UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission file number 1-04851
 
THE SHERWIN-WILLIAMS COMPANY
(Exact name of registrant as specified in its charter)
OHIO
  
34-0526850
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
101 West Prospect Avenue, Cleveland, Ohio
  
44115-1075
(Address of principal executive offices)
  
(Zip Code)
(216) 566-2000
Registrant’s telephone number, including area code
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
  
Name of each exchange on which registered
Common Stock, Par Value $1.00
  
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   x         No   o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.        Yes   o         No   x
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes   x         No   o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).        Yes   x         No   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.         x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer     x
 
Accelerated filer     o
  
Non-accelerated filer     o
 
Smaller reporting company     o
 
 
 
  
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes   o         No   x
At January 31, 2017 , 93,307,230  shares of common stock were outstanding, net of treasury shares. The aggregate market value of common stock held by non-affiliates of the Registrant at June 30, 2016 was $27,037,033,632 (computed by reference to the price at which the common stock was last sold on such date).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Annual Report to Shareholders for the fiscal year ended December 31, 2016 (“ 2016 Annual Report”) are incorporated by reference into Parts I, II and IV of this report.
Portions of our Proxy Statement for the 2017 Annual Meeting of Shareholders (“Proxy Statement”) to be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended December 31, 2016 are incorporated by reference into Part III of this report.

 



THE SHERWIN-WILLIAMS COMPANY
Table of Contents
 
   
 
Page
 
 
Item 1.
 
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.
Item 16.
 
 




PART I
ITEM 1.    BUSINESS
Introduction
The Sherwin-Williams Company, founded in 1866 and incorporated in Ohio in 1884, is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region, Europe and Asia. Our principal executive offices are located at 101 West Prospect Avenue, Cleveland, Ohio 44115-1075, telephone (216) 566-2000. As used in this report, the terms “Sherwin-Williams,” “Company,” “we” and “our” mean The Sherwin-Williams Company and its consolidated subsidiaries unless the context indicates otherwise.
Available Information
We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. You may access these documents on the “Investor Relations” page of our website at www.sherwin.com.
We also make available free of charge on our website our Corporate Governance Guidelines, our Director Independence Standards, our Code of Conduct and the charters of our Audit Committee, our Compensation and Management Development Committee and our Nominating and Corporate Governance Committee. You may access these documents in the “Corporate Governance” section on the “Investor Relations” page of our website at www.sherwin.com.
Basis of Reportable Segments
We report our segment information in the same way that management internally organizes our business for assessing performance and making decisions regarding allocation of resources in accordance with the Segment Reporting Topic of the Financial Accounting Standards Board Accounting Standards Codification (ASC). We have four reportable operating segments: Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group (individually, a "Reportable Segment" and collectively, the “Reportable Segments”). Factors considered in determining our Reportable Segments include the nature of business activities, the management structure directly accountable to the Company’s chief operating decision maker (CODM) for operating and administrative activities, availability of discrete financial information and information presented to our Board of Directors. We report all other business activities and immaterial operating segments that are not reportable in the Administrative segment. For more information about the Reportable Segments, see pages 8 through 17 of our 2016 Annual Report, which is incorporated herein by reference.
The Company’s CODM has been identified as the Chief Executive Officer because he has final authority over performance assessment and resource allocation decisions. Because of the diverse operations of the Company, the CODM regularly receives discrete financial information about each Reportable Segment as well as a significant amount of additional financial information about certain divisions, business units or subsidiaries of the Company. The CODM uses all such financial information for performance assessment and resource allocation decisions. The CODM evaluates the performance of and allocates resources to the Reportable Segments based on profit or loss before income taxes and cash generated from operations. The accounting policies of the Reportable Segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements on pages  44 through 48 of our 2016 Annual Report, which is incorporated herein by reference.
Paint Stores Group
The Paint Stores Group consisted of 4,180 company-operated specialty paint stores in the United States, Canada, Puerto Rico, Virgin Islands, Grenada, Trinidad and Tobago, St. Maarten, Jamaica, Curacao, Aruba, St. Lucia and Barbados at December 31, 2016 . Each store in this segment is engaged in the related business activity of selling paint, coatings and related products to end-use customers. The Paint Stores Group markets and sells Sherwin-Williams ® branded architectural paint and coatings, protective and marine products, original equipment manufacturer (“OEM”) product finishes and related items. These products are produced by manufacturing facilities in the Consumer Group. In addition, each store sells select purchased associated products. The loss of any single customer would not have a material adverse effect on the business of this segment. During 2016 , this segment opened 94 net new stores, consisting of 109 new stores opened ( 86 in the United States, 21 in Canada, 1 in Aruba and 1 in Barbados) and 15 stores closed ( 9 in the United States and 6 in Canada). During 2015 , this segment opened 83 net new stores. During 2014 , this segment opened 95 net new stores. A map on the cover flap of our 2016 Annual Report, which is incorporated herein by reference, shows the number of paint stores and their geographic locations. The CODM uses discrete financial information about the Paint Stores Group, supplemented with information by geographic region, product type and customer type, to assess performance of and allocate resources to the Paint Stores Group as a whole. In

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accordance with ASC 280-10-50-9, the Paint Stores Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment.
Consumer Group
The Consumer Group develops, manufactures and distributes a variety of paint, coatings and related products to third party customers primarily in the United States and Canada and the Paint Stores Group. Approximately 64 percent of the total sales of the Consumer Group in 2016 were intersegment transfers of products primarily sold through the Paint Stores Group. Sales and marketing of certain controlled brand and private labeled products are performed by a direct sales staff. The products distributed through third party customers are intended for resale to the ultimate end-user of the product. The Consumer Group had sales to certain customers that, individually, may be a significant portion of the sales of the segment. However, the loss of any single customer would not have a material adverse effect on the overall profitability of the segment. This segment incurred most of the Company’s capital expenditures related to ongoing environmental compliance measures. The CODM uses discrete financial information about the Consumer Group, supplemented with information by product type and customer type, to assess performance of and allocate resources to the Consumer Group as a whole. In accordance with ASC 280-10-50-9, the Consumer Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment.
Global Finishes Group
The Global Finishes Group develops, licenses, manufactures, distributes and sells a variety of protective and marine products, automotive finishes and refinish products, OEM product finishes and related products in North and South America, Europe and Asia. This segment meets the demands of its customers for a consistent worldwide product development, manufacturing and distribution presence and approach to doing business. This segment licenses certain technology and trade names worldwide. Sherwin-Williams ® and other controlled brand products are distributed through the Paint Stores Group and this segment’s 288 company-operated branches and by a direct sales staff and outside sales representatives to retailers, dealers, jobbers, licensees and other third party distributors. During 2016 , this segment opened 5 new branches ( 3 in the United States and 2 in Canada) and closed 13 branches ( 10 in the United States, 2 in Canada and 1 in Chile) for a net decrease of 8 branches. At December 31, 2016 , the Global Finishes Group consisted of operations in the United States and subsidiaries in 34  foreign countries. The CODM uses discrete financial information about the Global Finishes Group, supplemented with information about geographic divisions, business units, and subsidiaries, to assess performance of and allocate resources to the Global Finishes Group as a whole. In accordance with ASC 280-10-50-9, the Global Finishes Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment. A map on the cover flap of our 2016 Annual Report, which is incorporated herein by reference, shows the number of branches and their geographic locations.
Latin America Coatings Group
The Latin America Coatings Group develops, licenses, manufactures, distributes and sells a variety of architectural paint and coatings, protective and marine products, OEM product finishes and related products in North and South America. This segment meets the demands of its customers for consistent regional product development, manufacturing and distribution presence and approach to doing business. Sherwin-Williams ® and other controlled brand products are distributed through this segment’s 339 company-operated stores and by a direct sales staff and outside sales representatives to retailers, dealers, licensees and other third party distributors. During 2016 , this segment opened 49 new stores ( 31 in South America and 18 in Mexico) and closed 1 store in South America for a net increase of 48 stores. At December 31, 2016 , the Latin America Coatings Group consisted of operations from subsidiaries in 9 foreign countries and 4 foreign joint ventures. The CODM uses discrete financial information about the Latin America Coatings Group, supplemented with information about geographic divisions, business units, and subsidiaries, to assess performance of and allocate resources to the Latin America Coatings Group as a whole. In accordance with ASC 280-10-50-9, the Latin America Coatings Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment. A map on the cover flap of our 2016 Annual Report, which is incorporated herein by reference, shows the number of stores and their geographic locations.
Administrative Segment
The Administrative segment includes the administrative expenses of the Company’s corporate headquarters site. Also included in the Administrative segment was interest expense, interest and investment income, certain expenses related to closed facilities and environmental-related matters, and other expenses which were not directly associated with the Reportable Segments. The Administrative segment did not include any significant foreign operations. Also included in the Administrative segment was a real estate management unit that is responsible for the ownership, management, and leasing of non-retail properties held primarily for use by the Company, including the Company’s headquarters site, and disposal of idle facilities. Sales of this segment represented external leasing revenue of excess headquarters space or leasing of facilities no longer used

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by the Company in its primary businesses. Material gains and losses from the sale of property are infrequent and not a significant operating factor in determining the performance of the Administrative segment.
Segment Financial Information
For financial information regarding our Reportable Segments, including net external sales, segment profit, identifiable assets and other information by Reportable Segment, see Note 18 of the Notes to Consolidated Financial Statements on pages  72 through 75 of our 2016 Annual Report, which is incorporated herein by reference.
Domestic and Foreign Operations
Financial and other information regarding domestic and foreign operations is set forth in Note 18 of the Notes to Consolidated Financial Statements on page  73 of our 2016 Annual Report, which is incorporated herein by reference.
Additional information regarding risks attendant to foreign operations is set forth on page  31 of our 2016 Annual Report under the caption “Market Risk” of “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” which is incorporated herein by reference.
Business Developments
For additional information regarding our business and business developments, see pages  8 through 17 of our 2016 Annual Report and the “Letter to Shareholders” on pages  2 through  7 of our 2016 Annual Report, which is incorporated herein by reference.
Raw Materials and Products Purchased for Resale
We believe we generally have adequate sources of raw materials and fuel supplies used in our business. There are sufficient suppliers of each product purchased for resale that none of the Reportable Segments anticipate any significant sourcing problems during 2017 . See Item 1A Risk Factors for more information regarding cost and sourcing of raw materials.
Seasonality
The majority of the sales for the Reportable Segments traditionally occur during the second and third quarters. There is no significant seasonality in sales for the Administrative segment.
Working Capital
In order to meet increased demand during the second and third quarters, the Company usually builds its inventories during the first quarter. Working capital items (inventories and accounts receivable) are generally financed through short-term borrowings, which include the use of lines of credit and the issuance of commercial paper. For a description of the Company’s liquidity and capital resources, see pages  26 through  31 of our 2016 Annual Report under the caption “Financial Condition, Liquidity and Cash Flow” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated herein by reference.
Trademarks and Trade Names
Customer recognition of our trademarks and trade names collectively contribute significantly to our sales. The major trademarks and trade names used by each of the Reportable Segments are set forth below.
Paint Stores Group:     Sherwin-Williams ® , ProMar ® , SuperPaint ® , A-100 ® , Duron ® , MAB ® , PrepRite ® , Duration ® , Duration Home ® , Harmony ® , ProClassic ® , Woodscapes ® , SuperDeck ® , Cashmere ® , HGTV HOME ® by Sherwin-Williams, Emerald ® , Duracraft ® , Solo ® , ProIndustrial , ProPark ® , Frazee ® , Parker Paints, Kwal ® , Color Wheel , General Paint and Paint Shield ® .
Consumer Group:     Dutch Boy ® , Krylon ® , Minwax ® , Thompson’s ® WaterSeal ® , Pratt & Lambert ® , Martin Senour ® , H&C ® , White Lightning ® , Dupli-Color ® , Rubberset ® , Purdy ® , Bestt Liebco ® , Accurate Dispersions , Uniflex ® , VHT ® , Kool Seal ® , Snow Roof ® , Altax , Tri-Flow ® , Sprayon ® , Ronseal , DuraSeal ® , Geocel ® , Conco ® , Duckback ® , SuperDeck ® , Mason's Select ® and HGTV HOME ® by Sherwin-Williams.
Global Finishes Group:     Sherwin-Williams ® , Lazzuril ® , Excelo ® , Baco ® , Planet Color ® , AWX Performance Plus , Ultra , Ultra-Cure ® , Martin Senour ® , Kem Aqua ® , Sher-Wood ® , Powdura ® , Polane ® , Euronavy ® , Inchem ® , Sayerlack ® , AcromaPro ® , Firetex ® , Macropoxy ® , Oece , Arti , Acrolon ® , Sher-Nar ® , PermaClad ® , Heat-Flex ® , Magnalux , ATX , Genesis ® , Dimension ® , Finish 1 , Lanet , DFL , Conely , Envirolastic ® and Fastline .
Latin America Coatings Group:     Sherwin-Williams ® , Marson ® , Metalatex ® , Novacor ® , Loxon ® , Colorgin ® , Martin Senour ® , Sumare ® , Condor ® , Krylon ® , Kem Tone ® , Minwax ® and Pratt & Lambert ® .

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Patents
Although patents and licenses are not of material importance to our business as a whole or any segment, the Global Finishes Group and Latin America Coatings Group derive a portion of their income from the licensing of technology, trademarks and trade names to foreign companies.
Backlog and Productive Capacity
Backlog orders are not significant in the business of any Reportable Segment since there is normally a short period of time between the placing of an order and shipment. We believe that sufficient productive capacity currently exists to fulfill our needs for paint, coatings and related products through 2017 .
Research and Development
For information regarding our costs of research and development included in technical expenditures, see Note 1 of the Notes to Consolidated Financial Statements on page  47 of our 2016 Annual Report, which is incorporated herein by reference.
Competition
We experience competition from many local, regional, national and international competitors of various sizes in the manufacture, distribution and sale of our paint, coatings and related products. We are a leading manufacturer and retailer of paint, coatings and related products to professional, industrial, commercial and retail customers, however, our competitive position varies for our different products and markets.
In the Paint Stores Group, competitors include other paint and wallpaper stores, mass merchandisers, home centers, independent hardware stores, hardware chains and manufacturer-operated direct outlets. Product quality, product innovation, breadth of product line, technical expertise, service and price determine the competitive advantage for this segment.
In the Consumer Group, domestic and foreign competitors include manufacturers and distributors of branded and private labeled paint and coatings products. Technology, product quality, product innovation, breadth of product line, technical expertise, distribution, service and price are the key competitive factors for this segment.
The Global Finishes Group has numerous competitors in its domestic and foreign markets with broad product offerings and several others with niche products. Key competitive factors for this segment include technology, product quality, product innovation, breadth of product line, technical expertise, distribution, service and price.
In the Latin America Coatings Group, competitors include other paint and wallpaper stores, mass merchandisers, home centers, independent hardware stores, hardware chains and manufacturer-operated direct outlets. Product quality, product innovation, breadth of product line, technical expertise, service and price determine the competitive advantage for this segment.
The Administrative segment has many competitors consisting of other real estate owners, developers and managers in areas in which this segment owns property. The main competitive factors are the availability of property and price.
Employees
We employed 42,550  persons at December 31, 2016 .
Environmental Compliance
For additional information regarding environmental-related matters, see page  29 of our 2016 Annual Report under the caption “Environmental-Related Liabilities” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes  1 , 8 and 13 of the Notes to Consolidated Financial Statements on pages 46 , 61 and 68 , respectively, of our 2016 Annual Report, which is incorporated herein by reference.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in “Management's Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon management's current expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth, future business plans and the costs and potential liability for environmental-related matters and the lead pigment and lead-based paint litigation. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “expects,” “anticipates,” “believes,” “will,” “will likely result,” “will continue,” “plans to” and similar expressions.
Readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside our control, that could cause actual

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results to differ materially from such statements and from our historical results and experience. These risks, uncertainties and other factors include such things as:
general business conditions, strengths of retail and manufacturing economies and the growth in the coatings industry;
legal, regulatory and other matters that may affect the timing of our ability to complete the planned acquisition of The Valspar Corporation, or Valspar, if at all, including the potential for regulatory authorities to require divestitures in connection with the proposed transaction;
our ability to successfully integrate past and future acquisitions into our existing operations, including Valspar, as well as the performance of the businesses acquired;
risks inherent in the achievement of cost synergies and the timing thereof for the planned acquisition of Valspar;
competitive factors, including pricing pressures and product innovation and quality;
changes in raw material and energy supplies and pricing;
changes in our relationships with customers and suppliers;
our ability to attain cost savings from productivity initiatives;
changes in general domestic economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions, and changing government policies, laws and regulations;
risks and uncertainties associated with our expansion into and our operations in Asia, Europe, South America and other foreign markets, including general economic conditions, inflation rates, recessions, foreign currency exchange rates, foreign investment and repatriation restrictions, legal and regulatory constraints, civil unrest and other external economic and political factors;
the achievement of growth in foreign markets, such as Asia, Europe and South America;
increasingly stringent domestic and foreign governmental regulations, including those affecting health, safety and the environment;
inherent uncertainties involved in assessing our potential liability for environmental-related activities;
other changes in governmental policies, laws and regulations, including changes in accounting policies and standards and taxation requirements (such as new tax laws and new or revised tax law interpretations);
the nature, cost, quantity and outcome of pending and future litigation and other claims, including the lead pigment and lead-based paint litigation, and the effect of any legislation and administrative regulations relating thereto; and
unusual weather conditions.

Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the above list should not be considered to be a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
ITEM 1A.    RISK FACTORS
The risks described below and in other documents that we file from time to time with the Securities and Exchange Commission could materially and adversely affect our business, results of operations, cash flow, liquidity or financial condition.

Adverse changes in general business and economic conditions in the United States and worldwide may adversely affect our results of operations, cash flow, liquidity or financial condition.
Our business is sensitive to global and regional business and economic conditions. Adverse changes in such conditions in the United States and worldwide may reduce the demand for some of our products and impair the ability of those with whom we do business to satisfy their obligations to us, each of which could adversely affect our results of operations, cash flow, liquidity or financial condition. Higher inflation rates, interest rates, tax rates and unemployment rates, higher labor and healthcare costs, recessions, changing governmental policies, laws and regulations, and other economic factors could also adversely affect demand for some of our products and our results of operations, cash flow, liquidity or financial condition and that of our customers, vendors, and suppliers.
A weakening or reversal of the general economic recovery in the United States and other countries and regions in which we do business, or the continuation or worsening of the economic downturn in other countries and regions, may adversely affect our results of operations, cash flow, liquidity or financial condition.
Global economic uncertainty continues to exist. A weakening or reversal of the general economic recovery in the United States and other countries and regions in which we do business, or the continuation or worsening of the economic downturn in other countries and regions, may adversely impact our net sales, the collection of accounts receivable, funding for working capital needs, expected cash flow generation from current and acquired businesses, and our investments, which may adversely impact our results of operations, cash flow, liquidity or financial condition.

