impairment review performed as of October 1, 2018 did not result

in any of the reporting units having impairment or deemed at risk

for impairment.

In accordance with the Goodwill and Other Intangibles Topic of

the ASC, management tests indefinite-lived intangible assets for

impairment at the asset level, as determined by appropriate asset

valuations at acquisition. Management utilizes the royalty savings

method and valuation model to determine the estimated fair value

for each indefinite-lived intangible asset or trademark. In this

method, management estimates the royalty savings arising from

the ownership of the intangible asset. The key assumptions used in

estimating the royalty savings for impairment testing include

discount rates, royalty rates, growth rates, sales projections and

terminal value rates. Discount rates used are similar to the rates

developed by the WACC methodology considering any

differences in Company-specific risk factors between reporting

units and trademarks. Royalty rates are established by

management and valuation experts and periodically substantiated

by valuation experts. Operational management, considering

industry and Company-specific historical and projected data,

develops growth rates and sales projections for each significant

trademark. Terminal value rate determination follows common

methodology of capturing the present value of perpetual sales

estimates beyond the last projected period assuming a constant

WACC and low long-term growth rates. The royalty savings

valuation methodology and calculations used in 2018 impairment

testing are consistent with prior years. The annual impairment

review performed as of October 1, 2018 did not result in an

impairment.

The discounted cash flow and royalty savings valuation

methodologies require management to make certain assumptions

based upon information available at the time the valuations are

performed. Actual results could differ from these assumptions.

Management believes the assumptions used are reflective of what

a market participant would have used in calculating fair value

considering the current economic conditions. See Note 5, on pages

52 through 53 of this report, for a discussion of goodwill and

intangible assets and the impairment tests performed in

accordance with the Goodwill and Other Intangibles Topic of the

ASC.

Property, Plant and Equipment and Impairment of Long-Lived
Assets

Property, plant and equipment was stated on the basis of cost

and depreciated principally on a straight-line basis using industry

standards and historical experience to estimate useful lives. In

accordance with the Property, Plant and Equipment Topic of the

ASC, if events or changes in circumstances indicated that the

carrying value of long-lived assets may not be recoverable or the

useful life had changed, impairment tests were performed or the

useful life was adjusted. Undiscounted future cash flows were used

to calculate the recoverable value of long-lived assets to

determine if such assets were impaired. Where impairment was

identified, management determined fair values under the Fair

Value Topic of the ASC. Growth models were developed using

both industry and Company historical results and forecasts. If the

usefulness of an asset was determined to be impaired, then

management estimated a new useful life based on the period of

time for projected uses of the asset. Fair value approaches and

changes in useful life required management to make certain

assumptions based upon information available at the time the

valuation or determination was performed. Actual results could

differ from these assumptions. Management believes the

assumptions used are reflective of what a market participant

would have used in calculating fair value or useful life considering

the current economic conditions. All tested long-lived assets or

groups of long-lived assets had undiscounted cash flows that were

substantially in excess of their carrying value. See Notes 5 and 6,

on pages 52 through 55 of this report, for a discussion of the

reductions in carrying value or useful life of long-lived assets in

accordance with the Property, Plant and Equipment Topic of the

ASC.

Exit or Disposal Activities

Management is continually re-evaluating the Company’s

operating facilities against its long-term strategic goals. Liabilities

associated with exit or disposal activities are recognized as

incurred in accordance with the Exit or Disposal Cost Obligations

Topic of the ASC and property, plant and equipment is tested for

impairment in accordance with the Property, Plant and Equipment

Topic of the ASC. Provisions for qualified exit costs are made at

the time a facility is no longer operational, include amounts

estimated by management and primarily include post-closure rent

expenses or costs to terminate the contract before the end of its

term and costs of employee terminations. Adjustments may be

made to liabilities accrued for qualified exit costs if information

(cid:31) 22

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

becomes available upon which more accurate amounts can be

as actuarial assumptions and service costs change, and all such

reasonably estimated. If impairment of property, plant and

amounts will be amortized to expense over a period of years

equipment exists, then the carrying value is reduced to fair value

through the net pension and net periodic benefit costs.

estimated by management. Additional impairment may be

Pension costs for 2019 are expected to decrease significantly

recorded for subsequent revisions in estimated fair value. See

due to pension settlement lump sum activity in 2018 and annuity

Note 6, on pages 53 through 55 of this report, for information

contract purchases planned for 2019. The annuity contract

concerning impairment of property, plant and equipment and

purchases in 2019 are expected to result in a settlement charge of

accrued qualified exit costs.

approximately $30 million to $40 million in the first quarter of

Other Liabilities

The Company retains risk for certain liabilities, primarily

worker’s compensation claims, employee medical benefits, and

automobile, property, general and product liability claims.

Estimated amounts were accrued for certain worker’s

compensation, employee medical and disability benefits,

automobile and property claims filed but unsettled and estimated

claims incurred but not reported based upon management’s

2019. The Company will use any remaining overfunded cash

surplus balances to fund future company contributions to a

replacement defined contribution plan. Postretirement benefit

plan costs for 2019 are expected to be approximately the same as

2018 due to similar actuarial assumptions being applied. See Note

7, on pages 55 through 60 of this report, for information

concerning the Company’s defined benefit pension plans and

postretirement benefit plans other than pensions.

estimated aggregate liability for claims incurred using historical

Debt

experience, actuarial assumptions followed in the insurance

The fair values of the Company’s publicly traded long-term

industry and actuarially-developed models for estimating certain

debt were based on quoted market prices. The fair values of the

liabilities. Certain estimated general and product liability claims

Company’s non-traded long-term debt were estimated using

filed but unsettled were accrued based on management’s best

discounted cash flow analyses, based on the Company’s current

estimate of ultimate settlement or actuarial calculations of

incremental borrowing rates for similar types of borrowing

potential liability using industry experience and actuarial

arrangements. See Note 1, on page 45 of this report, for the

assumptions developed for similar types of claims.

carrying amounts and fair values of the Company’s long-term

Defined Benefit Pension and Other Postretirement Benefit Plans

To determine the Company’s ultimate obligation under its

debt, and Note 8, on pages 61 through 62 of this report, for a

description of the Company’s long-term debt arrangements.

defined benefit pension plans and postretirement benefit plans

Environmental Matters

other than pensions, management must estimate the future cost

The Company is involved with environmental investigation and

of benefits and attribute that cost to the time period during which

remediation activities at some of its currently and formerly owned

each covered employee works. To determine the obligations of

sites and at a number of third-party sites. The Company accrues

such benefit plans, management uses actuaries to calculate such

for environmental-related activities for which commitments or

amounts using key assumptions such as discount rates, inflation,

clean-up plans have been developed and for which costs can be

long-term investment returns, mortality, employee turnover, rate

reasonably estimated based on industry standards and

of compensation increases and medical and prescription drug

professional judgment. All accrued amounts were recorded on an

costs. Management reviews all of these assumptions on an

undiscounted basis. Environmental-related expenses included

ongoing basis to ensure that the most current information

direct costs of investigation and remediation and indirect costs

available is being considered. An increase or decrease in the

such as compensation and benefits for employees directly

assumptions or economic events outside management’s control

involved in the investigation and remediation activities and fees

could have a direct impact on the Company’s results of operations

paid to outside engineering, actuarial, consulting and law firms.

or financial condition.

Due to uncertainties surrounding environmental investigations and

In accordance with the Retirement Benefits Topic of the ASC,

remediation activities, the Company’s ultimate liability may result

the Company recognizes each plan’s funded status as an asset for

in costs that are significantly higher than currently accrued. See

overfunded plans and as a liability for unfunded or underfunded

page 28 and Note 9, on pages 62 through 63 of this report, for

plans. Actuarial gains and losses and prior service costs are

information concerning the accrual for extended environmental-

recognized and recorded in Cumulative other comprehensive loss,

related activities and a discussion concerning unaccrued future

a component of Shareholders’ equity. The amounts recorded in

loss contingencies.

Cumulative other comprehensive loss will continue to be modified

(cid:31) 23

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Litigation and Other Contingent Liabilities

In the course of its business, the Company is subject to a

variety of claims and lawsuits, including, but not limited to,

litigation relating to product liability and warranty, personal injury,

environmental, intellectual property, commercial, contractual and

antitrust claims. Management believes that the Company has

properly accrued for all known liabilities that existed and those

where a loss was deemed probable for which a fair value was

available or an amount could be reasonably estimated in

accordance with all present U.S. generally accepted accounting

During the second quarter of 2018, the Company made

purchase accounting adjustments related to the Acquisition which

resulted in the reversal of income tax benefits related to the

remeasurement of U.S. deferred tax liabilities. No other material

adjustments were made under SAB No. 118 for the 2018 tax year.

The Company has completed its analysis of the Tax Act in the

fourth quarter and the accounting under the Tax Act has been

finalized. See Note 15, on pages 71 through 73 of this report, for

more information.

principles. However, because litigation is inherently subject to

Stock-Based Compensation

many uncertainties and the ultimate result of any present or future

The cost of the Company’s stock-based compensation is

litigation is unpredictable, the Company’s ultimate liability may

recorded in accordance with the Stock Compensation Topic of the

result in costs that are significantly higher than currently accrued.

ASC. The Company estimates the fair value of option rights using a

In the event that the Company’s loss contingency is ultimately

Black-Scholes-Merton option pricing model which requires

determined to be significantly higher than currently accrued, the

management to make estimates for certain assumptions.

recording of the liability may result in a material impact on net

Management and a consultant continuously review the following

income for the annual or interim period during which such liability

significant assumptions: risk-free interest rate, expected life of

is accrued. Additionally, due to the uncertainties involved, any

options, expected volatility of stock and expected dividend yield

potential liability determined to be attributable to the Company

of stock. An increase or decrease in the assumptions or economic

arising out of such litigation may have a material adverse effect on

events outside management’s control could have a direct impact

the Company’s results of operations, liquidity or financial

on the Company’s results of operations. See Note 13, on pages 68

condition. See Note 10 on pages 63 through 67 of this report for

and 70 of this report, for more information on stock-based

information concerning litigation.

Income Taxes

compensation.

Revenue Recognition

The Company estimated income taxes in each jurisdiction that

The Company’s revenue was primarily generated from the sale

it operated. This involved estimating taxable earnings, specific

of products. All sales of products were recognized when shipped

taxable and deductible items, the likelihood of generating

and title passed to unaffiliated customers. Collectibility of amounts

sufficient future taxable income to utilize deferred tax assets and

recorded as revenue is probable at time of sale. Discounts were

possible exposures related to future tax audits. To the extent

recorded as a reduction to sales in the same period as the sale

these estimates change, adjustments to deferred and accrued

resulting in an appropriate net sales amount for the period.

income taxes will be made in the period in which the changes

Standard sales terms are final and returns or exchanges are not

occur.

permitted unless expressly stated. Estimated provisions for

On December 22, 2017, the Tax Act was enacted. The Tax Act

returns or exchanges, recorded as a reduction resulting in net

significantly revised the U.S. corporate income tax system by,

sales, were established in cases where the right of return existed.

among other things, lowering corporate income tax rates from

The Company offered a variety of programs, primarily to its retail

35% to 21%, implementing a territorial tax system and imposing a

customers, designed to promote sales of its products. Such

repatriation tax on deemed repatriated earnings of foreign

programs required periodic payments and allowances based on

subsidiaries. Staff Accounting Bulletin (SAB) No. 118 provides a

estimated results of specific programs and were recorded as a

measurement period that should not extend beyond one year

reduction resulting in net sales. The Company accrued the

from the enactment date for companies to complete the

estimated total payments and allowances associated with each

accounting under the Tax Act. In accordance with SAB No. 118,

transaction at the time of sale. Additionally, the Company offered

based on the information available as of December 31, 2018, the

programs directly to consumers to promote the sale of its

Company recorded provisional decreases in deferred tax liabilities

products. Promotions that reduced the ultimate consumer sale

which increased earnings for the year ended December 31, 2017.

prices were recorded as a reduction resulting in net sales at the

The majority of this benefit was driven by the effects of the

time the promotional offer was made, generally using estimated

implementation of the territorial tax system and the

redemption and participation levels. The Company continually

remeasurement of U.S. deferred tax liabilities on unremitted

assesses the adequacy of accruals for customer and consumer

foreign earnings.

promotional program costs earned but not yet paid. To the extent

(cid:31) 24

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

total program payments differ from estimates, adjustments may

Net Working Capital

be necessary. Historically, these total program payments and

adjustments have not been material. See Note 2 on page 49 for

information on the new revenue standard.

Financial Condition, Liquidity and Cash Flow

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 4 for a table detailing

the final opening balance sheet. Net working capital decreased

$373.0 million at December 31, 2018 compared to 2017 due to a

significant increase in other accruals included in current liabilities

and a decrease in current assets. Total debt at December 31, 2018

decreased $1.177 billion to $9.344 billion from $10.521 billion at

December 31, 2017 and decreased as a percentage of total

capitalization to 71.5 percent from 74.3 percent the prior year. At

December 31, 2018, the Company had remaining short-term

borrowing ability of $3.209 billion.

Net operating cash increased $59.7 million in 2018 to a cash

source of $1.944 billion from a cash source of $1.884 billion in 2017

due primarily to increased cash generated by changes in working

capital and favorable changes in non-cash items when compared

to 2017, partially offset by a reduction in net income of

$619.2 million. Net operating cash decreased as a percent to sales

to 11.1 percent in 2018 compared to 12.6 percent in 2017. During

2018, strong net operating cash continued to provide the funds

necessary to pay down total net debt, invest in new stores and

manufacturing and distribution facilities, and return cash to

shareholders through treasury stock purchases and dividends

paid. In 2018, the Company used a portion of Net operating cash

and Cash and cash equivalents to pay down total net debt

$1.154 billion, purchase $613.3 million in treasury stock, spend

$251.0 million in capital additions and improvements and pay

$322.9 million in cash dividends to its shareholders of stock.

Total current assets less Total current liabilities (net working

capital) decreased $373.0 million to a surplus of $46.7 million at

December 31, 2018 from a surplus of $419.8 million at December 31,

2017. The net working capital decrease is due to a significant

increase in other accruals included in current liabilities and a

decrease in current assets. Accounts payable increased

$7.9 million and other accruals increased $168.4 million both due

to timing of payments. The California litigation accrual of

$136.3 million was recorded in 2018. Cash and cash equivalents

decreased $48.7 million and Short-term borrowings decreased

$305.3 million resulting from the 1.35% senior notes becoming due

in 2019 while the current portion of long-term debt increased

$306.0 million. Accounts receivable decreased

$85.8 million and inventories increased $72.8 million primarily

due to increased cost. As a result of the net effect of these

changes, the Company’s current ratio decreased to 1.01 at

December 31, 2018 from 1.11 at December 31, 2017. Accounts

receivable as a percent of Net sales decreased to 11.5 percent in

2018 from 14.0 percent in 2017. Accounts receivable days

outstanding remained unchanged at 61 days in 2018 and 2017. In

2018, provisions for allowance for doubtful collection of

accounts decreased $7.1 million, or 13.4 percent. Inventories as a

percent of Net sales decreased to 10.4 percent in 2018 from

11.6 percent in 2017 primarily due to tighter inventory

management. Inventory days outstanding increased to 81 days in

2018 versus 78 days in 2017. The Company has sufficient total

available borrowing capacity to fund its current operating needs.

Goodwill and Intangible Assets

Goodwill, which represents the excess of cost over the fair

value of net assets acquired in purchase business combinations,

increased $142.4 million in 2018 due to final purchase accounting

measurement period adjustments for the Acquisition of

$213.6 million partially offset by foreign currency translation rate

fluctuations of $71.2 million. Intangible assets decreased

$800.8 million in 2018 primarily due to final purchase accounting

measurement period adjustments for the Acquisition of

$310.5 million, amortization of finite-lived intangible assets of

$318.1 million and foreign currency translation rate fluctuations of

$173.4 million. Acquired finite-lived intangible assets included

customer relationships and intellectual property. Costs related to

designing, developing, obtaining and implementing internal use

software are capitalized and amortized in accordance with the

Goodwill and Other Intangibles Topic of the ASC. See Note 5, on

pages 52 through 53 of this report, for a description of goodwill,

identifiable intangible assets and asset impairments recorded in

accordance with the Goodwill and Other Intangibles Topic of the

ASC and summaries of the remaining carrying values of goodwill

and intangible assets.

(cid:31) 25

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Deferred Pension and Other Assets

Debt

Deferred pension assets of $270.7 million at December 31, 2018

On June 2, 2017, the Company closed its previously announced

represent the excess of the fair value of assets over the actuarially

exchange offers and consent solicitations (Exchange Offer) for the

determined projected benefit obligations, primarily of the

outstanding senior notes of Valspar. Pursuant to the Exchange

domestic salaried defined benefit pension plan. The decrease in

Offer, the Company issued an aggregate principal amount of

Deferred pension assets during 2018 of $26.1 million from

approximately $1.478 billion (Exchange Notes). On May 16, 2017,

$296.7 million last year was primarily due to actual returns on plan

the Company issued $6.0 billion of New Notes in a public offering.

assets being lower than expected returns. In accordance with the

The net proceeds from the issuance of the New Notes were used

accounting prescribed by the Retirement Benefits Topic of the

to fund the Acquisition. The interest rate locks entered into during

ASC, the decrease in the value of the Deferred pension assets is

2016 settled in March 2017 resulting in a pretax gain of

offset in Cumulative other comprehensive loss and is amortized as

$87.6 million recognized in Cumulative other comprehensive other

a component of Net pension costs over a defined period of

loss. This gain is being amortized from Cumulative other

pension service. See Note 7, on pages 55 through 60 of this report,

comprehensive loss to a reduction of interest expense over the

for more information concerning the excess fair value of assets

terms of the New Notes. For 2018, the amortization of the

over projected benefit obligations of the salaried defined benefit

unrealized gain reduced interest expense by $8.3 million.

pension plan and the amortization of actuarial gains or losses

In April 2016, the Company entered into a $7.3 billion Bridge

relating to changes in the excess assets and other actuarial

Loan and a $2.0 billion Term Loan as committed financing for the

assumptions.

Acquisition, as disclosed in Note 4. On June 1, 2017, the Company

Other assets increased $82.0 million to $584.0 million at

terminated the agreement for the Bridge Loan and borrowed the

December 31, 2018 due primarily to increases in customer contract

full $2.0 billion on the Term Loan. As of December 31, 2018, the

assets.

Property, Plant and Equipment

Net property, plant and equipment decreased $100.3 million to

$1.777 billion at December 31, 2018 due primarily to depreciation

expense of $278.2 million and sale or disposition of assets with

remaining net book value of $99.0 million partially offset by

capital expenditures of $251.0 million, and currency translation

and other adjustments of $25.9 million. Capital expenditures

during 2018 in The Americas Group were primarily attributable to

the opening of new paint stores and renovation and improvements

in existing stores. In the Consumer Brands Group, capital

expenditures during 2018 were primarily attributable to

improvements and normal equipment replacements in

manufacturing and distribution facilities. Capital expenditures in

the Performance Coatings Group were primarily attributable to

improvements in existing manufacturing and distribution facilities.

The Administrative Segment incurred capital expenditures

primarily for information systems hardware. In 2019, the Company

expects to spend more than 2018 for capital expenditures. The

predominant share of the capital expenditures in 2019 is expected

to be for various productivity improvement and maintenance

projects at existing manufacturing, distribution and research and

development facilities, new store openings and new or upgraded

information systems hardware. The Company does not anticipate

the need for any specific long-term external financing to support

these capital expenditures.

Term Loan had no outstanding principal balance and the

agreement was terminated.

In August 2017, the Company entered into a floating rate loan
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

Interbank Offered Rate plus a margin. The fixed rate loan bears

interest at 0.92%. The proceeds will be used for general corporate

purposes, including repaying a portion of outstanding short-term

borrowings. The loans mature on August 23, 2021.

On July 19, 2018, the Company and three of its wholly-owned

subsidiaries, Sherwin-Williams Canada, Inc., Sherwin-Williams

Luxembourg S.à r.l and Sherwin-Williams UK Holding Limited (all

together with the Company, the Borrowers), entered into a new

five-year $2.000 billion credit agreement (New Credit

Agreement). The New Credit Agreement may be used for general

corporate purposes, including the financing of working capital

requirements. The New Credit Agreement replaced a credit

agreement dated July 16, 2015, as amended, which was

terminated. The New Credit Agreement allows the Company to

extend the maturity of the facility with two one-year extension

options and the Borrowers to increase the aggregate amount of

the facility to $2.750 billion, both of which are subject to the

discretion of each lender. In addition, the Borrowers may request

letters of credit in an amount of up to $250.0 million. At

December 31, 2018, there were no short-term borrowings under

the New Credit Agreement. Borrowings outstanding under various

other foreign programs were $37.0 million at December 31, 2018

with a weighted average interest rate of 9.3%.

(cid:31) 26

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

In September 2017, the Company entered into a five-year letter

defined benefit pension plans increased to 3.0 percent at

of credit agreement, subsequently amended on multiple dates,

December 31, 2018 from 2.73 percent at December 31, 2017

with an aggregate availability of $625.0 million at December 31,

primarily due to higher interest rates. The assumed discount rate

2018. On May 6, 2016, the Company entered into a five-year credit

used to determine the projected benefit obligation for other

agreement, subsequently amended on multiple dates. This credit

postretirement benefit obligations increased to 4.2 percent at

agreement gives the Company the right to borrow and to obtain

December 31, 2018 from 3.6 percent at December 31, 2017 for the

the issuance, renewal, extension and increase of a letter of credit

same reason. The rate of compensation increases used to

up to an aggregate availability of $875.0 million at December 31,

determine the projected benefit obligations at December 31, 2018

2018. Both of these credit agreements are being used for general

was 3.2 percent for domestic pension plans and 3.7 percent for

corporate purposes. At December 31, 2018, there were no

foreign pension plans, which was comparable to the rates used in

borrowings outstanding under these credit agreements. There

the prior year. In deciding on the rate of compensation increases,

were $350.0 million borrowings outstanding at December 31, 2017

management considered historical Company increases as well as

and no borrowings outstanding at December 31, 2016. There were

expectations for future increases. The expected long-term rate of

$291.4 million borrowings outstanding under the Company’s

return on assets remained 5.0 percent at December 31, 2018 for

domestic commercial paper program at December 31, 2018. There

domestic pension plans and was slightly lower for most foreign

were $274.8 million borrowings outstanding at December 31, 2017

plans. In establishing the expected long-term rate of return on

and no borrowings outstanding at December 31, 2016. See Note 8,

plan assets for 2018, management considered the historical rates

on pages 61 through 62 of this report, for a detailed description of

of return, the nature of investments and an expectation for future

the Company’s debt outstanding and other available financing

investment strategies. The assumed health care cost trend rates

programs.

Defined Benefit Pension and Other Postretirement Benefit Plans

The Company’s domestic defined benefit pension plan for

salaried employees was terminated during 2018 and the

participants were moved to a replacement defined contribution

plan. The Company is in the process of settling the liabilities of the

terminated plan through a combination of (i) lump sum payments

to eligible participants who elected to receive them and (ii) the

purchase of annuity contracts for participants who either did not

elect lump sums or were already receiving benefit payments. The

lump sum payments were paid in December 2018 and resulted in a

settlement charge of $37.6 million in 2018. The annuity contract

purchases in 2019 are expected to result in a settlement charge of

approximately $30 million to $40 million in the first quarter of

2019. The Company will use any remaining overfunded cash

surplus balances to fund future company contributions to a

replacement defined contribution plan. The Company’s domestic

defined benefit pension plan for hourly employees continues to

operate.

In accordance with the accounting prescribed by the

used to determine the net periodic benefit cost of postretirement

benefits other than pensions for 2018 were 5.0 percent and

11.0 percent, respectively, for medical and prescription drug cost

increases, both decreasing gradually to 4.5 percent in 2026. In

developing the assumed health care cost trend rates, management

considered industry data, historical Company experience and

expectations for future health care costs.

For 2019 Net pension cost for the ongoing domestic pension

plan, the Company will use a discount rate of 4.4 percent, an

expected long-term rate of return on assets of 5.0 percent and a

rate of compensation increase of 3.2 percent. Lower discount rates

and expected long-term rates of return on plan assets will be used

for most foreign plans. For 2019 Net periodic benefit costs for

postretirement benefits other than pensions, the Company will use

a discount rate of 4.21 percent. Net pension cost in 2019 for the

ongoing domestic pension plan is expected to be approximately

$4.6 million. Net periodic benefit costs for postretirement benefits

other than pensions in 2019 is expected to be comparable to 2018

expense. See Note 7, on pages 55 through 60 of this report, for

more information on the Company’s obligations and funded status

of its defined benefit pension plans and postretirement benefits

Retirement Benefits Topic of the ASC, the Company’s total liability

for unfunded or underfunded defined benefit pension plans

other than pensions.

decreased $13.2 million to $80.7 million primarily due to changes

Deferred Income Taxes

in the actuarial assumptions. Postretirement benefits other than

Deferred income taxes at December 31, 2018 decreased

pensions decreased $16.2 million to $274.6 million at December 31,

$288.7 million from a year ago primarily due to the final purchase

2018 due primarily to changes in the actuarial assumptions.

accounting measurement period adjustments for the Acquisition

The assumed discount rate used to determine the projected

and the impact of amortization of intangible assets and reversal of

benefit obligation for domestic defined benefit pension plans was

the associated deferred tax liabilities. See Note 4 on page 51 and

3.6 percent at December 31, 2018 and 2017. The assumed discount

Note 15 on pages 71 through 73 of this report for more information.

rate used to determine the projected benefit obligation for foreign

(cid:31) 27

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Other Long-Term Liabilities

Other long-term liabilities increased $324.8 million during 2018

due primarily to net increases of $142.9 million in environmental-

Company conducts its operations in compliance with applicable

environmental laws and regulations and has implemented various

programs designed to protect the environment and promote

related long-term liabilities and a liability of $225.3 million incurred

continued compliance.

in 2018 resulting from real estate financing lease transactions,

partially offset by decreases in other long-term liabilities. See Note

9, on pages 62 through 63 of this report, for further information on

Operating Leases.

Environmental-Related Liabilities

The operations of the Company, like those of other companies

in the same industry, are subject to various federal, state and local

environmental laws and regulations. These laws and regulations

not only govern current operations and products, but also impose

potential liability on the Company for past operations.

Management expects environmental laws and regulations to

impose increasingly stringent requirements upon the Company

and the industry in the future. Management believes that the

Contractual Obligations and Commercial Commitments

Depreciation of capital expenditures and other expenses

related to ongoing environmental compliance measures were

included in the normal operating expenses of conducting business.

The Company’s capital expenditures, depreciation and other

expenses related to ongoing environmental compliance measures

were not material to the Company’s financial condition, liquidity,

cash flow or results of operations during 2018. Management does

not expect that such capital expenditures, depreciation and other

expenses will be material to the Company’s financial condition,

liquidity, cash flow or results of operations in 2019. See Note 9, on

pages 62 through 63 of this report, for further information on

environmental-related long-term liabilities.

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, 2018.

(thousands of dollars)

Contractual Obligations

Long-term debt .................................................
Interest on Long-term debt ................................
Operating leases ................................................
Short-term borrowings ......................................
California litigation accrual .................................
Real estate financing transactions .......................
Purchase obligations(1) .......................................
Other contractual obligations(2) ..........................

Payments Due by Period

Total

$ 9,056,373
3,796,353
1,906,527
328,403
136,333
225,914
77,758
285,123

Less than
1 Year

301,149
308,057
412,211
328,403
136,333
13,516
77,758
190,884

1–3 Years

3–5 Years

1,781,380
542,939
676,564

$ 1,650,540
445,129
425,329

More than
5 Years

$ 5,323,304
2,500,228
392,423

27,033

27,958

157,407

62,472

19,149

12,618

Total contractual cash obligations .......................

$ 15,812,784

$ 1,768,311

$ 3,090,388

$ 2,568,105

$ 8,385,980

(1) Relate to open purchase orders for raw materials at December 31, 2018.
(2) 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.

Commercial Commitments

Total

Standby letters of credit ..........................................................
Surety bonds ..........................................................................

65,622
86,429

Less than
1 Year

65,622
86,429

1–3 Years

3–5 Years

More than
5 Years

Total commercial commitments ...............................................

$ 152,051

—

Amount of Commitment Expiration Per Period

(cid:31) 28

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Warranties

Directors at December 31, 2018 to purchase 10.13 million shares of

The Company offers product warranties for certain products.

its common stock.

The specific terms and conditions of such warranties vary

depending on the product or customer contract requirements.

Management estimated the costs of unsettled product warranty

claims based on historical results and experience and included an

amount in Other accruals. Management periodically assesses the

adequacy of the accrual for product warranty claims and adjusts

the accrual as necessary. Changes in the Company’s accrual for

product warranty claims during 2018, 2017 and 2016, including

customer satisfaction settlements during the year, were as follows:

Balance at January 1 .............
Charges to expense .............
Settlements ........................
Acquisition, divestiture and

2018

2017

2016

$ 151,425
31,706
(57,843)

$ 34,419
39,707
(53,143)

$ 31,878
38,954
(36,413)

other adjustments ............

(68,221)

130,442

Balance at December 31 .......

$ 57,067

$ 151,425

$ 34,419

Warranty accruals acquired in connection with the Acquisition

include warranties for certain products under extended furniture

protection plans. The furniture protection plan business was

divested during 2018 for an immaterial amount that approximated

net book value.

Shareholders’ Equity

The Company’s 2018 annual cash dividend of $3.44 per share

represented 18.9 percent of 2017 diluted net income per share. The

2018 annual dividend represented the fortieth consecutive year of

dividend payments since the dividend was suspended in 1978. The

Company is temporarily modifying its practice of paying

30.0 percent of the prior year’s diluted net income per share in

cash dividend. At a meeting held on February 13, 2019, the Board

of Directors increased the quarterly cash dividend to $1.13 per

share. This quarterly dividend, if approved in each of the remaining

quarters of 2019, would result in an annual dividend for 2019 of

$4.52 per share or a 38.7 percent payout of 2018 diluted net

income per share. See the Statements of Consolidated

Shareholders’ Equity, on page 44 of this report, and Notes 11, 12

and 13, on pages 67 through 70 of this report, for more information

concerning Shareholders’ equity.

Cash Flow

Net operating cash increased $59.7 million in 2018 to a cash

source of $1.944 billion from a cash source of $1.884 billion in 2017

due primarily to increased cash generated by changes in working

capital and favorable changes in non-cash items when compared to

2017, partially offset by a reduction in net income of $619.2 million.

Net operating cash decreased as a percent to sales to 11.1 percent in

2018 compared to 12.6 percent in 2017. During 2018, strong net

Shareholders’ equity increased $82.9 million to $3.731 billion at

operating cash continued to provide the funds necessary to pay

December 31, 2018 from $3.648 billion last year primarily due to an

down total net debt, invest in new stores and manufacturing and

increase in retained earnings of $788.1 million and an increase in

distribution facilities, and return cash to shareholders through

Other capital of $173.3 million, partially offset by purchase of

treasury stock purchases and dividends paid. Net investing cash

Treasury stock and Treasury stock received from stock option

usage decreased $8.796 billion to a usage of $251.6 million in 2018

exercises totaling $634.3 million and an increase in Cumulative

from a usage of $9.047 billion in 2017 due primarily to cash paid for

other comprehensive loss of $245.1 million. Retained earnings

the Acquisition of $8.810 billion and decreases in cash used for

increased $788.1 million during 2018 due to net income of

other investments of $22.5 million, partially offset by increased

$1.109 billion partially offset by $322.9 million in cash dividends

capital expenditures of $28.2 million and decreased proceeds from

paid. The increase in Other capital of $173.3 million was due

sale of assets of $8.9 million. Net financing cash usage increased

primarily to the recognition of stock-based compensation expense

$8.261 billion to a usage of $1.747 billion in 2018 from a source of

and stock option exercises. The increase in Cumulative other

$6.514 billion in 2017 due primarily to decreased proceeds from

comprehensive loss of $245.1 million was due primarily to

long-term debt of $8.275 billion, decreased net short-term

unfavorable foreign currency translation effects of $254.3 million

borrowings of $657.3 million, treasury stock purchases in 2018 of

and $6.2 million reduction in the unrealized gain on the interest

$613.3 million and decreased proceeds from stock options

rate locks, partially offset by $17.8 million in net actuarial loss and

exercised of $52.8 million, partially offset by decreased payments

prior service costs of defined benefit pension and other

of long-term debt of $1.000 billion and proceeds from real estate

postretirement benefit plans net of amortization.

financing transactions in 2018 of $225.3 million. In 2018, the

The Company purchased 1.525 million shares of its common

Company used Net operating cash and Cash and cash equivalents

stock for treasury during 2018. The Company acquires its common

on hand to spend $251.0 million in capital additions and

stock for general corporate purposes, and depending on its cash

improvements, make treasury stock purchases of $613.3 million,

position and market conditions, it may acquire shares in the future.

pay $322.9 million in cash dividends to its shareholders of common

The Company had remaining authorization from its Board of

stock and pay down long-term debt $852.6 million and short-term

borrowings $300.9 million.

(cid:31) 29

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Management considers a measurement of cash flow that is not

Financial Covenant

in accordance with U.S. generally accepted accounting principles

to be a useful tool in its determination of appropriate uses of the

Company’s Net operating cash. Management reduces Net

operating cash, as shown in the Statements of Consolidated Cash

Flows, by the amount reinvested in the business for Capital

expenditures and the return of investment to its shareholders by

the payments of cash dividends. The resulting value is referred to

by management as “Free Cash Flow” which may not be

comparable to values considered by other entities using the same

terminology. The reader is cautioned that the Free Cash Flow

measure should not be compared to other entities unknowingly,

and it does not consider certain non-discretionary cash flows, such

as mandatory debt and interest payments. The amount shown

below should not be considered an alternative to Net operating

cash or other cash flow amounts provided in accordance with U.S.

generally accepted accounting principles disclosed in the

Statements of Consolidated Cash Flows, on page 43 of this report.

Free Cash Flow as defined and used by management is

determined as follows:

(thousands of dollars)

Net operating cash .........
Capital expenditures ......
Cash dividends ..............

Year Ended December 31,
2017

2018

2016

$1,943,700 $1,883,968 $1,308,572
(239,026)
(312,082)

(250,957)
(322,934)

(222,767)
(319,029)

Free cash flow ...............

$1,369,809 $ 1,342,172 $ 757,464

Litigation

See page 24 of this report and Note 10 on pages 63 through 67

Certain borrowings contain a consolidated leverage covenant.

The covenant states the Company’s leverage ratio is not to exceed

4.75 to 1.00. The leverage ratio is defined as the ratio of total

indebtedness (the sum of Short-term borrowings, Current portion

of long-term debt and Long-term debt) at the reporting date to

consolidated “Earnings Before Interest, Taxes, Depreciation and

Amortization” (EBITDA) for the 12-month period ended on the

same date. Refer to the “Results of Operations” caption below for

a reconciliation of EBITDA to Net income. At December 31, 2018,

the Company was in compliance with the covenant. The

Company’s Notes, Debentures and revolving credit agreement

contain various default and cross-default provisions. In the event

of default under any one of these arrangements, acceleration of

the maturity of any one or more of these borrowings may result.

See Note 8 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 $104.7 million in 2018 compared to

$90.7 million in 2017. At December 31, 2018, there were 9,353,926

shares of the Company’s common stock being held by the ESOP,

representing 10.0 percent of the total number of voting shares

outstanding. See Note 12, on page 68 of this report, for more

information concerning the Company’s ESOP.

for more information concerning litigation.

Results of Operations—2018 vs. 2017

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. The

Company entered into foreign currency forward contracts with

maturity dates of less than twelve months in 2018, 2017 and 2016,

primarily to hedge against value changes in foreign currency.

There were no material foreign currency forward contracts

Shown below are net sales and segment profit and the

percentage change for the current period by segment for 2018 and

2017:

(thousands of dollars)

Year Ended December 31,
2018

2017

Change

Net Sales:
The Americas Group ........... $ 9,625,139 $ 9,117,279
2,154,729
Consumer Brands Group .....
Performance Coatings

2,739,053

5.6%
27.1%

Group .............................
Administrative ....................

5,166,380
3,921

3,706,134
5,646

39.4%
-30.6%

outstanding at December 31, 2018, 2017 and 2016. The Company

Net sales ............................ $17,534,493 $14,983,788

17.0%

believes it may be exposed to continuing market risk from foreign

currency exchange rate and commodity price fluctuations.

However, the Company does not expect that foreign currency

exchange rate and commodity price fluctuations or hedging

contract losses will have a material adverse effect on the

Company’s financial condition, results of operations or cash flows.

See Notes 1 and 14 on pages 46 and 71 of this report.

(cid:31) 30

(thousands of dollars)

Year Ended December 31,
2018

2017

Change

Income Before Income Taxes:
7.3%
The Americas Group ................. $1,898,403 $1,769,466
28.7%
202,813
Consumer Brands Group ...........
262,782
Performance Coatings Group .....
72.0%
(765,751) -63.5%
Administrative ..........................

261,068
452,089
(1,251,910)

Income before income taxes ...... $1,359,650 $ 1,469,310

-7.5%

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Consolidated net sales for 2018 increased due primarily to

decreased net sales 0.1 percent compared to 2017. In 2018, the

Incremental Valspar, higher paint sales volume in The Americas

Performance Coatings Group opened 3 new branches and closed

Group and selling price increases. Incremental Valspar sales

11 locations decreasing the total from 290 to 282 branches open in

increased net sales 12.4 percent for the year ended December 31,

the United States, Canada, Mexico, South America, Europe and

2018. As a result of the new revenue standard (ASC 606) adopted

Asia at year-end. In 2019, the Performance Coatings Group plans

in the first quarter of 2018, certain advertising support that was

to continue expanding its worldwide presence and improving its

previously classified as selling, general and administrative

customer base.

expenses is now classified as a reduction of revenue with no effect

Net sales in the Administrative segment, which primarily

on net income. The new revenue standard decreased consolidated

consists of external leasing revenue of excess headquarters space

net sales less than 1 percent in the year and quarter. Currency

and leasing of facilities no longer used by the Company in its

translation rate changes decreased 2018 consolidated net sales by

primary business, decreased by an insignificant amount in 2018.

0.6 percent. Net sales of all consolidated foreign subsidiaries

Consolidated gross profit increased $699.8 million in 2018 due

increased 36.1 percent to $4.028 billion for 2018 versus

primarily to Incremental Valspar sales, higher paint sales volume,

$2.960 billion for 2017 due primarily to Incremental Valspar sales.

reduced impacts of purchasing accounting costs on cost of sales,

Net sales of all operations other than consolidated foreign

and selling price increases, partially offset by raw material cost

subsidiaries increased 12.3 percent to $13.507 billion for 2018

increases and incremental supply chain costs for load-in demand

versus $12.024 billion for 2017.

of a new customer program. Consolidated gross profit as a percent

Net sales in The Americas Group increased due primarily to

to net sales decreased to 42.3 percent from 44.8 percent in 2017

higher architectural paint sales volume across most end market

due primarily to a full year of Valspar sales, raw material cost

segments and selling price increases. Net sales from stores in U.S.

increases, incremental supply chain costs for load-in demand of a

and Canada open for more than twelve calendar months increased

new customer program and the impact of adopting ASC 606,

5.1 percent in the year and 2.9 percent in the quarter over last

partially offset by higher paint sales volume, reduced impacts of

year’s comparable periods. Currency translation rate changes

purchasing accounting costs on cost of sales, and selling price

reduced net sales by 1.0 percent compared to 2017. During 2018,

increases. The Americas Group’s gross profit for 2018 increased

The Americas Group opened 91 new stores and closed 15

$225.0 million compared to 2017 due primarily to higher paint

redundant locations for a net increase of 76 stores, increasing the

sales volume and selling price increases, partially offset by higher

total number of stores in operation at December 31, 2018 to 4,696

raw material costs. The Americas Group’s gross profit margins

in the United States, Canada, Latin America and the Caribbean.

declined primarily due to increased raw material costs, partially

The Americas Group’s objective is to expand its store base an

offset by higher paint sales volume and selling price increases. The

average of 2.5 percent each year, primarily through internal

Consumer Brands Group’s gross profit increased $132.4 million due

growth. Sales of products other than paint increased

primarily to Incremental Valspar sales, reduced impacts of

approximately 5.4 percent for the year over 2017. A discussion of

purchasing accounting costs on cost of sales, and selling price

changes in volume versus pricing for sales of products other than

increases, partially offset by raw material cost increases and

paint is not pertinent due to the wide assortment of general

incremental supply chain costs for load-in demand of a new

merchandise sold.

customer program. The Consumer Brands Group’s gross profit

Net sales of the Consumer Brands Group increased in 2018

margins declined primarily due to raw material cost increases and

primarily due to Incremental Valspar sales, selling price increases

incremental supply chain costs for load-in demand of a new

and a new customer program, partially offset by lower volume

customer program and the impact of adopting ASC 606, partially

sales to some of the Group’s retail customers and the impact of

offset by reduced impacts of purchasing accounting costs on cost

adopting ASC 606. Incremental Valspar sales increased Group net

of sales, and selling price increases. The Performance Coatings

sales 26.9 percent in the year. The adoption of ASC 606 reduced

Group’s gross profit for 2018 increased $390.7 million due

Group net sales by 4.8 percent. In 2019, the Consumer Brands

primarily to Incremental Valspar sales, reduced impacts of

Group plans to continue promotions of new and existing products

purchasing accounting costs on cost of sales, and selling price

and expand its customer base and product assortment at existing

increases, partially offset by raw material cost increases. The

customers.

Performance Coatings Group’s gross profit margins declined

The Performance Coatings Group’s net sales in 2018 increased

primarily due to raw material cost increases, partially offset by

due primarily to Incremental Valspar sales and selling price

reduced impacts of purchasing accounting costs on cost of sales,

increases. Incremental Valspar sales increased Group net sales

and selling price increases. Acquisition-related purchase

34.3 percent in the year. Currency translation rate changes

accounting impacts were lower in 2018 in cost of sales for the

(cid:31) 31

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Consumer Brands and Performance Coatings Groups by

As required by the Goodwill and Other Intangibles Topic of the

$54.8 million and $68.2 million, respectively, versus 2017.

ASC, management performed an annual impairment test of

SG&A increased by $236.1 million due primarily to the inclusion

goodwill and indefinite-lived intangible assets as of October 1,

of Incremental Valspar SG&A, increased expenses to support

2018 which did not result in any impairment. The impairment tests

higher sales levels and net new store openings, partially offset by

in 2017, resulted in a $2.0 million impairment of trademarks

realized administrative and selling synergies from the Acquisition

recorded in The Americas Group. See Note 5, on pages 52 and 53

and the adoption of ASC 606. SG&A decreased as a percent of

of this report, for more information concerning the impairment of

sales to 28.7 percent in 2018 from 32.0 percent in 2017 primarily

intangible assets.

due to realized administrative and selling synergies from the

Interest expense increased $103.3 million in 2018 primarily due

Acquisition, improved expense control and the adoption of ASC

to higher average debt levels related to the Acquisition.

606, partially offset by increased expenses to support higher sales

Other expense (income) – net had an unfavorable change by

levels and net new store openings. In The Americas Group, SG&A

$52.8 million of expense in 2018 compared to 2017. This change

increased $92.6 million for the year due primarily to increased

was mainly due to a pension plan settlement expense of

spending due to the number of new store openings and general

$37.6 million recorded in 2018 in the Administrative segment and

comparable store expenses to support higher sales levels. The

was a result of elected lump sum cash payouts to defined benefit

Consumer Brands Group’s SG&A increased by $32.1 million for the

plan participants. In addition, foreign currency related transaction

year primarily due to the inclusion of Incremental Valspar SG&A

losses increased $7.1 million in 2018, primarily in The Americas

and increased expenses to support higher sales levels, partially

Group and Consumer Brands Group. There were no other items

offset by realized administrative and selling synergies from the

within Other income or Other expense that were individually

Acquisition and adoption of ASC 606. The Performance Coatings

significant at December 31, 2018. Note 7, on page 55 to 60 of this

Group’s SG&A increased by $126.5 million for the year primarily

report, for more information concerning Pension information. See

due to the inclusion of Incremental Valspar SG&A and increased

Note 14 on page 70 of this report for more information concerning

expenses to support higher sales levels, partially offset by realized

Other expense (income) – net.

administrative and selling synergies from the Acquisition. The

Consolidated Income before income taxes in 2018 decreased

Administrative segment’s SG&A decreased $15.1 million primarily

$109.7 million resulting from an increase of $236.1 million in SG&A,

due to decreased Acquisition-related costs and realized

Other general expense – net increase of $168.3 million, the 2018

administrative synergies from the Acquisition, partially offset by

California litigation charge of $136.3 million, an increase of

Incremental Valspar SG&A.

$109.3 million in amortization and impairment expenses in total, an

Amortization and impairment expenses in total increased

increase of $103.3 million in interest expense, and increased Other

$109.3 million in 2018 primarily due to a full year of amortization of

expense (income) – net of $52.8 million, partially offset by an

Acquisition-related intangibles. Amortization of Acquisition-related

increase of $699.8 million in gross profit. Income before income

intangibles increased by $72.1 million and $34.9 million for the

taxes increased $128.9 million, $189.3 million and $58.3 million in

Performance Coatings and Consumer Brands Groups, respectively.

The Americas, Performance Coating, and Consumer Brands

The California litigation charge of $136.3 million was recorded

Groups, respectively, when compared to 2017. The Administrative

in the third quarter 2018. See Note 10, on page 63 to 67 of this

segment expenses decreased Income before income taxes

report, for more information concerning Litigation.

$486.2 million more than in 2017 resulting primarily from increased

Other general expense – net increased $168.3 million in 2018

Acquisition-related expenses, increased Interest expense, and

compared to 2017. The increase was mainly caused by an increase

non-operating charges for environmental provisions, California

of $164.3 million of expense in the Administrative segment,

litigation, and pension settlement charges.

primarily due to an increase in provisions for environmental matters

The effective income tax rate for 2018 was 18.5 percent.

of $160.8 million and a year-over-year increase in gain on sale of

Excluding the income tax benefit of $668.8 million from the

assets of $3.5 million. The Company reached a series of agreements

Deferred income tax reductions, the effective income tax rate for

with the Environmental Protection Agency for remediation plans

income from continuing operations was 25.1 percent for 2017. The

with cost estimates at one of the Company’s four major sites which

Company also recorded an income tax provision of $41.5 million in

required significant environmental provisions be recorded during

the second quarter of 2017 related to the divestiture of Valspar’s

2018. See Note 9, on page 62 and 63 of this report, for more

North American industrial wood coatings business, which is

information concerning Other long-term liabilities and

reported as a discontinued operation and reduced diluted net

environmental matters. See Note 14, on page 70 of this report, for

income per share by $.44 per share. Diluted net income per share

more information concerning Other general expense – net.

for 2018 decreased to $11.67 per share from $18.20 per share for

(cid:31) 32

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

2017. Diluted net income per share in 2018 included per share

Results of Operations–2017 vs. 2016

charges for acquisition-related costs of $4.15 and other

Shown below are net sales and segment profit and the

non-operating expenses totaling $2.71. Other non-operating

percentage change for the current period by segment for 2017 and

expenses included environmental provisions of $1.32, California

2016:

litigation of $1.09 and pension plan settlement expense of $.30 per

share, respectively. Currency translation rate changes decreased

diluted net income per share in the year by $.21 per share. Diluted

net income per share in 2017 included a one-time benefit of $7.04

per share from Deferred income tax reductions, a one-time charge

of $.44 per share for discontinued operations and a charge of

$3.47 per share for acquisition-related costs.

Management considers a measurement that is not in

accordance with U.S. generally accepted accounting principles a

useful measurement of the operational profitability of the

Company. Some investment professionals also utilize such a

(thousands of dollars)

2017

2016

Change

Year Ended December 31,

Net Sales:
The Americas Group .......
Consumer Brands

$ 9,117,279 $ 8,377,083

8.8%

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%

Year Ended December 31,

measurement as an indicator of the value of profits and cash that

(thousands of dollars)

2017

2016

Change

are generated strictly from operating activities, putting aside

working capital and certain other balance sheet changes. For this

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

Income Before Income

Taxes:

The Americas Group ..........
Consumer Brands Group ....
Performance Coatings

Group ...........................
Administrative ..................

Income before income

$1,769,466 $1,605,306
301,041

202,813

10.2%
-32.6%

262,782
(765,751)

257,187
(568,301)

2.2%
-34.7%

Net operating cash as an indicator of operating performance or as

taxes ............................

$ 1,469,310 $ 1,595,233

-7.9%

a measure of liquidity. The reader should refer to the

determination of Net income and Net operating cash in

Consolidated net sales for 2017 increased due primarily to the

accordance with U.S. generally accepted accounting principles

addition of Valspar sales beginning in June and higher paint sales

disclosed in the Statements of Consolidated Income and

Statements of Consolidated Cash Flows, on pages 40 and 43 of

this report. EBITDA as used by management is calculated as

follows:

(thousands of dollars)

Net income from
continuing
operations ................
Interest Expense ..........
Income Taxes ...............
Depreciation ................
Amortization ...............

EBITDA from
continuing
operations ................