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We finance a portion of our sales through trade credit. Credit markets remain tight, and some customers who require financing for their businesses have not been able to obtain necessary financing. A continuation or worsening of these conditions could limit our ability to collect our accounts receivable, which could adversely affect our results of operations, cash flow, liquidity or financial condition.
We generally fund a portion of our seasonal working capital needs and obtain funding for other general corporate purposes through short-term borrowings backed by our revolving credit facility and other financing facilities. If any of the banks in these credit and financing facilities are unable to perform on their commitments, which could adversely affect our ability to fund seasonal working capital needs and obtain funding for other general corporate purposes, our cash flow, liquidity or financial condition could be adversely impacted.
Although we currently have available credit facilities to fund our current operating needs, we cannot be certain that we will be able to replace our existing credit facilities or refinance our existing or future debt when necessary. Our cost of borrowing and ability to access the capital markets are affected not only by market conditions, but also by our debt and credit ratings assigned by the major credit rating agencies. Downgrades in these ratings will increase our cost of borrowing and could have an adverse effect on our access to the capital markets, including our access to the commercial paper market. An inability to access the capital markets could have a material adverse effect on our results of operations, cash flow, liquidity or financial condition.
We have goodwill and intangible assets recorded on our balance sheet. We periodically evaluate the recoverability of the carrying value of our goodwill and intangible assets whenever events or changes in circumstances indicate that such value may not be recoverable. Impairment assessment involves judgment as to assumptions regarding future sales and cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions and may result in changes in our estimates of future sales and cash flows that may result in us incurring substantial impairment charges, which would adversely affect our results of operations or financial condition.
We hold investments in equity and debt securities in some of our defined benefit pension plans. A decrease in the value of plan assets resulting from a general financial downturn may cause a negative pension plan investment performance, which may adversely affect our results of operations, cash flow, liquidity or financial condition.
Protracted duration of economic downturns in cyclical segments of the economy may depress the demand for some of our products and adversely affect our sales, earnings, cash flow or financial condition.
Portions of our business involve the sale of paint, coatings and related products to segments of the economy that are cyclical in nature, particularly segments relating to construction, housing, manufacturing and oil production, refining, storage and transportation. Our sales to these segments are affected by the levels of discretionary consumer and business spending in these segments. During economic downturns in these segments, the levels of consumer and business discretionary spending may decrease, and the recovery of these segments may lag behind the recovery of the overall economy. This decrease in spending will likely reduce the demand for some of our products and may adversely affect our sales, earnings, cash flow or financial condition.
During the financial crisis of 2008 and 2009, the U.S. homebuilding industry experienced a significant and sustained decrease in demand for new homes and an oversupply of new and existing homes available for sale. During this same time period, the U.S. real estate industry also experienced a significant decrease in existing home turnover. The commercial and industrial building and maintenance sectors also experienced a significant decline. The downturn in each of these segments contributed to an unprecedented decline in the demand for some of our products. The recovery in new home starts, existing home sales and new commercial construction has been sluggish and erratic in many markets and remain below their pre-recession highs. In recent months, interest rates, including mortgage rates, have risen and are expected to continue to rise in 2017. Although interest rates remain low by historical standards, this increase may adversely affect the demand for new residential homes, existing home turnover, and new non-residential construction. Challenging market conditions are expected to continue for the foreseeable future and may worsen. A worsening in these segments will reduce the demand for some of our products and may adversely impact sales, earnings and cash flow.
In the U.S. construction and housing segments, the recent demand for new construction has caused contractors to experience a shortage of skilled workers, resulting in project backlogs and an adverse effect on the rate of growth of demand for our products. While we expect to see higher demand for our products as project backlogs are reduced in the future, this labor shortage may adversely impact our sales, earnings, cash flow or financial condition.
Increases in the cost of raw materials and energy may adversely affect our earnings or cash flow.
We purchase raw materials (including titanium dioxide and petrochemical feedstock sources, such as propylene and ethylene) and energy for use in the manufacturing, distribution and sale of our products. Factors such as adverse weather conditions, including hurricanes, and other disasters can disrupt raw material and fuel supplies and increase our costs. Although raw materials and energy supplies (including oil and natural gas) are generally available from various sources in sufficient

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quantities, unexpected shortages and increases in the cost of raw materials and energy, or any deterioration in our relationships with or the financial viability of our suppliers, may have an adverse effect on our earnings or cash flow in the event we are unable to offset higher costs in a timely manner by sufficiently decreasing our operating costs or raising the prices of our products. Recently, some raw material and energy prices have increased, particularly titanium dioxide and petrochemical feedstock sources, such as propylene and ethylene. The cost of raw materials and energy has in the past experienced, and likely will in the future continue to experience, periods of volatility.
Although we have an extensive customer base, the loss of any of our largest customers could adversely affect our sales, earnings or cash flow.
We have a large and varied customer base due to our extensive distribution network. During 2016 , no individual customer accounted for sales totaling more than ten percent of our sales. However, we have some customers that, individually, purchase a large amount of products from us. Although our broad distribution channels help to minimize the impact of the loss of any one customer, the loss of any of these large customers could have an adverse effect on our sales, earnings or cash flow.
Adverse weather conditions may temporarily reduce the demand for some of our products and could have a negative effect on our sales, earnings or cash flow.
Our business is seasonal in nature, with the second and third quarters typically generating a higher proportion of sales and earnings than other quarters. From time to time, adverse weather conditions in certain parts of the United States have had an adverse effect on our sales of paint, coatings and related products. For example, unusually cold and rainy weather could have an adverse effect on sales of our exterior paint products. An adverse effect on sales may cause a reduction in our earnings or cash flow.
Increased competition may reduce our sales, earnings or cash flow performance.
We face substantial competition from many international, national, regional and local competitors of various sizes in the manufacture, distribution and sale of our paint, coatings and related products. Some of our competitors are larger than us and have greater financial resources to compete. Other competitors are smaller and may be able to offer more specialized products. Technology, product quality, product innovation, breadth of product line, technical expertise, distribution, service and price are the key competitive factors for our business. Competition in any of these areas may reduce our sales and adversely affect our earnings or cash flow by resulting in decreased sales volumes, reduced prices and increased costs of manufacturing, distributing and selling our products.
Inability to protect or enforce our material trademarks and other intellectual property rights could have an adverse effect on our business.
We have numerous patents, trade secrets, trademarks, trade names and know-how that are valuable to our business. Despite our efforts to protect such intellectual property and other proprietary information from unauthorized use or disclosure, third parties may attempt to disclose, obtain or use our trademarks or such other intellectual property and information without our authorization. Although we rely on the patent, trademark, trade secret and copyright laws of the United States and other countries to protect our intellectual property rights, the laws of some countries may not protect such rights to the same extent as the laws of the United States. Unauthorized use of our intellectual property by third parties, the failure of foreign countries to have laws to protect our intellectual property rights, or an inability to effectively enforce such rights in foreign countries could have an adverse effect on our business.
Our planned acquisition of Valspar may not occur at all, may not occur in the expected time frame or may involve the divestiture of certain businesses, which may negatively affect the trading prices of our stock and our future business and financial results.
On March 19, 2016, we and Viking Merger Sub, Inc., one of our wholly owned subsidiaries, which we refer to as Merger Sub, entered into an Agreement and Plan of Merger, or Merger Agreement, with Valspar, pursuant to which, among other things and subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into Valspar. As a result of the planned acquisition of Valspar, Merger Sub will cease to exist, and Valspar will survive as a wholly owned subsidiary of ours.
Completion of the planned acquisition of Valspar is not assured and is subject to the satisfaction or waiver of customary closing conditions, including, among others: the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and the receipt of other required antitrust approvals.
The planned acquisition of Valspar is subject to risks and uncertainties, including the risk that the necessary regulatory approvals will not be obtained, the risk that the parties to the Merger Agreement may be required to divest certain businesses or assets in connection with the planned acquisition or that other closing conditions will not be satisfied. For example, in connection with obtaining the required regulatory approvals, the Company and/or Valspar may be required to divest assets of their respective businesses. We are not required to consummate the planned acquisition of Valspar if antitrust authorities require

7


the divestiture of assets of Valspar or us representing, in the aggregate, more than $1.5 billion in net sales, which for purposes of such calculation uses net sales for the applicable Valspar assets calculated as of October 30, 2015, with certain exclusions. In addition, if these divested businesses represent, in the aggregate, less than $1.5 billion in net sales but more than $650 million in net sales, which for purposes of such calculation uses net sales for the applicable Valspar assets calculated as of October 30, 2015 (subject to certain exclusions), then the per share consideration paid to Valspar stockholders in connection with the planned acquisition will be $105 in cash instead of $113 in cash. If the planned acquisition of Valspar is not completed, if there are significant delays in completing the planned acquisition or if the planned acquisition involves the divestiture of certain businesses, it could negatively affect the trading prices of our common stock and our future business and financial results and could result in our failure to realize certain synergies relating to such acquisition.
Our obligation to complete the planned acquisition of Valspar is not subject to a financing condition.
Our obligation to complete the planned acquisition of Valspar is not subject to a financing condition. We have obtained committed financing for $9.3 billion to pay a substantial portion of the purchase price for the acquisition of Valspar. If any of the banks in the committed financing facilities are unable to perform their commitments, we may be required to finance a portion of the purchase price of the planned acquisition at interest rates higher than currently expected.
We may not realize the growth opportunities and cost synergies that are anticipated from the planned acquisition of Valspar.
The benefits that are expected to result from the planned acquisition of Valspar will depend, in part, on our ability to realize the anticipated growth opportunities and cost synergies as a result of the planned acquisition. Our success in realizing these growth opportunities and cost synergies, and the timing of this realization, depends on whether the Company or Valspar are required to divest assets of their respective business and on the successful integration of Valspar. There is a significant degree of difficulty and management distraction inherent in the process of integrating an acquisition as sizable as Valspar. The process of integrating operations could cause an interruption of, or loss of momentum in, our and Valspar’s activities. Members of our senior management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage our company, service existing customers, attract new customers, and develop new products or strategies. If senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer. There can be no assurance that we will successfully or cost-effectively integrate Valspar. The failure to do so could have a material adverse effect on our business, financial condition, and results of operations.
Even if we are able to integrate Valspar successfully, this integration may not result in the realization of the full benefits of the growth opportunities and cost synergies that we currently expect from this integration, and we cannot guarantee that these benefits will be achieved within anticipated time frames or at all. For example, we may not be able to eliminate duplicative costs. Moreover, we may incur substantial expenses in connection with the integration of Valspar. While it is anticipated that certain expenses will be incurred to achieve cost synergies, such expenses are difficult to estimate accurately, and may exceed current estimates. Accordingly, the benefits from the planned acquisition may be offset by costs incurred to, or delays in, integrating the businesses.
We will incur a substantial amount of debt to complete the planned acquisition of Valspar. To service our debt, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. We also depend on the business of our subsidiaries to satisfy our cash needs. If we cannot generate the required cash, we may not be able to make the necessary payments required under our indebtedness.
At December 31, 2016 , we had total debt of approximately $2.0 billion . We have the ability under our existing credit facilities to incur substantial additional indebtedness in the future, and we plan to incur significant additional indebtedness in the event we complete the planned acquisition of Valspar. We expect to incur up to $9.3 billion of debt to complete the acquisition of Valspar. Our ability to make payments on our debt, fund our other liquidity needs, and make planned capital expenditures will depend on our ability to generate cash in the future. Our historical financial results have been, and we anticipate that our future financial results will be, subject to fluctuations. Our ability to generate cash, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot guarantee that our business will generate sufficient cash flow from our operations or that future borrowings will be available to us in an amount sufficient to enable us to make payments of our debt, fund other liquidity needs and make planned capital expenditures.
The degree to which we are currently leveraged and will be leveraged following the completion of the planned acquisition could have important consequences for shareholders. For example, it could:
require us to dedicate a substantial portion of our cash flow from operations to the payment of debt service, reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes;

8


increase our vulnerability to adverse economic or industry conditions;
limit our ability to obtain additional financing in the future to enable us to react to changes in our business; or
place us at a competitive disadvantage compared to businesses in our industry that have less debt.

Additionally, any failure to comply with covenants in the instruments governing our debt could result in an event of default which, if not cured or waived, would have a material adverse effect on us.
A significant portion of our operations are conducted through our subsidiaries. As a result, our ability to generate sufficient cash flow for our needs is dependent to some extent on the earnings of our subsidiaries and the payment of those earnings to us in the form of dividends, loans or advances and through repayment of loans or advances from us. Our subsidiaries are separate and distinct legal entities. Our subsidiaries have no obligation to pay any amounts due on our debt or to provide us with funds to meet our cash flow needs, whether in the form of dividends, distributions, loans or other payments. In addition, any payment of dividends, loans or advances by our subsidiaries could be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries’ earnings and business considerations. Our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors. In addition, even if we are a creditor of any of our subsidiaries, our rights as a creditor would be subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us. Finally, changes in the laws of foreign jurisdictions in which we operate may adversely affect the ability of some of our foreign subsidiaries to repatriate funds to us.
Our results of operations, cash flow or financial condition may be negatively impacted if we do not successfully integrate future acquisitions into our existing operations and if the performance of the businesses we acquire do not meet our expectations.
We have historically made strategic acquisitions of businesses in the paint and coatings industry and will likely acquire additional businesses in the future as part of our long-term growth strategy. The success of future acquisitions, including the planned acquisition of Valspar, depends in large part on our ability to integrate the operations and personnel of the acquired companies and manage challenges that may arise as a result of the acquisitions, particularly when the acquired businesses operate in new or foreign markets. In the event that we do not successfully integrate such future acquisitions into our existing operations so as to realize the expected return on our investment, our results of operations, cash flow or financial condition could be adversely affected.
Risks and uncertainties associated with our expansion into and our operations in Asia, Europe, South America and other foreign markets could adversely affect our results of operations, cash flow, liquidity or financial condition.
Net external sales of our consolidated foreign subsidiaries totaled approximately 14.5% , 15.8% and 19.8% of our total consolidated net sales in 2016 , 2015 and 2014 , respectively. Sales outside of the United States make up a significant part of our current business and future strategic plans. Our results of operations, cash flow, liquidity or financial condition could be adversely affected by a variety of international factors, including general economic conditions, inflation rates, recessions, foreign currency exchange rates, foreign currency exchange controls, interest rates, foreign investment and repatriation restrictions, legal and regulatory constraints, civil unrest, difficulties in staffing and managing foreign operations and other external economic and political factors. Our inability to successfully manage the risks and uncertainties relating to these factors could adversely affect our results of operations, cash flow, liquidity or financial condition.
In many foreign countries, it is acceptable to engage in certain business practices that we are prohibited from engaging in because of regulations that are applicable to us, such as the Foreign Corrupt Practices Act and the UK Bribery Act. Although we have internal control policies and procedures designed to ensure compliance with these regulations, there can be no assurance that our policies and procedures will prevent a violation of these regulations. Any violation could cause an adverse effect on our results of operations, cash flow or financial condition.
Fluctuations in foreign currency exchange rates could adversely affect our results of operations, cash flow, liquidity or financial condition.
Because of our international operations, we are exposed to risk associated with interest rates and value changes in foreign currencies, which may adversely affect our business. Historically, our reported net sales, earnings, cash flow and financial condition have been subjected to fluctuations in foreign exchange rates. Our primary exchange rate exposure is with the Argentine peso, the Brazilian real, the British pound, the Canadian dollar, the Chilean peso, the euro and the Mexican peso, each against the U.S. dollar. While we actively manage the exposure of our foreign currency risk as part of our overall financial risk management policy, we believe we may experience losses from foreign currency exchange rate fluctuations, and such losses could adversely affect our sales, earnings, cash flow, liquidity or financial condition.

9


We are subject to a wide variety of complex domestic and foreign laws, rules and regulations, for which compliance could adversely affect our results of operations, cash flow or financial condition.
We are subject to a wide variety of complex domestic and foreign laws, rules and regulations, and legal compliance risks, including securities laws, tax laws, employment and pension-related laws, competition laws, U.S. and foreign export and trading laws, data privacy and security laws, and laws governing improper business practices. We are affected by new laws and regulations, and changes to existing laws and regulations, including interpretations by courts and regulators. From time to time, our Company, our operations and the industries in which we operate are being reviewed or investigated by regulators, which could lead to enforcement actions or the assertion of private litigation claims and damages.
Although we believe that we have adopted appropriate risk management and compliance programs to mitigate these risks, the global and diverse nature of our operations means that compliance risks will continue to exist. Investigations, examinations and other proceedings, the nature and outcome of which cannot be predicted, will likely arise from time to time. These investigations, examinations and other proceedings could subject us to significant liability and require us to take significant accruals or pay significant settlements, fines and penalties, which could have a material adverse effect on our results of operations, cash flow or financial condition.
We are subject to tax laws and regulations in the United States and multiple foreign jurisdictions. We are affected by changes in tax laws and regulations, as well as changes in related interpretations and other tax guidance. In the ordinary course of our business, we are subject to examinations and investigations by various tax authorities. In addition to existing examinations and investigations, there could be additional examinations and investigations in the future, and existing examinations and investigations could be expanded.
For non-income tax risks, we estimate material loss contingencies and accrue for such loss contingencies as required by U.S. generally accepted accounting principles based on our assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and circumstances known to us at a particular point in time. Subsequent developments may affect our assessment and estimates of the loss contingency. In the event the loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material adverse effect on our results of operations 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 cannot be reasonably estimated, any potential liability ultimately determined to be attributable to us may result in a material adverse effect on our results of operations, cash flow or financial condition for the annual or interim period during which such liability is accrued or paid. For income tax risks, we recognize tax benefits based on our assessment that a tax benefit has a greater than 50% likelihood of being sustained upon ultimate settlement with the applicable taxing authority that has full knowledge of all relevant facts. For those income tax positions where we assess that there is not a greater than 50% likelihood that such tax benefits will be sustained, we do not recognize a tax benefit in our financial statements. Subsequent events may cause us to change our assessment of the likelihood of sustaining a previously-recognized benefit which could result in a material adverse effect on our results of operations, cash flow or financial position for the annual or interim period during which such liability is accrued or paid.
We discuss risks and uncertainties with regard to taxes in more detail in Note 14 of the Notes to Consolidated Financial Statements on pages 69 and 70 of our 2016 Annual Report.
Unauthorized disclosure of sensitive or confidential customer, employee, supplier or Company information, whether through a breach of our computer systems, including cyber attacks, or otherwise, could severely harm our business.
As part of our business, we collect, process, and retain sensitive and confidential personal information about our customers, employees and suppliers. Despite the security measures we have in place, our facilities and systems, and those of the retailers, dealers, licensees and other third party suppliers and vendors with which we do business, may be vulnerable to security breaches, cyber attacks, acts of vandalism or misconduct, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer, employee, supplier or Company information, whether by us or by the retailers, dealers, licensees and other third party suppliers and vendors with which we do business, could result in losses, severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and have a material adverse effect on our business, results of operations and financial condition. As cyber security threats evolve in sophistication and become more prevalent in numerous industries worldwide, we continue to increase our sensitivity and attention to these threats and seek additional investments and resources to address these threats and enhance the security of our facilities and systems. The regulatory environment related to information security, data collection and privacy is increasingly rigorous and complex, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs.

10


We are required to comply with numerous complex and increasingly stringent domestic and foreign health, safety and environmental laws and regulations, the cost of which is likely to increase and may adversely affect our results of operations, cash flow or financial condition.
Our operations are subject to various domestic and foreign health, safety and environmental laws and regulations. These laws and regulations not only govern our current operations and products, but also impose potential liability on us for our past operations. We expect health, safety and environmental laws and regulations to impose increasingly stringent requirements upon our industry and us in the future. Our costs to comply with these laws and regulations may increase as these requirements become more stringent in the future, and these increased costs may adversely affect our results of operations, cash flow or financial condition.
We are involved with environmental investigation and remediation activities at some of our currently and formerly owned sites, as well as a number of third-party sites, for which our ultimate liability may exceed the current amount we have accrued.
We are involved with environmental investigation and remediation activities at some of our currently and formerly owned sites and a number of third-party sites. We accrue for estimated costs of investigation and remediation activities at these sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs are based on currently available facts regarding each site. We continuously assess our potential liability for investigation and remediation activities and adjust our environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated. Due to the uncertainties surrounding environmental investigation and remediation activities, our liability may result in costs that are significantly higher than currently accrued and may have an adverse effect on our earnings. We discuss these risks and uncertainties in more detail on page 25 of our 2016 Annual Report under the caption “Environmental Matters,” page 29 of our 2016 Annual Report under the caption “Environmental-Related Liabilities” and in Note 8 of the Notes to Consolidated Financial Statements on pages 61 through 62 of our 2016 Annual Report.
The nature, cost, quantity and outcome of pending and future litigation, such as litigation arising from the historical manufacture and sale of lead pigments and lead-based paint, could have a material adverse effect on our results of operations, cash flow, liquidity and financial condition.
In the course of our business, we are 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 us. 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, we accrue 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 a 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 our 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 us may result in a material impact on our 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.
Our past operations included the manufacture and sale of lead pigments and lead-based paints. Along with other companies, we are and have been a defendant in a number of legal proceedings, including individual personal injury actions, purported class actions and actions brought by various counties, cities, school districts and other government-related entities, arising from the manufacture and sale of lead pigments and lead-based paints. The plaintiffs' claims have been based upon various legal theories, including negligence, strict liability, breach of warranty, negligent misrepresentations and omissions, fraudulent 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. We have 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. We believe that the litigation brought to date is without merit or subject to meritorious defenses and are vigorously defending such litigation. We have not settled any material lead pigment or lead-based paint litigation. We expect that additional lead pigment and lead-based

11


paint litigation may be filed against us in the future asserting similar or different legal theories and seeking similar or different types of damages and relief.
Notwithstanding our views on the merits, litigation is inherently subject to many uncertainties, and we ultimately may not prevail. Adverse court rulings, such as the court's decision in the Santa Clara County, California proceeding, the jury verdict against us and other defendants in the State of Rhode Island action and the Wisconsin State Supreme Court’s determination that Wisconsin’s risk contribution theory may apply in the lead pigment litigation, or determinations of liability, among other factors, could affect the lead pigment and lead-based paint litigation against us 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 we 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 administrative regulations may have on the litigation or against us. In addition, management cannot reasonably determine the scope or amount of the potential costs and liabilities related to such litigation, or resulting from any such legislation and regulations. We have not accrued any amounts for such litigation. With respect to such litigation, including the public nuisance litigation, the Company does not believe that it is probable that a loss has occurred, and it is not possible to estimate the range of potential losses as there is no prior history of a loss of this nature and there is no substantive information upon which an estimate could be based. In addition, any potential liability that may result from any changes to legislation and regulations cannot reasonably be estimated. In the event any significant liability is determined to be attributable to us relating to 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 us arising out of such litigation may have a material adverse effect on our results of operations, cash flow, liquidity or financial condition. An estimate of the potential impact on our results of operations, cash flow, liquidity or financial condition cannot be made due to the aforementioned uncertainties.
A trial commenced in the Santa Clara County, California proceeding on July 15, 2013 and ended on August 22, 2013. The court entered final judgment on January 27, 2014, finding in favor of the plaintiffs and against the Company and two other defendants, and holding the Company jointly and severally liable with the other two defendants to pay $1.15 billion into a fund to abate the public nuisance. The Company has filed a notice of appeal. However, if the appeal process is unsuccessful at reversing the decision or otherwise reducing the amount of the judgment, we and the other defendants will be subject to significant liabilities, costs and expenses to abate the public nuisance in, on and around residences in the plaintiffs' jurisdictions, which could encourage an increase in future public nuisance claims and proceedings. Any adverse court rulings or any determinations of liability against us may result in a material impact on our results of operations, liquidity or financial condition.
We discuss the risks and uncertainties related to litigation, including the lead pigment and lead-based paint litigation, in more detail on page 25 of our 2016 Annual Report under the caption “Litigation and Other Contingent Liabilities” and in Note 9 of the Notes to Consolidated Financial Statements on pages  62 through 65 of our 2016 Annual Report.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.