Year Ended December 31,
2017

2018

2016

$ 1,108,746 $ 1,769,488 $ 1,132,703
154,088
462,530
172,074
25,404

263,471
(300,178)
284,997
206,764

366,734
250,904
278,169
318,112

$2,322,665 $2,224,542 $1,946,799

volume in The Americas Group. Excluding Valspar net sales, net

sales increased 5.6 percent in the year. Currency translation rate

changes increased 2017 consolidated net sales by 0.3 percent. Net

sales of all consolidated foreign subsidiaries increased 71.9 percent

to $2.960 billion for 2017 versus $1.722 billion for 2016 due

primarily to the addition of Valspar sales since June. Net sales of

all operations other than consolidated foreign subsidiaries

increased 18.7 percent to $12.024 billion for 2017 versus

$10.133 billion for 2016.

Net sales in the The Americas Group increased in 2017 due

primarily to higher architectural paint sales volume across all end

market segments and selling price increases. Net sales from stores

in the U.S., Canada and Latin America open for more than twelve

calendar months increased 6.3 percent for the full year. During

(cid:31) 33

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

2017, The Americas Group opened 114 new stores and closed 13

Performance Coatings Group’s gross profit for 2017 increased

redundant locations for a net increase of 101 stores, increasing the

$387.0 million due primarily to inclusion of Valspar sales and

total number of stores in operation at December 31, 2017 to 4,620

favorable currency translation rate changes, partially offset by

in the United States, Canada, Latin America and the Caribbean.

higher raw material costs and Acquisition-related inventory

The Americas Group’s objective is to expand its store base an

purchase accounting adjustments. Acquisition-related purchase

average of 2.5 percent each year, primarily through internal

accounting adjustments decreased Consumer Brands and

growth. Sales of products other than paint increased

Performance Coatings Groups’ gross profit by $72.4 million and

approximately 14.3 percent for the year over 2016. A discussion of

$74.9 million, respectively, for 2017. Both Consumer Brands and

changes in volume versus pricing for sales of products other than

Performance Coatings Groups’ gross profit margins were lower

paint is not pertinent due to the wide assortment of general

due to inclusion of Valspar sales, higher raw material costs and

merchandise sold.

Acquisition-related inventory purchase accounting adjustments to

Net sales of the Consumer Brands Group increased in 2017

inventory, partially offset by selling price increases.

primarily due to the inclusion of Valspar sales since June, partially

SG&A increased by $657.4 million due primarily to the

offset by lower volume sales to some of the Group’s retail

inclusion of Valspar SG&A, increased expenses to support higher

customers. Valspar sales increased Group net sales 49.4 percent in

sales levels and net new store openings, as well as increased

the year. In 2018, the Consumer Brands Group plans to continue

Acquisition expenses in the Administrative segment. Acquisition

promotions of new and existing products and expand of its

expenses in the Administrative segment were $131.2 million and

customer base and product assortment at existing customers.

$58.4 million in 2017 and 2016, respectively. SG&A decreased as a

The Performance Coatings Group’s net sales in 2017 increased

percent of sales to 32.0 percent in 2017 from 34.9 percent in 2016

due primarily to the inclusion of Valspar sales and selling price

primarily due to the addition of Valspar sales beginning in June.

increases. Currency translation rate changes increased net sales

Excluding Valspar SG&A and Acquisition expenses, SG&A as a

1.5 percent for 2017. In 2017, the Performance Coatings Group

percent of sales was 33.7 percent and 34.4 percent in 2017 and

opened 4 new branches and closed 2 locations increasing the total

2016, respectively. In The Americas Group, SG&A increased

from 288 to 290 branches open in the United States, Canada,

$147.1 million for the year due primarily to increased spending due

Mexico, South America, Europe and Asia at year-end. In 2018, the

to the number of new store openings and general comparable

Performance Coatings Group plans to continue expanding its

store expenses to support higher sales levels. The Consumer

worldwide presence and improving its customer base.

Brands Group’s SG&A increased by $171.9 million for the year from

Net sales in the Administrative segment, which primarily

inclusion of Valspar SG&A, partially offset by improved expense

consist of external leasing revenue of excess headquarters space

control and integration synergies. The Performance Coatings

and leasing of facilities no longer used by the Company in its

Group’s SG&A increased by $254.1 million for the year primarily

primary business, decreased by an insignificant amount in 2017.

due to inclusion of Valspar SG&A, partially offset by improved

Consolidated gross profit increased $797.5 million in 2017 due

expense control and integration synergies. The Administrative

primarily to Valspar sales since June and higher paint sales

segment’s SG&A increased $84.4 million primarily due to

volume, partially offset by raw material cost increases.

increased Acquisition-related costs.

Consolidated gross profit as a percent to net sales decreased to

Amortization and impairment expenses in total increased

44.8 percent from 49.9 percent in 2016 due primarily to Valspar

$172.7 million in 2017 primarily due to amortization of Acquisition-

sales, Acquisition-related inventory purchase accounting

related intangibles. Amortization of Acquisition-related intangibles

adjustments and raw material cost increases, partially offset by

was $127.8 million and $54.4 million for the Performance Coatings

higher paint sales volume. The Americas Group’s gross profit for

and Consumer Brands Groups, respectively. Impairment of

2017 increased $297.7 million compared to 2016 due primarily to

goodwill and intangibles expenses decreased $8.7 million in 2017.

higher paint sales volume and selling price increases, partially

Other general expense – net increased $8.5 million in 2017

offset by higher raw material costs. The Americas Group’s gross

compared to 2016. The increase was mainly caused by an increase of

profit margins declined primarily due to increased raw material

$10.5 million of expense in the Administrative segment, primarily due

costs, partially offset by higher paint sales volume and selling price

to a year-over-year decrease in gain on sale of assets of $38.0 million

increases. The Consumer Brands Group’s gross profit increased

partially offset by a decrease in provisions for environmental matters

$122.0 million due primarily to the inclusion of Valspar sales,

of $27.5 million. See Note 14, on page 70 of this report, for more

partially offset by increased raw material costs, Acquisition-

information concerning Other general expense – net.

related inventory purchase accounting adjustments and lower

As required by the Goodwill and Other Intangibles Topic of the

sales volumes at certain customers compared to 2016. The

ASC, management performed an annual impairment test of

(cid:31) 34

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

goodwill and indefinite-lived intangible assets as of October 1,

2016 resulting primarily from Acquisition expenses and increased

2017. The impairment tests in 2017 resulted in $2.0 million

Interest expense.

impairment of trademarks recorded in The Americas Group. The

Net income increased in 2017 primarily due to the one-time

impairment tests in 2016, resulted in $10.7 million impairment in

benefit of $668.8 million from Deferred income tax reductions,

goodwill from the same reporting unit. See Note 5, on pages 52

which resulted in a consolidated effective income tax rate of

and 53 of this report, for more information concerning the

20.4 percent, improved operating results in The Americas Group

impairment of intangible assets.

and the inclusion of Valspar operating results, partially offset by

Interest expense increased $109.4 million in 2017 primarily due

Acquisition costs.

to Acquisition-related debt incurred.

Excluding the impact of the Deferred income tax reductions,

Other (income) expense – net increased $20.9 million in 2017

the effective income tax rate for continuing operations was

compared to 2016. This increase was mainly due to an increase in

25.1 percent for 2017 and 29.0 percent for 2016, primarily due to

foreign currency related transaction losses of $6.9 million in 2017,

the year over year impacts of Employee share-based payments.

primarily in The Americas Group and Consumer Brands Group.

Diluted net income per common share increased 51.8 percent to

There were no other items within Other income or Other expense

$18.2 per share for 2017 from $11.99 per share in 2016. Diluted net

that were individually significant at December 31, 2017. See Note

income per common share from continuing operations was $18.64

14 on page 70 of this report for more information concerning

per share in 2017, including a one-time benefit of $7.04 per share

Other (income) expense – net.

from the Deferred income tax reductions. Diluted net income per

Consolidated Income before income taxes in 2017 decreased

common share for 2017 was decreased by charges of $3.47 per

$125.9 million resulting from an increase of $657.4 million in SG&A,

share from Acquisition costs, including inventory purchase

an increase of $172.7 million in amortization and impairment

accounting adjustments and increased amortization of intangible

expenses in total, and an increase of $109.4 million in interest

assets. Valspar operations increased Diluted net income per

expense, partially offset by an increase of $797.5 million in gross

common share by $.80 per share for 2017, including a $.92 per

profit. Income before income taxes increased $164.2 million in The

share charge from interest expense on new debt. Diluted net

Americas Group and $5.6 million in the Performance Coatings

income per common share for 2016 was decreased by charges of

Group, but decreased $98.2 million in the Consumer Brands Group,

$.86 per share from Acquisition costs. Currency translation rate

when compared to 2016. The Administrative segment expenses

changes did not have a significant impact on diluted net income

decreased Income before income taxes $197.5 million more than in

per common share in 2017.

(cid:31) 35

Report of Management on Internal Control
Over Financial Reporting

Shareholders of The Sherwin-Williams Company

We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and

15d-15(f) under the Securities Exchange Act of 1934, as amended. We recognize that internal control over financial reporting cannot

provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial

reporting is a process that involves human diligence and is subject to the possibility of human error or the circumvention or the overriding

of internal control. Therefore, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal

control over financial reporting. However, we believe we have designed into the process safeguards to reduce, though not eliminate, this

risk. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because

of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In order to ensure that the Company’s internal control over financial reporting was effective as of December 31, 2018, 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.

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, 2018, 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,

2018 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

(cid:31) 36

Report of 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, 2018, 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, 2018, based on the COSO criteria.

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, 2018, 2017, and 2016, and the related

statements of consolidated income and comprehensive income, cash flows and shareholders’ equity for each of the three years in the

period ended December 31, 2018, and the related notes and our report dated February 22, 2019 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 PCAOB. 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 22, 2019

(cid:31) 37

Report of Management on the
Consolidated Financial Statements

Shareholders of The Sherwin-Williams Company

We are responsible for the preparation and fair presentation of the consolidated financial statements, accompanying notes and related

financial information included in this report of The Sherwin-Williams Company and its consolidated subsidiaries (collectively, the

“Company”) as of December 31, 2018, 2017 and 2016 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, 2018.

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

(cid:31) 38

Report of Independent Registered Public Accounting Firm
on the Consolidated Financial Statements

To The Board of Directors and Shareholders of The Sherwin-Williams Company

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of The Sherwin-Williams Company (the “Company”) as of

December 31, 2018, 2017 and 2016, and the related statements of consolidated income and comprehensive income, cash flows and

shareholders’ equity for each of the three years in the period ended December 31, 2018, 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, 2018, 2017 and 2016, and the consolidated results of its operations and its cash flows for each

of the three years in the period ended December 31, 2018, 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, 2018, 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 22, 2019 expressed an unqualified opinion thereon.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, in 2018 the Company elected to reduce the number of pools used for

determining inventory cost under the last-in, first-out (LIFO) method of accounting for inventory in the United States.

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 22, 2019

(cid:31) 39

Statements of Consolidated Income and Comprehensive Income
(thousands of dollars except per share data)

Year Ended December 31,
2017

2018

2016

Net sales .........................................................................................................................
Cost of goods sold(1), (2) .....................................................................................................

$17,534,493
10,115,931

$14,983,788
8,264,988

$11,855,602
5,934,344

Gross profit(1), (2) ...............................................................................................................
Percent to net sales(1), (2) ................................................................................................

Selling, general and administrative expenses(2) ...................................................................
Percent to net sales ......................................................................................................

Other general expense – net .............................................................................................
Amortization ...................................................................................................................
Impairment of goodwill and trademarks .............................................................................
Interest expense ..............................................................................................................
Interest and net investment income ...................................................................................
California litigation expense ..............................................................................................
Other expense (income) – net(2) ........................................................................................

Income from continuing operations before income taxes(1) ..................................................
Income tax expense (credit)(1) ...........................................................................................

7,418,562
42.3%

5,033,780
28.7%

189,122
318,112

366,734
(5,286)
136,333
20,117

1,359,650
250,904

6,718,800
44.8%

4,797,641
32.0%

20,865
206,764
2,022
263,471
(8,571)

5,921,258
49.9%

4,140,260
34.9%

12,368
25,404
10,688
154,088
(4,960)

(32,702)

(11,823)

1,469,310
(300,178)

1,595,233
462,530

Net income from continuing operations(1) ..........................................................................

1,108,746

1,769,488

1,132,703

Loss from discontinued operations ....................................................................................
Income taxes ...................................................................................................................

41,540

Net loss from discontinued operations ...............................................................................

—

(41,540)

—

Net income(1) ...................................................................................................................

$ 1,108,746

$ 1,727,948

$ 1,132,703

Basic net income per share: ...............................................................................................
Continuing operations(1) ................................................................................................
Discontinued operations ................................................................................................

Net income per share(1) ..............................................................................................

Diluted net income per share .............................................................................................
Continuing operations(1) ................................................................................................
Discontinued operations ................................................................................................

Net income per share(1) ..............................................................................................

11.92

11.67

19.04
(.44)

18.60

18.64
(.44)

18.20

12.33

11.99

(1) The year ended December 31, 2017 has been adjusted for an inventory accounting change. See Note 1.
(2) The years ended December 31, 2017 and 2016 have been adjusted for the adoption of ASU No. 2017-07. See Note 1.

See notes to consolidated financial statements.

(cid:31) 40

Statements of Consolidated Income and Comprehensive Income
(thousands of dollars except per share data)

Net income(1) ........................................................................................................................
Other comprehensive (loss) income, net of tax:

Foreign currency translation adjustments ............................................................................
Pension and other postretirement benefit adjustments:

Year Ended December 31,

2018

2017

2016

$ 1,108,746

$1,727,948

$1,132,703

(254,306)

147,930

(18,648)

Amounts recognized in Other comprehensive (loss) income(2) ...........................................
Amounts reclassified from Other comprehensive (loss) income(3) ......................................

(13,473)
31,245

47,995
(7,762)

(28,385)
7,635

Unrealized net gains on available-for sale securities:

Amounts recognized in Other comprehensive (loss) income(4) ...........................................
Amounts reclassified from Other comprehensive (loss) income(5) ......................................

Unrealized net (losses) gains on cash flow hedges:

Amounts recognized in Other comprehensive (loss) income(6) ...........................................
Amounts reclassified from Other comprehensive (loss) income(7) ...................................

17,772

40,233

(20,750)

2,026
(720)

1,306

(30,765)
(3,223)

(33,988)

1,046
89

1,135

85,007

—

(6,210)

Other comprehensive (loss) income .......................................................................................

(242,744)

155,481

46,744

Comprehensive income(1) ......................................................................................................

$ 866,002

$1,883,429

$1,179,447

(1) The year ended December 31, 2017 has been adjusted for an inventory accounting change. See Note 1.
(2) Net of taxes of $6,799, $(19,313) and $17,200 in 2018, 2017 and 2016, respectively.
(3) Net of taxes of $(10,291), $4,764 and $(4,691) in 2018, 2017 and 2016, respectively.
(4) Net of taxes of $(1,244) and $(643) in 2017 and 2016, respectively.
(5) Net of taxes of $442 and $(55) in 2017 and 2016, respectively.
(6) Net of taxes of $18,884 and $(52,226) in 2017 and 2016, respectively.
(7) Net of taxes of $2,045 and $1,978 in 2018 and 2017, respectively.

See notes to consolidated financial statements.

(cid:31) 41

Consolidated Balance Sheets
(thousands of dollars)

2018

December 31,
2017

2016

Assets
Current assets:

Cash and cash equivalents ...................................................................................
Accounts receivable, less allowance ......................................................................
Inventories:

Finished goods(1) ..........................................................................................
Work in process and raw materials ................................................................

Deferred income taxes ........................................................................................
Other current assets ............................................................................................

155,505
2,018,768

204,213
2,104,555

$ 889,793
1,230,987

1,426,366
388,909

1,815,275

1,356,429
386,036

1,742,465

354,939

355,697

898,627
169,699

1,068,326
57,162
381,030

Total current assets ......................................................................................

4,344,487

4,406,930

3,627,298

Property, plant and equipment:

Land ..................................................................................................................
Buildings ............................................................................................................
Machinery and equipment ....................................................................................
Construction in progress ......................................................................................

Less allowances for depreciation ..........................................................................

Goodwill ...................................................................................................................
Intangible assets ........................................................................................................
Deferred pension assets .............................................................................................
Other assets ..............................................................................................................

244,608
979,140
2,668,492
147,931

4,040,171
2,263,332

1,776,839

6,956,702
5,201,579
270,664
584,008

254,676
962,094
2,572,963
177,056

3,966,789
2,089,674

115,555
714,815
2,153,437
117,126

3,100,933
2,005,045

1,877,115

1,095,888

6,814,345
6,002,361
296,743
502,023

1,126,892
255,010
225,529
421,904

Total Assets(1) ............................................................................................................

$ 19,134,279

$ 19,899,517

$ 6,752,521

Liabilities and Shareholders’ Equity
Current liabilities:

Short-term borrowings ........................................................................................
Accounts payable ...............................................................................................
Compensation and taxes withheld ........................................................................
Accrued taxes .....................................................................................................
Current portion of long-term debt ........................................................................
California litigation accrual ...................................................................................
Other accruals ....................................................................................................

Total current liabilities ..................................................................................
Long-term debt .........................................................................................................
Postretirement benefits other than pensions ................................................................
Deferred income taxes(1) ............................................................................................
Other long-term liabilities ...........................................................................................
Shareholders’ equity:

Common stock – $1.00 par value:

93,116,762, 93,883,645 and 93,013,031 shares outstanding at December 31, 2018,

2017 and 2016, respectively ...........................................................................
Other capital .......................................................................................................
Retained earnings(1) ............................................................................................
Treasury stock, at cost .........................................................................................
Cumulative other comprehensive loss ...................................................................

328,403
1,799,424
504,547
80,766
307,191
136,333
1,141,083

4,297,747
8,708,057
257,621
1,130,872
1,009,237

633,731
1,791,552
508,166
79,901
1,179

40,739
1,034,608
398,045
76,765
700,475

972,651

3,987,180
9,885,745
274,675
1,419,601
684,442

578,547

2,829,179
1,211,326
250,397
73,833
509,345

118,373
2,896,448
6,246,548
(4,900,690)
(629,934)

117,561
2,723,183
5,458,416
(4,266,416)
(384,870)

116,563
2,488,564
4,049,497
(4,235,832)
(540,351)

Total shareholders’ equity(1) ..........................................................................

3,730,745

3,647,874

1,878,441

Total Liabilities and Shareholders’ Equity(1) ..................................................................

$ 19,134,279

$ 19,899,517

$ 6,752,521

(1) December 31, 2017 has been adjusted for an inventory accounting change. See Note 1.

See notes to consolidated financial statements.

(cid:31) 42

Statements of Consolidated Cash Flows
(thousands of dollars)

Year Ended December 31,
2017

2018

2016

Operating Activities
Net income(1) ....................................................................................................................
Adjustments to reconcile net income to net operating cash:

Loss from discontinued operations ..................................................................................
Depreciation ..................................................................................................................
Amortization of intangible assets .....................................................................................
Amortization of inventory purchase accounting adjustments(1) ...........................................
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(1) .................................................................................................
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:

Decrease (increase) in accounts receivable ......................................................................
(Increase) in inventories .................................................................................................
Increase (decrease) in accounts payable ..........................................................................
Increase (decrease) in accrued taxes ...............................................................................
Increase in accrued compensation and taxes withheld .......................................................
Decrease (increase) in refundable income taxes ................................................................
Increase in California litigation accrual .............................................................................
Other ............................................................................................................................
Costs incurred for environmental-related matters ................................................................
Costs incurred for qualified exit costs ..................................................................................
Other ................................................................................................................................

$ 1,108,746

$ 1,727,948

$ 1,132,703

278,169
318,112

12,133
176,297
14,923
(143,378)
36,371
82,588
(15,863)
72,453
12,825
(13,839)

18,424
(119,510)
113,786
2,717
4,640
20,092
136,333
(46,773)
(17,718)
(21,256)
(86,572)

41,540
284,997
206,764
113,833
2,022
8,313
15,443
50,503
(620,730)
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

Net operating cash .........................................................................................................

1,943,700

1,883,968

1,308,572

Investing Activities
Capital expenditures ..........................................................................................................
Acquisitions of businesses, net of cash acquired ...................................................................
Proceeds from sale of assets ...............................................................................................
Increase in other investments .............................................................................................

(250,957)

38,354
(39,037)

(222,767)
(8,810,315)
47,246
(61,526)

(239,026)

38,434
(103,182)

Net investing cash ..........................................................................................................

(251,640)

(9,047,362)

(303,774)

Financing Activities
Net (decrease) increase 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 ................................................................................
Treasury stock purchased ...................................................................................................
Proceeds from real estate financing transactions ..................................................................
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 ....................................................................

(300,942)

(852,627)
(5,185)
(322,934)
90,745
(613,312)
225,345
32,257

(1,746,653)
5,885

(48,708)
204,213

Cash and cash equivalents at end of year .............................................................................

155,505

Taxes paid on income ........................................................................................................
Interest paid on debt ..........................................................................................................

$ 292,169
368,045

356,320
8,275,169
(1,852,812)
(49,376)
(319,029)
143,579

(899)
500
(1,111)
(65,119)
(312,082)
86,831

(39,761)

(15,473)

6,514,090
(36,276)

(685,580)
889,793

(307,353)
(13,396)

684,049
205,744

204,213

$ 889,793

419,695
220,630

$ 477,786
153,850

(1) The year ended December 31, 2017 has been adjusted for an inventory accounting change. See Note 1.

See notes to consolidated financial statements.

(cid:31) 43

Statements of Consolidated Shareholders’ Equity
(thousands of dollars except per share data)

Balance at January 1, 2016 ..............
Net income ...................................
Other comprehensive income .........
Stock-based compensation

activity ......................................
Cash dividends – $3.36 per share ....

Balance at December 31, 2016 .........
Net income(1) ................................
Other comprehensive income .........
Stock-based compensation

activity ......................................
Acquired noncontrolling interest .....
Cash dividends – $3.40 per share ....

Balance at December 31, 2017(1) ......
Net income ...................................
Other comprehensive loss ..............
Adjustment to initially apply ASU

2016-01 .....................................
Treasury stock purchased ...............
Stock-based compensation

activity ......................................
Noncontrolling interest activity .......
Cash dividends – $3.44 per share ....

Common
Stock

Other
Capital

$ 115,761

$2,330,426

Retained
Earnings

$3,228,876
1,132,703

Treasury
Stock

Cumulative
Other
Comprehensive
Loss

$ (4,220,058)

$(587,095)

46,744

802

158,138

(15,774)

116,563

2,488,564

998

232,351
2,268

117,561

2,723,183

812

172,447
818

(312,082)

4,049,497
1,727,948

(319,029)

5,458,416
1,108,746

2,320

(322,934)

(4,235,832)

(540,351)

155,481

(30,584)

(4,266,416)

(384,870)

(242,744)

(2,320)

(613,312)

(20,962)

Total

$ 867,910
1,132,703
46,744

143,166
(312,082)

1,878,441
1,727,948
155,481

202,765
2,268
(319,029)

3,647,874
1,108,746
(242,744)

—
(613,312)

152,297
818
(322,934)

Balance at December 31, 2018 .........

$118,373

$2,896,448

$ 6,246,548

$(4,900,690)

$ (629,934)

$3,730,745

(1) Net income, Retained earnings, and Total shareholders’ equity for the year ended December 31, 2017 has been adjusted for an inventory accounting change. See Note 1.

See notes to consolidated financial statements.

(cid:31) 44

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Note 1 – Significant Accounting Policies

Investments in securities: Investments classified as

Consolidation. The consolidated financial statements include

available-for-sale are carried at fair market value. See the

the accounts of The Sherwin-Williams Company and its wholly

recurring fair value measurement table on page 46.

owned subsidiaries (collectively, the Company). Inter-company

Non-traded investments: The Company has investments

accounts and transactions have been eliminated.

in the U.S. affordable housing and historic renovation real

Inventory Accounting Change. During the fourth quarter of 2018,

estate markets and certain other investments that have been

the Company made a voluntary change in accounting principle to

identified as variable interest entities. However, because the

reduce the number of pools used for determining inventory cost

Company does not have the power to direct the day-to-day

under the last-in, first-out (LIFO) method of accounting for inventory

operations of the investments and the risk of loss is limited to

in the United States. Following the continued Valspar (See Note 4)

the amount of contributed capital, the Company is not

integration of the operations, systems, processes, manufacturing and

considered the primary beneficiary. In accordance with the

distribution facilities, management determined that while keeping

Consolidation Topic of the Financial Accounting Standards

separate historical LIFO pools were possible to maintain, it was not

Board (FASB) Accounting Standards Codification (ASC), the

preferable. The Company believes the elected change is preferable

investments are not consolidated. For affordable housing

because it reduces the likelihood of liquidations of similar product

investments entered into prior to the January 1, 2015 adoption

types and achieves conformity in the composition of all pools.

of Accounting Standard Update (ASU) No. 2014-01, the

Comparative financial statements of 2017 have been adjusted to

Company uses the effective yield method to determine the

apply the inventory accounting change retrospectively. There was no

carrying value of the investments. Under the effective yield

effect on periods prior to the acquisition of Valspar in 2017. The

method, the initial cost of the investments is amortized to

adjustments to the 2017 financial statements are summarized in the

income tax expense over the period that the tax credits are

Adjustments and Reclassifications section at the end of this Note 1.

recognized. For affordable housing investments entered into

Use of estimates. The preparation of consolidated financial

on or after the January 1, 2015 adoption of ASU No. 2014-01,

statements in conformity with U.S. generally accepted accounting

the Company uses the proportional amortization method.

principles requires management to make estimates, judgments

Under the proportional amortization method, the initial cost

and assumptions that affect the amounts reported in the

of the investments is amortized to income tax expense in

consolidated financial statements and accompanying notes. Actual

proportion to the tax credits and other tax benefits received.

results could differ from those amounts.

The carrying amounts of the investments, included in Other

Nature of operations. The Company is engaged in the

assets, were $181,171, $189,386 and $193,413 at December 31,

development, manufacture, distribution and sale of paint, coatings

2018, 2017 and 2016, respectively. The liabilities recorded on

and related products to professional, industrial, commercial and

the balance sheets for estimated future capital contributions

retail customers primarily in North and South America, with

to the investments were $182,994, $179,026 and $178,584 at

additional operations in the Caribbean region, Europe, Asia and

December 31, 2018, 2017 and 2016, respectively.

Australia.

Short-term borrowings: The carrying amounts reported

Reportable segments. See Note 19 for further details.

for Short-term borrowings approximate fair value.

Cash flows. Management considers all highly liquid

Long-term debt (including current portion): The fair

investments with a maturity of three months or less when

values of the Company’s publicly traded debt, shown below,

purchased to be cash equivalents.

are based on quoted market prices. The fair values of the

Fair value of financial instruments. The following methods

Company’s non-traded debt, also shown below, are estimated

and assumptions were used by the Company in estimating its fair

using discounted cash flow analyses, based on the Company’s

value disclosures for financial instruments:

current incremental borrowing rates for similar types of

Cash and cash equivalents: The carrying amounts reported

borrowing arrangements. The Company’s publicly traded

for Cash and cash equivalents approximate fair value.

debt and non-traded debt are classified as level 1 and level 2,

Short-term investments: The carrying amounts reported

respectively, in the fair value hierarchy. See Note 8.

for Short-term investments approximate fair value.

2018

December 31,
2017

Carrying
Amount

$8,731,731
283,517

Fair Value

$8,330,222
272,689

Carrying
Amount

$8,742,739
1,144,185

Fair Value

$9,054,277
1,088,630

2016

Carrying
Amount

$1,907,704
4,097

Fair
Value

$1,912,646
3,783

Publicly traded debt ................
Non-traded debt .....................

(cid:31) 45

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Derivative instruments: The Company utilizes derivative

In 2016, the Company entered into a series of interest rate lock

instruments as part of its overall financial risk management policy.

agreements which were designated as cash flow hedges. The

The Company entered into foreign currency forward contracts

interest rate locks settled during 2017. See Note 8.

with maturity dates of less than twelve months in 2018, 2017, and

Fair value measurements. The following table summarizes

2016, primarily to hedge against value changes in foreign currency.

the Company’s assets and liabilities measured on a recurring basis

See Note 14. There were no material foreign currency option and

in accordance with the Fair Value Measurements and Disclosures

forward contracts outstanding at December 31, 2018, 2017 and

Topic of the ASC:

2016.

Assets:

Fair Value at
December 31,
2018

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Deferred compensation plan assets(1) ..................

Liabilities:

Deferred compensation plan liabilities(2) ..............

52,460

62,599

27,019

25,441

62,599

(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 quotes. The cost basis of
the investment funds is $53,719.

(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.

Except for the acquisition-related fair value measurements

Intangible assets. Intangible assets include indefinite-lived

described in Note 4, there were no assets and liabilities measured

trademarks, customer relationships and intellectual property. As

at fair value on a nonrecurring basis. The acquisition-related fair

required by the Goodwill and Other Intangibles Topic of the ASC,

value measurements qualified as level 3 measurements.

indefinite-lived trademarks are not amortized, but instead are

Accounts receivable and allowance for doubtful accounts.

tested annually for impairment, and between annual tests

Accounts receivable were recorded at the time of credit sales net

whenever an event occurs or circumstances indicate potential

of provisions for sales returns and allowances. The Company

impairment. See Note 5. The costs of finite-lived intangible assets

recorded an allowance for doubtful accounts of $45,883, $52,997

are amortized on a straight-line basis over the expected period of

and $40,450 at December 31, 2018, 2017 and 2016, respectively, to

benefit, which ranges primarily from 15 to 20 years.

reduce Accounts receivable to their estimated net realizable value.

Impairment of long-lived assets. In accordance with the

The allowance was based on an analysis of historical bad debts, a

Property, Plant and Equipment Topic of the ASC, management

review of the aging of Accounts receivable and the current

evaluates the recoverability and estimated remaining lives of long-

creditworthiness of customers. Accounts receivable balances are

lived assets whenever events or changes in circumstances indicate

written-off against the allowance if a final determination of

that the carrying amount may not be recoverable or the useful life

uncollectibility is made. All provisions for allowances for doubtful

has changed. See Notes 5 and 6.

collection of accounts are related to the creditworthiness of

Property, plant and equipment. Property, plant and

accounts and are included in Selling, general and administrative

equipment is stated on the basis of cost. Depreciation is provided

expenses.

by the straight-line method. Depreciation and amortization are

Reserve for obsolescence. The Company recorded a reserve

included in the appropriate Cost of goods sold or Selling, general

for obsolescence of $105,871, $103,698 and $87,715 at

and administrative expense caption on the Statements of

December 31, 2018, 2017 and 2016, respectively, to reduce

Consolidated Income. Included in Property, plant and equipment

Inventories to their estimated net realizable value.

are leasehold improvements. The major classes of assets and

Goodwill. Goodwill represents the cost in excess of fair value

ranges of annual depreciation rates are:

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 5.

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%

(cid:31) 46

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Standby letters of credit. The Company occasionally enters

(ESOP) in accordance with the Employee Stock Ownership Plans

into standby letter of credit agreements to guarantee various

Subtopic of the Compensation – Stock Ownership Topic of the

operating activities. These agreements provide credit availability

ASC. The Company recognized compensation expense for

to the various beneficiaries if certain contractual events occur.

amounts contributed to the ESOP. See Note 12.

Amounts outstanding under these agreements totaled $65,622,

Defined benefit pension and other postretirement benefit

$75,272 and $43,658 at December 31, 2018, 2017 and 2016,

plans. The Company accounts for its defined benefit pension and

respectively.

other postretirement benefit plans in accordance with the

Product warranties. The Company offers assurance type

Retirement Benefits Topic of the ASC, which requires the

product warranties for certain products. The specific terms and

recognition of a plan’s funded status as an asset for overfunded

conditions of such warranties vary depending on the product or

plans and as a liability for unfunded or underfunded plans. See

customer contract requirements. Management estimated the costs

Note 7.

of unsettled product warranty claims based on historical results

Stock-based compensation. The cost of the Company’s

and experience and included an amount in Other accruals.

stock-based compensation is recorded in accordance with the

Management periodically assesses the adequacy of the accrual for

Stock Compensation Topic of the ASC. See Note 13.

product warranty claims and adjusts the accrual as necessary.

Foreign currency translation. All consolidated non-highly

Changes in the Company’s accrual for product warranty claims

inflationary foreign operations use the local currency of the

during 2018, 2017 and 2016, including customer satisfaction

country of operation as the functional currency and translated the

settlements during the year, were as follows:

local currency asset and liability accounts at year-end exchange

Balance at January 1 .................
Charges to expense ..................
Settlements .............................
Acquisition, divestiture and

2018

2017

2016

$ 151,425 $ 34,419 $ 31,878
38,954
(36,413)

31,706
(57,843)

39,707
(53,143)

other adjustments ................

(68,221)

130,442

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,

2018, the ending balance of Cumulative other comprehensive loss

Balance at December 31 ............

$ 57,067 $ 151,425 $ 34,419

included adjustments for foreign currency translation of $607,652,

Warranty accruals acquired in connection with the Valspar

acquisition include warranties for certain products under extended

furniture protection plans. The furniture protection plan business

was divested during 2018 for an immaterial amount that

approximated net book value.

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

net prior service costs and net actuarial losses related to pension

and other postretirement benefit plans of $67,091 and unrealized

net gains on interest rate lock cash flow hedges of $44,809. At

December 31, 2017 and 2016, the ending balance of Cumulative

other comprehensive loss included adjustments for foreign

currency translation of $353,346 and $501,277, respectively, net

prior service costs and net actuarial losses related to pension and

other postretirement benefit plans of $84,863 and $125,096,

respectively, and unrealized gains on marketable equity securities

of $2,320 and $1,015, respectively. At December 31, 2017, the

ending balance of Cumulative other comprehensive loss also

included unrealized net gains on interest rate lock hedges of

a number of third-party sites. The Company accrued for

$51,019.

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

Revenue recognition. The Company recognized revenue

when products were shipped and title passed to unaffiliated

customers. Collectibility of amounts recorded as revenue was

professional judgment. All accrued amounts were recorded on an

probable at the time of recognition. See Note 2.

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

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

paid to outside engineering, consulting and law firms. See Notes 9

sales or rebates for attaining certain sales goals. The Company

and 14.

received consideration from certain suppliers of raw materials in

Employee Stock Purchase and Savings Plan. The Company

the form of volume rebates or rebates that constituted a

accounts for the Employee Stock Purchase and Savings Plan

(cid:31) 47

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

percentage of purchases. These rebates were recognized on an

Selling, general and administrative expenses is now classified as a

accrual basis by the Company as a reduction of the purchase price

reduction of revenue. This reclassification had no effect on Net

of the raw materials and a subsequent reduction of Cost of goods

income, and therefore, there was no adjustment to the opening

sold when the related product was sold.

balance of retained earnings. The Company does not expect the

Costs of goods sold. Included in Costs of goods sold were

adoption of the new revenue standard to have a material impact

costs for materials, manufacturing, distribution and related

on its Net income on an ongoing basis. See Note 2 for additional

support. Distribution costs included expenses related to the

information.

distribution of products including inbound freight charges,

Effective January 1, 2018, the Company adopted ASU

purchase and receiving costs, warehousing costs, internal transfer

No. 2017-07, “Improving the Presentation of Net Periodic Pension

costs and other costs incurred to ship products. Also included in

Cost and Net Periodic Postretirement Benefit Costs.” The standard

Costs of goods sold were total technical expenditures, which

requires the service component of pension and other

included research and development costs, quality control, product

postretirement benefit expense to be presented in the same

formulation expenditures and other similar items. Research and

income statement lines as other employee compensation costs,

development costs included in technical expenditures were

and the other components to be presented outside of operating

$51,922, $58,474 and $58,041 for 2018, 2017 and 2016,

income. The guidance on the presentation of components of

respectively. See Note 10.

pension and other postretirement benefit expense was adopted

Selling, general and administrative expenses. Selling costs

retrospectively, as required, and the practical expedient allowing

included advertising expenses, marketing costs, employee and

estimates for comparative periods using the information

store costs and sales commissions. The cost of advertising was

previously disclosed in the pension and other postretirement

expensed as incurred. The Company incurred $357,843, $374,059

benefit plan note was elected. As a result of this ASU, 2018

and $351,002 in advertising costs during 2018, 2017 and 2016,

pension and other postretirement benefit plan expense of $3,483,

respectively. General and administrative expenses included human

$13,930 and $26,888 was recorded in Cost of goods sold, SG&A

resources, legal, finance and other support and administrative

and Other expense (income) – net, respectively. The

functions.

reclassifications in the 2017 and 2016 financial statements are

Earnings per share. Common stock held in a revocable trust

summarized in the Adjustments and Reclassifications section at

(see Note 11) was not included in outstanding shares for basic or

the end of this note.

diluted income per share calculations. All references to “shares” or

“per share” information throughout this report relate to shares and

are stated on a diluted per share basis, unless otherwise indicated.

Basic and diluted net income per share were calculated using the

treasury stock method in accordance with the Earnings Per

Common Share Topic of the ASC. Basic net income per share

amounts were computed based on the weighted-average number

of shares outstanding during the year. Diluted net income per

share amounts were computed based on the weighted-average

number of shares outstanding plus all dilutive securities potentially

outstanding during the year. See Note 16.

Impact of recently issued accounting standards. Effective

January 1, 2018, the Company adopted ASU No. 2014-09,

“Revenue from Contracts with Customers,” and all the related

amendments (ASC 606). ASC 606 consists of a comprehensive

revenue recognition standard, which requires the recognition of

revenue when promised goods or services are transferred to

customers in an amount that reflects the consideration to which

the entity expects to be entitled. The Company adopted the

standard using the modified retrospective method and applied it

to all contracts. Under the modified retrospective method, the

comparative periods are not restated. The only significant change

that resulted from the new revenue standard was that certain

advertising support of $103,108 that was previously classified as

Effective January 1, 2018, the Company adopted ASU

No. 2016-01, “Recognition and Measurement of Financial Assets

and Financial Liabilities,” which amends the guidance for certain

aspects of recognition, measurement and disclosure of financial

instruments. As a result of this standard, changes in fair value of

available-for-sale marketable securities that were previously

recognized in other comprehensive income are now recognized in

earnings. In addition, in accordance with the guidance, the

Company reclassified its opening unrealized gains balance of

$2,320 to Retained earnings. The adoption of this standard did not

have a significant impact on the Company’s results of operations,

financial condition or liquidity.

In February 2016, the FASB issued ASU No. 2016-02, “Leases,”

which consists of a comprehensive lease accounting standard

(ASC 842). Under the new standard, right-of-use assets and lease

liabilities arising from most leases will be recognized on the

balance sheet and enhanced disclosures on key quantitative and

qualitative information about leasing arrangements will be

required. Leases will be classified as either operating or financing,

and the lease classification will determine whether expense is

recognized on a straight-line basis (operating leases) or based on

separately amortizing the right-of-use asset and applying an

effective interest method on the lease liability (financing leases).

(cid:31) 48

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

The new standard is effective for interim and annual periods

and controls. The Company has made enhancements to its

starting in 2019, and the Company will apply the transitional

financial information systems and internal controls in response to

package of practical expedients allowed by the standard to not

the new rule requirements including the implementation of a lease

reassess the identification, classification and initial direct costs of

tracking software for managing and reporting information related

leases commencing before the effective date of Topic 842. The

to leases. Upon adoption, the Company is prepared to provide

Company also will apply the practical expedient to not separate

expanded disclosures in the consolidated financial statements and

lease and non-lease components to new leases as well as existing

it expects to recognize assets and liabilities of between

leases through transition, and will make an accounting policy

approximately $1.6 billion and $1.8 billion. The adoption of ASC

election to not apply recognition requirements of the guidance to

842 is not expected to have a material impact on the Company’s

short-term leases. The Company does not expect to elect the

results of operations, cash flows or debt covenants.

hindsight transitional practical expedient to determine lease term

Adjustments and Reclassifications. Certain amounts in the

on existing leases. In July 2018, the FASB issued ASU No. 2018-11,

notes to the consolidated financial statements for 2016 and 2017

“Leases: Targeted Improvements,” which provides an optional

have been adjusted and reclassified to conform to the 2018

transition method that allows entities to initially apply the new

presentation.

lease standard at the adoption date and recognize a cumulative-

The table below summarizes the adjustments and

effect adjustment to the opening balance of retained earnings in

reclassifications in the 2017 and 2016 Consolidated Income

the period of adoption while comparative periods presented will

Statements. In addition, the Inventory Accounting Change

continue to be in accordance with ASC Topic 840. The Company

reduced previously reported 2017 Inventories, Deferred income

will use the optional transition method and apply the lease

taxes and retained earnings by $58,910, $14,595 and $44,315,

standard as of January 1, 2019 and does not anticipate a material

respectively, and reduced previously reported 2017 segment profit

cumulative-effect adjustment to the opening balance of retained

for Performance Coatings and Consumer Brands Groups by

earnings. The Company is nearing completion of its assessment

$35,722 and $23,188, respectively. Although there were changes to

process and its determination of the expanded disclosure

certain captions on the Cash flow statement due to the Inventory

regarding leases, as well as the impact to the consolidated

Accounting Change, Cash flow from operations was not changed

financial statements. This final assessment includes contract

for 2017. The effect of continuing to apply the historical

analysis and updating accounting policies and related processes

accounting to 2018 would not have been material.

(millions of dollars except per share data)

Cost of goods sold ....................................
Selling, general and administrative

expenses ..............................................
Other income ............................................
Income from continuing operations before
income taxes .........................................
Income tax (credit) expense ......................
Net income from continuing operations ......
Net income ...............................................
Diluted net income per share from

continuing operations ............................
Diluted net income per share .....................

Year Ended December 31, 2017

Previously
Reported

Adoption
of ASU
2017-07

Inventory
Accounting
Change

Adjusted

Year Ended December 31, 2016
Adoption
of ASU
2017-07

Previously
Reported

Adjusted

$ 8,202.6

$ 3.5

$ 58.9

$ 8,265.0 $ 5,932.9 $

1.4

$ 5,934.3

4,785.4
(17.0)

12.2
(15.7)

4,797.6
(32.7)

4,134.5
(4.6)

5.8
(7.2)

4,140.3
(11.8)

1,528.2
(285.6)
1,813.8
1,772.3

19.11
18.67

$
$

(58.9)
(14.6)
(44.3)
$ (44.3)

$
$

(.47)
(.47)

$
$

1,469.3
(300.2)
1,769.5
1,727.9 $

1,595.2
462.5
1,132.7
1,132.7

18.64 $
18.20 $

11.99
11.99

1,595.2
462.5
1,132.7
1,132.7

11.99
11.99

$
$

Note 2 – Revenue

agreement or any form of contract with the Company. These sales

The Company manufactures and sells paint, stains, supplies,

are paid for at the time of sale in cash, credit card, or may be on

equipment and floor covering through company-operated stores,

account with the vast majority of customers having terms

branded and private label products through retailers, and a broad

between 30 and 60 days, not to exceed one year. Many customers

range of industrial coatings directly to global manufacturing

who purchase on account take advantage of early payment

customers through company-operated branches. A large portion

discounts offered by paying within 30 days of being invoiced. The

of the Company’s revenue is recognized at a point in time and

Company estimates variable consideration for these sales on the

made to customers who are not engaged in a long-term supply

basis of both historical information and current trends to estimate

(cid:31) 49

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

the expected amount of discounts to which customers are likely to

obligations. Under these circumstances, the Company recognizes

be entitled.

a contract asset and amortizes these prepayments over the

The remaining revenue is governed by long-term supply

expected benefit life of the long-term contract typically on a

agreements and related purchase orders (“contracts”) that specify

straight-line basis. Management judgment is required when

shipping terms and aspects of the transaction price including

estimating sales-based variable consideration, determining

rebates, discounts and other sales incentives, such as advertising

whether it is constrained, measuring obligations for returns,

support. Contracts are at standalone pricing. The performance

refunds, and determining amortization periods for prepayments.

obligation in these contracts is determined by each of the

The majority of variable consideration in the Company’s

individual purchase orders and the respective stated quantities,

contracts include a form of volume rebate, discounts, and other

with revenue being recognized at a point in time when obligations

incentives, where the customer receives a retrospective

under the terms of the agreement are satisfied. This generally

percentage rebate based on the amount of their purchases. In

occurs with the transfer of control of our products to the

these situations, the rebates are accrued as a fixed percentage of

customer. Sales, value add, and other taxes we collect concurrent

sales and recorded as a reduction of net sales until paid to the

with revenue-producing activities are excluded from revenue.

customer per the terms of the supply agreement. Forms of

Refer to Note 19 for the Company’s disaggregation of Net sales by

variable consideration such as tiered rebates, whereby a customer

reportable segment. As the reportable segments are aligned by

receives a retrospective price decrease dependent on the volume

similar economic factors, trends and customers, this

of their purchases, are calculated using a forecasted percentage to

disaggregation best depicts how the nature, amount, timing and

determine the most likely amount to accrue. Management creates

uncertainty of revenue and cash flows are affected by economic

a baseline calculation using historical sales and then utilizing

factors.

forecast information, estimates the anticipated sales volume each

The Company has made payments or credits for rebates or

quarter to calculate the expected reduction to sales. The

incentives at the beginning of a long-term contract where future

remainder of the transaction price is fixed as agreed upon with the

revenue is expected and before satisfaction of performance

customer, limiting estimation of revenues including constraints.

The Company’s Accounts receivable and current and long-term contract assets and liabilities are summarized in the following table.

Balance at January 1, 2018 ...................................

$ 2,104,555

$ 33,031

$ 135,150

$ 208,909

$ 8,745

Balance at December 31, 2018 ..............................

2,018,768

56,598

213,954

272,857

8,745

Accounts
Receivable,
Less Allowance

Contract
Assets
(Current)

Contract
Assets
(Long-Term)

Contract
Liabilities
(Current)

Contract
Liabilities
(Long-Term)

The difference between the opening and closing balances of

liabilities are excluded from the table above and discussed in Note

the Company’s contract assets and contract liabilities primarily

1. Amounts recognized during the year from deferred liabilities to

results from the timing difference between the Company’s

Revenue were not material. The Company records a right of return

performance and the customer’s payment.

liability within each of its operations to accrue for expected

Provisions for estimated returns are established and the

customer returns. Historical actual returns are used to estimate

expected costs continue to be recognized as contra-revenue per

future returns as a percentage of current sales. Obligations for

ASC 606 when the products are sold. The Company only offers an

returns and refunds were not material individually or in the

assurance type warranty on products sold, and there is no material

aggregate.

service to the customer beyond fixing defects that existed at the

time of sale and no warranties are sold separately. Warranty

(cid:31) 50

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Note 3 – Inventories

The preliminary and final allocation of the fair value of the

Inventories were principally stated at the lower of cost or

Acquisition is summarized in the following table. The allocation of

market with cost determined on the last-in, first-out (LIFO)

the fair value is based on the acquisition method of accounting

method. The following presents the effect on inventories, net

and third-party valuation appraisals. The measurement period

income and net income per share had the Company used the

adjustments resulted from differences between the preliminary

first-in, first-out (FIFO) inventory valuation method adjusted for

and final report of third-party valuation appraisals.

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

from 2016 to 2017 was due to the acquisition of Valspar (See Note

4) which only carried approximately 40 percent of its inventory on

the LIFO method. Certain amounts in the table below for 2017

have been adjusted to reflect the Inventory Accounting Change

(see Note 1).

Percentage of total

2018

2017

2016

inventories on LIFO ........

72%

71%

79%

Excess of FIFO over LIFO ...

$436,010

$288,186

$253,353

Note 4 – Acquisitions

(millions of
dollars)

Cash ...............
Accounts

receivable ....
Inventories ......
Indefinite-lived
trademarks ..

Finite-lived
intangible
assets ..........
Goodwill .........
Property, plant

and
equipment ...

All other

assets ..........

Accounts

Preliminary
Allocation
(as reported
at December 31,
2017)

129.1

Measurement
Period
Adjustments

Final
Allocation
(as reported
at June 30,
2018)

129.1

817.5
684.5

$ (0.1)

817.5
684.4

775.9

(161.6)

614.3

5,071.8
5,675.2

(148.9)
213.6

4,922.9
5,888.8

833.0

231.1

7.7

4.0

840.7

235.1

(553.2)

(1,603.5)

On June 1, 2017, the Company completed the acquisition of The

payable .......

(553.2)

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,

Long-term

debt ............

(1,603.5)

Deferred

taxes ...........

(2,028.9)

113.0

(1,915.9)

2017, the Company and Valspar entered into a definitive

All other

agreement with Axalta Coating Systems Ltd. to divest the assets

liabilities ......

(1,093.1)

(27.7)

(1,120.8)

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

Total ...............
Total, net of

$ 8,939.4

cash ............

$ 8,810.3

$ 8,939.4

$ 8,810.3

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 reduced basic and diluted net income per

share by $.44 for the year ended December 31, 2017. The

Acquisition expanded the Company’s diversified array of brands

and technologies, expanded its global platform and added new

capabilities in its packaging and coil businesses.