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ITEM 2.    PROPERTIES
We own our world headquarters located in Cleveland, Ohio, which includes the world headquarters for the Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group. Our principal manufacturing and distribution facilities are located as set forth below. We believe our manufacturing and distribution facilities are well-maintained and are suitable and adequate, and have sufficient productive capacity, to meet our current needs.

CONSUMER GROUP
 
Manufacturing Facilities
Andover, Kansas
 
Owned
 
Holland, Michigan
 
Owned
Arlington, Texas
 
Owned
 
Homewood, Illinois
 
Owned
Baltimore, Maryland
 
Owned
 
Lawrenceville, Georgia
 
Owned
Bedford Heights, Ohio
 
Owned
 
Manchester, Georgia
 
Owned
Beltsville, Maryland
 
Owned
 
Memphis, Tennessee
 
Owned
Chicago, Illinois
 
Owned
 
Morrow, Georgia
 
Owned
Cincinnati, Ohio
 
Owned
 
Ontario, California
 
Leased
Columbus, Ohio
 
Owned
 
Orlando, Florida
 
Owned
Crisfield, Maryland
 
Leased
 
Plymouth, United Kingdom
 
Leased
Elkhart, Indiana
 
Owned
 
Portland, Oregon
 
Leased
Ennis, Texas
 
Owned
 
Rexdale, Ontario, Canada
 
Owned
Fernley, Nevada
 
Owned
 
Richmond, Kentucky
 
Owned
Flora, Illinois
 
Owned
 
Rockford, Illinois
 
Leased
Fort Erie, Ontario, Canada
 
Owned
 
San Diego, California
 
Owned
Garland, Texas
 
Owned
 
Sheffield, United Kingdom
 
Owned
Greensboro, North Carolina (2)
 
Owned
 
South Holland, Illinois
 
Owned
Grimsby, Ontario, Canada
 
Owned
 
Szamotuly, Poland
 
Owned
Grove City, Ohio
 
Owned
 
Victorville, California
 
Owned
 
Distribution Facilities
Aurora, Colorado
 
Leased
 
Richmond, Kentucky
 
Owned
Buford, Georgia
 
Leased
 
Sheffield, United Kingdom
 
Owned
Effingham, Illinois
 
Leased
 
Swaffham, United Kingdom
 
Leased
Fredericksburg, Pennsylvania
 
Owned
 
Szamotuly, Poland
 
Owned
Moreno Valley, California
 
Leased
 
Waco, Texas
 
Leased
Plymouth, United Kingdom
 
Leased
 
Winter Haven, Florida
 
Owned
Reno, Nevada
 
Leased
 
 
 
 
 

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GLOBAL FINISHES GROUP
 
Manufacturing Facilities
Bello, Sweden
 
Owned
 
Pianoro, Italy
 
Owned
Binh Duong Province, Vietnam
 
Owned
 
Sady, Poland
 
Leased
Bolton, United Kingdom
 
Owned
 
Saint Cheron, France
 
Owned
Brantford, Ontario, Canada
 
Owned
 
Sao Paulo, Brazil
 
Owned
Cavezzo, Italy
 
Owned
 
Shanghai, China
 
Leased
Changzhou, China
 
Owned
 
Texcoco, Mexico
 
Owned
Mariano Comense, Italy
 
Owned
 
Valencia, Spain
 
Owned
Marsta, Sweden
 
Owned
 
Wuppertal, Germany
 
Owned
Pasir Gudang, Johor, Malaysia
 
Owned
 
Zhao Qing, China
 
Owned
 
Distribution Facilities
Bolton, United Kingdom
 
Owned
 
Quito, Ecuador
 
Owned
Changzhou, China
 
Owned
 
Sao Paulo, Brazil
 
Owned
Lima, Peru
 
Leased
 
Shanghai, China
 
Leased
Monterrey, Mexico
 
Owned
 
Texcoco, Mexico
 
Owned
Nassjo, Sweden
 
Leased
 
 
 
 
 
LATIN AMERICA COATINGS GROUP
 
Manufacturing Facilities
Buenos Aires, Argentina
 
Owned
 
Santiago, Chile (2)
 
Leased
Montevideo City, Uruguay
 
Owned
 
Sao Paulo, Brazil (2)
 
Owned
Quito, Ecuador
 
Owned
 
Sao Paulo, Brazil
 
Leased
Santiago, Chile
 
Owned
 
Vallejo, Mexico
 
Owned
 
Distribution Facilities
Buenos Aires, Argentina
 
Owned
 
Quito, Ecuador
 
Owned
Hermosillo, Mexico
 
Leased
 
Santiago, Chile
 
Owned
Lima, Peru
 
Leased
 
Sao Paulo, Brazil (2)
 
Owned
Machala, Ecuador
 
Leased
 
Sao Paulo, Brazil
 
Leased
Montevideo City, Uruguay
 
Owned
 
Vallejo, Mexico
 
Owned
The operations of the Paint Stores Group included a manufacturing and distribution facility in Jamaica and 4,180 company-operated specialty paint stores, of which 207 were owned, in the United States, Canada, Puerto Rico, Virgin Islands, Grenada, Trinidad and Tobago, St. Maarten, Jamaica, Curacao, Aruba, St. Lucia and Barbados at December 31, 2016 . These paint stores are divided into five separate operating divisions that are responsible for the sale of predominantly architectural, protective and marine and related products through the paint stores located within their geographical region. At the end of 2016 :
the Mid Western Division operated 1,070 paint stores primarily located in the midwestern and upper west coast states;
the Eastern Division operated 842 paint stores along the upper east coast and New England states;
the Canada Division operated 213 paint stores throughout Canada;
the Southeastern Division operated a manufacturing and distribution facility in Jamaica and 1,074 paint stores principally covering the lower east and gulf coast states, Puerto Rico, Virgin Islands, Grenada, Trinidad and Tobago, St. Maarten, Jamaica, Curacao, Aruba, St. Lucia and Barbados; and
the South Western Division operated 981  paint stores in the central plains and the lower west coast states.
During 2016 , the Paint Stores Group opened 94 net new stores, consisting of 109 new stores opened ( 86 in the United States, 21 in Canada, 1 in Aruba and 1 in Barbados) and 15 stores closed ( 9 in the United States and 6 in Canada).

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The Global Finishes Group operated 229 branches in the United States, of which 8 were owned, at December 31, 2016 . The Global Finishes Group also operated 59 branches internationally, of which 6 were owned, at December 31, 2016 , consisting of branches in Canada (26), Europe (16), Chile (11), Mexico (4), Peru (1) and Thailand (1). During 2016 , the Global Finishes Group opened 5 new branches ( 3 in the United States and 2 in Canada) and closed 13  branches ( 10 in the United States, 2 in Canada and 1 in Chile) resulting in a net decrease of 8 branches.
The Latin America Coatings Group operated 339 stores, of which 10 were owned, at December 31, 2016 , consisting of stores in Mexico (142), Brazil (102), Chile (51), Ecuador (29), Uruguay (11), Peru (3) and Colombia (1). During 2016 , the Latin America Coatings Group opened 49 new stores ( 31 in South America and 18 in Mexico) and closed 1 store in South America for a net increase of 48 stores.
All real property within the Administrative segment is owned by us. For additional information regarding real property within the Administrative segment, see the information set forth in Item 1 of this report, which is incorporated herein by reference.
For additional information regarding real property leases, see Note 17 of the Notes to Consolidated Financial Statements on page  72 of our 2016 Annual Report, which is incorporated herein by reference.
ITEM 3.    LEGAL PROCEEDINGS
For information regarding environmental-related matters and other legal proceedings, see pages  29 and 31 of our 2016 Annual Report under the captions “Environmental-Related Liabilities” and “Litigation” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes  1 , 8 , 9 and 13 of the Notes to Consolidated Financial Statements on pages  46 , 61 through 62 , 62 through 65 and 68 , respectively, of our 2016 Annual Report, which is incorporated herein by reference.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is the name, age and present position of each of our executive officers at February 15, 2017 , as well as all prior positions held by each during the last five years and the date when each was first elected or appointed as an executive officer. Executive officers are generally elected annually by the Board of Directors and hold office until their successors are elected and qualified or until their earlier death, resignation or removal.
 
Name
Age
Present Position
Date When
First Elected
or Appointed
John G. Morikis
53
Chairman, President and Chief Executive Officer, Director
1999
Allen J. Mistysyn
48
Senior Vice President – Finance and Chief Financial Officer
2010
Jane M. Cronin
49
Senior Vice President – Corporate Controller
2016
Thomas P. Gilligan
56
Senior Vice President – Human Resources
2016
Sean P. Hennessy
59
Senior Vice President – Corporate Planning, Development and Administration
2001
Catherine M. Kilbane
53
Senior Vice President, General Counsel and Secretary
2013
Robert J. Wells
59
Senior Vice President – Corporate Communications and Public Affairs
2006
Joel D. Baxter
56
President & General Manager, Global Supply Chain Division, Consumer Group
2016
Robert J. Davisson
56
President, The Americas Group
2010
David B. Sewell
48
President, Global Finishes Group
2014

Mr. Morikis has served as Chairman since January 2017 and President and Chief Executive Officer since January 2016. Mr. Morikis served as President and Chief Operating Officer from October 2006 to January 2016. Mr. Morikis has served as a Director since October 2015 and has been employed with the Company since December 1984.
Mr. Mistysyn has served as Senior Vice President – Finance and Chief Financial Officer since January 2017. Mr. Mistysyn served as Senior Vice President – Finance from October 2016 to January 2017, Senior Vice President - Corporate

15


Controller from October 2014 to October 2016, and Vice President – Corporate Controller from May 2010 to October 2014. Mr. Mistysyn has been employed with the Company since June 1990.
Ms. Cronin has served as Senior Vice President – Corporate Controller since October 2016. Ms. Cronin served as Vice President – Corporate Audit and Loss Prevention from September 2013 to October 2016 and Vice President – Controller, Diversified Brands Division, Consumer Group from July 2005 to September 2013. Ms. Cronin has been employed with the Company since September 1989.
Mr. Gilligan has served as Senior Vice President – Human Resources since January 2016. Mr. Gilligan served as Senior Vice President, Human Resources, The Americas Group from August 2014 to January 2016 and Senior Vice President, Human Resources, Paint Stores Group from July 2000 to August 2014. Mr. Gilligan has been employed with the Company since October 1983.
Mr. Hennessy has served as Senior Vice President – Corporate Planning, Development and Administration since January 2017. Mr. Hennessy served as Senior Vice President – Finance and Chief Financial Officer from August 2001 to January 2017. Mr. Hennessy has been employed with the Company since September 1984.
Ms. Kilbane has served as Senior Vice President, General Counsel and Secretary since January 2013. Prior to joining the Company, Ms. Kilbane was Senior Vice President, General Counsel and Secretary of American Greetings Corporation from October 2003 to December 2012. Ms. Kilbane has been employed with the Company since January 2013.
Mr. Wells has served as Senior Vice President – Corporate Communications and Public Affairs since February 2009. Mr. Wells has been employed with the Company since May 1998.
Mr. Baxter has served as President & General Manager, Global Supply Chain Division, Consumer Group since September 2008. Mr. Baxter has been employed with the Company since September 1990.
Mr. Davisson has served as President, The Americas Group since August 2014. Mr. Davisson served as President, Paint Stores Group from November 2010 to August 2014. Mr. Davisson has been employed with the Company since April 1986.
Mr. Sewell has served as President, Global Finishes Group since August 2014. Mr. Sewell served as President & General Manager, Product Finishes Division, Global Finishes Group from July 2012 to August 2014 and Senior Vice President, North American Sales, Automotive Division, Global Finishes Group from September 2011 to July 2012. Mr. Sewell has been employed with the Company since February 2007.


16


PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange and traded under the symbol SHW. The number of shareholders of record at January 31, 2017 was 6,770 .
Information regarding market prices and dividend information with respect to our common stock is set forth on page  77 of our 2016 Annual Report, which is incorporated herein by reference. The performance graph set forth on page  18 of our 2016 Annual Report is incorporated herein by reference. The information with respect to securities authorized for issuance under the Company’s equity compensation plans is set forth under the caption “Equity Compensation Plan Information” in our Proxy Statement, which is incorporated herein by reference.
Issuer Purchases of Equity Securities
The following table sets forth a summary of the Company’s purchases of common stock during the fourth quarter of 2016 .  
Period
 
Total
Number of
Shares
Purchased
 
Average Price
Paid per
Share
 
Total Number
of Shares
Purchased as
Part of a
Publicly
Announced Plan
 
Maximum Number
of Shares
that May
Yet Be
Purchased Under
the Plan
 
 
 
 
 
 
 
 
 
October 1 – October 31
 
 
 
 
 
 
 
 
Share repurchase program (1)
 
 
 
 
 
 
 
11,650,000

Employee transactions (2)
 
203

 
$266.98
 
 
 
NA

 
 
 
 
 
 
 
 
 
November 1 – November 30
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 1 – December 31
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
Share repurchase program (1)
 
 
 
 
 
 
 
11,650,000

Employee transactions (2)
 
203

 
$266.98
 
 
 
NA

 
 
 
 
 
 
 
 
 
(1)  
All shares are purchased through the Company’s publicly announced share repurchase program. There is no expiration date specified for the program. The Company had remaining authorization at December 31, 2016 to purchase 11,650,000  shares.
(2)  
All shares were delivered to satisfy the exercise price and/or tax withholding obligations by employees who exercised stock options or had shares of restricted stock vest.

17



ITEM 6. SELECTED FINANCIAL DATA
(millions of dollars, except per common share data)
 
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
Operations
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
11,856

 
$
11,339

 
$
11,130

 
$
10,186

 
$
9,534

 
Net income
 
1,133

 
1,054

 
866

 
753

 
631

 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Position
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
6,753

 
$
5,779

 
$
5,699

 
$
6,383

 
$
6,235

 
Long-term debt
 
1,211

 
1,907

 
1,116

 
1,122

 
1,632

 
Ratio of earnings to fixed charges  (1)
 
6.5x

 
9.1x

 
7.7x

 
7.4x

 
7.2x

 
 
 
 
 
 
 
 
 
 
 
 
 
Per Common Share Data
 
 
 
 
 
 
 
 
 
 
 
Net income — basic  (2)
 
$
12.33

 
$
11.43

 
$
9.00

 
$
7.46

 
$
6.20

 
Net income — diluted (2)
 
11.99

 
11.15

 
8.77

 
7.25

 
6.02

 
Cash dividends
 
3.36

 
2.68

 
2.20

 
2.00

 
1.56

 
(1)  
For purposes of calculating the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges. Fixed charges consist of interest expense, net, including amortization of discount and financing costs and the portion of operating rental expense which management believes is representative of the interest component of rent expense. The following schedule includes the figures used to calculate the ratios:
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
Income before income taxes
 
$
1,595

 
$
1,549

 
$
1,258

 
$
1,086

 
$
907

 
Fixed charges:
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
154

 
62

 
64

 
63

 
43

 
Interest component of rent expense
 
138

 
130

 
125

 
108

 
103

 
Total fixed charges
 
292

 
192

 
189

 
171

 
146

 
Earnings
 
$
1,887

 
$
1,741

 
$
1,447

 
$
1,257

 
$
1,053

 

(2)  
Presented under the treasury stock method.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is set forth on pages  21 through 35 of our 2016 Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated herein by reference.
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk associated with interest rates, foreign currency and commodity fluctuations. We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use derivative instruments for speculative or trading purposes. The Company entered into foreign currency option and forward currency exchange contracts during 2016 to hedge against value changes in foreign currency. There were no material contracts outstanding at December 31, 2016 . Foreign currency option and forward contracts are described in Note 13 of the Notes to Consolidated Financial Statements on page  69 of our 2016 Annual Report. We believe we may experience continuing losses from foreign currency fluctuations. However, we do not expect currency translation, transaction or hedging contract losses to have a material adverse effect on our financial condition, results of operations or cash flows. In 2016, we entered into a series of interest rate lock agreements. See Note 7 of the Notes to Consolidated Financial Statements on pages  60 through 61 of our 2016 Annual Report.

18


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is set forth on pages  38 through 75 of our 2016 Annual Report under the captions “Report of Management on the Consolidated Financial Statements,” “Report of the Independent Registered Public Accounting Firm on the Consolidated Financial Statements,” “Statements of Consolidated Income and Comprehensive Income,” “Consolidated Balance Sheets,” “Statements of Consolidated Cash Flows,” “Statements of Consolidated Shareholders’ Equity,” and “Notes to Consolidated Financial Statements,” which is incorporated herein by reference. Unaudited quarterly data is set forth in Note 16 of the Notes to Consolidated Financial Statements on page  71 of our 2016 Annual Report, which is incorporated herein by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.    CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chairman, President and Chief Executive Officer and our Senior Vice President – Finance and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, our Chairman, President and Chief Executive Officer and our Senior Vice President – Finance and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and accumulated and communicated to our management, including our Chairman, President and Chief Executive Officer and our Senior Vice President – Finance and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
The “Report of Management on Internal Control over Financial Reporting” is set forth on page  36 of our 2016 Annual Report, which is incorporated herein by reference.
The “Report of the Independent Registered Public Accounting Firm on Internal Control over Financial Reporting” is set forth on page  37 of our 2016 Annual Report, which is incorporated herein by reference.
There were no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.    OTHER INFORMATION
None.

19


PART III
ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The information regarding our directors is set forth under the captions “Proposal 1 – Election of Directors” and “Experiences, Qualifications, Attributes and Skills of Director Nominees” in our Proxy Statement, which is incorporated herein by reference.
There were no material changes to the procedures by which security holders may recommend nominees to our Board of Directors during 2016 . Please refer to the information set forth under the caption “Board Meetings and Committees” in our Proxy Statement, which is incorporated herein by reference.
Executive Officers
The information regarding our executive officers is set forth under the caption “Executive Officers of the Registrant” in Part I of this report, which is incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
The information regarding compliance with Section 16 of the Securities Exchange Act of 1934 is set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement, which is incorporated herein by reference.
Audit Committee
The information regarding the Audit Committee of our Board of Directors and the information regarding audit committee financial experts are set forth under the caption “Board Meetings and Committees” in our Proxy Statement, which is incorporated herein by reference.
Code of Ethics
We have adopted a Code of Conduct, which applies to all directors, officers and employees of Sherwin-Williams and our subsidiaries wherever located. Our Code of Conduct contains the general guidelines and principles for conducting Sherwin-Williams' business consistent with the highest standards of business ethics. Under our Code of Ethics for Senior Financial Management, our chief executive officer, chief financial officer and senior financial management are responsible for creating and maintaining a culture of high ethical standards and of commitment to compliance throughout our company to ensure the fair and timely reporting of Sherwin-Williams' financial results and condition. Senior financial management includes the controller, the treasurer, the principal financial/accounting personnel in our operating groups and divisions, and all other financial/accounting personnel within our corporate departments and operating groups and divisions with staff supervision responsibilities. Please refer to the information set forth under the caption “Corporate Governance – Code of Conduct” in our Proxy Statement, which is incorporated herein by reference. Our Code of Conduct and Code of Ethics for Senior Financial Management are available in the “Corporate Governance” section on the “Investor Relations” page of our website at www.sherwin.com.
We intend to disclose on our website any amendment to, or waiver from, a provision of our Code of Conduct or Code of Ethics for Senior Financial Management that applies to our directors and executive officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, or any persons performing similar functions, and that is required to be publicly disclosed pursuant to the rules of the Securities and Exchange Commission.
ITEM 11.    EXECUTIVE COMPENSATION
The information required by this item is set forth under the captions “Compensation Committee Report,” “Compensation Risk Assessment,” “ 2016 Director Compensation Table” and “Director Compensation Program” in our Proxy Statement, and under the Executive Compensation section of our Proxy Statement commencing with the information under the caption “Compensation Discussion and Analysis (CD&A)” and continuing through the information under the caption “Estimated Payments upon Termination or Change in Control Table,” which is incorporated herein by reference.

20


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information regarding security ownership of certain beneficial owners and management is set forth under the captions “Security Ownership of Management” and “Security Ownership of Certain Beneficial Owners” in our Proxy Statement, which is incorporated herein by reference.
The information regarding securities authorized for issuance under the Company’s equity compensation plans is set forth under the caption “Equity Compensation Plan Information” in our Proxy Statement, which is incorporated herein by reference.  
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is set forth under the captions “Certain Relationships and Transactions with Related Persons,” and “Independence of Directors” in our Proxy Statement, which is incorporated herein by reference.
ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is set forth under the caption “Matters Relating to the Independent Registered Public Accounting Firm” in our Proxy Statement, which is incorporated herein by reference.