Finite-lived intangible assets include customer relationships of

$3.2 billion and intellectual property and technology of $1.7 billion,

which are being amortized over weighted average amortization

periods ranging from 15 to 20 years. The measurement period

adjustments for finite-lived intangible assets resulted in a

$7.7 million reduction of amortization expense in the second

quarter of 2018 that related to prior periods ($5.4 million for the

year ended December 31, 2017. Goodwill of $2.0 billion, $1.1 billion,

and $2.8 billion was recorded in The Americas Group, Consumer

Brands Group, and Performance Coatings Group, respectively, and

relates primarily to expected synergies. The results of operations

for Valspar are included in the Company’s consolidated financial

statements from the date of acquisition.

(cid:31) 51

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Note 5 – Goodwill, Intangible and Long-lived Assets

for impairment annually, and interim impairment tests are

In accordance with the Property, Plant and Equipment Topic of

performed whenever an event occurs or circumstances change

the ASC, whenever events or changes in circumstances indicate

that indicate an impairment has more likely than not occurred.

that the carrying value of long-lived assets may not be recoverable

October 1 has been established for the annual impairment review.

or the useful life may have changed, impairment tests are to be

At the time of impairment testing, values are estimated separately

performed. Undiscounted cash flows are to be used to calculate

for goodwill and trademarks with indefinite lives using a valuation

the recoverable value of long-lived assets to determine if such

model, incorporating discount rates commensurate with the risks

assets are impaired. Where impairment is identified, a valuation

involved for each group of assets. An optional qualitative

model, incorporating discount rates commensurate with the risks

assessment may alleviate the need to perform the quantitative

involved for each group of assets, is to be used to determine the

goodwill impairment test when impairment is unlikely.

fair value for the assets to measure any potential impairment. No

The annual impairment review performed as of October 1, 2018

material impairments were recorded in 2018, 2017 or 2016.

did not result in any goodwill or trademark impairment. The annual

The Company recorded goodwill of $5.9 billion, finite-lived

impairment review performed as of October 1, 2017 resulted in

intangibles of $4.9 billion and indefinite-lived trademarks of

trademark impairment of $2,022 in The Americas Group related to

$614.3 million in connection with the Acquisition. See Note 4.

lower than anticipated sales of an acquired brand and no goodwill

In accordance with the Goodwill and Other Intangibles Topic of

impairment. The annual impairment review performed as of

the ASC, goodwill and indefinite-lived intangible assets are tested

October 1, 2016 resulted in goodwill and trademark impairment in

The Americas Group of $10,455 and $233, respectively.

A summary of changes in the Company’s carrying value of goodwill by Reportable Segment is as follows:

Goodwill

Balance at January 1, 2016(1) ...........................................................
Impairment charged to operations ..............................................
Currency and other adjustments .................................................

Balance at December 31, 2016(2) .....................................................
Acquisition ................................................................................
Currency and other adjustments .................................................

The Americas
Group

$ 295,052
(10,455)
813

285,410
2,276,127
(5,928)

Consumer
Brands
Group

Performance
Coatings
Group

$ 701,071

147,210

(1,197)

699,874
1,473,239
60,128

(5,602)

141,608
1,925,878
(41,991)

Balance at December 31, 2017(2) .....................................................

2,555,609

2,233,241

2,025,495

Acquisition adjustments .............................................................
Currency and other adjustments .................................................

(273,922)
(25,133)

(413,248)
(66,124)

900,764
20,020

Consolidated
Totals

$ 1,143,333
(10,455)
(5,986)

1,126,892
5,675,244
12,209

6,814,345

213,594
(71,237)

Balance at December 31, 2018(2) .....................................................

$2,256,554

$1,753,869

$2,946,279

$6,956,702

(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 ($10,455 in The Americas Group, $8,113 in the Consumer Brands Group and $791 in the Performance Coatings Group).

(cid:31) 52

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

A summary of the Company’s carrying value of intangible assets is as follows:

Finite-Lived Intangible Assets

Software

Customer
Relationships

Intellectual
Property

All Other

Subtotal

Trademarks
With
Indefinite
Lives

Total
Intangible
Assets

December 31, 2018
Weighted-average amortization
period ..................................
Gross .......................................
Accumulated amortization ........

7 years
165,198
(127,303)

15 years
$3,103,665
(326,333)

20 years
$ 1,730,337
(136,985)

13 years
$ 315,008
(256,155)

17 years
$ 5,314,208
(846,776)

Net value ..............................

$ 37,895

$2,777,332

$ 1,593,352

$ 58,853

$4,467,432

$ 734,147

$ 5,201,579

December 31, 2017
Weighted-average amortization
period ..................................
Gross .......................................
Accumulated amortization ........

7 years
$ 165,019
(116,621)

15 years
$ 3,361,675
(129,568)

20 years
$1,774,000
(51,742)

13 years
$ 329,440
(257,506)

17 years
$ 5,630,134
(555,437)

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
$ 313,613
(240,217)

10 years
$ 458,170
(343,952)

Net value ..............................

$ 40,822

—

$ 73,396

114,218

$ 140,792

$ 255,010

Amortization of finite-lived intangible assets is estimated as

demand or redundancy. The Company continues to evaluate all

follows for the next five years: $306,227 in 2019, $305,820 in

legacy operations in response to the Acquisition in order to

2020, $303,348 in 2021, $302,359 in 2022 and $298,047 in 2023.

optimize restructured operations. Provisions of $12,251 and $2,672

Note 6 – Exit or Disposal Activities

for severance and other qualified exit costs, along with other 2018

activity, were charged to the Administrative Segment and

Management is continually re-evaluating the Company’s

Performance Coatings Group, respectively. There were $612 of

operating facilities, including acquired operating facilities, against

provisions recorded for severance and other qualified exit costs

its long-term strategic goals. Liabilities associated with exit or

related to manufacturing facilities, distribution facilities, stores and

disposal activities are recognized as incurred in accordance with

branches closed prior to 2018.

the Exit or Disposal Cost Obligations Topic of the ASC. Provisions

During 2017, 13 stores in The Americas Group and 2 branches in

for qualified exit costs are made at the time a facility is no longer

the Performance Coatings Group were closed due to lower

operational. Qualified exit costs primarily include post-closure rent

demand or redundancy. Accruals for exit and disposal activities of

expenses or costs to terminate the contract before the end of its

$4,456 were acquired in connection with the Acquisition. These

term and costs of employee terminations. Adjustments may be

Acquisition-related restructuring charges were recorded in the

made to liabilities accrued for qualified exit costs if information

Administrative segment as presented in the table below.

becomes available upon which more accurate amounts can be

Provisions of $47,308 and $143 for severance and other qualified

reasonably estimated. Concurrently, property, plant and

exit costs related to the Acquisition and other 2017 activity were

equipment is tested for impairment in accordance with the

charged to the Administrative Segment and Performance Coatings

Property, Plant and Equipment Topic of the ASC, and if

Group, respectively. Provisions for severance and other qualified

impairment exists, the carrying value of the related assets is

exit costs related to manufacturing facilities, distribution facilities,

reduced to estimated fair value. Additional impairment may be

stores and branches closed prior to 2017 of $3,052 were recorded.

recorded for subsequent revisions in estimated fair value.

During 2016, 16 stores in The Americas Group, 13 branches in

Adjustments to prior provisions and additional impairment

the Performance Coatings Group and 2 facilities in Consumer

charges for property, plant and equipment of closed sites being

Brands Group were closed due to lower demand or redundancy.

held for disposal are recorded in Other general expense – net.

Provisions for severance and other qualified exit cost of $1,020

During 2018, 15 stores in The Americas Group and 11 branches

and $505 were charged to Consumer Brands Group and

in the Performance Coatings Group were closed due to lower

(cid:31) 53

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Performance Coatings Group, respectively. Provisions for

expected to be incurred by the end of 2019. The remaining portion

severance and other qualified exit costs related to manufacturing

of the ending accrual for facilities shutdown prior to 2016 primarily

facilities, distribution facilities, stores and branches closed prior to

represented post-closure contractual expenses related to certain

2016 of $1,513 were recorded.

owned facilities which are closed and being held for disposal. The

At December 31, 2018, a portion of the remaining accrual for

Company cannot reasonably estimate when such matters will be

qualified exit costs relating to facilities shutdown prior to 2016 is

concluded to permit disposition.

The following tables summarize the activity and remaining liabilities associated with qualified exit costs:

Exit Plan

Administrative segment acquisition-related restructuring:

Balance at
December 31,
2017

Provisions in
Cost of goods
sold or SG&A

Actual
expenditures
charged to
accrual

Balance at
December 31,
2018

Severance and related costs ................................................
Other qualified exit costs .....................................................

6,019
5,541

12,043
208

(16,939)
(1,503)

1,123
4,246

Performance Coatings Group facilities shutdown in 2018:

Severance and related costs ................................................
Other qualified exit costs .....................................................

Performance Coatings Group branches shutdown in 2017:

Severance and related costs ................................................
Other qualified exit costs .....................................................

Consumer Brands Group facilities shutdown in 2016:

Severance and related costs ................................................

Performance Coatings Group branches shutdown in 2016:

Severance and related costs ................................................
Other qualified exit costs ........................................................
Severance and other qualified exit costs for facilities shutdown
prior to 2016 .......................................................................

14
121

111

1,558

13
2,047

274
338

(13)
(1,426)

(235)
(224)

(21)

(77)

(818)

—
621

53
235

—

—
34

740

Totals ................................................................................

13,385

14,923

(21,256)

7,052

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:
Severance and related costs ..........................
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

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)

907

2,910

(3,796)

136
269

195

433

(136)
(255)

(215)

(446)

(362)

—
14
121

—
111

—

1,546

facilities shutdown prior to 2015 .....................

1,908

Totals ..........................................................

3,848

$ 4,456

50,503

(45,422)

13,385

(cid:31) 54

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Balance at
December 31,
2015

Provisions in
Cost of goods
sold or SG&A

Actual
expenditures
charged to
accrual

Balance at
December 31,
2016

Exit Plan

Consumer Brands Group facilities shutdown in 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

184

445
52

430
353

shutdown prior to 2014 ....................................................

1,755

136
369

481

499

430

103

(100)

(298)

(1,096)
(2,816)

(81)

(46)
(39)

(430)
(600)

(648)

136
269

195

—
433

103

399
13

—
183

1,210

Totals ................................................................................

7,077

3,038

(6,267)

3,848

Note 7 – Pension, Health Care and Postretirement
Benefits other than Pensions

was $65,220, $38,426 and $36,731 for 2018, 2017 and 2016,

respectively. The contribution percentage ranges from two

The Company provides pension benefits to substantially all

percent to seven percent of compensation for covered employees

full-time employees through primarily noncontributory defined

based on an age and service formula. Assets in employee accounts

contribution or defined benefit plans and certain health care and

of the domestic defined contribution pension plan are invested in

life insurance benefits to domestic active employees and eligible

various investment funds as directed by the participants. These

retirees. In accordance with the Retirement Benefits Topic of the

investment funds did not own a significant number of shares of the

ASC, the Company recognizes an asset for overfunded defined

Company’s common stock for any year presented.

benefit pension or other postretirement benefit plans and a

The Company’s annual contributions for its foreign defined

liability for unfunded or underfunded plans. In addition, actuarial

contribution pension plans, which are based on various

gains and losses and prior service costs of such plans are recorded

percentages of compensation for covered employees up to certain

in Cumulative other comprehensive loss, a component of

limits, were $19,462, $10,480 and $6,676 for 2018, 2017 and 2016,

Shareholders’ equity. The amounts recorded in Cumulative other

respectively. Assets in employee accounts of the foreign defined

comprehensive loss will continue to be modified as actuarial

contribution pension plans are invested in various investment

assumptions and service costs change, and all such amounts will

funds. These investment funds did not own a significant number of

be amortized to expense over a period of years through the net

shares of the Company’s common stock for any year presented.

pension cost (credit) and net periodic benefit cost.

Defined benefit pension plans. Prior to December 31, 2017,

Health care plans. The Company provides certain domestic

the Company had one salaried and one hourly domestic defined

health care plans that are contributory and contain cost-sharing

benefit pension plan. In connection with the Acquisition, the

features such as deductibles and coinsurance. There were 26,323,

Company acquired Valspar’s domestic defined benefit pension

26,565 and 22,708 active employees entitled to receive benefits

plan. Effective December 31, 2017, the three domestic defined

under these plans at December 31, 2018, 2017 and 2016,

benefit pension plans were merged into one plan. In 2018, this plan

respectively. The cost of these benefits for active employees,

was split into two separate overfunded plans: one that will

which includes claims incurred and claims incurred but not

continue to operate and one that was frozen and subsequently

reported, amounted to $298,800, $281,158 and $220,589 for 2018,

terminated during 2018. The Company is in the process of settling

2017 and 2016, respectively.

the liabilities of the terminated plan through a combination of

Defined contribution pension plans. The Company’s annual

(i) lump sum payments to eligible participants who elected to

contribution for its domestic defined contribution pension plan

receive them and (ii) the purchase of annuity contracts for

(cid:31) 55

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

participants who either did not elect lump sums or were already

obligation of $632,797, fair value of plan assets of $847,013 and

receiving benefit payments. The lump sum payments were paid in

excess plan assets of $214,216.

December 2018 and resulted in a settlement charge of

The Company has thirty-one foreign defined benefit pension

$37.6 million in 2018. The annuity contracts were purchased in

plans, twelve of which were acquired through the Acquisition. At

2019 and are expected to result in a settlement charge of

December 31, 2018, twenty-four of the Company’s foreign defined

approximately $30 million to $40 million in the first quarter of

benefit pension plans were unfunded or underfunded, with

2019. The Company will use any remaining overfunded cash

combined accumulated benefit obligations, projected benefit

surplus balances to fund future company contributions to a

obligations, fair values of net assets and deficiencies of plan assets

replacement defined contribution plan.

of $168,395, $199,881, $119,232 and $80,649, respectively.

At December 31, 2018, the domestic defined benefit pension

The Company expects to make the following benefit payments

plans were overfunded, with a projected benefit obligation of

for all domestic and foreign defined benefit pension plans:

$524,675, fair value of plan assets of $776,961 and excess plan

$49,259 in 2019; $46,809 in 2020; $46,469 in 2021; $46,104 in

assets of $252,286. The plans were funded in accordance with all

2022; $46,532 in 2023; and $226,112 in 2024 through 2028. The

applicable regulations at December 31, 2018. At December 31,

Company expects to contribute $5,295 to the foreign plans in

2017, the domestic defined benefit pension plan was overfunded,

2019.

with a projected benefit obligation of $916,175, fair value of plan

The estimated net actuarial losses and prior service costs for

assets of $1,188,638 and excess plan assets of $272,463. At

the defined benefit pension plans that are expected to be

December 31, 2016, the domestic salaried and hourly defined

amortized from Cumulative other comprehensive loss into the net

benefit pension plan were overfunded, with a projected benefit

pension costs in 2019 are $1,033 and $1,397, respectively.

The following table summarizes the components of the net pension costs and Cumulative other comprehensive loss related to the

defined benefit pension plans:

Net pension cost (credit):

Domestic
Defined Benefit Pension Plans
2017
2018

2016

Foreign
Defined Benefit Pension Plans
2016
2017
2018

Service cost .........................................................
Interest cost .........................................................
Expected return on plan assets ..............................
Amortization of prior service cost ..........................
Amortization of actuarial losses .............................

7,259
32,161
(53,005)
3,530

Ongoing pension cost (credit) ............................
Settlement cost (credit) ........................................
Curtailment cost ...................................................

(10,055)
37,648
825

21,711
31,085
(48,275)
1,362
6,210

12,093
(1,990)

$ 22,291
26,498
(50,197)
1,205
4,532

4,329

$ 8,160
9,486
(10,837)

$ 7,039
8,177
(9,070)

$ 4,225
7,441
(6,915)

1,518

8,327
(374)

1,833

7,979
71

1,540

6,291
4,231

Net pension cost ...............................................

28,418

10,103

4,329

7,953

8,050

10,522

Other changes in plan assets and projected benefit

obligation recognized in Cumulative other
comprehensive loss (before taxes):
Net actuarial losses (gains) arising during the

year .................................................................
Prior service cost arising during the year ................
Amortization of actuarial losses .............................
Amortization of prior service cost ..........................
(Loss) gain recognized for settlement ....................
Prior service cost recognized for curtailment ..........
Loss arising from curtailment ................................
Exchange rate (loss) gain recognized during the

year .................................................................

Total recognized in Cumulative other

29,927
4,577

(3,530)
(37,648)
(825)
(742)

(65,829)
844
(6,210)
(1,362)
1,990

18,926
2,081
(4,532)
(1,205)

(5,107)

(13,960)

17,030

(1,518)

(1,833)

(1,540)

374

(71)

(1,890)

4,133

(11,627)

comprehensive loss .......................................

(8,241)

(70,567)

15,270

(8,141)

(11,731)

3,863

Total recognized in net pension cost and

Cumulative other comprehensive loss .............

$ 20,177

$(60,464)

$ 19,599

(188)

$ (3,681)

$ 14,385

(cid:31) 56

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Service cost is recorded in Cost of goods sold and Selling,

maximize the long-term return of assets for a prudent level of risk.

general and administrative expense. All other components of Net

In determining the expected long-term rate of return on defined

pension costs are recorded in Other expense (income) – net. See

benefit pension plan assets, management considers the historical

Note 1 for information on the adoption of ASU No. 2017-07.

rates of return, the nature of investments and an expectation of

The Company employs a total return investment approach for

future investment strategies. The target allocations for plan assets

the domestic and foreign defined benefit pension plan assets. A

are 35 – 65 percent equity securities and 35 – 55 percent fixed

mix of equities and fixed income investments are used to

income securities.

The following tables summarize the fair value of the defined benefit pension plan assets at December 31, 2018, 2017 and 2016. The

presentation is in accordance with the Retirement Benefits Topic of the ASC, as updated by ASU No. 2015-07 (see Note 1).

Fair value at
December 31,
2018

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

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) ..........

215,812
609,926
38,413

864,151
166,376

Total investments ........................................................

$ 1,030,527

123,982
462,777

586,759

91,830
147,149
38,413

277,392

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)

Investments at fair value:

Total investments in fair value hierarchy ........................
Investments measured at NAV or its equivalent(4) ..........

514,983
380,902
39,196

935,081
533,561

Total investments ........................................................

$ 1,468,642

409,911
146,816

556,727

105,072
234,086
39,196

378,354

Fair value at
December 31,
2016

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Investments at fair value:

Total investments in fair value hierarchy ........................
Investments measured at NAV or its equivalent(4) ..........

393,045
294,103
14,643

701,791
310,230

Total investments ........................................................

$ 1,012,021

321,152
144,668

465,820

71,893
149,435
14,643

235,971

(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 15.2 percent of total domestic plan assets. Dividends

pension plan assets at December 31, 2018 were 300,000 shares of

received on the Company’s common stock during 2018 totaled

the Company’s common stock with a market value of $118,038,

$1,032.

(cid:31) 57

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

The following table summarizes the obligations, plan assets and assumptions used for the defined benefit pension plans, which are all

measured as of December 31:

Accumulated benefit obligations at end of

year .............................................................

$ 520,958

$ 913,363

$ 630,159

$280,046

$ 308,164

$ 172,047

Domestic
Defined Benefit Pension Plans
2017

2018

2016

Foreign
Defined Benefit Pension Plans
2016
2017

2018

Projected benefit obligations:

Balances at beginning of year ........................
Service cost .................................................
Interest cost .................................................
Actuarial (gains) losses .................................
Acquisition ...................................................
Contributions and other ................................
Settlements .................................................
Effect of foreign exchange ............................
Benefits paid ................................................

Plan assets:

Balances at beginning of year ........................
Actual returns on plan assets .........................
Acquisition ...................................................
Contributions and other ................................
Settlements .................................................
Effect of foreign exchange ............................
Benefits paid ................................................

916,175
7,259
32,161
(13,552)

3,834
(379,064)

$ 632,797
21,711
31,085
67,945
246,894
844
(43,381)

$ 624,791
22,291
26,498
8,132

$ 349,597
8,160
9,486
(20,958)

2,081

1,572
(6,319)
(16,226)
(9,467)

$ 206,873
7,039
8,177
(4,002)
115,045
1,397
(758)
22,938
(7,112)

$ 201,854
4,225
7,441
43,736

947
(14,862)
(30,360)
(6,108)

(42,138)

(41,720)

(50,996)

1,188,638
9,525

847,013
182,049
244,677

(379,064)

(43,381)

858,605
39,404

280,004
(4,896)

165,008
16,282
82,314
6,048
(758)
18,222
(7,112)

162,339
33,569

15,019
(14,862)
(24,949)
(6,108)

8,278
(6,319)
(14,034)
(9,467)

(42,138)

(41,720)

(50,996)

Balances at end of year .................................

524,675

916,175

632,797

315,845

349,597

206,873

Balances at end of year .................................

776,961

1,188,638

847,013

253,566

280,004

165,008

Excess (deficient) plan assets over projected

benefit obligations ........................................

$ 252,286

$ 272,463

$ 214,216

$ (62,279)

$ (69,593)

$ (41,865)

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

$ 252,286

$ 272,463

$ 214,216

18,378
(2,716)
(77,941)

$ 24,280
(2,523)
(91,350)

11,313
(1,522)
(51,656)

$ 252,286

$ 272,463

$ 214,216

$(62,279)

$(69,593)

$ (41,865)

$ (56,335)
(5,719)

$(64,799)
(5,496)

$(134,847)
(6,015)

$ (25,732)

$ (33,873)

$(45,604)

$ (62,054)

$(70,295)

$(140,862)

$ (25,732)

$ (33,873)

$(45,604)

3.60%
3.17%

3.60%
3.33%

4.20%
3.38%

3.04%
3.65%

2.73%
3.69%

3.21%
4.43%

3.60%
5.00%
3.33%

4.15%
5.00%
3.30%

4.40%
6.00%
3.14%

2.73%
3.84%
3.69%

3.88%
4.75%
4.33%

4.20%
4.70%
4.00%

(cid:31) 58

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Postretirement Benefits Other Than Pensions. Employees

retirement, subject to the terms of the unfunded plans. There

of the Company hired in the United States prior to January 1,

were 2,987, 3,486 and 4,524 retired employees entitled to

1993 who are not members of a collective bargaining unit, and

receive such postretirement benefits at December 31, 2018, 2017

certain groups of employees added through acquisitions, are

and 2016, respectively.

eligible for health care and life insurance benefits upon

The following table summarizes the obligation and the assumptions used for postretirement benefits other than pensions:

Postretirement Benefits Other than Pensions
2017

2016

2018

Benefit obligation:

Balance at beginning of year – unfunded ............................................................
Service cost .....................................................................................................
Interest cost .....................................................................................................
Acquisition ......................................................................................................
Actuarial (gain) loss ..........................................................................................
Plan amendments .............................................................................................
Benefits paid ....................................................................................................

$ 290,823
1,994
10,178

(9,047)
(77)
(19,237)

$ 265,137
2,105
10,749
17,010
11,637

$ 263,383
2,244
11,009

7,548

(15,815)

(19,047)

Balance at end of year – unfunded .....................................................................

$ 274,634

$ 290,823

$ 265,137

Liabilities recognized in the Consolidated Balance Sheets:

Postretirement benefits other than pensions .......................................................
Other accruals ..................................................................................................

$ (257,621)
(17,013)

$(274,675)
(16,148)

$(250,397)
(14,740)

$(274,634)

$(290,823)

$ (265,137)

Amounts recognized in Cumulative other comprehensive loss:

Net actuarial losses ...........................................................................................
Prior service credits ..........................................................................................

$ (32,774)
6,134

$ (44,147)
12,625

$ (23,211)
19,205

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:

$ (26,640)

$ (31,522)

$ (4,006)

4.21%
6.69%
4.94%
9.75%
9.75%

3.61%
7.00%
5.00%
11.00%

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%

(cid:31) 59

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

The following table summarizes the components of the net periodic benefit cost and Cumulative other comprehensive loss related to

postretirement benefits other than pensions:

Postretirement Benefits Other
than Pensions
2017

2016

2018

Net periodic benefit cost (credit):

Service cost ................................................................................................................................
Interest cost ...............................................................................................................................
Amortization of actuarial losses ....................................................................................................
Amortization of prior service credit ..............................................................................................

Net periodic benefit cost ..........................................................................................................
Settlement credit ........................................................................................................................

$ 1,994
10,178
2,326
(6,569)

7,929

$ 2,105
10,749
32
(6,579)

6,307
(9,332)

$ 2,244
11,009

(6,578)

6,675

Net periodic benefit cost (credit) ..............................................................................................

7,929

(3,025)

6,675

Other changes in projected benefit obligation recognized in Cumulative other comprehensive loss

(before taxes):
Net actuarial (gain) loss arising during the year .............................................................................
Prior service credit arising during the year .....................................................................................
Amortization of actuarial losses ....................................................................................................
Settlement cost ...........................................................................................................................
Amortization of prior service credit ..............................................................................................

(9,047)
(78)
(2,326)

6,569

11,637

7,548

(32)
9,332
6,579

6,578

14,126

Total recognized in Cumulative other comprehensive loss ...........................................................

(4,882)

27,516

Total recognized in net periodic benefit cost and Cumulative other comprehensive loss ................

$ 3,047

$ 24,491

$ 20,801

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:

2019 .............................................................
2020 .............................................................
2021 ..............................................................
2022 .............................................................
2023 .............................................................
2024 through 2028 ........................................

Total expected benefit cash payments .............

Expected Cash
Payments

$ 17,013
18,757
19,391
19,969
19,991
98,836

$193,957

to be amortized from Cumulative other comprehensive loss into

net periodic benefit cost in 2019 are $535 and $(4,997),

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 2019 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, 2018:

One-Percentage Point
(Decrease)
Increase

Effect on total of service and

interest cost components ............
Effect on the postretirement benefit
obligation ..................................

$ 132

$ (132)

$3,602

$(3,636)

(cid:31) 60

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Note 8 – Debt

Long-term debt

Due Date

2018

2017

2016

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

2020
2027
2022
2047
2022
2024
2022
2025
2045
2026
2019
2042
2021
2025
2045
2027
2021
2097
Through 2027

$ 1,496,015
1,485,023
1,242,850
1,229,373

496,287
416,815
397,621
394,082
360,822

296,251
257,371
249,304
238,747
119,029
22,877
3,500
2,090

$ 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

295,938

118,936

3,500
2,417

$8,708,057

$9,885,745

$1,211,326

(1) Senior notes issued in 2017 to fund the Acquisition
(2) 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: $301,149 in 2019; $1,500,375 in 2020; $281,005 in 2021,

exchange offers and consent solicitations (Exchange Offer) for the

$1,650,268 in 2022 and $272 in 2023. Interest expense on long-

outstanding senior notes of Valspar. Pursuant to the Exchange

term debt was $343,119, $257,350 and $75,509 for 2018, 2017 and

Offer, the Company issued an aggregate principal amount of

2016, 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

the event of default under any one of these arrangements,

In August 2017, the Company entered into a floating rate loan
of €225.0 million and a fixed rate loan of €20.0 million. The floating

acceleration of the maturity of any one or more of these

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 4. 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. During 2018, the Company paid

This gain is being amortized from Cumulative other

the outstanding balance on the Term Loan and the agreement was

comprehensive loss to a reduction of interest expense over the

terminated.

terms of the New Notes. For the year ended December 31, 2018,

the amortization of the unrealized gain reduced interest expense

by $8.3 million.

(cid:31) 61

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Short-term borrowings. On July 19, 2018, the Company and

Company conducts its operations in compliance with applicable

three of its wholly-owned subsidiaries, Sherwin-Williams Canada,

environmental laws and regulations and has implemented various

Inc., Sherwin-Williams Luxembourg S.à r.l and Sherwin-Williams

programs designed to protect the environment and promote

UK Holding Limited (all together with the Company, the

continued compliance.

Borrowers), entered into a new five-year $2.000 billion credit

The Company is involved with environmental investigation and

agreement (New Credit Agreement). The New Credit Agreement

remediation activities at some of its currently and formerly owned

may be used for general corporate purposes, including the

sites (including sites which were previously owned and/or

financing of working capital requirements. The New Credit

operated by businesses acquired by the Company). In addition,

Agreement replaced a credit agreement dated July 16, 2015, as

the Company, together with other parties, has been designated a

amended, which was terminated. The New Credit Agreement

potentially responsible party under federal and state

allows the Company to extend the maturity of the facility with two

environmental protection laws for the investigation and

one-year extension options and the Borrowers to increase the

remediation of environmental contamination and hazardous waste

aggregate amount of the facility to $2.750 billion, both of which

at a number of third-party sites, primarily Superfund sites. In

are subject to the discretion of each lender. In addition, the

general, these laws provide that potentially responsible parties

Borrowers may request letters of credit in an amount of up to

may be held jointly and severally liable for investigation and

$250.0 million. At December 31, 2018, there were no short-term

remediation costs regardless of fault. The Company may be

borrowings under the New Credit Agreement. Borrowings

similarly designated with respect to additional third-party sites in

outstanding under various other foreign programs were

the future.

$37.0 million at December 31, 2018 with a weighted average

The Company initially provides for estimated costs of

interest rate of 9.3%.

environmental-related activities relating to its past operations and

In September 2017, the Company entered into a five-year letter

third-party sites for which commitments or clean-up plans have

of credit agreement, subsequently amended on multiple dates,

been developed and when such costs can be reasonably estimated

with an aggregate availability of $625.0 million at December 31,

based on industry standards and professional judgment. These

2018. On May 6, 2016, the Company entered into a five-year credit

estimated costs are determined based on currently available facts

agreement, subsequently amended on multiple dates. This credit

regarding each site. If the best estimate of costs can only be

agreement gives the Company the right to borrow and to obtain

identified as a range and no specific amount within that range can

the issuance, renewal, extension and increase of a letter of credit

be determined more likely than any other amount within the range,

up to an aggregate availability of $875.0 million at December 31,

the minimum of the range is provided. The Company continuously

2018. Both of these credit agreements are being used for general

assesses its potential liability for investigation and remediation-

corporate purposes. At December 31, 2018, there were no

related activities and adjusts its environmental-related accruals as

borrowings outstanding under these credit agreements. There

information becomes available upon which more accurate costs can

were $350.0 million borrowings outstanding at December 31, 2017

be reasonably estimated and as additional accounting guidelines

and no borrowings outstanding at December 31, 2016.

are issued. Included in Other long-term liabilities at December 31,

There were $291.4 million borrowings outstanding under the

2018, 2017 and 2016 were accruals for extended environmental-

Company’s domestic commercial paper program at December 31,

related activities of $322,459, $179,593 and $163,847, respectively.

2018. There were $274.8 million borrowings outstanding at

Included in Other accruals at December 31, 2018, 2017 and 2016

December 31, 2017 and no borrowings outstanding at

were accruals for estimated costs of current investigation and

December 31, 2016.

Note 9 – Other Long-Term Liabilities

remediation activities of $51,038, $28,556 and $19,969,

respectively. See Note 14 regarding provisions for environmental

matters-net and related increases to the environmental accrued

The operations of the Company, like those of other companies

liabilities at December 31, 2018.

in our industry, are subject to various domestic and foreign

Actual costs incurred may vary from the accrued estimates due

environmental laws and regulations. These laws and regulations

to the inherent uncertainties involved including, among others, the

not only govern current operations and products, but also impose

number and financial condition of parties involved with respect to

potential liability on the Company for past operations.

any given site, the volumetric contribution which may be

Management expects environmental laws and regulations to

attributed to the Company relative to that attributed to other

impose increasingly stringent requirements upon the Company

parties, the nature and magnitude of the wastes involved, the

and the industry in the future. Management believes that the

various technologies that can be used for remediation

(cid:31) 62

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

and the determination of acceptable remediation with respect to a

distribution and store facilities. These obligations relate primarily

particular site. If the Company’s future loss contingency is

to asbestos abatement, hazardous waste Resource Conservation

ultimately determined to be at the unaccrued maximum of the

and Recovery Act (RCRA) closures, well abandonment,

estimated range of possible outcomes for every site for which

transformers and used oil disposals and underground storage tank

costs can be reasonably estimated, the Company’s accrual for

closures. Using investigative, remediation and disposal methods

environmental-related activities would be $117,518 higher than the

that are currently available to the Company, the estimated costs of

minimum accruals at December 31, 2018.

Four of the Company’s currently and formerly owned

manufacturing sites account for the majority of the accrual for

environmental-related activities and the unaccrued maximum of

the estimated range of possible outcomes at December 31, 2018.

At December 31, 2018, $326,202, or 87.2 percent of the total

accrual, related directly to these four sites. In the aggregate

unaccrued maximum of $117,518 at December 31, 2018, $93,191, or

79.3 percent, related to the four manufacturing sites. While

environmental investigations and remedial actions are in different

stages at these sites, additional investigations, remedial actions

and monitoring will likely be required at each site. Management

cannot presently estimate the ultimate potential loss

contingencies related to these sites or other less significant sites

until such time as a substantial portion of the investigation at the

sites is completed and remedial action plans are developed. In the

event any future loss contingency significantly exceeds the

current amount accrued, the recording of the ultimate liability may

result in a material impact on net income for the annual or interim

period during which the additional costs are accrued. Management

does not believe that any potential liability ultimately attributed to

the Company for its environmental-related matters will have a

material adverse effect on the Company’s financial condition,

liquidity, or cash flow due to the extended period of time during

which environmental investigation and remediation takes place.

An estimate of the potential impact on the Company’s operations

cannot be made due to the aforementioned uncertainties.

Management expects these contingent environmental-related

liabilities to be resolved over an extended period of time.

Management is unable to provide a more specific time frame due

to the indefinite amount of time to conduct investigation activities

at any site, the indefinite amount of time to obtain environmental

agency approval, as necessary, with respect to investigation and

remediation activities, and the indefinite amount of time necessary

to conduct remediation activities.

The Asset Retirement and Environmental Obligations Topic of

the ASC requires a liability to be recognized for the fair value of a

conditional asset retirement obligation if a settlement date and fair

value can be reasonably estimated. The Company recognizes a

liability for any conditional asset retirement obligation when

sufficient information is available to reasonably estimate a

settlement date to determine the fair value of such a liability. The

Company has identified certain conditional asset retirement

obligations at various current and closed manufacturing,

these obligations were accrued and are not significant. The

recording of additional liabilities for future conditional asset

retirement obligations may result in a material impact on net

income for the annual or interim period during which the costs are

accrued. Management does not believe that any potential liability

ultimately attributed to the Company for its conditional asset

retirement obligations will have a material adverse effect on the

Company’s financial condition, liquidity, or cash flow due to the

extended period of time over which sufficient information may

become available regarding the closure or modification of any one

or group of the Company’s facilities.

An estimate of the potential impact on the Company’s operations

cannot be made due to the aforementioned uncertainties.

Note 10 – Litigation

In the course of its business, the Company is subject to a

variety of claims and lawsuits, including, but not limited to,

litigation relating to product liability and warranty, personal injury,

environmental, intellectual property, commercial, contractual and

antitrust claims that are inherently subject to many uncertainties

regarding the possibility of a loss to the Company. These

uncertainties will ultimately be resolved when one or more future

events occur or fail to occur confirming the incurrence of a liability

or the reduction of a liability. In accordance with the Contingencies

Topic of the ASC, the Company accrues for these contingencies by

a charge to income when it is both probable that one or more

future events will occur confirming the fact of a loss and the

amount of the loss can be reasonably estimated. In the event that

the Company’s loss contingency is ultimately determined to be

significantly higher than currently accrued, the recording of the

additional liability may result in a material impact on the

Company’s results of operations, liquidity or financial condition for

the annual or interim period during which such additional liability

is accrued. In those cases where no accrual is recorded because it

is not probable that a liability has been incurred and the amount of

any such loss cannot be reasonably estimated, any potential

liability ultimately determined to be attributable to the Company

may result in a material impact on the Company’s results of

operations, liquidity or financial condition for the annual or interim

period during which such liability is accrued. In those cases where

no accrual is recorded or exposure to loss exists in excess of the

amount accrued, the Contingencies Topic of the ASC requires

disclosure of the contingency when there is a reasonable

possibility that a loss or additional loss may have been incurred.

(cid:31) 63

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Lead pigment and lead-based paint litigation. The

administrative regulations may have on the litigation or against

Company’s past operations included the manufacture and sale of

the Company. In addition, management cannot reasonably

lead pigments and lead-based paints. The Company, along with

determine the scope or amount of the potential costs and

other companies, is and has been a defendant in a number of legal

liabilities related to such litigation, or resulting from any such

proceedings, including individual personal injury actions,

legislation and regulations. Except with respect to the litigation in

purported class actions, and actions brought by various counties,

California discussed below, the Company has not accrued any

cities, school districts and other government-related entities,

amounts for such litigation because the Company does not believe

arising from the manufacture and sale of lead pigments and lead-

it is probable that a loss has occurred, and the Company believes it

based paints. The plaintiffs’ claims have been based upon various

is not possible to estimate the range of potential losses as there is

legal theories, including negligence, strict liability, breach of

no substantive information upon which an estimate could be

warranty, negligent misrepresentations and omissions, fraudulent

based. In addition, any potential liability that may result from any

misrepresentations and omissions, concert of action, civil

conspiracy, violations of unfair trade practice and consumer

protection laws, enterprise liability, market share liability, public

nuisance, unjust enrichment and other theories. The plaintiffs seek

various damages and relief, including personal injury and property

damage, costs relating to the detection and abatement of lead-

based paint from buildings, costs associated with a public

education campaign, medical monitoring costs and others. The

Company has also been a defendant in legal proceedings arising

from the manufacture and sale of non-lead-based paints that seek

recovery based upon various legal theories, including the failure to

adequately warn of potential exposure to lead during surface

preparation when using non-lead-based paint on surfaces

previously painted with lead-based paint. The Company believes

that the litigation brought to date is without merit or subject to

meritorious defenses and is vigorously defending such litigation.

The Company has not settled any material lead pigment or lead-

based paint litigation. The Company expects that additional lead

pigment and lead-based paint litigation may be filed against the

Company in the future asserting similar or different legal theories

and seeking similar or different types of damages and relief.

Notwithstanding the Company’s views on the merits, litigation

is inherently subject to many uncertainties, and the Company

ultimately may not prevail. Adverse court rulings or

determinations of liability, among other factors, could affect the

lead pigment and lead-based paint litigation against the Company

and encourage an increase in the number and nature of future

claims and proceedings. In addition, from time to time, various

legislation and administrative regulations have been enacted,

promulgated or proposed to impose obligations on present and

former manufacturers of lead pigments and lead-based paints

respecting asserted health concerns associated with such

products or to overturn the effect of court decisions in which the

Company and other manufacturers have been successful.

Due to the uncertainties involved, management is unable to

predict the outcome of the lead pigment and lead-based paint

litigation, the number or nature of possible future claims and

proceedings or the effect that any legislation and/or

changes to legislation and regulations cannot reasonably be

estimated. In the event any significant liability is determined to be

attributable to the Company relating to such litigation or any such

liability is higher than any amount currently accrued for such

litigation, the recording of the liability may result in a material

impact on net income for the annual or interim period during

which such liability is accrued. Additionally, due to the

uncertainties associated with the amount of any such liability and/

or the nature of any other remedy which may be imposed in such

litigation, any potential liability determined to be attributable to

the Company arising out of such litigation may have a material

adverse effect on the Company’s results of operations, liquidity or

financial condition. An estimate of the potential impact on the

Company’s results of operations, liquidity or financial condition

cannot be made due to the aforementioned uncertainties.

Public nuisance claim litigation. The Company and other

companies are or were defendants in legal proceedings seeking

recovery based on public nuisance liability theories, among other

theories, brought by the State of Rhode Island; the City of St.

Louis, Missouri; various cities and counties in the State of New

Jersey; various cities in the State of Ohio and the State of Ohio; the

City of Chicago, Illinois; the City of Milwaukee, Wisconsin; the

County of Santa Clara, California, and other public entities in the

State of California; and Lehigh and Montgomery Counties in

Pennsylvania. Except for the Santa Clara County, California

proceeding and the pending Pennsylvania proceedings, all of

these legal proceedings have been concluded in favor of the

Company and other defendants at various stages in the

proceedings.

Santa Clara County, California Proceeding. The Santa Clara

County, California proceeding was initiated in March 2000 in the

Superior Court of the State of California, County of Santa Clara. In

the original complaint, the plaintiffs asserted various claims

including fraud and concealment, strict product liability/failure to

warn, strict product liability/design defect, negligence, negligent

breach of a special duty, public nuisance, private nuisance, and

violations of California’s Business and Professions Code. A number

of the asserted claims were resolved in favor of the defendants

through pre-trial proceedings. The named plaintiffs in the Fourth

(cid:31) 64

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Amended Complaint, filed on March 16, 2011, are the Counties of

Motion for Good Faith Settlement on July 12, 2018 and

Santa Clara, Alameda, Los Angeles, Monterey, San Mateo, Solano

subsequently denied NL Industries’ Motion. NL Industries has filed

and Ventura, as well as the Cities of Oakland and San Diego and

a petition for writ of mandate with the Sixth District Court of

the City and County of San Francisco. The Fourth Amended

Appeal seeking to obtain immediate appellate review and reversal

Complaint asserted a sole claim for public nuisance, alleging that

of the denial of its motion. On July 16, 2018, the Company filed a

the presence of lead pigments for use in paint and coatings in, on

Petition for Writ of Certiorari with the Supreme Court of the

and around residences in the plaintiffs’ jurisdictions constitutes a

United States seeking discretionary review. On October 15, 2018,

public nuisance. The plaintiffs sought the abatement of the alleged

the Supreme Court of the United States denied the Company’s

public nuisance that exists within the plaintiffs’ jurisdictions. A trial

Petition for Writ of Certiorari.

commenced on July 15, 2013 and ended on August 22, 2013. The

The trial court has selected a receiver for the abatement fund,

court entered final judgment on January 27, 2014, finding in favor

but the terms of an order appointing the receiver have not been

of the plaintiffs and against the Company and two other

determined and will be the subject of a further hearing scheduled

defendants (ConAgra Grocery Products Company and NL

for March 7, 2019. The trial court has stayed the entry of judgment

Industries, Inc.). The final judgment held the Company jointly and

pending the decision of the Sixth District Court of Appeal on NL

severally liable with the other two defendants to pay $1.15 billion

Industries’ petition for writ of mandate, but otherwise has ruled

into a fund to abate the public nuisance. The Company strongly

that, within sixty days of entry of judgment, the Company,

disagrees with the judgment.

ConAgra and NL Industries shall pay into the abatement fund all

On February 18, 2014, the Company filed a motion for new trial

amounts due.

and a motion to vacate the judgment. The court denied these

Although the Company believes it is probable that a loss has

motions on March 24, 2014. On March 28, 2014, the Company filed

occurred, the ultimate amount of such loss and the timing of any

a notice of appeal to the Sixth District Court of Appeal for the

payments remains uncertain and could change in the future due to

State of California. Oral argument before the Sixth District Court of

the numerous possible outcomes and uncertainties, including, but

Appeal was held on August 24, 2017. On November 14, 2017, the

not limited to, (i) the final amount of the abatement fund that will

Sixth District Court of Appeal entered its decision, which affirmed

be paid, particularly because participation in the abatement

the trial court’s judgment of liability with respect to residences

program by eligible homeowners is voluntary and it is uncertain

built before 1951 and reversed and vacated the trial court’s

what percentage of eligible homeowners will participate or how

judgment with respect to residences built after 1950. The Sixth

claims will be administered, and (ii) the portion of the abatement

District Court of Appeal directed the trial court to: (i) recalculate

fund for which the Company, the two other defendants and others

the amount of the abatement fund to limit the fund to the amount

are determined to be responsible. However, the Company has

necessary to cover the cost of inspecting and remediating pre-1951

accrued $136.3 million for this litigation, which is one-third of the

residences; and (ii) hold an evidentiary hearing to appoint a

amount of the abatement fund. It is possible that the Company

suitable receiver. On November 29, 2017, the Company and the

may change the amount accrued for this litigation based on the

two other defendants filed separate Petitions for Rehearing, which

facts and circumstances. Because of joint and several liability, it is

the Sixth District Court of Appeal denied on December 6, 2017.

possible the Company could ultimately be liable for the total

The Sixth District Court of Appeal’s decision became final on

amount of the abatement fund. In the event any liability is higher

December 14, 2017. On December 22, 2017, the Company and the

than any amount currently accrued for such litigation, the

two other defendants submitted separate Petitions for Review to

recording of any liability may result in a material impact on the

the California Supreme Court. On February 14, 2018, the California

Company’s results of operations, liquidity or financial condition for

Supreme Court issued an order denying the Petitions for Review.

the annual or interim period during which such liability is accrued.

On April 17, 2018, the parties filed their briefs with the trial

Pennsylvania Proceedings. Two proceedings in Pennsylvania

court regarding the recalculation of the amount of the abatement

were initiated in October 2018. The County of Montgomery,

fund. The plaintiffs proposed $730.0 million as the amount of the

Pennsylvania filed a Complaint against the Company and several

abatement fund, and the Company and the other two defendants

other former lead-based paint and lead pigment manufacturers in

jointly proposed a maximum amount of no more than

the Court of Common Pleas of Montgomery County, Pennsylvania.

$409.1 million. On August 17, 2018, the trial court held a hearing

The County of Lehigh, Pennsylvania also filed a Complaint against

regarding the recalculation of the amount of the abatement fund.

the Company and several other former lead-based paint and lead

On September 4, 2018, the trial court ruled that the amount of the

pigment manufacturers in the Court of Common Pleas of Lehigh

abatement fund is $409.1 million. On May 17, 2018, NL Industries

County, Pennsylvania. The Company removed both actions to the

filed a Motion for Good Faith Settlement, which the Company and

United States District Court for the Eastern District of Pennsylvania

ConAgra opposed. The trial court held a hearing on NL Industries’

on November 28, 2018. The plaintiffs filed a motion for

(cid:31) 65

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

remand in each action on January 7, 2019, which the defendants

plaintiff to identify the manufacturer of the product that allegedly

will oppose. In both actions, the counties request declaratory relief

injured the plaintiff in the lead pigment and lead-based paint

establishing the existence of a public nuisance and the defendants’

litigation. Although the risk contribution liability theory was

contribution to it, the abatement of an ongoing public nuisance

applied during the Thomas trial, the constitutionality of this theory

arising from the presence of lead-based paint in housing

as applied to the lead pigment cases has not been judicially

throughout the applicable county, an injunction against future

determined by the Wisconsin state courts. However, in an

illicit conduct, and the costs of litigation and attorneys’ fees.

unrelated action filed in the United States District Court for the

In October 2018, the Company filed a Complaint in the United

Eastern District of Wisconsin, Gibson v. American Cyanamid, et al.,

States District Court for the Eastern District of Pennsylvania

on November 15, 2010, the District Court held that Wisconsin’s risk

against the Pennsylvania Counties of Delaware, Erie and York

contribution theory as applied in that case violated the

seeking injunctive and declaratory relief to prevent the violation of

defendants’ right to substantive due process and is

the Company’s rights under the First Amendment and Due Process

unconstitutionally retroactive. The District Court’s decision in

Clause of the U.S. Constitution. The Company voluntarily

Gibson v. American Cyanamid, et al., was appealed by the plaintiff

dismissed defendant Erie County on November 9, 2018 and

to the United States Court of Appeals for the Seventh Circuit. On

defendant York County on November 21, 2018. Defendant

July 24, 2014, the United States Court of Appeals for the Seventh

Delaware County has filed a motion to dismiss the Complaint,

Circuit reversed the judgment and remanded the case back to the

which is pending.

District Court for further proceedings. On January 16, 2015, the

Litigation seeking damages from alleged personal injury.

defendants filed a petition for certiorari in the United States

The Company and other companies are defendants in a number of

Supreme Court seeking that Court’s review of the Seventh Circuit’s

legal proceedings seeking monetary damages and other relief

decision, and on May 18, 2015, the United States Supreme Court

from alleged personal injuries. These proceedings include claims

denied the defendants’ petition. The case is currently pending in

by children allegedly injured from ingestion of lead pigment or

the District Court.

lead-containing paint and claims for damages allegedly incurred

The United States District Court for the Eastern District of

by the children’s parents or guardians. These proceedings

Wisconsin has consolidated three cases (Ravon Owens v.

generally seek compensatory and punitive damages, and seek

American Cyanamid, et al., Cesar Sifuentes v. American Cyanamid,

other relief including medical monitoring costs. These proceedings

et al., and Glenn Burton, Jr. v. American Cyanamid, et al.) for

include purported claims by individuals, groups of individuals and

purposes of trial and set a trial date for May 6, 2019. The parties

class actions.

are preparing for trial.

The plaintiff in Thomas v. Lead Industries Association, et al.,

In Maniya Allen, et al. v. American Cyanamid, et al., also

initiated an action in Wisconsin state court against the Company,

pending in the United States District Court for the Eastern District

other alleged former lead pigment manufacturers and the Lead

of Wisconsin, cases involving six of the 146 plaintiffs were selected

Industries Association in September 1999. The claims against the

for discovery. In Dijonae Trammell, et al. v. American Cyanamid, et

Company and the other defendants included strict liability,

al., also pending in the United States District Court for the Eastern

negligence, negligent misrepresentation and omissions, fraudulent

District of Wisconsin, discovery for one of the three plaintiffs was

misrepresentation and omissions, concert of action, civil

consolidated with the six Allen cases referenced above. The

conspiracy and enterprise liability. Implicit within these claims is

parties have selected four of the cases to proceed to expert

the theory of “risk contribution” liability (Wisconsin’s theory which

discovery and to prepare for trial. No dates for expert discovery,

is similar to market share liability, except that liability can be joint

pretrial dispositive motions, or trial have been set by the District

and several) due to the plaintiff’s inability to identify the

Court in the Allen and Trammell cases.

manufacturer of any product that allegedly injured the plaintiff.