21


PART IV
ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
Financial Statements
The following consolidated financial statements of the Company included in our 2016 Annual Report are incorporated by reference in Item 8.
(i)
Report of Management on the Consolidated Financial Statements (page  38 of our 2016 Annual Report);
(ii)
Report of the Independent Registered Public Accounting Firm on the Consolidated Financial Statements (page  39 of our 2016 Annual Report);
(iii)
Statements of Consolidated Income and Comprehensive Income for the years ended December 31, 2016 , 2015 and 2014 (page  40 of our 2016 Annual Report);
(iv)
Consolidated Balance Sheets at December 31, 2016 , 2015 and 2014 (page  41 of our 2016 Annual Report);
(v)
Statements of Consolidated Cash Flows for the years ended December 31, 2016 , 2015 and 2014 (page  42 of our 2016 Annual Report);
(vi)
Statements of Consolidated Shareholders’ Equity for the years ended December 31, 2016 , 2015 and 2014 (page  43 of our 2016 Annual Report); and
(vii)
Notes to Consolidated Financial Statements for the years ended December 31, 2016 , 2015 and 2014 (pages  44 through  75 of our 2016 Annual Report).
(2)
Financial Statement Schedule
Schedule II — Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2016 , 2015 and 2014 is set forth below. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
Valuation and Qualifying Accounts and Reserves
(Schedule II)
Changes in the allowance for doubtful accounts were as follows:  
(thousands of dollars)
2016
 
2015
 
2014
Beginning balance
$
49,420

 
$
53,770

 
$
54,460

Bad debt expense
29,869

 
30,393

 
34,810

Uncollectible accounts written off, net of recoveries
(38,839
)
 
(34,743
)
 
(35,500
)
Ending balance
$
40,450

 
$
49,420

 
$
53,770

 
(3)
Exhibits
See the Exhibit Index on pages  24 through 28 of this report.
ITEM 16. FORM 10-K SUMMARY
None.

22


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 22, 2017 .
 
THE SHERWIN-WILLIAMS COMPANY
 
 
By:
/ S /
C ATHERINE  M. K ILBANE
 
 
Catherine M. Kilbane, Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 22, 2017 .
* J OHN   G.   M ORIKIS
 
Chairman, President and
Chief Executive Officer, Director
(Principal Executive Officer)
    John G. Morikis
 
* A LLEN J . M ISTYSYN
 
Senior Vice President – Finance and Chief Financial Officer (Principal Financial Officer)
    Allen J. Mistysyn
 
* J ANE M . C RONIN
 
Senior Vice President – Corporate Controller
(Principal Accounting Officer)
    Jane M. Cronin
 
* A RTHUR  F. A NTON
 
Director
    Arthur F. Anton
 
 
* C HRISTOPHER M . C ONNOR
 
Director
    Christopher M. Connor
 
 
* D AVID  F. H ODNIK
 
Director
    David F. Hodnik
 
 
* T HOMAS  G. K ADIEN
 
Director
    Thomas G. Kadien
 
 
* R ICHARD  J. K RAMER
 
Director
    Richard J. Kramer
 
* S USAN  J. K ROPF
 
Director
    Susan J. Kropf
 
 
* C HRISTINE  A. P OON
 
Director
    Christine A. Poon
 
* J OHN  M. S TROPKI
 
Director
    John M. Stropki
 
* M ATTHEW T HORNTON III
 
Director
    Matthew Thornton III
 
* S TEVEN  H. W UNNING
 
Director
    Steven H. Wunning
 

*
The undersigned, by signing her name hereto, does sign this report on behalf of the designated officers and directors of the Company pursuant to powers of attorney executed on behalf of each such officer and director and filed as an exhibit to this report.
By:
/ S /
C ATHERINE  M K ILBANE
  
February 22, 2017
 
 
Catherine M. Kilbane, Attorney-in-fact
  
 

23




EXHIBIT INDEX
2.
*(a)
Agreement and Plan of Merger, among the Company, Viking Merger Sub, Inc., and The Valspar Corporation, dated as of March 19, 2016, filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated March 19, 2016, and incorporated herein by reference.
 
 
 
3.
(a)
Amended and Restated Articles of Incorporation of the Company, as amended through February 18, 2015, filed as Exhibit 3 to the Company's Current Report on Form 8-K dated February 18, 2015, and incorporated herein by reference.
 
 
 
 
(b)
Regulations of the Company, as amended and restated April 20, 2011, filed as Exhibit 3 to the Company's Current Report on Form 8-K dated April 20, 2011, and incorporated herein by reference.
 
 
 
4.
(a)
Indenture between the Company and The Bank of New York Mellon (as successor to Chemical Bank), as trustee, dated as of February 1, 1996, filed as Exhibit 4(a) to Form S-3 Registration Statement Number 333-01093 dated February 20, 1996, and incorporated herein by reference.
 
 
 
 
(b)
First Supplemental Indenture between the Company and The Bank of New York Mellon, as trustee (including Form of Note), dated as of December 21, 2009, filed as Exhibit 4(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and incorporated herein by reference.
 
 
 
 
(c)
Second Supplemental Indenture by and between the Company and The Bank of New York Mellon, as trustee (including Form of Note), dated as of December 7, 2012, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated December 4, 2012, and incorporated herein by reference.
 
 
 
 
(d)
Third Supplemental Indenture by and between the Company and The Bank of New York Mellon, as trustee (including Form of Note), dated as of December 7, 2012, filed as Exhibit 4.2 to the Company's Current Report on Form 8-K dated December 4, 2012, and incorporated herein by reference.
 
 
 
 
(e)
Indenture by and between the Company and Wells Fargo Bank, National Association, as trustee, dated July 31, 2015, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated July 28, 2015, and incorporated herein by reference.
 
 
 
 
(f)
First Supplemental Indenture by and between the Company and Wells Fargo Bank, National Association, as trustee, dated July 31, 2015, (including Form of Note), filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated July 28, 2015, and incorporated herein by reference.
 
 
 
 
(g)
Second Supplemental Indenture by and between the Company and Wells Fargo Bank, National Association, as trustee, dated July 31, 2015, (including Form of Note), filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K dated July 28, 2015, and incorporated herein by reference.
 
 
 
 
(h)
Credit Agreement, dated as of July 16, 2015, by and among the Company, Sherwin-Williams Canada Inc., Sherwin-Williams Luxembourg S.à r.l. and Sherwin-Williams UK Holding Limited, as borrowers, the lenders party thereto, Bank of America, N.A., as domestic administrative agent, Bank of America, National Association, as Canadian administrative agent, JPMorgan Chase Bank, N.A., Citibank, N.A. and U.S. Bank National Association, as co-documentation agents, and Wells Fargo Bank, National Association, as syndication agent, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated July 15, 2015, and incorporated herein by reference.
 
 
 
 
(i)
Amendment No. 1 to Credit Agreement, dated as of April 13, 2016, by and among the Company, Sherwin-Williams Canada Inc., Sherwin-Williams Luxembourg S.à r.l. and Sherwin-Williams UK Holding Limited, as borrowers, the lenders party thereto, Bank of America, N.A., as domestic administrative agent, and Bank of America, National Association, as Canadian administrative agent, filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K dated April 13, 2016, and incorporated herein by reference.
 
 
 
 
(j)
Five Year Credit Agreement, dated as of January 30, 2012, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders from time to time party thereto, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated January 30, 2012, and incorporated herein by reference.
 
 
 
 
(k)
Agreement for Letter of Credit, dated as of January 30, 2012, by and between the Company and Citibank, N.A. filed as Exhibit 4.2 to the Company's Current Report on Form 8-K dated January 30, 2012, and incorporated herein by reference.
 
 
 
 
(l)
Five Year Credit Agreement Amendment No. 1, dated as of February 6, 2012, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders from time to time party thereto, filed as Exhibit 4 to the Company's Current Report on Form 8-K dated February 6, 2012, and incorporated herein by reference.

24


 
 
 
 
(m)
Five Year Credit Agreement Amendment No. 2, dated as of February 13, 2012, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders from time to time party thereto, filed as Exhibit 4 to the Company's Current Report on Form 8-K dated February 13, 2012, and incorporated herein by reference.
 
 
 
 
(n)
Five Year Credit Agreement Amendment No. 3, dated as of February 27, 2012, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders from time to time party thereto, filed as Exhibit 4 to the Company's Current Report on Form 8-K dated February 27, 2012, and incorporated herein by reference.
 
 
 
 
(o)
Five Year Credit Agreement, dated as of April 23, 2012, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders party thereto, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated April 23, 2012, and incorporated herein by reference.
 
 
 
 
(p)
Agreement for Letter of Credit, dated as of April 23, 2012, by and between the Company and Citibank, N.A. filed as Exhibit 4.2 to the Company's Current Report on Form 8-K dated April 23, 2012, and incorporated herein by reference.
 
 
 
 
(q)
Five Year Credit Agreement Amendment No. 1, dated as of April 25, 2012, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders party thereto, filed as Exhibit 4 to the Company's Current Report on Form 8-K dated April 25, 2012, and incorporated herein by reference.
 
 
 
 
(r)
Five Year Credit Agreement Amendment No. 2, dated as of May 7, 2012, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders party thereto, filed as Exhibit 4 to the Company's Current Report on Form 8-K dated May 7, 2012, and incorporated herein by reference.
 
 
 
 
(s)
Credit Agreement, dated as of May 9, 2016, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders party thereto, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 9, 2016, and incorporated herein by reference.
 
 
 
 
(t)
Agreement for Letter of Credit, dated as of May 9, 2016, by and between the Company and Citibank, N.A. filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated May 9, 2016, and incorporated herein by reference.
 
 
 
 
(u)
Amendment No. 1 to the Credit Agreement, dated as of May 12, 2016, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders party thereto, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 12, 2016, and incorporated herein by reference.
 
 
 
 
(v)
Amendment No. 2 to the Credit Agreement, dated as of June 20, 2016, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders party thereto, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 20, 2016, and incorporated herein by reference.
 
 
 
 
(w)
Amendment No. 3 to the Credit Agreement, dated as of August 1, 2016, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders party thereto, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 1, 2016, and incorporated herein by reference.
 
 
 
 
(x)
Amendment No. 4 to the Credit Agreement, dated as of January 31, 2017, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders party thereto, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated January 31, 2017, and incorporated herein by reference.
 
 
 
 
(y)
Amendment No. 5 to the Credit Agreement, dated as of February 13, 2017, by and among the Company, Citicorp USA, Inc., as administrative agent and issuing bank, and the lenders party thereto, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated February 13, 2017, and incorporated herein by reference.
 
 
 
 
(z)
364-Day Bridge Credit Agreement, dated as of April 13, 2016, by and among the Company, the lenders party thereto, Citibank, N.A., as administrative agent, and Citigroup Global Markets Inc., as sole lead arranger and sole bookrunner, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated April 13, 2016, and incorporated herein by reference.
 
 
 
 
(aa)
Term Loan Credit Agreement, dated as of April 13, 2016, by and among the Company, the lenders party thereto, Citibank, N.A., as administrative agent, and Wells Fargo Bank, National Association, Morgan Stanley Senior Funding, Inc. and PNC Bank, National Association, as co-syndication agents, filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated April 13, 2016, and incorporated herein by reference.
 
 
 
10.
**(a)
Summary of Compensation Payable to Non-Employee Directors (filed herewith).
 
 
 
 
**(b)
Summary of Base Salary and Annual Incentive Compensation Payable to Named Executive Officers (filed herewith).
 
 
 

25


 
**(c)
Forms of Amended and Restated Severance Agreements filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and incorporated herein by reference.
 
 
 
 
**(d)
Schedule of Executive Officers who are Parties to the Amended and Restated Severance Agreements in the forms referred to in Exhibit 10(c) above (filed herewith).
 
 
 
 
**(e)
The Sherwin-Williams Company 2005 Deferred Compensation Savings and Pension Equalization Plan (Amended and Restated Effective as of January 1, 2016) filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and incorporated herein by reference.
 
 
 
 
**(f)
The Sherwin-Williams Company 2005 Key Management Deferred Compensation Plan (Amended and Restated Effective as of January 1, 2016) filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and incorporated herein by reference.
 
 
 
 
**(g)
The Sherwin-Williams Company Director Deferred Fee Plan (1997 Amendment and Restatement) filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997, and incorporated herein by reference.
 
 
 
 
**(h)
2004-1 Amendment to The Sherwin-Williams Company Director Deferred Fee Plan (1997 Amendment and Restatement) filed as Exhibit 10(d) to the Company's Current Report on Form 8-K dated July 20, 2005, and incorporated herein by reference.
 
 
 
 
**(i)
The Sherwin-Williams Company 2005 Director Deferred Fee Plan (Amended and Restated Effective as of January 1, 2016) filed as Exhibit 10(i) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and incorporated herein by reference.
 
 
 
 
**(j)
The Sherwin-Williams Company Executive Disability Income Plan filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference.
 
 
 
 
**(k)
Amendment Number One to The Sherwin-Williams Company Executive Disability Income Plan filed as Exhibit 10(l) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and incorporated herein by reference.
 
 
 
 
**(l)
Summary of The Sherwin-Williams Company Revised Executive Disability Plan filed as Exhibit 10(o) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and incorporated herein by reference.
 
 
 
 
**(m)
The Sherwin-Williams Company 2008 Amended and Restated Executive Life Insurance Plan filed as Exhibit 10(m) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and incorporated herein by reference.
 
 
 
 
**(n)
The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan filed as Exhibit 10(b) to the Company's Current Report on Form 8-K dated April 19, 2006, and incorporated herein by reference.
 
 
 
 
**(o)
Form of Nonqualified Stock Option Award under The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan filed as Exhibit 10(y) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007, and incorporated herein by reference.
 
 
 
 
**(p)
Form of Incentive Stock Option Award under The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan filed as Exhibit 10(z) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007, and incorporated herein by reference.
 
 
 
 
**(q)
The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of April 21, 2010) filed as Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and incorporated herein by reference.
 
 
 
 
**(r)
First Amendment to The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of April 21, 2010) filed as Exhibit 10(w) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and incorporated herein by reference.
 
 
 
 
**(s)
Forms of Stock Option Award under The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of April 21, 2010) filed as Exhibit 10(b) to the Company's Current Report on Form 8-K dated April 20, 2010, and incorporated herein by reference.
 
 
 
 
**(t)
Forms of Stock Option Award under The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of April 21, 2010) filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012, and incorporated herein by reference.
 
 
 

26


 
**(u)
Forms of Stock Option Award under The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of April 21, 2010) filed as Exhibit 10(z) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and incorporated herein by reference.
 
 
 
 
**(v)
Forms of Stock Option Award under The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of February 17, 2015) filed as Exhibit 10(x) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and incorporated herein by reference.
 
 
 
 
**(w)
Form of Restricted Stock Grant under The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of April 21, 2010) filed as Exhibit 10(dd) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and incorporated herein by reference.
 
 
 
 
**(x)
The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of February 17, 2015) filed as Exhibit 10(dd) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and incorporated herein by reference.
 
 
 
 
**(y)
Form of Restricted Stock Units Award Agreement under The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of February 17, 2015) filed as Exhibit 10(ee) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and incorporated herein by reference.
 
 
 
 
**(z)
Form of Restricted Stock Units Award Agreement under The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of February 17, 2015) filed as Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and incorporated herein by reference.
 
 
 
 
**(aa)
Form of Restricted Stock Units Award Agreement under The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of February 17, 2015) (filed herewith).
 
 
 
 
**(bb)
The Sherwin-Williams Company 2006 Stock Plan for Nonemployee Directors filed as Exhibit 10(c) to the Company's Current Report on Form 8-K dated April 19, 2006, and incorporated herein by reference.
 
 
 
 
**(cc)
Form of Restricted Stock Grant under The Sherwin-Williams Company 2006 Stock Plan for Nonemployee Directors filed as Exhibit 10(d) to the Company's Current Report on Form 8-K dated April 20, 2010, and incorporated herein by reference.
 
 
 
 
**(dd)
The Sherwin-Williams Company 2006 Stock Plan for Nonemployee Directors (Amended and Restated as of February 17, 2015) filed as Exhibit 10(hh) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and incorporated herein by reference.
 
 
 
 
**(ee)
Form of Restricted Stock Units Award Agreement under The Sherwin-Williams Company 2006 Stock Plan for Nonemployee Directors (Amended and Restated as of February 17, 2015) filed as Exhibit 10(ii) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and incorporated herein by reference.
 
 
 
 
**(ff)
The Sherwin-Williams Company 2006 Stock Plan for Nonemployee Directors (Amended and Restated as of April 20, 2016) filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016, and incorporated herein by reference.
 
 
 
 
**(gg)
Form of Restricted Stock Units Award Agreement under The Sherwin-Williams Company 2006 Stock Plan for Nonemployee Directors (Amended and Restated as of April 20, 2016) (filed herewith).
 
 
 
 
**(hh)
The Sherwin-Williams Company 2007 Executive Performance Bonus Plan (As Amended and Restated Effective January 1, 2012) filed as Exhibit 10(a) to the Company's Current Report on Form 8-K dated April 18, 2012, and incorporated herein by reference.
 
 
 
13.
 
Our 2016 Annual Report, portions of which are incorporated herein by reference (filed herewith). With the exception of those portions of our 2016 Annual Report that are specifically incorporated by reference in this report, our 2016 Annual Report shall not be deemed “filed” as part of this report.
 
 
 
21.
 
Subsidiaries (filed herewith).
 
 
 
23.
 
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith).
 
 
 
24.
(a)
Powers of Attorney (filed herewith).
 
 
 
 
(b)
Certified Resolution Authorizing Signature by Power of Attorney (filed herewith).
 
 
 
31.
(a)
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (filed herewith).
 
 
 
 
(b)
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith).
 
 
 

27


32.
(a)
Section 1350 Certification of Chief Executive Officer (furnished herewith).
 
 
 
 
(b)
Section 1350 Certification of Chief Financial Officer (furnished herewith).
 
 
 
101.INS
XBRL Instance Document
 
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document

 
*
Certain exhibits and schedules have been omitted and the Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted exhibits and schedules upon request.
 
**
Management contract or compensatory plan or arrangement.



28


EXHIBIT 10(a)

SUMMARY OF COMPENSATION
PAYABLE TO NON-EMPLOYEE DIRECTORS


Director Fees. The cash compensation payable to Sherwin-Williams’ non-employee directors is as follows:

An annual cash retainer of $115,000;
An additional annual cash retainer of $25,000 for the Lead Director;
An additional annual cash retainer of $21,000 for the chair of the Audit Committee;
An additional annual cash retainer of $21,000 for the chair of the Compensation and Management Development Committee;
An additional annual cash retainer of $15,000 for the chair of the Nominating and Corporate Governance Committee; and
A meeting fee of $1,750 for each Board or Committee meeting attended in excess of twelve meetings during a calendar year. For purposes of calculating the number of meetings during a calendar year, any Board and Committee meetings held within 24 hours shall constitute one meeting.
  
All retainer amounts are payable in quarterly installments in advance. All meeting fees are payable on the date of the meeting.

In addition, non-employee directors receive an annual grant of restricted stock units of approximately $145,000, valued over a prior 30-day period, under The Sherwin-Williams Company 2006 Stock Plan for Nonemployee Directors.

Other Benefits . All directors are reimbursed for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of the Board and of committees of the Board.

Sherwin-Williams provides liability insurance and business travel accident insurance for all directors, including $300,000 accidental death and dismemberment coverage and $300,000 permanent total disability coverage, while the directors are traveling on Sherwin-Williams’ business.

Directors may also receive the same discounts as Sherwin-Williams’ employees on the purchase of products at Sherwin-Williams’ stores and are eligible to participate in Sherwin-Williams’ matching gifts and grants for volunteers program on the same basis as employees.

Deferral of Director Fees. In accordance with the Director Deferred Fee Plan, directors may elect to defer all or a part of their retainer and meeting fees. Deferred fees may be credited in a common stock account, a shadow stock account or an interest bearing cash account. Amounts deferred may be distributed either in annual installments over a period up to ten years or in a lump sum pursuant to a director’s payment election. Amounts credited to a shadow stock account are distributed in cash.




EXHIBIT 10(b)

SUMMARY OF BASE SALARY AND ANNUAL INCENTIVE
COMPENSATION PAYABLE TO NAMED EXECUTIVE OFFICERS

2017 Base Salary . The Compensation and Management Development Committee (the “Compensation Committee”) of the Board of Directors of The Sherwin-Williams Company (“Sherwin-Williams”) set the 2017 base salaries of the executive officers who are expected to be named in the Summary Compensation Table of Sherwin-Williams’ 2017 Proxy Statement (the “Named Executive Officers”). The base salaries of the Named Executive Officers for 2017 are as follows: John G. Morikis, Chairman, President and Chief Executive Officer ($1,150,000); Sean P. Hennessy, Senior Vice President - Corporate Planning, Development and Administration ($705,198); Robert J. Davisson, President, The Americas Group ($633,152); and Catherine M. Kilbane, Senior Vice President, General Counsel and Secretary ($561,418). Christopher M. Connor, formerly Executive Chairman, retired at the close of business on December 31, 2016.


Annual Incentive Compensation to Be Earned in 2017 . The Compensation Committee also approved the following minimum, target and maximum cash bonus award levels, as a percent of salary, for the Named Executive Officers for 2017 under The Sherwin-Williams Company 2007 Executive Performance Bonus Plan.

    
 
 
Incentive Award as a Percentage of Base Salary
Named Executive Officer
 
Minimum
 
Target
 
Maximum
John G. Morikis
 
0
 
135
 
270
Sean P. Hennessy
 
0
 
80
 
160
Robert J. Davisson
 
0
 
80
 
160
Catherine M. Kilbane
 
0
 
70
 
140
Christopher M. Connor
 
N/A
 
N/A
 
N/A







EXHIBIT 10(d)


Schedule of Executive Officers who are Parties
to the Amended and Restated Severance Agreements in the Forms Filed as
Exhibit 10(e) to the Company’s Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2010



Form A of Severance Agreement

John G. Morikis
Sean P. Hennessy


Form B of Severance Agreement

Joel D. Baxter
Robert J. Davisson
Robert J. Wells


Form C of Severance Pay Agreement

Jane M. Cronin
Thomas P. Gilligan
Catherine M. Kilbane
Allen J. Mistysyn
David B. Sewell





EXHIBIT 10(aa)

THE SHERWIN-WILLIAMS COMPANY
2006 EQUITY AND PERFORMANCE INCENTIVE PLAN
(AMENDED AND RESTATED AS OF FEBRUARY 17, 2015)

Restricted Stock Units Award Agreement

Grantee:
 
 
Date of Grant:
 
 
 
 
Date of Vesting:
 
 
 
 
 
 
Target number of Performance-Based EPS RSUs (“Target EPS RSUs”):
 
Target number of Performance-Based RONAE RSUs (“Target RONAE RSUs”):
 
Total number of Performance-Based Restricted Stock Units (“Total RSUs”):
 

1.     Grant of Restricted Stock Units. The Compensation and Management Development Committee of the Board of Directors (the “Committee”) of The Sherwin-Williams Company (the “Company”) or its delegate has granted to you (“Grantee”) the Restricted Stock Unit awards (the “RSUs”) set forth above in accordance with the terms of this Restricted Stock Units Award Agreement (this “Agreement”) and the terms of The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of February 17, 2015) (the “Plan”), the related Prospectus and any Prospectus Supplement, and such other rules and procedures as may be adopted by the Company. The Total RSUs consist of the Target EPS RSUs and Target RONAE RSUs (collectively, the “Target RSUs”), as set forth above, and subject to the terms and conditions set forth herein, in the Plan, and on file with the Committee. Capitalized terms used herein without definition or other identification shall have the meanings assigned to them in the Plan.
2.     Vesting of RSUs.
(A)     Vesting of Performance-Based EPS RSUs. Subject to Section 3 hereof, provided Grantee is continuously employed with the Company or a Subsidiary from the Date of Grant through the Date of Vesting, inclusive (the “Restriction Period”), in Grantee’s present position or in such other position that, as the Committee may determine, entitles Grantee to retain the rights under this grant (each such position being hereinafter referred to as a “Participating Position”), a percentage ranging from 0% to 200% of the Target EPS RSUs shall become nonforfeitable (“Vested,” “Vested RSUs” or similar terms) in accordance with the relative level of achievement of the Management Objective set forth below (the “Vesting Percentage”) and shall be settled in accordance with the terms of Section 4 hereof. The determination of the Vesting Percentage shall be made after such time as the Committee has obtained the information, made the decisions, and completed the calculations necessary to make such determination. The Vesting Percentage is based upon the Company’s Earnings Per Share (“Cumulative EPS”) during the three-year period ending on December 31 of the most recently completed fiscal year prior to the Date of Vesting (the “Measurement Period”), as determined in accordance with the following table:





Cumulative EPS
Vesting Percentage
Equal to or greater than
200%
 
175%
 
150%
 
125%
 
100%
 
88%
 
75%
 
63%
 
50%
 
38%
 
25%
Less than
0%
When the Cumulative EPS results during the Measurement Period fall between the table values, straight-line mathematical interpolation will be used to determine the Vesting Percentage calculated to the nearest hundredth of a percentage. The manner in which the Committee will determine Cumulative EPS during the Measurement Period is set forth on Exhibit A attached hereto, subject to terms set by and on file with the Committee.
(B)     Vesting of Performance-Based RONAE RSUs. Subject to Section 3 hereof, provided Grantee is continuously employed with the Company or a Subsidiary during the Restriction Period, in Grantee’s Participating Position, a percentage ranging from 0% to 200% of the Target RONAE RSUs shall become Vested in accordance with the Vesting Percentage (as set forth below) and shall be settled in accordance with the terms of Section 4 hereof. The determination of the Vesting Percentage shall be made after such time as the Committee has obtained the information, made the decisions, and completed the calculations necessary to make such determination. The Vesting Percentage is based upon the Company’s Return On Net Assets Employed (“Average Annual RONAE”) during the Measurement Period, as determined in accordance with the following table:
Average Annual RONAE
Vesting Percentage
Equal to or greater than
200%
 
175%
 
150%
 
125%
 
100%
 
88%
 
75%
 
63%
 
50%
 
38%
 
25%
Less than
0%
When the Average Annual RONAE results during the Measurement Period fall between the table values, straight-line mathematical interpolation will be used to determine the Vesting Percentage calculated to the nearest hundredth of a percentage. The manner in which the Committee will determine Average Annual RONAE during the Measurement Period is set forth on Exhibit B attached hereto, subject to terms set by and on file with the Committee.





3.     Termination of Rights to Total RSUs; Acceleration of Vesting. Notwithstanding anything herein to the contrary:
(A)    On the date Grantee ceases to be continuously employed in any Participating Position(s) at any time during the Restriction Period, the Total RSUs shall be forfeited and Grantee shall forfeit and lose all rights to the Total RSUs that are not Vested as of such date, except as otherwise provided below:
(i)     In the event of the death of Grantee during the Restriction Period, the greater of (I) 100% of the Target RSUs or (II) the Vesting Percentage of the Target RSUs based on the actual Cumulative EPS and Average Annual RONAE measured as of the end of the last completed fiscal quarter preceding the date of Grantee’s death and the projected forecast of Cumulative EPS and Average Annual RONAE over the remaining Restriction Period, shall immediately be Vested.
(ii)    In the event Grantee becomes Disabled, the greater of (I) 100% of the Target RSUs or (II) the Vesting Percentage of the Target RSUs based on the actual Cumulative EPS and Average Annual RONAE measured as of the end of the last completed fiscal quarter preceding the date on which Grantee becomes Disabled and the projected forecast of Cumulative EPS and Average Annual RONAE over the remaining Restriction Period, shall immediately be Vested.
(iii)    In the event Grantee’s employment terminates as a result of “Retirement,” all rights of Grantee under this grant with respect to the Target RSUs shall continue as if Grantee had continued employment in a Participating Position, and the Vesting Percentage of the Target RSUs will be determined as if Grantee had remained employed in a Participating Position throughout the Restriction Period. “Retirement” shall be defined as: (x) the attainment of age 65; (y) the attainment of age 55-59 with at least twenty (20) years of service with the Company or a Subsidiary; or (z) the attainment of age 60 or older and the Grantee’s combination of age and service with the Company or any Subsidiary equals at least 75.
(iv)    Notwithstanding Section 2 above, in the event of a Change of Control, the Total RSUs shall Vest on fulfillment of the conditions specified in Section 12 of the Plan, and, for clarification in this regard, the phrase “as if 100% of the Management Objectives have been achieved” contained in Section 12 of the Plan, as applied to this Agreement, means as if all Management Objectives have been achieved (i.e., achievement at or above the maximum target levels set forth in this Agreement).
(B)    With respect to a Grantee that is a corporate officer and operating management, in the event Grantee is transferred from a Participating Position, the Committee shall have the right to cancel Grantee’s rights hereunder, continue Grantee’s rights hereunder in full, or prorate the number of Total RSUs evidenced hereby for the portion of the Restriction Period completed as of the date of such transfer or as the Committee may otherwise deem appropriate. In the event Grantee’s rights hereunder continue in full or the number of Total RSUs is prorated, the other requirements for Vesting will continue to apply, including that Grantee remain continuously employed by the Company or a Subsidiary through the Date of





Vesting, subject to earlier Vesting pursuant to Section 3(A). Any such Award will be settled in accordance with Section 4.
(C)    In the event that Grantee knowingly or willfully engages in misconduct during the Restriction Period, which is materially harmful to the interests of the Company or a Subsidiary, as determined by the Committee, all rights of Grantee to the RSUs shall terminate.
4.     Settlement of RSUs.
(A)     General . Upon satisfaction of the Vesting requirements set forth in Sections 2 and/or 3 hereof, and as soon as administratively practicable following (but no later than thirty (30) days following) the Date of Vesting, the Company shall issue Grantee one share of Common Stock free and clear of any restrictions for each Vested RSU.
(B)     Other Payment Events for Vested RSUs . Notwithstanding Section 4(A), to the extent that prior to the Date of Vesting there are any Vested RSUs pursuant to Section 3 hereof, such Vested RSUs shall be settled prior to the date set forth under Section 4(A) as follows:
(i)     Death . In the event of the death of the Grantee during the Restriction Period, the Company shall issue Grantee one share of Common Stock free and clear of any restrictions for each Vested RSU within thirty (30) days of the date of Grantee’s death.
(ii)     Disability . In the event Grantee becomes “Disabled” during the Restriction Period, the Company shall issue Grantee one share of Common Stock free and clear of any restrictions for each Vested RSU within thirty (30) days of the date on which Grantee becomes Disabled. “Disabled” shall mean that Grantee (x) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (y) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Company.
(iii)     Change of Control . In the event of a Change of Control during the Restriction Period, Vested RSUs shall be settled in accordance with Section 12 of the Plan. Notwithstanding any provision of this Agreement or the Plan to the contrary, if Section 409A of the Code applies to the payment and Grantee experiences a termination of employment after the Change of Control resulting in Vested RSUs under Section 12 of the Plan, Grantee is entitled to receive settlement of any Vested RSUs under Section 12 of the Plan on the date that would have otherwise applied pursuant to Sections 4(A), 4(B)(i) or 4(B)(ii) as though such Change of Control had not occurred. Notwithstanding any provision of this Agreement or the Plan to the contrary and to the extent required to comply





with Section 409A, if any Target RSU is Assumed, any outstanding Target RSUs which at the time of the Change of Control are not subject to a “substantial risk of forfeiture” (within the meaning of Section 409A of the Code) will be deemed to be not Assumed and will be payable in accordance with Section 12(b) of the Plan.
5.     Dividend Equivalents; Other Rights. From and after the Date of Grant and until the earlier of (A) the time when the RSUs Vest and are settled in accordance with Section 4 hereof or (B) the time when Grantee’s rights to the RSUs are forfeited in accordance with Section 3 hereof, on the date that the Company pays a cash dividend (if any) to holders of Common Stock generally, Grantee shall be entitled to a deferred cash payment equal to the value of the product of (x) the dollar amount of the cash dividend paid per share of Common Stock on such date and (y) 200% of the Target RSUs; however, such dividend equivalents (if any) shall be paid in cash, and shall be subject to such other applicable terms and conditions (including payment or forfeitability) as the RSUs on which the dividend equivalents were credited. In this regard, the right to any such dividend equivalent payment shall Vest at the same time as the RSUs to which they relate and shall be distributed to Grantee concurrently with the RSUs (and in proportion to the percentage of the RSUs that Vest and are to be paid in Common Stock in settlement of such RSUs), without regard to the number of shares of Common Stock withheld to pay any applicable withholding tax obligations. The obligations of the Company hereunder will be merely that of an unfunded and unsecured promise of the Company to deliver shares of Common Stock or cash, as the case may be, in the future, and the rights of Grantee will be no greater than that of an unsecured general creditor. No assets of the Company will be held or set aside as security for the obligations of the Company hereunder.
6.     No Shareholder/Voting Rights. Grantee will not be a shareholder of record and shall have no voting rights with respect to shares of Common Stock underlying an RSU prior to the Company’s issuance of such shares following the Date of Vesting or the otherwise applicable settlement date.
7.     Transferability. During the Restriction Period, Grantee shall not be permitted to sell, transfer, pledge, encumber, assign or dispose of the RSUs.
8.     Withholding; Taxes. If the Company shall be required to withhold any federal, state, local or foreign tax in connection with the RSUs or the underlying shares of Common Stock, Grantee shall pay or make provision satisfactory to the Company for payment of all such taxes. In accordance with administrative procedures established by the Company, Grantee may elect to satisfy Grantee’s statutory withholding tax obligations on account of Vesting hereunder in one or a combination of the following methods: (A) in cash or by separate check made payable to the Company; (B) authorizing the Company to withhold a number of shares of Common Stock issued hereunder equal to the applicable minimum statutory withholding tax obligation (or such other amount as permitted by the Plan and authorized by the Committee or its delegate) and/or (C) by delivering to the Company other shares of Common Stock held by Grantee. Notwithstanding any other provision of this Agreement or the Plan, the Company shall not be obligated to guarantee any particular tax result for Grantee with respect to any payment provided to Grantee hereunder, and Grantee shall be responsible for any taxes imposed on Grantee with respect to any such payment.





9.     No Right to Future Awards or Employment. The grant is a voluntary, discretionary bonus being made on a one-time basis and it does not constitute a commitment to make any future awards. The grant and any related payments made to Grantee will not be considered salary or other compensation for purposes of any severance pay or similar allowance, except as otherwise required by law. Nothing contained herein will confer upon Grantee any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate Grantee’s employment or other service at any time.
10.     Nature of Grant. Grantee acknowledges that (A) the future value of the underlying shares of Common Stock is unknown and cannot be predicted with certainty and (B) in consideration of the grant of the RSUs, no claim or entitlement to compensation or damages shall arise from termination of the RSUs or diminution in value of the shares received upon settlement including (without limitation) any claim or entitlement resulting from termination of Grantee’s active employment by the Company or a Subsidiary (for any reason whatsoever and whether or not in breach of local labor laws) and Grantee hereby releases the Company and its Subsidiaries from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by accepting the RSUs and this Agreement, Grantee shall be deemed irrevocably to have waived his or her entitlement to pursue such claim.
11.     Severability. If any provision of this grant or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this grant and the application of such provision to any other person or circumstances shall not be affected, and the provisions so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent (and only to the extent) necessary to make it enforceable, valid and legal.
12.     Governing Law. This grant shall be governed by and construed with the internal substantive laws of the State of Ohio, without giving effect to any principle of law that would result in the application of the law of any other jurisdiction
13.     Recapture/Recoupment Rights and Policies. Grantee acknowledges and agrees that the terms and conditions set forth in The Sherwin-Williams Company Executive Compensation Adjustment and Recapture Policy (“Policy”) are incorporated in this Agreement by reference. To the extent the Policy is applicable to Grantee, it creates additional rights for the Company with respect to Grantee’s RSUs. Notwithstanding any provisions in this Agreement to the contrary, any RSU granted under this Agreement will be subject to mandatory repayment by the Grantee to the Company to the extent the Grantee is, or in the future becomes, subject to (A) any Company clawback or recoupment policy that is adopted to comply with the requirements of any applicable laws, rules or regulations, or otherwise, or (B) any applicable laws which impose mandatory recoupment, under circumstances set forth in such applicable laws. By accepting the RSUs, Grantee hereby agrees and acknowledges that Grantee is obligated to cooperate with, and provide any and all assistance necessary to, the Company to recover or recoup the RSUs or amounts paid under the Plan subject to clawback pursuant to such law or policy.  Such cooperation and assistance shall include, but is not limited to, executing, completing and





submitting any documentation necessary to recover or recoup any Award or amounts paid pursuant to this Award.
14.     Data Privacy. Grantee explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of Grantee’s personal data as described in this document by and among, as applicable, Grantee’s employer (“Employer”) and the Company and its Subsidiaries, for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan. Grantee understands that Employer and the Company and its Subsidiaries hold (but only process or transfer to the extent required or permitted by local law) the following personal information about Grantee: Grantee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of Common Stock or directorships held in the Company, details of all RSUs or any other entitlement to shares of Common Stock awarded, canceled, exercised, vested, unvested or outstanding in Grantee’s favor, for the purpose of implementing, administering and managing the Plan (“Data”). Grantee understands that Data may be transferred to third parties assisting in the implementation, administration and management of the Plan, including Fidelity Stock Plan Service LLC, that these recipients may be located in Grantee’s country or elsewhere (including countries outside of the European Union or the European Economic Area, such as the United States of America), and that the recipient’s country may have different data privacy laws and protections than those that apply in Grantee’s country. Grantee understands that Grantee may request a list with the names and addresses of any potential recipients of the Data by contacting Grantee’s local human resources representative. Grantee authorizes these recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing Grantee’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom Grantee may elect to deposit any shares acquired upon vesting or earning of the RSUs. Grantee understands that Data will be held only as long as is necessary to implement, administer and manage Grantee’s participation in the Plan and in accordance with local law. Grantee understands that Grantee may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing Grantee’s local human resources representative. Grantee understands, however, that refusing or withdrawing Grantee’s consent may affect Grantee’s ability to participate in the Plan. For more information on the consequences of Grantee’s refusal to consent or withdrawal of consent, Grantee hereby understands that Grantee may contact his or her local human resources representative.
15.     Electronic Delivery. The Company may, in its sole discretion, deliver any documents related to the RSUs and Grantee’s participation in the Plan, or future awards that may be granted under the Plan, by electronic means or request Grantee’s consent to participate in the Plan by electronic means. Grantee hereby consents to receive such documents by electronic delivery and, if requested, agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.
16.     Compliance with Section 409A of the Code. The award covered by this Agreement is intended to be excepted from coverage under, or compliant with, the provisions of Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and other





guidance promulgated thereunder (“Section 409A”). Notwithstanding the foregoing or any other provision of this Agreement or the Plan to the contrary, if the award is subject to the provisions of Section 409A (and not exempted therefrom), the provisions of this Agreement and the Plan shall be administered, interpreted and construed in a manner necessary to comply with Section 409A (or disregarded to the extent such provision cannot be so administered, interpreted or construed). If any payments or benefits hereunder may be deemed to constitute nonconforming deferred compensation subject to taxation under the provisions of Section 409A, Grantee agrees that the Company may, without the consent of Grantee, modify the Agreement to the extent and in the manner the Company deems necessary or advisable or take such other action or actions, including an amendment or action with retroactive effect, that the Company deems appropriate in order either to preclude any such payment or benefit from being deemed “deferred compensation” within the meaning of Section 409A or to provide such payments or benefits in a manner that complies with the provisions of Section 409A such that they will not be subject to the imposition of taxes and/or interest thereunder. If, at the time of Grantee’s separation from service (within the meaning of Section 409A of the Code), (A) Grantee shall be a specified employee (within the meaning of Section 409A of the Code and using the identification methodology selected by the Company from time to time) and (B) the Company shall make a good faith determination that an amount payable hereunder constitutes deferred compensation (within the meaning of Section 409A of the Code) the settlement of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A of the Code in order to avoid taxes or penalties under Section 409A of the Code, then the Company shall not settle such amount on the otherwise scheduled settlement date but shall instead settle it, without interest, on the first business day of the month after such six-month period. Notwithstanding the foregoing, the Company makes no representations and/or warranties with respect to compliance with Section 409A, and Grantee recognizes and acknowledges that Section 409A could potentially impose upon Grantee certain taxes and/or interest charges for which Participant is and shall remain solely responsible.
17.     Construction . This Agreement is made and granted pursuant to the Plan and is in all respects limited by and subject to the terms of the Plan. In the event of any inconsistency between the Plan and this Agreement, the terms of the Plan shall control.
18.     Compliance with Laws and Regulations . The issuance of shares of Common Stock pursuant to this Agreement shall be subject to compliance by Grantee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which Company’s stock may be listed for trading at the time of such issuance.
19.     Binding Effect; No Third Party Beneficiaries . This Agreement shall be binding upon and inure to the benefit of the Company and Grantee and their respective heirs, representatives, successors and permitted assigns. This Agreement shall not confer any rights or remedies upon any person other than the Company and Grantee and their respective heirs, representatives, successors and permitted assigns.
20.     Notice . Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Company at its principal corporate office. Except to the extent electronic notice is authorized hereunder, any notice required to be given or delivered to Grantee shall be in writing and addressed to Grantee at





Grantee’s most recent address set forth in the Company’s records. All notices shall be deemed effective upon personal delivery (or electronic delivery to the extent authorized hereunder) or upon deposit in the U.S. mail, postage, prepaid and properly addressed to the party to be notified.






Exhibit A


Cumulative Earnings Per Share shall be equal to the sum of the Earnings Per Share (“EPS”) for each fiscal year of the Company during the Measurement Period.

Example :

Year 1 EPS
$9.00
Year 2 EPS
$9.40
Year 3 EPS
$10.00
Cumulative EPS
$28.40


Cumulative EPS = $28.40







Exhibit B

Average Annual Return On Net Assets Employed shall be equal to the sum of the Return On Net Assets Employed (“RONAE”) for each fiscal year of the Company during the Measurement Period divided by three.