Other lead-based paint and lead pigment litigation. In Mary

The case ultimately proceeded to trial and, on November 5, 2007,

Lewis v. Lead Industries Association, et al. pending in the Circuit

the jury returned a defense verdict, finding that the plaintiff had

Court of Cook County, Illinois, parents seek to recover the cost of

ingested white lead carbonate, but was not brain damaged or

their children’s blood lead testing against the Company and three

injured as a result. The plaintiff appealed and, on December 16,

other defendants that made (or whose alleged corporate

2010, the Wisconsin Court of Appeals affirmed the final judgment

predecessors made) white lead pigments. The Circuit Court has

in favor of the Company and other defendants.

certified a statewide class and a Chicago subclass of parents or

Wisconsin is the only jurisdiction to date to apply a theory of

legal guardians of children who lived in high-risk zip codes

liability with respect to alleged personal injury (i.e., risk

identified by the Illinois Department of Health and who were

contribution/market share liability) that does not require the

screened for lead toxicity between August 1995 and February

2008. Excluded from the class are those parents or

(cid:31) 66

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

guardians who have incurred no expense, liability or obligation to

without a determination of liability against the Company in the

pay for the cost of their children’s blood lead testing. In 2017, the

lead pigment or lead-based paint litigation will have no impact on

Company and other defendants moved for summary judgment on

the Company’s results of operation, liquidity or financial condition.

the grounds that the three named plaintiffs have not paid and

As previously stated, however, except with respect to the

have no obligation or liability to pay for their children’s blood lead

litigation in California discussed above, the Company has not

testing because Medicaid paid for the children of two plaintiffs and

accrued any amounts for the lead pigment or lead-based paint

private insurance paid for the third plaintiff without any evidence

litigation and any significant liability ultimately determined to be

of a co-pay or deductible. The Circuit Court granted the motion,

attributable to the Company relating to such litigation may result

but on September 7, 2018, the Appellate Court reversed with

in a material impact on the Company’s results of operations,

respect to the two plaintiffs for whom Medicaid paid for their

liquidity or financial condition for the annual or interim period

children’s testing. Defendants filed a petition with the Supreme

during which such liability is accrued.

Court of Illinois for discretionary review. By order entered

January 31, 2019, that court has allowed defendants’ petition for

Note 11 – Capital Stock

leave to appeal.

At December 31, 2018, there were 300,000,000 shares of

Insurance coverage litigation. The Company and its liability

common stock and 30,000,000 shares of serial preferred stock

insurers, including certain underwriters at Lloyd’s of London,

authorized for issuance. Of the authorized serial preferred stock,

initiated legal proceedings against each other to determine,

3,000,000 shares are designated as cumulative redeemable serial

among other things, whether the costs and liabilities associated

preferred and 1,000,000 shares are designated as convertible

with the abatement of lead pigment are covered under certain

serial preferred stock. See Note 12. Under the 2006 Equity and

insurance policies issued to the Company. The Company’s action,

Performance Incentive Plan (2006 Employee Plan), 23,700,000

filed on March 3, 2006 in the Common Pleas Court, Cuyahoga

shares may be issued or transferred. See Note 13. An aggregate of

County, Ohio, is currently stayed and inactive. On January 9, 2019,

9,643,433, 10,715,939 and 7,720,815 shares of common stock at

the Company filed an unopposed motion to lift the stay with the

December 31, 2018, 2017 and 2016, respectively, were reserved for

trial court, which was granted, allowing the case to proceed. The

the exercise and future grants of option rights and future grants of

liability insurers’ action, which was filed on February 23, 2006 in

restricted stock and restricted stock units. See Note 13. Shares

the Supreme Court of the State of New York, County of New York,

outstanding shown in the following table included 489,647,

has been dismissed. An ultimate loss in the insurance coverage

489,260 and 488,714 shares of common stock held in a revocable

litigation would mean that insurance proceeds could be

trust at December 31, 2018, 2017 and 2016, respectively. The

unavailable under the policies at issue to mitigate any ultimate

revocable trust is used to accumulate assets for the purpose of

abatement related costs and liabilities. The Company has not

funding the ultimate obligation of certain non-qualified benefit

recorded any assets related to these insurance policies or

plans. Transactions between the Company and the trust are

otherwise assumed that proceeds from these insurance policies

accounted for in accordance with the Deferred Compensation –

would be received in estimating any contingent liability accrual.

Rabbi Trusts Subtopic of the Compensation Topic of the ASC,

Therefore, an ultimate loss in the insurance coverage litigation

which requires the assets held by the trust be consolidated with

the Company’s accounts.

(cid:31) 67

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Balance at January 1, 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 .......................................................................................

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 canceled of restricted stock ..................................................................................................

Balance at December 31, 2017 ...................................................................................................................
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 .....................................................................................................................

Shares
in Treasury

Shares
Outstanding

23,514,054
3,441

59,916

23,577,411
16,545

82,777

23,676,733
1,159

52,144

1,525,000

92,246,525
(3,441)
733,876
(59,916)
95,987

93,013,031
(16,545)
1,152,015
(82,777)
(182,079)

93,883,645
(1,159)
661,599
(52,144)
149,821
(1,525,000)

Balance at December 31, 2018 ...................................................................................................................

25,255,036

93,116,762

Note 12 – Stock Purchase Plan

account under the ESOP are voted by the trustee under

As of December 31, 2018, 39,941 employees contributed to the

instructions from each individual plan member. Shares for which

Company’s ESOP, a voluntary defined contribution plan available

no instructions are received are voted by the trustee in the same

to all eligible salaried employees. Participants are allowed to

proportion as those for which instructions are received.

contribute, on a pretax or after-tax basis, up to the lesser of

twenty percent of their annual compensation or the maximum

Note 13 – Stock-Based Compensation

dollar amount allowed under the Internal Revenue Code. The

The 2006 Employee Plan authorizes the Board of Directors, or

Company matches one hundred percent of all contributions up to

a committee of the Board of Directors, to issue or transfer up to an

six percent of eligible employee contributions. Such participant

aggregate of 23,700,000 shares of common stock, plus any shares

contributions may be invested in a variety of investment funds or a

relating to awards that expire, are forfeited or canceled. The

Company common stock fund and may be exchanged between

Company issues new shares upon exercise of option rights and

investments as directed by the participant. Participants are

vesting of restricted stock units (RSUs). The Employee Plan

permitted to diversify both future and prior Company matching

permits the granting of option rights, appreciation rights,

contributions previously allocated to the Company common stock

restricted stock, RSUs, performance shares and performance units

fund into a variety of investment funds.

to eligible employees. At December 31, 2018, no appreciation

The Company made contributions to the ESOP on behalf of

rights, performance shares or performance units had been granted

participating employees, representing amounts authorized by

under the 2006 Employee Plan.

employees to be withheld from their earnings, of $170,326,

The 2006 Stock Plan for Nonemployee Directors

$138,731 and $127,697 in 2018, 2017 and 2016, respectively. The

(Nonemployee Director Plan) authorizes the Board of Directors, or

Company’s matching contributions to the ESOP charged to

a committee of the Board of Directors, to issue or transfer up to an

operations were $104,715, $90,682 and $85,525 for 2018, 2017 and

aggregate of 200,000 shares of common stock, plus any shares

2016, respectively.

relating to awards that expire, are forfeited or are canceled. The

At December 31, 2018, there were 9,353,926 shares of the

Nonemployee Director Plan permits the granting of option rights,

Company’s common stock being held by the ESOP, representing

appreciation rights, restricted stock and RSUs to members of the

10.0 percent of the total number of voting shares outstanding.

Board of Directors who are not employees of the Company. At

Shares of Company common stock credited to each member’s

December 31, 2018, no option rights or appreciation rights had

been granted under the Nonemployee Director Plan.

(cid:31) 68

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

In connection with the Acquisition (see Note 4), the Company

The risk-free interest rate is based upon the U.S. Treasury yield

assumed certain outstanding RSUs of Valspar granted under the

curve at the time of grant. The expected life of option rights was

Amended and Restated 2015 Omnibus Equity Plan. Upon close of

calculated using a scenario analysis model. Historical data was

the Acquisition, the Valspar RSUs were converted into RSUs

used to aggregate the holding period from actual exercises, post-

relating to common stock of the Company.

vesting cancellations and hypothetical assumed exercises on all

The cost of the Company’s stock-based compensation is

outstanding option rights. The expected dividend yield of stock is

recorded in accordance with the Stock Compensation Topic of the

the Company’s best estimate of the expected future dividend

ASC. At December 31, 2018, the Company had total unrecognized

yield. Expected volatility of stock was calculated using historical

stock-based compensation expense of $130,748 that is expected

and implied volatilities. The Company applied an estimated

to be recognized over a weighted-average period of 1.06 years.

forfeiture rate of 2.00 percent to the 2018 grants. This rate was

Stock-based compensation expense during 2018, 2017 and 2016

calculated based upon historical activity and is an estimate of

was $82,588, $90,292 and $72,109, respectively. The related tax

granted shares not expected to vest. If actual forfeitures differ

benefit was $20,461, $34,343 and $27,442 during 2018, 2017 and

from the expected rate, the Company may be required to make

2016, respectively. Subsequent to the adoption of ASU

additional adjustments to compensation expense in future periods.

No. 2016-09 in 2016, excess tax benefits from share-based

Grants of option rights for non-qualified and incentive stock

payments are recognized in the income tax provision rather than

options have been awarded to certain officers and key employees

in other capital when exercised. For the years ended December 31,

under the 2006 Employee Plan and the 2003 Stock Plan. The

2018, 2017 and 2016, the Company’s tax benefit from options

option rights generally become exercisable to the extent of

exercised reduced the income tax provision by $43,371, $86,540,

one-third of the optioned shares for each full year following the

and $44,233 respectively.

date of grant and generally expire ten years after the date of

Option rights. The fair value of the Company’s option rights

grant. Unrecognized compensation expense with respect to option

was estimated at the date of grant using a Black-Scholes- Merton

rights granted to eligible employees amounted to $61,050 at

option-pricing model with the following weighted-average

December 31, 2018. The unrecognized compensation expense is

assumptions for all options granted:

being amortized on a straight-line basis over the three-year

2018

2017

2016

Risk-free interest

rate ....................

2.99%

1.97%

1.24%

Expected life of

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 2018, 2017 and 2016 was $90.86, $77.14

option rights .......

5.05 years

and $49.36, respectively. The total intrinsic value of option rights

Expected dividend

exercised during 2018, 2017, and 2016 was $190,227, $255,482 and

yield of stock .......

.89%

.85%

1.06%

$129,230, respectively. The total fair value of options vested

Expected volatility

of stock ..............

.211

.213

.212

during 2018, 2017 and 2016 was $38,580, $31,292 and $32,476,

respectively. There were no outstanding option rights for

nonemployee directors at December 31, 2018, 2017 and 2016.

A summary of the Company’s non-qualified and incentive stock option right activity is shown in the following table:

2018
Weighted-
Average
Exercise
Price
Per Share

Optioned
Shares

Aggregate
Intrinsic
Value

Optioned
Shares

2017
Weighted-
Average
Exercise
Price
Per Share

Aggregate
Intrinsic
Value

Optioned
Shares

2016
Weighted-
Average
Exercise
Price
Per Share

Aggregate
Intrinsic
Value

Outstanding beginning of year ....
Granted ....................................
Exercised ..................................
Forfeited ...................................
Expired .....................................

4,646,313 $204.33
410.00
137.03
327.08
238.26

565,336
(662,218)
(60,288)
(3,894)

5,163,709 $ 163.61
377.84
689,506
123.16
(1,154,698)
267.02
(49,977)
236.97
(2,227)

5,219,506 $ 141.58
271.46
108.81
232.83
176.28

712,967
(733,876)
(26,653)
(8,235)

Outstanding end of year .............

4,485,249 $ 238.53

$704,160 4,646,313 $204.33

$ 955,810 5,163,709 $ 163.61

$545,531

Exercisable at end of year ...........

3,274,780 $ 188.48

$ 671,269 3,288,237 $ 156.43

$833,938 3,783,755 $130.59

$522,921

(cid:31) 69

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

The weighted-average remaining term for options outstanding

The weighted-average per share fair value of RSUs granted

at the end of 2018, 2017 and 2016 was 6.09, 6.28 and 6.25 years,

during 2018, 2017 and 2016 was $404.08, $313.88 and $257.99,

respectively. The weighted-average remaining term for options

respectively.

exercisable at the end of 2018, 2017 and 2016 was 5.01, 5.11 and

5.20 years, respectively. Shares reserved for future grants of

Note 14 – Other

option rights, restricted stock and RSUs were 5,135,822, 6,041,092

Other general expense—net. Included in Other general

and 2,557,106 at December 31, 2018, 2017 and 2016, respectively.

expense—net were the following:

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

Provisions for

environmental
matters—net .............

2018

2017

2016

$176,297

$ 15,443

$ 42,932

Plan. The February 2018, 2017 and 2016 grants consisted of

Loss (gain) on sale or

performance-based awards that vest at the end of a three-year

disposition of assets ...

12,825

5,422

(30,564)

period based on the Company’s achievement of specified financial

Total ............................

$ 189,122

$20,865

$ 12,368

goals relating to earnings per share and return on net assets

employed. The February 2015 grant consisted of a combination of

Provisions for environmental matters–net represent initial

performance-based awards and time-based awards. The

provisions for site-specific estimated costs of environmental

performance based awards vest at the end of a three-year period

investigation or remediation and increases or decreases to

based on the Company’s achievement of specified financial goals

environmental-related accruals as information becomes available

relating to earnings per share. The time-based awards generally

upon which more accurate costs can be reasonably estimated and

vest at the end of a three-year period based on continuous

as additional accounting guidelines are issued. Environmental-

employment.

related accruals are not recorded net of insurance proceeds in

Unrecognized compensation expense with respect to grants of

accordance with the Offsetting Subtopic of the Balance Sheet

RSUs to eligible employees amounted to $68,103 at December 31,

Topic of the ASC. During 2018, the Company reached a series of

2018 and is being amortized on a straight-line basis over the

agreements on remediation plans at one of the Company’s four

vesting period and is expected to be recognized over a weighted-

major sites, resulting in a significant increase to provisions for

average period of 0.91 years.

environmental matters–net for 2018. See Note 9 for further details

Grants of RSUs have been awarded to nonemployee directors

on the Company’s environmental-related activities.

under the Nonemployee Director Plan. These grants generally vest

The loss (gain) on sale or disposition of assets represents the

and stock is received without restriction to the extent of one-third

net realized loss (gain) associated with the sale or disposal of

of the RSUs for each year following the date of grant.

property, plant and equipment and intangible assets previously

Unrecognized compensation expense with respect to grants of

used in the conduct of the primary business of the Company. The

RSUs to nonemployee directors amounted to $1,595 at

2016 gain primarily relates to the sale of a closed domestic facility.

December 31, 2018 and is being amortized on a straight-line basis

Other expense (income)—net. Included in Other expense

over the three-year vesting period and is expected to be

(income)—net were the following:

recognized over a weighted-average period of 0.88 years.

A summary of the Company’s RSU activity for the years ended

December 31 is shown in the following table:

Outstanding at

beginning of year .....
Granted ......................
Exchanged Valspar
awards (net of
forfeitures) ..............
Vested .......................
Forfeited ....................

Outstanding at end of
year ........................

2018

2017

2016

335,796
116,636

397,326
112,647

467,744
99,662

(150,576)
(11,454)

51,009
(215,433)
(9,753)

(166,405)
(3,675)

290,402

335,796

397,326

2018

2017

2016

Dividend and royalty

income ...................

$ (4,276)

$ (7,648)

$ (4,573)

Net expense from

financing activities ..

9,658

9,843

8,667

Foreign currency

transaction related
losses .....................
Domestic pension plan

settlement
expense .................
Miscellaneous pension
income ...................
Other income .............
Other expense ............

7,532

450

7,335

37,648

(10,761)
(32,219)
12,535

(15,728)
(32,570)
12,951

(7,236)
(25,279)
9,263

Total .........................

$ 20,117

$(32,702)

$ (11,823)

(cid:31) 70

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

The Net expense from financing activities includes the net

tax year. The Company completed its analysis of the Tax Act in the

expense relating to changes in the Company’s financing fees.

fourth quarter of 2018 and the accounting under the Tax Act has

Foreign currency transaction related losses represent net

been finalized.

realized losses on U.S. dollar-denominated liabilities of foreign

Deferred income taxes reflect the net tax effects of temporary

subsidiaries and net realized and unrealized losses from foreign

differences between the carrying amounts of assets and liabilities

currency option and forward contracts. There were no material

for financial reporting purposes and the amounts used for income

foreign currency option and forward contracts outstanding at

tax purposes using the enacted tax rates and laws that are

December 31, 2018, 2017 and 2016.

currently in effect. Significant components of the Company’s

See Note 7 for information on the Domestic pension plan

deferred tax assets and liabilities as of December 31, 2018, 2017

settlement expense and Miscellaneous pension income. See Note 1

and 2016 were as follows:

for information on the adoption of ASU No. 2017-07.

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

Other income or Other expense that were individually significant

at December 31, 2018, 2017 and 2016.

Note 15 – Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act)

was enacted. The Tax Act significantly revised the U.S. corporate

income tax system by, among other things, lowering corporate

income tax rates from 35% to 21%, implementing a territorial tax

system and imposing a repatriation tax on deemed repatriated

earnings of foreign subsidiaries. Staff Accounting Bulletin (SAB)

No. 118 provided a measurement period that should not extend

beyond one year from the enactment date for companies to

complete the accounting under the Tax Act.

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 system

and the remeasurement of U.S. deferred tax liabilities on

unremitted foreign earnings.

As a result of the Inventory Accounting Change (see Note 1),

Cost of goods sold was increased for the year ended December 31,

2017 while income tax provision was reduced by $14,595, including

a reversal of $7,853 income tax benefit related to the

remeasurement of U.S. deferred tax liabilities in 2017 for the Tax

Act. Related amounts in this Income Tax Note have been revised

due to the impact of the Inventory Accounting Change for the year

ended December 31, 2017.

During the second quarter of 2018, the Company made

purchase accounting adjustments related to the Acquisition which

resulted in the reversal of $27,455 of income tax benefits related

to the remeasurement of U.S. deferred tax liabilities. No other

material adjustments were made under SAB No. 118 for the 2018

Deferred tax assets:

Exit costs,

environmental
and other similar
items .................

Employee related
and benefit
items .................
Other items ...........

Total deferred

2018

2017

2016

84,517

50,193

$ 74,535

96,963
161,578

104,098
113,184

166,313
148,910

tax assets .......

343,058

267,475

389,758

Deferred tax
liabilities:
Depreciation and

amortization ......
LIFO inventories ....
Other items ...........

Total deferred

1,303,620
64,502
29,464

1,506,650
66,580
49,670

254,430
83,659
59,746

tax liabilities ...

1,397,586

1,622,900

397,835

Net deferred tax

liabilities ...............

$1,054,528

$ 1,355,425

8,077

As of December 31, 2018, the Company’s net deferred income

tax liability relates primarily to deferred tax liabilities recorded for

intangible assets acquired through the Acquisition.

Netted against the Company’s other deferred tax assets were

valuation allowances of $73,543, $44,101 and $17,292 at

December 31, 2018, 2017 and 2016, respectively. The increase in

the valuation allowance in 2018 is primarily due to net operating

losses of certain foreign subsidiaries, as well as foreign tax credit

carryforwards due to uncertainty of their realization. The Company

has $23,210 of domestic net operating loss carryforwards acquired

through acquisitions that have expiration dates through the tax

year 2037, foreign tax credits of $18,781 that expire in calendar

years 2027 through 2028 and foreign net operating losses of

$340,007. 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 2018 to 2038.

(cid:31) 71

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Significant components of the provisions for income taxes

Excluding the tax benefit recorded in the 2017 tax year for the

were as follows:

Current:

2018

2017

2016

Federal .................
Foreign .................
State and local ......

$ 288,755
53,155
52,372

$ 269,330
53,442
39,320

$438,244
31,125
61,402

enactment of the Tax Act, the 2018 effective tax rate was

significantly lower than the 2017 effective tax rate. The decrease in

the effective tax rate was primarily due to the overall impact of the

Tax Act in 2018 and the favorable tax benefits from the reduction

in the corporate domestic income tax rate from 35% to 21%. The

Company received tax benefits in 2018 from filing amended U.S.

Total current ......

394,282

362,092

530,771

income tax returns and favorable adjustments to the 2017 U.S.

Deferred:

Federal .................
Foreign .................
State and local ......

(102,149)
(35,276)
(5,953)

(486,669)
(42,292)
(91,769)

(56,891)
(2,121)
(9,229)

Total deferred ....

(143,378)

(620,730)

(68,241)

Total provisions
(credits) for
income taxes .........

$ 250,904

$ (258,638)

$462,530

Under provisions of the Tax Act, the Company received an

income tax benefit in 2018 of $8,590 related to foreign derived

intangible income and incurred a $5,515 income tax expense

related to Global Intangible Low Taxed Income (GILTI). The

Company has made an accounting policy election to record GILTI

as a period cost.

Significant components of income before income taxes as used

for income tax purposes, were as follows:

income tax return filed in 2018. Due to the reduction in the federal

benefit related to the deduction of state and local income taxes,

the impact of state and local income taxes increased in 2018

compared to 2017. The tax benefit related to employee share

based payments decreased in 2018 compared to 2017 due to a

decrease in the excess tax benefit related to Company stock

options exercised by current and former employees of the

Company and a reduction in the benefit of the deduction for U.S.

income tax purposes from 35% to 21%. The Tax Act eliminated the

favorable deduction for domestic production activities.

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. There has been no significant adjustments proposed

by the IRS at this point in the audits. The IRS and the Joint

Committee of Taxation have approved refund claims for the 2010,

2011 and 2012 tax years. The Company will receive approximately

2018

2017

2016

$5,000 of tax and interest related to the refund claims. In addition,

Domestic ..............
Foreign ................

$1,309,279
50,371

$ 1,415,572
53,738

$1,504,990
90,243

the IRS concluded the refund claim audit for the 2014 tax year of

the Company’s Valspar subsidiary and has approved refunds of

$1,359,650

$1,469,310

$ 1,595,233

$5,426 and submitted them to the Joint Committee of Taxation for

A reconciliation of the statutory federal income tax rate to the

limitations has not expired for the 2013, 2014, 2015, 2016 and 2017

effective tax rate follows:

tax years.

approval. As of December 31, 2018, the federal statute of

As of December 31, 2018, the Company is subject to non-U.S.

income tax examinations for the tax years of 2013 through 2017. In

addition, the Company is subject to state and local income tax

examinations for the tax years 1998 through 2018.

Statutory federal income tax rate .........

21.0%

35.0% 35.0%

2018

2017

2016

Effect of:

State and local income taxes .........
Investment vehicles ......................
Domestic production activities ......
Employee share-based

3.2
(1.2)

2.1
(1.4)
(3.1)

2.3
(1.5)
(2.9)

payments .................................

(3.2)

(5.9)

(2.8)

Research and development

credits .....................................
Amended returns and refunds .......
Other—net ...................................

(1.3)
(1.6)
(.3)

(.9)
(.9)
(.4)

(.2)

(.9)

Subtotal .............................................

16.6%

24.5% 29.0%

Effect of:

Tax Act ........................................
Subsidiary mergers .......................

1.9

(40.8)
(4.2)

Reported effective tax rate ..................

18.5%

(20.5)% 29.0%

(cid:31) 72

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

A reconciliation of the beginning and ending amount of

related to a number of positions taken on current and amended

unrecognized tax benefits is as follows:

income tax returns filed in the U.S. federal, and various state and

2018

2017

2016

Balance at beginning of

year ............................

$ 59,001

$ 32,805

$ 33,873

Additions from the

Acquisition ..................

12,396

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

12,890

6,780

5,674

10,968

4,033

3,890

(1,993)
(1,380)

(1,168)
(368)

(5,901)
(3,763)

limitations ...................

(2,393)

(2,009)

(968)

Balance at end of year .....

$89,489

$ 59,001

$ 32,805

An additional $12,396 in unrecognized tax benefits were

recorded in 2018 related to the Acquisition. Other increases in the

balance of unrecognized tax benefits at December 31, 2018 were

Note 16 – Net Income Per Share

foreign jurisdictions. At December 31, 2018, 2017 and 2016, the

Company had unrecognized tax benefits of $82,960, $49,520,

$27,686, respectively, the recognition of which would have an

effect on the effective tax rate.