Example :

Year 1 RONAE
21.00%
Year 2 RONAE
21.50%
Year 3 RONAE
22.00%
Average Annual RONAE
21.50%


Average Annual RONAE = 21.50%








EXHIBIT 10(gg)

THE SHERWIN-WILLIAMS COMPANY
2006 STOCK PLAN FOR NONEMPLOYEE DIRECTORS
(AMENDED AND RESTATED AS OF APRIL 20, 2016)

Restricted Stock Units Award Agreement

Grantee:
 
 
 
Date of Grant:
 
Aggregate Number of RSUs:
 
 
 
 
 
 
 
 
 
 
 
RSUs Vesting:
 
 
 
Date of Vesting:
 
RSUs Vesting:
 
 
 
Date of Vesting:
 
RSUs Vesting:
 
 
 
Date of Vesting:
 



1.     Grant of Restricted Stock Units. The Board of Directors (the “Board”) of The Sherwin-Williams Company (the “Company”) grants to you (“Grantee”) the aggregate number of Restricted Stock Units (the “RSUs”) set forth above in accordance with the terms hereof (this “Agreement”) and the terms of The Sherwin-Williams Company 2006 Stock Plan for Nonemployee Directors ( Amended and Restated as of April 20, 2016) (the “Plan”). Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan.
2.     Vesting of RSUs. (A) The RSUs shall become nonforfeitable (“Vest” or similar terms) to the extent of one-third of the RSUs after Grantee has continuously served as a member of the Board for one full year from the Date of Grant and additional one-third of the RSUs after each of the next two successive full years thereafter during which Grantee shall have continuously served as a member of the Board (the “Restriction Period”). Each one-year anniversary of the Date of Grant shall be the “Date of Vesting” for the portion of RSUs that become Vested on such date in accordance with the foregoing.
(B)    Notwithstanding Section 2(A) above, in the event of a “Change of Control” of the Company, as defined below, during the Restriction Period the full number of the RSUs shall immediately Vest.
3.     Change of Control. A “Change of Control” shall mean the occurrence of any of the following events:
(A)    any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) is or becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of the combined voting power of the then-outstanding “Voting Stock” of the Company; provided, however, that:
(i)    for purposes of this Section 3, the following acquisitions will not constitute a Change of Control: (1) any acquisition of Voting Stock directly from Company that is approved by a majority of the “Incumbent Directors,” (2) any acquisition of Voting Stock by Company or any Subsidiary, (3) any acquisition of Voting Stock by the trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by Company or any Subsidiary, and (4) any





acquisition of Voting Stock by any Person pursuant to a “Business Transaction” that complies with clauses (1), (2) and (3) of Section 3(C) below;
(ii)    if any Person is or becomes the beneficial owner of 30% or more of combined voting power of the then-outstanding Voting Stock as a result of a transaction described in clause (1) of Section 3(A)(i) above and such Person thereafter becomes the beneficial owner of any additional shares of Voting Stock representing 1% or more of the then-outstanding Voting Stock, other than in an acquisition directly from Company that is approved by a majority of the Incumbent Directors or other than as a result of a stock dividend, stock split or similar transaction effected by Company in which all holders of Voting Stock are treated equally, such subsequent acquisition shall be treated as a Change of Control; or
(iii)    a Change of Control will not be deemed to have occurred if a Person is or becomes the beneficial owner of 30% or more of the Voting Stock as a result of a reduction in the number of shares of Voting Stock outstanding pursuant to a transaction or series of transactions that is approved by a majority of the Incumbent Directors unless and until such Person thereafter becomes the beneficial owner of any additional shares of Voting Stock representing 1% or more of the then-outstanding Voting Stock, other than as a result of a stock dividend, stock split or similar transaction effected by Company in which all holders of Voting Stock are treated equally; or
(iv)    if at least a majority of the Incumbent Directors determine in good faith that a Person has acquired beneficial ownership of 30% or more of the Voting Stock inadvertently, and such Person divests as promptly as practicable but no later than the date, if any, set by the Incumbent Directors a sufficient number of shares so that such Person beneficially owns less than 30% of the Voting Stock, then no Change of Control shall have occurred as a result of such Person’s acquisition; or
(B)    a majority of the Board ceases to be comprised of Incumbent Directors; or
(C)     the consummation of a reorganization, merger or consolidation, or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of the stock or assets of another corporation, or other transaction (each, a “Business Transaction”), unless, in each case, immediately following such Business Transaction (1) the Voting Stock outstanding immediately prior to such Business Transaction continues to represent (either by remaining outstanding or by being converted into voting stock of the surviving entity or any parent thereof), more than 50% of the combined voting power of the then outstanding shares of voting stock of the entity resulting from such Business Transaction (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (2) no Person (other than the Company, such entity resulting from such Business Transaction, or any employee benefit plan (or related trust) sponsored or maintained by the Company, any Subsidiary or such entity resulting from such Business Transaction) beneficially owns, directly or indirectly, 30% or more of the combined voting power of the then outstanding shares of voting stock of the entity resulting from such Business Transaction, and (3) at least a majority of the members of the board of directors of the entity resulting from such Business Transaction were Incumbent Directors at the time of the execution of the initial agreement or of the action of the Board providing for such Business Transaction; or





(D)    the consummation of the liquidation or dissolution of the Company, except pursuant to a Business Transaction that occurs under the circumstances described in clauses (1), (2) and (3) of Section 3(C).
For purposes of this Section 3, the terms (A) “Incumbent Directors” shall mean, during any period of two consecutive years, individuals who at the beginning of such period constituted the Board and any new director (other than a director initially elected or nominated as a director as a result of an actual or threatened election contest with respect to directors or any other actual or threatened solicitation of proxies by or on behalf of such director, including any director nominated or elected to the Board pursuant to any proxy access procedures included in the Company’s organizational documents) whose election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved and (B) “Voting Stock” shall mean the voting securities of the Company which have the right to vote in the election of members of the Board.
4.     Settlement of RSUs. Upon satisfaction of the Vesting requirements set forth in Section 2 or 5(A) hereof, and as soon as administratively practicable following (but no later than thirty (30) days following) the respective Date of Vesting or, if earlier, the otherwise applicable Vesting date, the Company shall issue Grantee one share of Common Stock free and clear of any restrictions for each Vested RSU. Notwithstanding any provision to the contrary in this Agreement, if a Change of Control occurs and such Change of Control would not qualify as a permissible date of distribution under Section 409A(a)(2)(A) of the Code, and the regulations thereunder, and where Section 409A of the Code applies to the settlement of the Vested RSUs, Grantee is entitled to receive the corresponding payment in settlement of the Vested RSUs on the date that would have otherwise applied as though such Change of Control had not occurred.
5.     Termination of Rights to RSUs. Notwithstanding anything herein to the contrary:
(A)    On the date Grantee ceases to be a member of the Board at any time during the Restriction Period, any portion of the RSUs that are not Vested as of such date shall be forfeited and Grantee shall forfeit and lose all rights to any portion of the RSUs that are not Vested as of such date, except as otherwise provided below:
(i)    In the event of the death of Grantee during the Restriction Period, the full number of RSUs shall immediately Vest.
(ii)    In the event Grantee becomes “Disabled” due to sickness or bodily injury during the Restriction Period, the full number of RSUs shall immediately Vest. The term “Disabled” as used herein means permanent and total disability within the meaning of Treasury Regulations Section 1.409A-3(i)(4)(i)(A), as the same has been or may be amended from time to time.
(iii)    In the event Grantee ceases to be a member of the Board by reason of “Retirement,” all rights of Grantee hereunder shall continue as if Grantee had continued as a member of the Board, and the settlement of the Vested RSUs will occur at the same time they would have otherwise occurred pursuant to Sections 2 and 4 had the Grantee continued as a member of the Board through the applicable Date of Vesting or other Vesting date. The term “Retirement” as used herein means termination of





Grantee’s status as a member of the Board at or after attaining the age of sixty-five (65) or completing either five (5) years of service or five (5) one-year terms as a member of the Board by reason of resignation from the Board or by reason of not standing for reelection as a member of the Board.
(B)    In the event that Grantee knowingly or willfully engages in misconduct during the Restriction Period, which is materially harmful to the interests of the Company or a Subsidiary as determined by the Board, all rights of Grantee to the RSUs shall terminate.
6.     Dividend Equivalents; Other Rights. From and after the Date of Grant and until the earlier of (A) the time when any portion of the RSUs Vest and are settled in accordance with Section 4 hereof or (B) the time when Grantee’s rights to the RSUs are forfeited in accordance with Section 5 hereof, on the date that the Company pays a cash dividend (if any) to holders of Common Stock generally, Grantee shall be entitled to a deferred cash payment equal to the value of the product of (x) the dollar amount of the cash dividend paid per share of Common Stock on such date and (y) the total number of RSUs covered hereby that have not been settled in shares by such date. Such dividend equivalents (if any) shall be paid in cash, and shall be subject to such other applicable terms and conditions (including payment or forfeitability) as the RSUs based on which the dividend equivalents were credited. The obligations of the Company hereunder will be merely that of an unfunded and unsecured promise of the Company to deliver shares of Common Stock or cash, as the case may be, in the future, and the rights of Grantee will be no greater than that of an unsecured general creditor. No assets of the Company will be held or set aside as security for the obligations of the Company hereunder.
7.     No Shareholder/Voting Rights. Grantee will not be a shareholder of record and shall have no voting rights with respect to shares of Common Stock underlying an RSU prior to the Company’s issuance of such shares following the Date of Vesting or the otherwise applicable Vesting date.
8.     Transferability. During the Restriction Period, Grantee shall not be permitted to sell, transfer, pledge, encumber, assign or dispose of the RSUs.
9.     Withholding; Taxes. If the Company shall be required to withhold any federal, state, local or foreign tax in connection with the RSUs or the underlying shares of Common Stock, Grantee shall pay or make provision satisfactory to the Company for payment of all such taxes. Notwithstanding any other provision of this Agreement or the Plan, the Company shall not be obligated to guarantee any particular tax result for Grantee with respect to any payment provided to Grantee hereunder, and Grantee shall be responsible for any taxes imposed on Grantee with respect to any such payment.
10.     No Right to Future Awards or Service. The grant is a voluntary, discretionary bonus being made on a one-time basis and it does not constitute a commitment to make any future awards. The grant and any related settlement or payments made to Grantee will not confer upon Grantee any right with respect to continuance of service as a member of the Board, nor will it interfere in any way with any right the Company would otherwise have to terminate Grantee’s service at any time.
11.     Nature of Grant. Grantee acknowledges that (A) the future value of the underlying shares of Common Stock is unknown and cannot be predicted with certainty and (B) in consideration of the grant of the RSUs, no claim or entitlement to compensation or damages





shall arise from termination of the RSUs or diminution in value of the shares received upon settlement including (without limitation) any claim or entitlement resulting from termination of Grantee’s service as a member of the Board, and Grantee hereby releases the Company from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by accepting the RSUs and this Agreement, Grantee shall be deemed irrevocably to have waived his or her entitlement to pursue such claim.
12.     Severability. If any provision of this grant or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this grant and the application of such provision to any other person or circumstances shall not be affected, and the provisions so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent (and only to the extent) necessary to make it enforceable, valid and legal.
13.     Adjustments . The Board shall make or provide for such adjustments in the numbers of shares of Common Stock covered by the RSUs and in the kind of shares covered thereby as the Board, in its sole discretion, may determine is equitably required to prevent dilution or enlargement of the rights of Grantee that otherwise would result from (A) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, or (B) any merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights or warrants to purchase securities, or (C) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, in the event of any such transaction or event, the Board, in its discretion, shall provide in substitution for outstanding RSUs such alternative consideration (including cash), if any, as it may determine to be equitable in the circumstances and may require in connection therewith the surrender of all outstanding RSUs so replaced.
14.     Governing Law. This grant shall be governed by and construed with the internal substantive laws of the State of Ohio, without giving effect to any principle of law that would result in the application of the law of any other jurisdiction.
15.     Electronic Delivery. The Company may, in its sole discretion, deliver any documents related to the RSUs and Grantee’s participation in the Plan, or future awards that may be granted under the Plan, by electronic means or request Grantee’s consent to participate in the Plan by electronic means. Grantee hereby consents to receive such documents by electronic delivery and, if requested, agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third-party designated by the Company.
16.     Compliance with Section 409A of the Code. The award covered by this Agreement is intended to be excepted from coverage under, or compliant with, the provisions of Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and other guidance promulgated thereunder (“Section 409A”). Notwithstanding the foregoing or any provision of this Agreement or the Plan to the contrary, if the award is subject to the provisions of Section 409A (and not excepted therefrom), the provisions of this Agreement and the Plan shall be administered, interpreted and construed in a manner necessary to comply with Section 409A (or disregarded to the extent such provision cannot be so administered, interpreted or construed). If any payments or benefits hereunder may be deemed to constitute nonconforming deferred compensation subject to taxation under the provisions of Section 409A, Grantee agrees that the Company may, without the consent of Grantee, modify the Agreement to the extent and in the manner the Company deems necessary or advisable or take such other action or actions,





including an amendment or action with retroactive effect, that the Company deems appropriate in order either to preclude any such payment or benefit from being deemed “deferred compensation” within the meaning of Section 409A or to provide such payments or benefits in a manner that complies with the provisions of Section 409A such that they will not be such to the imposition of taxes and/or interest thereunder. If, at the time of Grantee’s separation from service (within the meaning of Section 409A of the Code), (A) Grantee shall be a specified employee (within the meaning of Section 409A of the Code and using the identification methodology selected by the Company from time to time) and (B) the Company shall make a good faith determination that an amount payable hereunder constitutes deferred compensation (within the meaning of Section 409A of the Code) the settlement of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A of the Code in order to avoid taxes or penalties under Section 409A of the Code, then the Company shall not settle such amount on the otherwise scheduled settlement date but shall instead settle it, without interest, on the first business day of the month after such six-month period. Notwithstanding the foregoing, the Company makes no representations and/or warranties with respect to compliance with Section 409A, and Grantee recognizes and acknowledges that Section 409A could potentially impose upon Grantee certain taxes and/or interest charges for which Participant is and shall remain solely responsible.
17.     Construction . This Agreement is made and granted pursuant to the Plan and is in all respects limited by and subject to the terms of the Plan. In the event of any inconsistency between the Plan and this Agreement, the terms of the Plan shall control.
18.     Compliance with Laws and Regulations . The issuance of shares of Common Stock pursuant to this Agreement shall be subject to compliance by Grantee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which Company’s stock may be listed for trading at the time of such issuance.
19.     Binding Effect; No Third Party Beneficiaries . This Agreement shall be binding upon and inure to the benefit of the Company and Grantee and their respective heirs, representatives, successors and permitted assigns. This Agreement shall no confer any rights or remedies upon any person other than the Company and Grantee and their respective heirs, representatives, successors and permitted assigns.
20.     Notice . Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Company at its principal corporate office. Except to the extent electronic notice is authorized hereunder, any notice required to be given or delivered to Grantee shall be in writing and addressed to Grantee at Grantee’s most recent address set forth in the Company’s records. All notices shall be deemed effective upon personal delivery (or electronic delivery to the extent authorized hereunder) or upon deposit in the U.S. mail, postage, prepaid and properly addressed to the party to be notified.




Exhibit 13
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FINANCIAL PERFORMANCE

G259918G99K04A02A01A05.JPG
 
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

19


FINANCIAL SUMMARY
(millions of dollars except as noted and per share data)

 
2016
 
2015
 
2014
 
2013
 
2012
Operations
 
 
 
 
 
 
 
 
 
Net sales
$
11,856

 
$
11,339

 
$
11,130

 
$
10,186

 
$
9,534

Cost of goods sold
5,933

 
5,780

 
5,965

 
5,569

 
5,328

Selling, general and administrative expenses
4,159

 
3,914

 
3,823

 
3,468

 
3,260

Impairments and dissolution
11

 
 
 
 
 
 
 
4

Interest expense
154

 
62

 
64

 
63

 
43

Income before income taxes
1,595

 
1,549

 
1,258

 
1,086

 
907

Net income
1,133

 
1,054

 
866

 
753

 
631

Financial Position
 
 
 
 
 
 
 
 
 
Accounts receivable - net
$
1,231

 
$
1,114

 
$
1,131

 
$
1,098

 
$
1,033

Inventories
1,068

 
1,019

 
1,034

 
971

 
920

Working capital - net
798

 
515

 
(115
)
 
630

 
1,273

Property, plant and equipment - net
1,096

 
1,042

 
1,021

 
1,021

 
966

Total assets
6,753

 
5,779

 
5,699

 
6,383

 
6,235

Long-term debt
1,211

 
1,907

 
1,116

 
1,122

 
1,632

Total debt
1,953

 
1,950

 
1,799

 
1,722

 
1,705

Shareholders’ equity
1,878

 
868

 
996

 
1,775

 
1,792

Per Common Share Information
 
 
 
 
 
 
 
 
 
Average shares outstanding (thousands)
91,839

 
92,197

 
96,190

 
100,898

 
101,715

Book value
$
20.20

 
$
9.41

 
$
10.52

 
$
17.72

 
$
17.35

Net income - diluted (1), (2)
11.99

 
11.15

 
8.77

 
7.25

 
6.02

Net income - basic (2)
12.33

 
11.43

 
9.00

 
7.46

 
6.20

Cash dividends
3.36

 
2.68

 
2.20

 
2.00

 
1.56

Financial Ratios
 
 
 
 
 
 
 
 
 
Return on sales
9.6
%
 
9.3
%
 
7.8
 %
 
7.4
%
 
6.6
%
Asset turnover
1.8
x
 
2.0
x
 
2.0
x
 
1.6
x
 
1.5
x
Return on assets
16.8
%
 
18.2
%
 
15.2
 %
 
11.8
%
 
10.1
%
Return on equity (3)
130.5
%
 
105.8
%
 
48.8
 %
 
42.0
%
 
41.6
%
Dividend payout ratio (4)
30.1
%
 
30.6
%
 
30.3
 %
 
33.2
%
 
37.7
%
Total debt to capitalization
51.0
%
 
69.2
%
 
64.4
 %
 
49.2
%
 
48.8
%
Current ratio
1.3

 
1.2

 
1.0

 
1.2

 
1.7

Interest coverage (5)
11.4
x
 
26.1
x
 
20.6
x
 
18.3
x
 
22.2
x
Net working capital to sales
6.7
%
 
4.5
%
 
(1.0
)%
 
6.2
%
 
13.3
%
Effective income tax rate (6)
29.0
%
 
32.0
%
 
31.2
 %
 
30.7
%
 
30.4
%
General
 
 
 
 
 
 
 
 
 
Capital expenditures
$
239

 
$
234

 
$
201

 
$
167

 
$
157

Total technical expenditures (7)
153

 
150

 
155

 
144

 
140

Advertising expenditures
351

 
338

 
299

 
263

 
247

Repairs and maintenance
100

 
99

 
96

 
87

 
83

Depreciation
172

 
170

 
169

 
159

 
152

Amortization of intangible assets
26

 
28

 
30

 
29

 
27

Shareholders of record (total count)
6,787

 
6,987

 
7,250

 
7,555

 
7,954

Number of employees (total count)
42,550

 
40,706

 
39,674

 
37,633

 
34,154

Sales per employee (thousands of dollars)
$
279

 
$
279

 
$
281

 
$
271

 
$
279

Sales per dollar of assets
1.76

 
1.96

 
1.95

 
1.60

 
1.53

 
 
 
 
 
 
 
 
 
 
(1)  
Diluted net income per common share for 2016 includes an $.86 per share charge for Valspar acquisition costs, partially offset by a $.40 per share increase related to an income tax accounting change due to the adoption of ASU No. 2016-09. See Notes 2 and 14, respectively.
(2)  
All earnings per share amounts are presented using the treasury stock method. See Note 15 .
(3)  
Based on net income and shareholders’ equity at beginning of year.
(4)  
Based on cash dividends per common share and prior year’s diluted net income per common share.
(5)  
Ratio of income before income taxes and interest expense to interest expense.
(6)  
Based on income before income taxes.
(7)  
See Note 1 for a description of technical expenditures.

20  

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SUMMARY
The Sherwin-Williams Company, founded in 1866, and its consolidated wholly owned subsidiaries (collectively, the “Company”) are engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region, Europe and Asia. The Company is structured into four reportable segments – Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group (collectively, the “Reportable Segments”) – and an Administrative Segment in the same way it is internally organized for assessing performance and making decisions regarding allocation of resources. See pages 8 through 17 of this report and Note 18 , on pages 72 through 75 of this report, for more information concerning the Reportable Segments.
The Company’s financial condition, liquidity and cash flow continued to be strong in 2016 as net operating cash topped $1.000 billion for the fourth straight year primarily due to improved operating results in our Paint Stores and Global Finishes Groups. Net working capital increased $282.8 million at December 31, 2016 compared to 2015 due to a significant increase in cash and other current assets partially offset by a significant increase in current liabilities. Cash and cash equivalents increased $684.0 million which were generated from cash flow from operations. Other current assets increased $150.3 million primarily due to an interest rate lock asset, while current portion of long-term debt increased $697.3 million resulting from 1.35% senior notes becoming due in 2017. In April 2016, the Company entered into a $7.3 billion bridge credit agreement (Bridge Loan) and a $2.0 billion term loan credit agreement (Term Loan) as committed financing for the pending acquisition of The Valspar Corporation (Acquisition) as disclosed in Note 2. No balances were drawn against these facilities as of December 31, 2016 . Debt issuance costs of $65.1 million related to these facilities were incurred and recorded in Other current assets. Of this amount, $61.1 million was amortized and included in Interest expense for year ended December 31, 2016 . The Company has been able to arrange sufficient short-term borrowing capacity at reasonable rates, and the Company has sufficient total available borrowing capacity to fund its current operating needs. Net operating cash decreased $138.9 million to $1.309 billion in 2016 from $1.447 billion in 2015 as an increase in net income was not enough to offset increased cash used for working capital accounts due to timing of payments. Strong net operating cash provided the funds necessary to invest in new stores and manufacturing and distribution facilities, return cash to shareholders through dividends, and build a cash reserve needed for the pending Acquisition expected to be completed in early 2017.
 

Results of operations for the Company were strong and improved in many areas in 2016 , primarily due to an improving domestic architectural paint market. Consolidated net sales increased 4.6 percent in 2016 to $11.856 billion from $11.339 billion in 2015 due primarily to higher paint sales volume in the Paint Stores and the impact of a change in revenue classification beginning in the third quarter related to grossing up third-party service revenue and related costs which were previously netted and immaterial in prior periods (Revenue reclassification). The Revenue reclassification increased net sales 1.1 percent . This prospective change primarily impacts the Paint Stores and Global Finishes Groups. This change had no impact on segment profit, but reduced segment profit as a percent to net sales of the affected groups. Consolidated gross profit as a percent of consolidated net sales increased to 50.0 percent in 2016 from 49.0 percent in 2015 due primarily to increased paint sales volume and improved operating efficiency, partially offset by the Revenue reclassification. Selling, general and administrative expenses (SG&A) increased $245.9 million in 2016 compared to 2015 and increased as a percent of consolidated net sales to 35.1 percent in 2016 as compared to 34.5 percent in 2015 due primarily to new store openings and Acquisition expenses. Amortization of credit facility costs incurred in early 2016 and interest on debt issued in July 2015 increased interest expense $92.3 million in 2016 . The effective income tax rate was 29.0 percent for 2016 and 32.0 percent for 2015 . The decrease in the effective tax rate in 2016 compared to 2015 was primarily due to the Company's adoption of ASU No. 2016-09 which reduced the income tax provision (Income tax accounting change). See Notes 1 and 14 for more information. Diluted net income per common share increased 7.5 percent to $11.99 per share for 2016 , including an $.86 per share charge for costs associated with the Acquisition partially offset by an increase of $.40 per share related to the Income tax accounting change, from $11.15 per share a year ago.

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. Management utilized certain outside economic sources of information when developing the bases for their estimates and assumptions. 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


21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

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 unlikely to significantly impact the current valuation of assets and liabilities that were not readily available from other sources.
All of the significant accounting policies that were followed in the preparation of the consolidated financial statements are disclosed in Note 1 , on pages 44 through 48 , of this report. The following procedures and assumptions utilized by management directly impacted many of the reported amounts in the consolidated financial statements.
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 29 of this report. See Note 1 , on page 44 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 are resolved, or if the financial condition of any of the Company’s customers were to deteriorate and their ability to make required payments became impaired, increases in these allowances may be required. At December 31, 2016 , no individual customer constituted more than 5 percent of Accounts receivable.
Inventories
Inventories were stated at the lower of cost or market with cost determined principally on the last-in, first-out (LIFO) method based on inventory quantities and costs determined during the 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 48 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 dates 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


22  

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 useful lives of finite-lived intangible assets in accordance with the Goodwill and Other Intangibles Topic of the ASC.
As required by the Goodwill and Other Intangibles Topic of the ASC, management performs impairment tests of goodwill and indefinite-lived intangible assets on an annual basis, as well as 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 two-step 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, impairment of the reporting unit may exist. 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.
The Company had six reporting units with goodwill as of October 1, 2016, the date of the annual impairment test. The annual impairment review performed as of October 1, 2016 resulted in goodwill impairment in the Latin America Coatings Group of $10.5 million . The impairment related primarily to lower than anticipated cash flow in the Latin America Coatings Group. None of the other reporting units had impairment or were 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 2016 impairment testing are consistent with prior years.
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 4 , on pages 49 through 50 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


23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

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 for assets using a discounted cash flow valuation model, incorporating discount rates commensurate with the risks involved for each group of assets. 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. Such models 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 4 and 5 , on pages 49 through 53 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 becomes available upon which more accurate amounts can be reasonably estimated. If impairment of property, plant and equipment exists, then the carrying value is reduced to fair value estimated by management. Additional impairment may be recorded for subsequent revisions in estimated fair value. See Note 5 , on pages 50 through 53 of this report, for information concerning impairment of property, plant and equipment and accrued qualified exit costs.
 
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 estimated aggregate liability for claims incurred using historical experience, actuarial assumptions followed in the insurance industry and actuarially-developed models for estimating certain liabilities. Certain estimated general and product liability claims filed but unsettled were accrued based on management’s best estimate of ultimate settlement or actuarial calculations of potential liability using industry experience and actuarial assumptions developed for similar types of claims.
Defined Benefit Pension and Other Postretirement Benefit Plans
To determine the Company’s ultimate obligation under its defined benefit pension plans and postretirement benefit plans other than pensions, management must estimate the future cost of benefits and attribute that cost to the time period during which each covered employee works. To determine the obligations of such benefit plans, management uses actuaries to calculate such amounts using key assumptions such as discount rates, inflation, long-term investment returns, mortality, employee turnover, rate of compensation increases and medical and prescription drug costs. Management reviews all of these assumptions on an ongoing basis to ensure that the most current information available is being considered. An increase or decrease in the assumptions or economic events outside management’s control could have a direct impact on the Company’s results of operations or financial condition.
In accordance with the Retirement Benefits Topic of the ASC, the Company recognizes each plan’s funded status as an asset for overfunded plans and as a liability for unfunded or underfunded plans. Actuarial gains and losses and prior service costs are recognized and recorded in Cumulative other comprehensive loss, a component of Shareholders’ equity. The amounts recorded in Cumulative other comprehensive loss will continue to be modified as actuarial assumptions and service costs change, and all such amounts will be amortized to expense over a period of years through the net pension and net periodic benefit costs.
The deficit in market value of equity securities held by the plans versus the expected returns in 2016 will increase the future amortization of actuarial losses. The amortization of actuarial losses on plan assets and decrease in discount rates on projected benefit obligations will increase net pension costs in 2017 . See Note 6 , on pages 54 through 59 of this report, for


24  

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

information concerning the Company’s defined benefit pension plans and postretirement benefit plans other than pensions.
Debt
The fair values of the Company’s publicly traded long-term debt were based on quoted market prices. The fair values of the Company’s non-traded long-term debt were estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. See Note 1 , on page 44 of this report, for the carrying amounts and fair values of the Company’s long-term debt, and Note 7 , on pages 60 through 61 of this report, for a description of the Company’s long-term debt arrangements.
Environmental Matters
The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned sites and at a number of third-party sites. The Company accrues for environmental-related activities for which commitments or clean-up plans have been developed and for which costs can be reasonably estimated based on industry standards and professional judgment. All accrued amounts were recorded on an undiscounted basis. Environmental-related expenses included direct costs of investigation and remediation and indirect costs such as compensation and benefits for employees directly involved in the investigation and remediation activities and fees paid to outside engineering, actuarial, consulting and law firms. Due to uncertainties surrounding environmental investigations and remediation activities, the Company’s ultimate liability may result in costs that are significantly higher than currently accrued. See page 29 and Note 8 , on pages 61 through 62 of this report, for information concerning the accrual for extended environmental-related activities and a discussion concerning unaccrued future loss contingencies.
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 principles. However, because litigation is inherently subject to many uncertainties and the ultimate result of any present or future litigation is unpredictable, the Company’s ultimate liability may result in costs that are significantly higher than currently accrued. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, 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 involved, 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. See Note 9 on pages 62 through 65 of this report for information concerning litigation.
Income Taxes
The Company estimated income taxes in each jurisdiction that it operated. This involved estimating taxable earnings, specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets and possible exposures related to future tax audits. To the extent these estimates change, adjustments to deferred and accrued income taxes will be made in the period in which the changes occur.
During the second quarter of 2016, the Company early adopted an Income tax accounting change related to ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies various provisions related to how share-based payments are accounted for and presented in the financial statements. The changes have been applied prospectively beginning on January 1, 2016 in accordance with the ASU and prior years have not been restated. See Note 14 , on pages 69 and 70 of this report, for information concerning the Company’s unrecognized tax benefits, interest and penalties and current and deferred tax expense.
Stock-Based Compensation
The cost of the Company’s stock-based compensation is recorded in accordance with the Stock Compensation Topic of the ASC. The Company follows the “modified prospective” method as described in the Topic whereby compensation cost is recognized for all share-based payments granted after December 31, 2005.
The Company estimates the fair value of option rights using a Black-Scholes-Merton option pricing model which requires management to make estimates for certain assumptions. Management and a consultant continuously review the following significant assumptions: risk-free interest rate, expected life of options, expected volatility of stock and expected dividend yield of stock. An increase or decrease in the assumptions or economic events outside management’s control could have a direct impact on the Company’s results of operations. See Note 12 , on pages 67 and 68 of this report, for more information on stock-based compensation.
Revenue Recognition
The Company’s revenue was primarily generated from the sale of products. All sales of products were recognized when


25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

shipped and title had passed to unaffiliated customers. Collectibility of amounts recorded as revenue is reasonably assured at time of sale. Discounts were recorded as a reduction to sales in the same period as the sale resulting in an appropriate net sales amount for the period. Standard sales terms are final and returns or exchanges are not permitted unless expressly stated. Estimated provisions for returns or exchanges, recorded as a reduction resulting in net sales, were established in cases where the right of return existed. The Company offered a variety of programs, primarily to its retail customers, designed to promote sales of its products. Such programs required periodic payments and allowances based on estimated results of specific programs and were recorded as a reduction resulting in net sales. The Company accrued the estimated total payments and allowances associated with each transaction at the time of sale. Additionally, the Company offered programs directly to consumers to promote the sale of its products. Promotions that reduced the ultimate consumer sale prices were recorded as a reduction resulting in net sales at the time the promotional offer was made, generally using estimated redemption and participation levels. The Company continually assesses the adequacy of accruals for customer and consumer promotional program costs earned but not yet paid. To the extent total program payments differ from estimates, adjustments may be necessary. Historically, these total program payments and adjustments have not been material.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW
Overview
The Company’s financial condition, liquidity and cash flow continued to be strong in 2016 as net operating cash topped $1.000 billion for the fourth straight year primarily due to improved operating results in our Paint Stores and Global Finishes Groups. Net working capital increased $282.8 million at December 31, 2016 compared to 2015 due to a significant increase in cash and other current assets partially offset by a significant increase in current liabilities. Cash and cash equivalents increased $684.0 million which were generated from cash flow from operations. Other current assets increased $150.3 million primarily due to an interest rate lock asset, while current portion of long-term debt increased $697.3 million resulting from 1.35% senior notes becoming due in 2017. In April 2016, the Company entered into a $7.3 billion bridge credit agreement (Bridge Loan) and a $2.0 billion term loan credit agreement (Term Loan) as committed financing for the pending Acquisition as disclosed in Note 2. No balances were drawn against these facilities as of December 31, 2016 . Debt issuance costs of $65.1 million related to these facilities were incurred and recorded in Other current assets. Of this amount, $61.1 million was amortized and included in Interest expense for year ended December 31, 2016 . The Company has been able to
 
arrange sufficient short-term borrowing capacity at reasonable rates, and the Company has sufficient total available borrowing capacity to fund its current operating needs.
Net operating cash decreased $138.9 million to $1.309 billion in 2016 from $1.447 billion in 2015 due primarily to an increase in working capital from timing of payments of $244.2 million partially offset by an increase in net income of $78.9 million . Net operating cash decreased as a percent to sales to 11.0 percent in 2016 compared to 12.8 percent in 2015 . Strong net operating cash provided the funds necessary to invest in new stores, manufacturing and distribution facilities, return cash to shareholders through dividends, and build a cash reserve needed for the pending Acquisition expected to be completed in early 2017. In 2016 , the Company used a portion of Net operating cash and Cash and cash equivalents to spend $239.0 million in capital additions and improvements and pay $312.1 million in cash dividends to its shareholders of common stock.
Net Working Capital
Total current assets less Total current liabilities (net working capital) increased $282.8 million to a surplus of $798.1 million at December 31, 2016 from a surplus of $515.3 million at December 31, 2015 . The net working capital increase is due to a significant increase in current assets only partially offset by a significant increase in current liabilities. Cash and cash equivalents increased $684.0 million . Accounts receivable increased $116.7 million , Inventories increased $49.8 million and Deferred tax net assets decreased $30.7 million while the remaining current assets increased $150.3 million , primarily due to an interest rate lock asset. Current portion of long-term debt increased $697.3 million resulting from 1.35% senior notes becoming due in 2017. Short-term borrowings increased $1.3 million . Accounts payable decreased $123.0 million while Accrued taxes decreased $4.4 million and all other current liabilities, excluding current portion of long-term debt, increased $116.1 million . As a result of the net effect of these changes, the Company’s current ratio improved to 1.28 at December 31, 2016 from 1.24 at December 31, 2015 . Accounts receivable as a percent of Net sales increased to 10.4 percent in 2016 from 9.8 percent in 2015 . Accounts receivable days outstanding was flat at 54 days in 2016 and 2015 . In 2016 , provisions for allowance for doubtful collection of accounts decreased $9.0 million , or 18.2 percent . Inventories were flat as a percent of Net sales at 9.0 percent in 2016 and 2015 . Inventory days outstanding was down at 79 days in 2016 versus 83 days in 2015 . Accounts payable decreased in 2016 to $1.035 billion compared to $1.158 billion last year due primarily to timing of payments. The Company has sufficient total available borrowing capacity to fund its current operating needs.


26  

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Goodwill and Intangible Assets
Goodwill, which represents the excess of cost over the fair value of net assets acquired in purchase business combinations, decreased $16.4 million in 2016 due primarily to an impairment charge of $10.5 million and foreign currency translation rate fluctuations. The goodwill impairment charge related primarily to lower than anticipated cash flow in the Latin America Coatings Group.
Intangible assets decreased $0.4 million in 2016 . Decreases from amortization of finite-lived intangible assets of $25.6 million were partially offset by $21.6 million of capitalized software costs. Foreign currency translation rate fluctuations and other adjustments accounted for the other increases. Acquired finite-lived intangible assets included assets such as covenants not to compete, customer lists and product formulations. 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 4 , on pages 49 through 50 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.
Deferred Pension and Other Assets
Deferred pension assets of $225.5 million at December 31, 2016 represent the excess of the fair value of assets over the actuarially determined projected benefit obligations, primarily of the domestic salaried defined benefit pension plan. The decrease in Deferred pension assets during 2016 of $19.4 million , from $244.9 million last year, was due to an increase in the projected benefit obligations primarily resulting from changes in actuarial assumptions, and a decrease in the fair value of plan assets. In accordance with the accounting prescribed by the Retirement Benefits Topic of the ASC, the decrease in the value of the Deferred pension assets is offset in Cumulative other comprehensive loss and is amortized as a component of Net pension costs over a defined period of pension service. See Note 6 , on pages 54 through 59 of this report, for more information concerning the excess fair value of assets over projected benefit obligations of the salaried defined benefit pension plan and the amortization of actuarial gains or losses relating to changes in the excess assets and other actuarial assumptions.
Other assets decreased $14.4 million to $421.9 million at December 31, 2016 due primarily to net decreases in various long-term investments. 
Property, Plant and Equipment
Net property, plant and equipment increased $54.0 million to $1.096 billion at December 31, 2016 due primarily to capital expenditures of $239.0 million partially offset by depreciation
 
expense of $172.1 million , sale or disposition of assets with remaining net book value of $7.9 million and currency translation and other adjustments of $5.6 million . Capital expenditures during 2016 in the Paint Stores Group were primarily attributable to the opening of new paint stores and renovation and improvements in existing stores. In the Consumer Group, capital expenditures during 2016 were primarily attributable to improvements and normal equipment replacements in manufacturing and distribution facilities. Capital expenditures in the Global Finishes Group were primarily attributable to improvements in existing manufacturing and distribution facilities. The Administrative Segment incurred capital expenditures primarily for information systems hardware. In 2017 , the Company expects to spend more than 2016 for capital expenditures. The predominant share of the capital expenditures in 2017 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.
Debt
There were no borrowings outstanding under the domestic commercial paper program at December 31, 2016 and 2015, respectively. There were $625.9 million in borrowings outstanding under this program at December 31, 2014 with a weighted-average interest rate of 0.3 percent . Borrowings outstanding under various foreign programs at December 31, 2016 were $40.7 million with a weighted-average interest rate of 7.9 percent . At December 31, 2015 and December 31, 2014 , foreign borrowings were $39.5 million and $53.6 million with weighted-average interest rates of 7.0 percent and 6.0 percent , respectively. Long-term debt, including the current portion, increased $1.4 million during 2016 resulting primarily from amortization of debt issuance costs. On July 28, 2015, the Company issued $400.0 million of 3.45% Senior Notes due 2025 and $400.0 million of 4.55% Senior Notes due 2045. The notes are covered under a shelf registration filed with the Securities and Exchange Commission on July 28, 2015. The proceeds were used for general corporate purposes, which included repayment of a portion of the Company’s outstanding short-term borrowings in 2015.
In April 2016, the Company entered into a $7.3 billion Bridge Loan and a $2.0 billion Term Loan as committed financing for the pending Acquisition as disclosed in Note 2. No balances were drawn against these facilities as of December 31, 2016 . During the first six months of 2016, in anticipation of a probable issuance of new long-term fixed rate debt, the Company entered into a series of interest rate lock agreements (collectively, the interest rate locks) on a combined notional amount of $3.6 billion . The objective of the interest rate locks is


27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

to hedge the variability in the future semi-annual payments on the anticipated debt attributable to changes in the benchmark interest rate (U.S. Treasury) during the hedge periods. The future semi-annual interest payments are exposed to interest rate risk due to changes in the benchmark interest rate from the inception of the hedge to the time of issuance. The interest rate locks were evaluated for hedge accounting treatment and were designated as cash flow hedges. Therefore, the interest rate locks are recognized at fair value on the Consolidated Balance Sheet, and changes in fair value (to the extent effective) are recognized in Cumulative other comprehensive loss. Amounts recognized in Cumulative other comprehensive loss will be reclassified to Interest expense in periods following the settlement of the interest rate locks. The Company will evaluate hedge effectiveness each period until settlement. At December 31, 2016 , an interest rate lock asset of $137.2 million was included in Other current assets, and the related pretax gain of $137.2 million was recognized in Cumulative other comprehensive loss.
See Note 7 , on pages 60 through 61 of this report, for a detailed description of the Company’s debt outstanding and other available financing programs.
Defined Benefit Pension and Other Postretirement Benefit Plans
In accordance with the accounting prescribed by the Retirement Benefits Topic of the ASC, the Company’s total liability for unfunded or underfunded defined benefit pension plans increased $2.6 million to $53.2 million primarily due to changes in the actuarial assumptions of the Company's foreign plans. Postretirement benefits other than pensions increased $1.8 million to $265.1 million at December 31, 2016 due primarily to changes in the actuarial assumptions.
Effective July 1, 2009, the domestic salaried defined benefit pension plan was revised. Prior to July 1, 2009, the contribution was based on six percent of compensation for covered employees. Under the revised plan, such participants are credited with certain contribution credits that range from two percent to seven percent of compensation based on an age and service formula. Amounts previously recorded in Cumulative other comprehensive loss in accordance with the provisions of the Retirement Benefits Topic of the ASC were modified in 2009 resulting in a decrease in comprehensive loss due primarily to the change in the domestic salaried defined benefit pension plan and an increase in the excess plan assets over the actuarially calculated projected benefit obligation in the domestic defined benefit pension plans. Partially offsetting this decreased loss were modifications to actuarial assumptions used to calculate projected benefit obligations.
Effective October 1, 2011, the domestic salaried defined benefit pension plan was frozen for new hires, and all newly hired U.S. non-collectively bargained employees are eligible to
 
participate in the Company’s domestic defined contribution plan. Effective January 1, 2017, the domestic salaried defined benefit plan was amended. Contribution credits earned prior to January 1, 2017 are subject to the hypothetical returns achieved on each participant’s allocation of units from investments in various investment funds as directed by the participant. Effective January 1, 2017, contribution credits are credited interest at an annual fixed rate equal to the Internal Revenue Service (IRS) 24-month average second segment rate.
The assumed discount rate used to determine the actuarial present value of projected defined benefit pension and other postretirement benefit obligations for domestic plans was decreased from 4.40 percent to 4.20 percent at December 31, 2016 due to decreased rates of high-quality, long-term investments and foreign defined benefit pension plans had similar discount rate decreases for the same reasons. The rate of compensation increases used to determine the projected benefit obligations increased to 3.4 percent in 2016 from 3.1 percent for domestic pension plans and similar increases on most foreign plans. In deciding on the rate of compensation increases, management considered historical Company increases as well as expectations for future increases. The expected long-term rate of return on assets remained at 6.0 percent for 2016 for domestic pension plans and was slightly lower for most foreign plans. In establishing the expected long-term rate of return on plan assets for 2016 , management considered the historical rates of return, the nature of investments and an expectation for future investment strategies. The assumed health care cost trend rates used to determine the net periodic benefit cost of postretirement benefits other than pensions for 2016 were 5.0 percent and 11.5 percent , respectively, for medical and prescription drug cost increases, both decreasing gradually to 4.5 percent in 2025 . In developing the assumed health care cost trend rates, management considered industry data, historical Company experience and expectations for future health care costs.
For 2017 Net pension cost and Net periodic benefit cost recognition for domestic plans, the Company will use a discount rate of 4.20 percent , an expected long-term rate of return on assets of 5.0 percent , a rate of compensation increase of 3.4 percent . Lower discount rates and expected long-term rates of return on plan assets will be used for most foreign plans. Use of these assumptions and amortization of actuarial losses will result in a domestic Net pension cost in 2017 that is expected to be approximately $9.3 million higher than in 2016 and a Net periodic benefit cost for postretirement benefits other than pensions that is expected to decrease $0.5 million in 2017 compared to 2016 . See Note 6 , on pages 54 through 59 of this report, for more information on the Company’s obligations and funded status of its defined benefit pension plans and postretirement benefits other than pensions.