Included in the balance of unrecognized tax benefits at

December 31, 2018 is $14,509 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, 2018, there was an increase in income tax interest

and penalties of $4,899. There was a decrease in income tax

interest and penalties of $790 and an increase of $1,410 for the

years ended December 31, 2017 and 2016, respectively. At

December 31, 2018, 2017 and 2016, the Company has separately

accrued $24,757, $14,592 and $9,275, respectively, for the

potential payment of interest and penalties.

2018

2017

2016

Basic

Average shares outstanding .....................................................................................

92,992,457

92,908,638

91,838,603

Net income

Continuing operations(1) ........................................................................................
Discontinued operations .......................................................................................

1,108,746

$ 1,769,488
(41,540)

Net income(1) ....................................................................................................

1,108,746

$ 1,727,948

Basic net income per share

Net income per share(1) .....................................................................................

11.92

19.04
(.44)

18.60

1,132,703

12.33

Diluted

Average shares outstanding ..................................................................................
Stock options and other contingently issuable shares(2) ...........................................
Non-vested restricted stock grants ........................................................................

92,992,457
1,938,586
57,027

92,908,638
1,931,157
87,418

91,838,603
2,089,921
559,562

Average shares outstanding assuming dilution ........................................................

94,988,070

94,927,213

94,488,086

Net income

Continuing operations(1) ....................................................................................
Discontinued operations ....................................................................................

1,108,746

$ 1,769,488
(41,540)

Net income(1) ....................................................................................................

1,108,746

$ 1,727,948

Diluted net income per share

Net income per share(1) .....................................................................................

11.67

18.64
(.44)

18.20

1,132,703

11.99

(1) The year ended December 31, 2017 has been adjusted for an inventory accounting change. See Note 1.
(2) Stock options and other contingently issuable shares excludes 28,321, 638,795 and 62,935 shares at December 31, 2018, 2017 and 2016, respectively, due to their anti-

dilutive effect.

Basic and diluted net income per share are calculated using the treasury stock method.

(cid:31) 73

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

Note 17 – Summary of Quarterly Results of Operations (Unaudited)

Net sales ........................................................................
Gross profit ....................................................................
Net income .....................................................................
Net income per share—basic ............................................
Net income per share—diluted .........................................

1st
Quarter

2nd
Quarter

$3,965,006
1,686,847
250,127
2.68
2.62

$4,773,796
2,038,628
403,604
4.34
4.25

1st
Quarter

2nd
Quarter

$ 2,761,387
1,343,053
239,152
2.58
2.53

$ 3,735,817
1,734,617
319,111
3.44
3.36

2018
3rd
Quarter

$ 4,731,470
2,010,404
354,027
3.80
3.72

2017
3rd
Quarter

$4,507,020
1,901,827
316,606
3.40
3.33

4th
Quarter

$ 4,064,221
1,682,683
100,988
1.09
1.07

4th
Quarter

$3,979,564
1,739,303
853,079
9.14
8.92

Full Year

$17,534,493
7,418,562
1,108,746
11.92
11.67

Full Year

$14,983,788
6,718,800
1,727,948
18.60
18.20

Net income for the fourth quarter of 2018 included increased

Note 18 – Operating Leases

provisions for environmental matters of $135,904 related to one of

The Company leases certain stores, warehouses,

the Company’s four major sites and pension plan settlement

manufacturing facilities, office space and equipment. Renewal

expense of $37,648 resulting from the election of lump sum cash

options are available on the majority of leases and, under certain

payouts to defined benefit plan participants. See Note 14 for

conditions, options exist to purchase certain properties. Rental

information on the provision for environmental matters and Note 7

expense for operating leases, recognized on a straight-line basis

for information on the pension plan settlement expense. Net

over the lease term in accordance with the Leases Topic of the

income in the fourth quarter of 2017 included a tax benefit of

ASC was $552,658, $464,616 and $417,549 for 2018, 2017 and

$668,779 related to Deferred income tax reductions.

2016, respectively. Certain store leases require the payment of

The effect of retrospectively applying the Inventory

contingent rentals based on sales in excess of specified minimums.

Accounting Change (see Note 1) was recorded in the fourth

Contingent rentals included in rent expense were $68,180,

quarter of 2017. The impact of the change was not material to any

$63,300 and $58,865 in 2018, 2017 and 2016, respectively. Rental

other period presented. Therefore the results for the second and

income, as lessor, from real estate leasing activities and sublease

third quarter of 2017 and the first, second and third quarter of 2018

rental income for all years presented was not significant. The

have not been retrospectively adjusted.

following schedule summarizes the future minimum lease

payments under noncancellable operating leases having initial or

remaining terms in excess of one year at December 31, 2018:

2019 .....................................................................
2020 ....................................................................
2021 .....................................................................
2022 ....................................................................
2023 ....................................................................
Later years ...........................................................

412,211
369,570
306,994
245,437
179,892
392,423

Total minimum lease payments ..............................

$1,906,527

(cid:31) 74

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

During 2018, the Company completed transactions to sell and

by manufacturing facilities in the Consumer Brands Group. In

subsequently leaseback certain real estate properties and received

addition, each store sells select purchased associated products.

proceeds totaling $225,345. The transactions were accounted for

The Americas Group sells a variety of architectural paints, coatings

as financing transactions primarily due to the Company’s

and related products through dedicated dealers, home centers,

continuing involvement resulting from the length of the lease term

distributors, hardware stores and other retailers throughout Latin

in comparison to the remaining economic life of the real estate

America. The Americas Group meets regional customer demands

properties. The financing transactions have related future

through developing, licensing, manufacturing, distributing and

obligations of $225,914 at December 31, 2018.

selling a variety of architectural paints, coatings and related

products in North and South America. The loss of any single

Note 19 – Reportable Segment Information

customer would not have a material adverse effect on the business

The Company reports its segment information in the same way

of this segment. At December 31, 2018, The Americas Group

that management internally organizes its business for assessing

consisted of operations from subsidiaries in 10 foreign countries.

performance and making decisions regarding allocation of

During 2018, this segment opened 76 net new stores, consisting of

resources in accordance with the Segment Reporting Topic of the

91 new stores opened (74 in the United States, 16 in Canada, and 1

ASC. The Company has three reportable operating segments: The

in South America) and 15 stores closed (1 in the United States, 2 in

Americas Group, Consumer Brands Group and Performance

Canada, 11 in South America and 1 in Mexico). In 2017 and 2016, this

Coatings Group (individually, a Reportable Segment and

segment opened 101 and 142 net new stores, respectively. A map

collectively, the Reportable Segments). Factors considered in

on the cover flap of this report shows the number of paint stores

determining the three Reportable Segments of the Company

and their geographic location. The CODM uses discrete financial

include the nature of business activities, the management

information about The Americas Group, supplemented with

structure directly accountable to the Company’s chief operating

information by geographic region, product type and customer

decision maker (CODM) for operating and administrative activities,

type, to assess performance of and allocate resources to The

availability of discrete financial information and information

Americas Group as a whole. In accordance with ASC 280-10-50-9,

presented to the Board of Directors. The Company reports all

The Americas Group as a whole is considered the operating

other business activities and immaterial operating segments that

segment, and because it meets the criteria in ASC 280-10-50-10, it

are not reportable in the Administrative segment. See pages 8

is also considered a Reportable Segment.

through 15 of this report for more information about the

Reportable Segments.

The Consumer Brands Group supplies a broad portfolio of

branded and private-label architectural paints, stains, varnishes,

The Company’s CODM has been identified as the Chief Executive

industrial products, wood finishes products, wood preservatives,

Officer because he has final authority over performance assessment

applicators, corrosion inhibitors, aerosols, caulks and adhesives to

and resource allocation decisions. Because of the diverse operations

retailers and distributors throughout North America, as well as in

of the Company, the CODM regularly receives discrete financial

Australia, New Zealand, China and Europe. The Consumer Brands

information about each Reportable Segment as well as a significant

Group also supports the Company’s other businesses around the

amount of additional financial information about certain divisions,

world with new product research and development,

business units or subsidiaries of the Company. The CODM uses all

manufacturing, distribution and logistics. Approximately 55.82% of

such financial information for performance assessment and resource

the total sales of the Consumer Brands Group in 2018 were

allocation decisions. The CODM evaluates the performance of and

allocates resources to the Reportable Segments based on segment

intersegment transfers of products primarily sold through The

Americas Group. At December 31, 2018, the Consumer Brands

profit or loss and cash generated from operations. The accounting

Group consisted of operations in the United States and

policies of the Reportable Segments are the same as those described

subsidiaries in 6 foreign countries. Sales and marketing of certain

in Note 1 of this report.

controlled brand and private labeled products is performed by a

The Americas Group consisted of 4,696 company-operated

direct sales staff. The products distributed through third-party

specialty paint stores in the United States, Canada, Latin America

customers are intended for resale to the ultimate end-user of the

and the Caribbean region at December 31, 2018. Each store in this

product. The Consumer Brands Group had sales to certain

segment is engaged in servicing the needs of architectural and

industrial paint contractors and do-it-yourself homeowners. The

customers that, individually, may be a significant portion of the

sales of the segment. However, the loss of any single customer

Americas Group company-owned stores market and sell Sherwin-

would not have a material adverse effect on the overall

Williams® and other controlled brand architectural paint and

profitability of the segment. This segment incurred most of the

coatings, protective and marine products, OEM product finishes

Company’s capital expenditures related to ongoing environmental

and related products. The majority of these products are produced

compliance measures at sites currently in operation. The CODM

(cid:31) 75

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

uses discrete financial information about the Consumer Brands

headquarters site, and disposal of idle facilities. Sales of this

Group, supplemented with information by product type and

segment represents external leasing revenue of excess

customer type, to assess performance of and allocate resources to

headquarters space or leasing of facilities no longer used by the

the Consumer Brands Group as a whole. In accordance with ASC

Company in its primary businesses. Material gains and losses from

280-10-50-9, the Consumer Brands Group as a whole is

the sale of property are infrequent and not a significant operating

considered the operating segment, and because it meets the

factor in determining the performance of the Administrative

criteria in ASC 280-10-50-10, it is also considered a Reportable

segment.

Segment.

Net external sales of all consolidated foreign subsidiaries were

The Performance Coatings Group develops and sells industrial

$4,027,775, $2,959,785 and $1,722,246 for 2018, 2017 and 2016,

coatings for wood finishing and general industrial (metal and

respectively.

plastic) applications, automotive refinish, protective and marine

Long-lived assets consisted of Property, plant and equipment,

coatings, coil coatings, packaging coatings and performance-

Goodwill, Intangible assets, Deferred pension assets and Other

based resins and colorants worldwide. This segment licenses

assets. The aggregate total of long-lived assets for the Company

certain technology and trade names worldwide. Sherwin-Williams®

was $14,789,793, $15,492,586 and, $3,125,222 at December 31,

and other controlled brand products are distributed through The

2018, 2017 and 2016, respectively. Long-lived assets of

Americas Group and this segment’s 282 company-operated

consolidated foreign subsidiaries totaled $3,289,794, $3,691,035

branches and by a direct sales staff and outside sales

and $477,889 at December 31, 2018, 2017 and 2016, respectively.

representatives to retailers, dealers, jobbers, licensees and other

Total Assets of the Company were $19,134,279, $19,899,517 and

third-party distributors. The Performance Coatings Group had

$6,752,521 at December 31, 2018, 2017 and 2016, respectively. Total

sales to certain customers that, individually, may be a significant

assets of consolidated foreign subsidiaries were $4,809,356,

portion of the sales of the segment. However, the loss of any

$5,253,995 and $1,233,666, which represented 25.1 percent,

single customer would not have a material adverse effect on the

26.4 percent and 18.3 percent of the Company’s total assets at

overall profitability of the segment. During 2018, this segment

December 31, 2018, 2017 and 2016, respectively.

opened 3 new branches and closed 11 branches for a net decrease

No single geographic area outside the United States was

of 8 branches. At December 31, 2018, the Performance Coatings

significant relative to consolidated net external sales or

Group consisted of operations in the United States and

consolidated long-lived assets. Export sales and sales to any

subsidiaries in 45 foreign countries. The CODM uses discrete

individual customer were each less than 10 percent of

financial information about the Performance Coatings Group

consolidated sales to unaffiliated customers during all years

reportable segment, supplemented with information about

presented.

geographic divisions, business units and subsidiaries, to assess

In the reportable segment financial information that follows,

performance of and allocate resources to the Performance

Segment profit was total net sales and intersegment transfers less

Coatings Group as a whole. In accordance with ASC 280-10-50-9,

operating costs and expenses. Identifiable assets were those

the Performance Coatings Group as a whole is considered the

directly identified with each reportable segment. The

operating segment, and because it meets the criteria in ASC

Administrative segment assets consisted primarily of cash and

280-10-50-10, it is also considered a Reportable Segment. A map

cash equivalents, investments, deferred pension assets and

on the cover flap of this report shows the number of branches and

headquarters property, plant and equipment. The margin for each

their geographic locations.

reportable segment was based upon total net sales and

The Administrative segment includes the administrative

intersegment transfers. Domestic intersegment transfers were

expenses of the Company’s corporate headquarters site. Also

primarily accounted for at the approximate fully absorbed

included in the Administrative segment is interest expense,

manufactured cost, based on normal capacity volumes, plus

interest and investment income, certain expenses related to

customary distribution costs for paint products. Non-paint

closed facilities and environmental-related matters, and other

domestic and all international intersegment transfers were

expenses which are not directly associated with the Reportable

accounted for at values comparable to normal unaffiliated

Segments. The Administrative segment does not include any

customer sales. All intersegment transfers are eliminated within

significant foreign operations. Also included in the Administrative

the Administrative segment. Certain amounts in the following

segment is a real estate management unit that is responsible for

table for 2017 have been adjusted to reflect the Inventory

the ownership, management and leasing of non-retail properties

Accounting Change (see Note 1).

held primarily for use by the Company, including the Company’s

(cid:31) 76

Notes to Consolidated Financial Statements
(thousands of dollars unless otherwise indicated)

(millions of dollars)

The Americas
Group

Consumer
Brands
Group

Performance
Coatings
Group

Administrative

2018

The Americas
Group

Consumer
Brands
Group

Performance
Coatings
Group

Administrative

Net external sales ..........................................
Intersegment transfers ...................................

Total net sales and intersegment transfers .......
Segment profit ..............................................
Interest expense ............................................
Administrative expenses and other .................

Income from continuing operations before

income taxes .............................................
Reportable segment margins ..........................
Identifiable assets ..........................................
Capital expenditures ......................................
Depreciation .................................................
Amortization .................................................

$9,625
1

$9,626
$ 1,898

$ 1,898
19.7%
$ 4,071
70
72
5

$ 2,739
3,460

$ 6,199
$ 261

$ 261
4.2%
$ 5,385
96
89
97

$ 5,166
22

$ 5,188
$ 452

$ 452
8.7%
$ 8,535
61
78
211

2017

Net external sales ..........................................
Intersegment transfers ...................................

Income from continuing operations before

$ 9,117
6

$ 9,123
$ 1,769

$ 1,769
19.4%
$4,359
69
75
4

$ 2,155
3,162

$ 5,317
$ 203

$ 203
3.8%
$ 5,816
95
92
61

$ 3,706
22

$ 3,728
$ 263

$ 263
7.1%
$ 8,265
37
69
135

The
Americas
Group

Consumer
Brands
Group

2016
Performance
Coatings
Group

Net external sales .................................................
Intersegment transfers ..........................................

Total net sales and intersegment transfers ..............
Segment profit .....................................................
Interest expense ...................................................
Administrative expenses and other ........................

Income from continuing operations before income
taxes ................................................................
Reportable segment margins .................................
Identifiable assets .................................................
Capital expenditures .............................................
Depreciation ........................................................
Amortization ........................................................

$8,377
39

$8,416
$1,606

$1,606
19.1%
$ 2,148
100
76
4

$ 1,528
2,775

$4,303
$ 301

$ 301
7.0%
$2,005
99
47
5

$1,946
15

$ 1,961
$ 257

$ 257
13.1%
$ 818
19
20
9

Consolidated
Totals

$ 17,534

$ 17,534
$ 2,611
(367)
(884)

4
(3,483)

$(3,479)

$ (367)
(884)

$ (1,251)

1,360

1,143
24
39
5

$ 19,134
251
278
318

Consolidated
Totals

$ 14,984

$ 14,984
$ 2,235
(263)
(503)

6
(3,190)

$ (3,184)

$ (263)
(503)

$ (766)

1,469

$ 1,460
22
49
7

$ 19,900
223
285
207

Administrative

5
(2,829)

$(2,824)

$ (154)
(415)

Consolidated
Totals

$ 11,856

$ 11,856
$ 2,164
(154)
(415)

$ (569)

$ 1,595

1,782
21
29
7

$ 6,753
239
172
25

(cid:31) 77

Cautionary Statement Regarding Forward-looking Information

Certain statements contained in “Management’s Discussion

additional 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 tariff policies, as well as changes

forward-looking statements. Forward-looking statements are

in accounting policies and standards and taxation requirements

necessarily subject to risks, uncertainties and other factors, many

(such as new tax laws and new or revised tax law interpretations);

of which are outside our control, that could cause actual results to

(n) the nature, cost, quantity and outcome of pending and future

differ materially from such statements and from our historical

litigation and other claims, including the lead pigment and lead-

results and experience. These risks, uncertainties and other factors

based paint litigation, and the effect of any legislation and

include such things as: (a) general business conditions, strengths

administrative regulations relating thereto; and (o) adverse

of retail and manufacturing economies and growth in the coatings

weather conditions and natural disasters.

industry; (b) changes in general domestic economic conditions

Readers are cautioned that it is not possible to predict or

such as inflation rates, interest rates, tax rates, unemployment

identify all of the risks, uncertainties and other factors that may

rates, higher labor and healthcare costs, recessions, and changing

affect future results and that the above list should not be

government policies, laws and regulations; (c) changes in raw

considered to be a complete list. Any forward-looking statement

material and energy supplies and pricing; (d) changes in our

speaks only as of the date on which such statement is made, and

relationships with customers and suppliers; (e) our ability to

we undertake no obligation to update or revise any forward-

successfully integrate past and future acquisitions into our existing

looking statement, whether as a result of new information, future

operations, including Valspar, as well as the performance of the

events or otherwise except as otherwise required by law.

businesses acquired; (f) risks inherent in the achievement of

(cid:31) 78

Shareholder Information

Transfer Agent & Registrar
Our transfer agent, EQ Shareowner

Services, maintains the records for our

registered shareholders and can help

with a wide variety of shareholder

related services, including 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

Annual Meeting
The annual meeting of shareholders will

be held in the Landmark Conference

Independent Registered Public
Accounting Firm
Ernst & Young LLP

Center, 927 Midland Building,

Cleveland, Ohio

101 W. Prospect Avenue, Cleveland, Ohio

on Wednesday, April 17, 2019 at

9:00 A.M., local time.

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

Stock Trading
Sherwin-Williams Common Stock –

Symbol, SHW – is traded on the

New York Stock Exchange.

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) ........................................

2018

$ 477.98
365.24
393.46
6,244
180,900

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

Quarterly Stock Prices and Dividends

Quarter

1st ...................
2nd .................
3rd ..................
4th ..................

2018

High

$ 432.84
407.57
477.98
457.00

Low

$385.25
367.66
406.76
365.24

2017

Dividend

Quarter

$.860
.860
.860
.860

1st ...................
2nd .................
3rd .................
4th .................

High

$315.36
361.03
359.72
414.34

Low

Dividend

$274.54
308.35
328.97
359.43

$.850
.850
.850
.850

(cid:31) 79

Corporate Officers and Operating Management

Corporate Officers

Operating Management

John G. Morikis, 55*

Chairman, President and
Chief Executive Officer

Allen J. Mistysyn, 50*
Senior Vice President - Finance

and Chief Financial Officer

Jane M. Cronin, 51*
Senior Vice President -

Corporate Controller

Mary L. Garceau, 46*
Senior Vice President, General

Counsel and Secretary

Thomas P. Gilligan, 58*
Senior Vice President -

Human Resources

Robert J. Wells, 61*
Senior Vice President - Corporate

Communications and Public Affairs

Lawrence J. Boron, 60
Vice President - Taxes and

Assistant Secretary

John D. Hullibarger, 38
Vice President - Corporate Audit

and Loss Prevention

Jeffrey J. Miklich, 44
Vice President and Treasurer

Stephen J. Perisutti, 56
Vice President, Deputy General

Counsel and Assistant Secretary

Bryan J. Young, 43
Vice President - Corporate

Strategy & Development

Joel D. Baxter, 58*
President & General Manager

Global Supply Chain Division

Consumer Brands Group

Justin T. Binns, 43
President & General Manager

Automotive Finishes Division

Performance Coatings Group

Lee B. Diamond, 49
President & General Manager

Canada Division

The Americas Group

Aaron M. Erter, 45*
President

Consumer Brands Group

Peter J. Ippolito, 54*
President

The Americas Group

Bruce G. Irussi, 58
President & General Manager

General Industrial Coatings Division

Performance Coatings Group

Karl J. Jorgenrud, 42
President & General Manager

Protective & Marine Division

Robert F. Lynch, 58

President & General Manager

Retail - North America

Consumer Brands Group

Mark A. Provenson, 45
President & General Manager

Eastern Division

The Americas Group

Jonathan N. Reid, 47
President & General Manager

South Western Division

The Americas Group

David B. Sewell, 50*
President

Performance Coatings Group

Samuel W. Shoemaker, 57

President & General Manager

Global Packaging, Coil, and Coatings

Resins & Colorants Division

Performance Coatings Group

Todd A. Stephenson, 49
President & General Manager

Mid Western Division

The Americas Group

Todd V. Wipf, 54

Performance Coatings Group

President & General Manager

Dennis H. Karnstein, 52
President & General Manager

Industrial Wood Coatings Division

Performance Coatings Group

Southeastern Division

The Americas Group

* Executive Officer as defined by the Securities Exchange Act of 1934

(cid:31) 80

branches

CANADA

facility

241

paint stores

facilities

4,032

paint stores

223

branches

UNITED

STATES

facilities

paint stores

CARIBBEAN

LATIN AMERICA /

SOUTH AMERICA

branches

facilities

342

paint stores

facilities

The Americas Group

Consumer Brands Group

Performance Coatings Group

Corporate headquarters

New Hampshire

Manitoba

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

269

313

159

155

Massachusetts

Michigan

116

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

142

164

199

200

339

125

105

West Virginia

Wisconsin

Wyoming

CANADA

Alberta

British Columbia 49

New Brunswick

Newfoundland

Nova Scotia

Ontario

Prince Edward Island 1

Quebec

Saskatchewan

CARIBBEAN

LATIN AMERICA

Brazil

Chile

Ecuador

Mexico

Uruguay

TOTAL

147

4,696

Board of
Directors

branches

facilities

EMEAI

ASIA-PACIFIC

branches

facilities

paint stores

facilities

AUSTRALIA/NEW ZEALAND

Our Global

Footprint

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, Asia-Pacific and Australia/

New Zealand.

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

342 stores throughout Latin America and sells through more than 700 dedicated dealer

outlets, primarily located in Brazil, Chile, Ecuador, Mexico and Uruguay.

•

Consumer Brands Group includes company-operated outlets in Australia and New

Zealand and a highly efficient global supply chain consisting of 95 manufacturing plants

and distribution centers.

•

Performance Coatings Group sells to a growing customer base in more than

120 countries around the world and has 282 company-operated general industrial,

industrial wood, protective and marine, and automotive branches.

1. Christine A. Poon, 66*
Executive in Residence
The Max M. Fisher College of Business
The Ohio State University
Retired, former Vice Chairman
Johnson & Johnson

2. Steven H. Wunning, 67

Retired, former Group President
Caterpillar Inc.

3. Arthur F. Anton, 61*

Chairman and Chief Executive Officer
Swagelok Company

5. John G. Morikis, 55

9. Susan J. Kropf, 70

Chairman, President and
Chief Executive Officer
The Sherwin-Williams Company

Retired, former President and
Chief Operating Officer
Avon Products, Inc.

10. Michael H. Thaman, 55

Chairman and Chief Executive Officer
Owens Corning

6. Richard J. Kramer, 55*
Chairman of the Board,
Chief Executive Officer and President
The Goodyear Tire & Rubber Company

7. John M. Stropki, 68

Retired, former Chairman, President
and Chief Executive Officer
Lincoln Electric Holdings, Inc.

4. Matthew Thornton III, 60*

8. David F. Hodnik, 71

Executive Vice President and
Chief Operating Officer
FedEx Freight
FedEx Corporation

Retired, former President and
Chief Executive Officer
Ace Hardware Corporation

•

The Americas Group has 4,354 company-operated specialty paint stores in the United