28  

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other Long-Term Liabilities
Other long-term liabilities decreased $30.2 million during 2016 due primarily to a decrease in non-current deferred tax liabilities of $65.2 million partially offset by an increase in accruals for extended environmental-related liabilities of $34.0 million .
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 Company conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance. 
 
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 2016 . 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 2017 . See Note 8 , on pages 61 through 62 of this report, for further information on environmental-related long-term liabilities.
Contractual Obligations and Commercial Commitments
On March 19, 2016, the Company and Valspar entered into a definitive agreement under which the Company will acquire Valspar for $113 per share in an all cash transaction. The transaction is subject to certain conditions and regulatory approvals. See Note 2 for more information.

The Company has certain obligations and commitments to make future payments under contractual obligations and commercial commitments. The following table summarizes such obligations and commitments as of December 31, 2016 :
(thousands of dollars)
 
Payments Due by Period
Contractual Obligations
 
Total
 
Less than
1 Year
 
1–3 Years
 
3–5 Years
 
More than
5 Years
Long-term debt
 
$
1,927,001

 
$
701,679

 
$
1,002

 
$
508

 
$
1,223,812

Operating leases
 
1,600,329

 
342,565

 
559,012

 
372,511

 
326,241

Short-term borrowings
 
40,739

 
40,739

 
 
 
 
 
 
Interest on Long-term debt
 
1,091,271

 
62,234

 
106,205

 
106,161

 
816,671

Purchase obligations (1)
 
63,098

 
63,098

 
 
 
 
 
 
Other contractual obligations (2)
 
214,221

 
86,742

 
61,596

 
43,458

 
22,425

Total contractual cash obligations
 
$
4,936,659

 
$
1,297,057

 
$
727,815

 
$
522,638

 
$
2,389,149

(1)  
Relate to open purchase orders for raw materials at December 31, 2016 .
(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.


 
 
Amount of Commitment Expiration Per Period
Commercial Commitments
 
Total
 
Less than
1 Year
 
1–3 Years
 
3–5 Years
 
More than
5 Years
Standby letters of credit
 
$
43,658

 
$
43,658

 
 
 
 
 
 
Surety bonds
 
70,417

 
70,417

 
 
 
 
 
 
Other commercial commitments
 
24,456

 
24,456

 
 
 
 
 
 
Total commercial commitments
 
$
138,531

 
$
138,531

 
$

 
$

 
$


29

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

Warranties
The Company offers product warranties for certain products. 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. 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 2016 , 2015 and 2014 , including customer satisfaction settlements during the year, were as follows:
(thousands of dollars)
2016
 
2015
 
2014
Balance at January 1
$
31,878

 
$
27,723

 
$
26,755

Charges to expense
38,954

 
43,484

 
37,879

Settlements
(36,413
)
 
(39,329
)
 
(36,911
)
Balance at December 31
$
34,419

 
$
31,878

 
$
27,723

Shareholders’ Equity
Shareholders’ equity increased $1.011 billion to $1.878 billion at December 31, 2016 from $867.9 million last year primarily due to an increase in retained earnings of $820.6 million and an increase in Other capital of $158.1 million . Retained earnings increased $820.6 million during 2016 due to net income of $1.133 billion partially offset by $312.1 million in cash dividends paid. The increase in Other capital of $158.1 million was due primarily to the recognition of stock-based compensation expense and stock option exercises. Cumulative other comprehensive loss decreased $46.7 million due primarily to unrealized gains of $85.0 million on the interest rate locks, partially offset by unfavorable foreign currency translation effects of $18.6 million attributable to the weakening of most foreign operations’ functional currencies against the U.S. dollar and $20.8 million in net actuarial losses and prior service costs of defined benefit pension and other postretirement benefit plans net of amortization.
The Company did not make any open market purchases of its common stock for treasury during 2016 . The Company acquires its common stock for general corporate purposes, and depending on its cash position and market conditions, it may acquire shares in the future. The Company had remaining authorization from its Board of Directors at December 31, 2016 to purchase 11.65 million shares of its common stock.
The Company's 2016 annual cash dividend of $3.36 per common share represented 30.1 percent of 2015 diluted net income per common share. The 2016 annual dividend represented the thirty-eighth 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 common share in cash dividend. At a meeting held on
 
February 15, 2017 , the Board of Directors increased the quarterly cash dividend to $.85 per common share. This quarterly dividend, if approved in each of the remaining quarters of 2017 , would result in an annual dividend for 2017 of $3.40 per common share or a 28.4 percent payout of 2016 diluted net income per common share. See the Statements of Consolidated Shareholders’ Equity, on page 43 of this report, and Notes 10 , 11 and 12 , on pages 66 through 68 of this report, for more information concerning Shareholders’ equity.
Cash Flow
Net operating cash decreased $138.9 million to $1.309 billion in 2016 from $1.447 billion in 2015 due primarily to an increase in cash used in working capital of $244.2 million , due to timing of payments, partially offset by an increase in net income of $78.9 million . Strong net operating cash provided the funds necessary to invest in new stores, manufacturing and distribution facilities, return cash to shareholders through dividends, and build a cash reserve needed for the pending Acquisition expected to be completed in early 2017. Net investing cash usage increased $15.1 million to a usage of $303.8 million in 2016 from a usage of $288.6 million in 2015 due primarily to increased cash used for other investments of $37.6 million and increased capital expenditures of $4.7 million partially offset by increased proceeds from sale of assets of $27.1 million . Net financing cash improved $673.0 million to a usage of $307.4 million in 2016 from a usage of $980.4 million in 2015 due primarily to decreased treasury stock purchases of $1.035 billion and decreased net payments on short-term borrowings of $629.3 million partially offset by decreased net proceeds of long-term debt of $798.1 million and increased payments of cash dividends of $62.4 million . In 2016 , the Company used Net operating cash and Cash and cash equivalents on hand to spend $239.0 million in capital additions and improvements, pay $312.1 million in cash dividends to its shareholders of common stock, and build a cash reserve needed for the pending Acquisition.
Management considers a measurement of cash flow that is not 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


30  

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 42 of this report. Free Cash Flow as defined and used by management is determined as follows: 
 
Year Ended December 31,
(thousands of dollars)
2016
 
2015
 
2014
Net operating cash
$
1,308,572

 
$
1,447,463

 
$
1,081,528

Capital expenditures
(239,026
)
 
(234,340
)
 
(200,545
)
Cash dividends
(312,082
)
 
(249,647
)
 
(215,263
)
Free cash flow
$
757,464

 
$
963,476

 
$
665,720

Litigation
Titanium dioxide suppliers antitrust class action lawsuit. The Company was a member of the plaintiff class related to Titanium Dioxide Antitrust Litigation that was initiated in 2010 against certain suppliers alleging various theories of relief arising from purchases of titanium dioxide made from 2003 through 2012. The Court approved a settlement less attorney fees and expense, and the Company timely submitted claims to recover its pro-rata portion of the settlement. There was no specified deadline for the claims administrator to complete the review of all claims submitted. In October 2014, the Company was notified that it would receive a disbursement of settlement funds, and the Company received a pro-rata disbursement net of all fees of approximately $21.4 million . The Company recorded this settlement gain in the fourth quarter of 2014.
See page 25 of this report and Note 9 on pages 62 through 65 for more information concerning litigation.
Market Risk
The Company is exposed to market risk associated with interest rate, foreign currency and commodity fluctuations. The Company occasionally utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes. The Company entered into foreign currency option and forward currency exchange contracts with maturity dates of less than twelve months in 2016 , 2015 and 2014 , primarily to hedge against value changes in foreign currency. There were no material foreign currency option and forward contracts outstanding at December 31, 2016 , 2015 and 2014 . The Company 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. In 2016, the Company entered into a series of interest rate lock agreements which were designated as cash flow hedges. See Notes 1 and 13 on pages 44 and 69 of this report.
 
Financial Covenant
Certain borrowings contain a consolidated leverage covenant. The covenant states the Company’s leverage ratio is not to exceed 3.50 to 1.00 (or 5.25 to 1.00 after pending Acquisition closing). 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, 2016 , 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 7 on pages 60 through 61 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 $85.5 million in 2016 compared to $80.4 million in 2015 . At December 31, 2016 , there were 10,710,973 shares of the Company’s common stock being held by the ESOP, representing 11.5 percent of the total number of voting shares outstanding. See Note 11 , on page 66 of this report, for more information concerning the Company’s ESOP.
RESULTS OF OPERATIONS - 2016 vs. 2015
Shown below are net sales and segment profit and the percentage change for the current period by segment for 2016 and 2015 :
 
Year Ended December 31,
(thousands of dollars)
2016
 
2015
 
Change
Net Sales:
 
 
 
 
 
Paint Stores Group
$
7,790,157

 
$
7,208,951

 
8.1
 %
Consumer Group
1,584,413

 
1,577,955

 
0.4
 %
Global Finishes Group
1,889,106

 
1,916,300

 
-1.4
 %
Latin America Coatings Group
586,926

 
631,015

 
-7.0
 %
Administrative
5,000

 
5,083

 
-1.6
 %
Net sales
$
11,855,602

 
$
11,339,304

 
4.6
 %
 
 
 
 
 
 


31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

 
Year Ended December 31,
(thousands of dollars)
2016
 
2015
 
Change
Income Before Income Taxes:
 
 
 
 
 
Paint Stores Group
$
1,622,697

 
$
1,433,504

 
13.2
 %
Consumer Group
319,228

 
308,833

 
3.4
 %
Global Finishes Group
239,000

 
201,881

 
18.4
 %
Latin America Coatings Group
(17,391
)
 
18,494

 
-194.0
 %
Administrative
(568,301
)
 
(413,746
)
 
-37.4
 %
Income before
income taxes
$
1,595,233

 
$
1,548,966

 
3.0
 %
Consolidated net sales for 2016 increased due primarily to higher paint sales volume in our Paint Stores Group and the impact of the Revenue reclassification beginning in the third quarter related to grossing up third-party service revenue and related costs which were previously netted and immaterial in prior periods. The Revenue reclassification increased sales in the year 1.1 percent . This prospective change primarily impacts the Paint Stores and Global Finishes Groups. This change had no impact on segment profit, but reduced segment profit as a percent to net sales of the affected groups. Unfavorable currency translation rate changes decreased 2016 consolidated net sales 1.4 percent . Net sales of all consolidated foreign subsidiaries decreased 3.7 percent to $1.722 billion for 2016 versus $1.789 billion for 2015 due primarily to unfavorable foreign currency translation rates. Net sales of all operations other than consolidated foreign subsidiaries increased 6.1 percent to $10.133 billion for 2016 versus $9.550 billion for 2015 .
Net sales in the Paint Stores Group in 2016 increased due primarily to higher architectural paint sales volume across all end market segments and the impact of the Revenue reclassification. Net sales from stores open for more than twelve calendar months, excluding the Revenue reclassification, increased 5.3 percent for the full year. During 2016 , the Paint Stores Group opened 109 new stores and closed 15 redundant locations for a net increase of 94 stores, increasing the total number of stores in operation at December 31, 2016 to 4,180 in the United States, Canada and the Caribbean. The Paint Stores Group’s objective is to expand its store base an average of two and a half percent each year, primarily through internal growth. Sales of products other than paint, excluding the Revenue reclassification, increased approximately 13.2 percent for the year over 2015 . A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold.
Net sales of the Consumer Group increased primarily due to higher volume sales to most of the Group's retail customers, partially offset by unfavorable currency translation rate changes. Unfavorable currency translation rate changes
 
decreased net sales 1.1 percent in the year. Sales of wood care coatings, brushes, rollers, caulk and other paint related products, were all up at least mid to high-single digits as compared to 2015 while sales of aerosol products were down slightly. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of paint-related merchandise sold. The Consumer Group plans to continue its promotions of new and existing products in 2017 and continue expanding its customer base and product assortment at existing customers.
The Global Finishes Group’s net sales in 2016 , when stated in U.S. dollars, decreased due primarily to unfavorable currency translation rate changes. Unfavorable currency translation rate changes in the year decreased net sales by 2.6 percent for 2016 . In 2016 , the Global Finishes Group opened 5 new branches and closed 13 locations decreasing the total from 296 to 288 branches open in the United States, Canada, Mexico, South America, Europe and Asia at year-end. In 2017 , the Global Finishes Group expects to continue expanding its worldwide presence and improving its customer base.
The Latin America Coatings Group’s net sales in 2016 , when stated in U.S. dollars, decreased due primarily to unfavorable currency translation rate changes and lower paint sales volume partially offset by selling price increases. Paint sales volume percentage decreased in the low-single digits as compared to 2015 . Unfavorable currency translation rate changes in the year decreased net sales by 13.5 percent for 2016 . In 2016 , the Latin America Coatings Group opened 49 new stores and closed 1 location for a net increase of 48 stores, increasing the total to 339 stores open in North and South America at year-end. In 2017 , the Latin America Coatings Group expects to continue expanding its regional presence and improving its customer base.
Net sales in the Administrative segment, which primarily consist of external leasing revenue of excess headquarters space and leasing of facilities no longer used by the Company in its primary business, decreased by an insignificant amount in 2016 .
Consolidated gross profit increased $363.0 million in 2016 and improved as a percent to net sales to 50.0 percent from 49.0 percent in 2015 due primarily to higher paint sales volume and improved operating efficiencies partially offset by unfavorable currency translation rate changes. Excluding the effect of the Revenue reclassification, consolidated gross profit percent to net sales was 50.4 percent for 2016. The Paint Stores Group’s gross profit for 2016 increased $360.7 million compared to 2015 due primarily to higher paint sales volume. The Paint Stores Group's gross profit margins increased primarily due to higher paint sales volume partially offset by the effect of the Revenue reclassification. The Consumer Group’s gross profit increased $19.8 million due primarily to improved operating efficiency and increased paint sales volume. The Consumer Group’s gross profit margins increased for those same reasons. The Global Finishes Group’s gross profit for 2016 increased


32  

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

$8.8 million due primarily to improved operating efficiencies and decreasing raw material costs partially offset by unfavorable currency translation rate changes. The Global Finishes Group’s gross profit increased as a percent of sales for those same reasons. Foreign currency translation rate fluctuations decreased Global Finishes Group’s gross profit by $15.7 million for 2016 . The Latin America Coatings Group’s gross profit for 2016 decreased $21.8 million and decreased as a percent of sales, when stated in U.S. dollars, primarily due to unfavorable currency translation rate changes and increasing raw material costs. Unfavorable currency translation rate changes and lower volume sales were only partially offset by selling price increases in 2016 compared to 2015 . Foreign currency translation rate fluctuations decreased gross profit by $30.6 million for 2016 . The Administrative segment’s gross profit decreased by $4.4 million .
SG&A increased by $245.9 million due primarily to increased expenses to support higher sales levels and net new store openings as well as the impact of Acquisition expenses of $58.4 million recorded in the Administrative segment. SG&A increased as a percent of sales to 35.1 percent in 2016 from 34.5 percent in 2015 primarily due to those same reasons. Excluding Acquisition expenses, SG&A as a percent of sales was 34.6 percent in 2016. In the Paint Stores Group, SG&A increased $171.0 million for the year due primarily to increased spending due to the number of new store openings and general comparable store expenses to support higher sales levels. The Consumer Group’s SG&A increased by $6.5 million for the year in support of increased sales levels. The Global Finishes Group’s SG&A decreased by $22.1 million for the year relating primarily to foreign currency translation rate fluctuations reducing SG&A by $16.0 million . The Latin America Coatings Group’s SG&A increased by $6.8 million for the year partially offset by foreign currency translation rate fluctuations of $16.8 million . The Administrative segment’s SG&A increased $83.8 million primarily due to Acquisition expenses and incentive compensation.
Other general expense - net decreased $17.9 million in 2016 compared to 2015 . The decrease was mainly caused by a decrease of $19.2 million of expense in the Administrative segment, primarily due to a year-over-year increase in gain on sale of assets of $29.8 million partially offset by an increase in provisions for environmental matters of $11.9 million . See Note 13 , on page 68 of this report, for more information concerning Other general expense - net .
As required by the Goodwill and Other Intangibles Topic of the ASC, management performed an annual impairment test of goodwill and indefinite-lived intangible assets as of October 1, 2016 . The impairment tests in 2016 resulted in $10.7 million impairment of goodwill and trademarks recorded in the Latin America Coatings Group. No impairments were recorded in 2015 . See Note 4 , on pages 49 and 50 of this report, for more information concerning the impairment of intangible assets.
Amortization of credit facility costs incurred in early 2016 and interest on debt issued in July 2015 increased interest expense $92.3 million in 2016 .
 
Other (income) expense - net increased to $4.6 million income from $6.1 million expense in 2015 . This was primarily due to decreased net expense from banking activities of $2.4 million and decreased miscellaneous net expenses of $5.2 million both primarily recorded in the Administrative segment. Additionally, foreign currency related transaction losses were $7.3 million in 2016 compared to $9.5 million in 2015 , primarily in the Global Finishes and Latin America Coatings Groups. See Note 13 , on page 68 of this report, for more information concerning Other (income) expense - net .
Consolidated Income before income taxes in 2016 increased $46.3 million due primarily to an increase of $363.0 million in gross profit partially offset by an increase of $245.9 million in SG&A and an increase of $60.2 million in interest expense, interest and net investment income and other expenses. Income before income taxes increased $189.2 million in the Paint Stores Group, $10.4 million in the Consumer Group, and $37.1 million in the Global Finishes Group but decreased $35.9 million in the Latin America Coatings Group when compared to 2015 . The Administrative segment had a decreased impact on Income before income taxes of $154.6 million when compared to 2015 resulting primarily from Acquisition expenses and increased Interest expense. Segment profit of all consolidated foreign subsidiaries decreased 20.7 percent to $60.1 million for 2016 versus $75.8 million for 2015 . Segment profit of all operations other than consolidated foreign subsidiaries increased 4.2 percent to $1.535 billion for 2016 versus $1.473 billion for 2015 .
Net income increased $78.9 million in 2016 primarily due to the increase in Income before income taxes and the Income tax accounting change.
The effective income tax rate was 29.0 percent for 2016 and 32.0 percent for 2015 . The decrease in the effective tax rate in 2016 compared to 2015 was primarily due to the Income tax accounting change. Excluding the impact of Acquisition expense tax benefits and the Income tax accounting change, the effective income tax rate was 32.3 percent for 2016 . Diluted net income per common share increased 7.5 percent to $11.99 per share for 2016 , including an $.86 per share charge for expenses associated with the Acquisition partially offset by an increase of $.40 per share related to the Income tax accounting change, from $11.15 per share a year ago. Unfavorable currency translation rate changes decreased diluted net income per common share by $.14 per share for the year.
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 measurement as an indicator of the value of profits and cash that 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 Net operating cash as an indicator


33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

of operating performance or as a measure of liquidity. The reader should refer to the determination of Net income and Net operating cash in accordance with U.S. generally accepted accounting principles disclosed in the Statements of Consolidated Income and Statements of Consolidated Cash Flows, on pages 40 and 42 of this report. EBITDA as used by management is calculated as follows:
 
Year Ended December 31,
(thousands of dollars)
2016
 
2015
 
2014
Net income
$
1,132,703

 
$
1,053,849

 
$
865,887

Interest expense
154,088

 
61,791

 
64,205

Income taxes
462,530

 
495,117

 
392,339

Depreciation
172,074

 
170,323

 
169,087

Amortization
25,637

 
28,239

 
29,858

EBITDA
$
1,947,032

 
$
1,809,319

 
$
1,521,376



RESULTS OF OPERATIONS - 2015 vs. 2014
Shown below are net sales and segment profit and the percentage change for the current period by segment for 2015 and 2014
 
Year Ended December 31,
(thousands of dollars)
2015
 
2014
 
Change
Net Sales:
 
 
 
 
 
Paint Stores Group
$
7,208,951

 
$
6,851,581

 
5.2
 %
Consumer Group
1,577,955

 
1,420,757

 
11.1
 %
Global Finishes Group
1,916,300

 
2,080,854

 
-7.9
 %
Latin America Coatings Group
631,015

 
771,378

 
-18.2
 %
Administrative
5,083

 
4,963

 
2.4
 %
Net sales
$
11,339,304

 
$
11,129,533

 
1.9
 %
 
 
 
 
 
 
  
Year Ended December 31,
(thousands of dollars)
2015
 
2014
 
Change
Income Before Income Taxes:
 
 
 
 
 
Paint Stores Group
$
1,433,504

 
$
1,201,420

 
19.3
 %
Consumer Group
308,833

 
252,859

 
22.1
 %
Global Finishes Group
201,881

 
201,129

 
0.4
 %
Latin America Coatings Group
18,494

 
40,469

 
-54.3
 %
Administrative
(413,746
)
 
(437,651
)
 
5.5
 %
Income before
income taxes
$
1,548,966

 
$
1,258,226

 
23.1
 %
Consolidated net sales for 2015 increased due primarily to higher paint sales volume in the Paint Stores and Consumer Groups. Unfavorable currency translation rate changes decreased 2015 consolidated net sales 3.3 percent. Net sales of all consolidated foreign subsidiaries were down 18.8 percent to $1.789 billion for 2015 versus $2.204 billion for 2014 due
 
primarily to unfavorable foreign currency translation rates. Net sales of all operations other than consolidated foreign subsidiaries were up 7.0 percent to $9.550 billion for 2015 versus $8.926 billion for 2014.
Net sales in the Paint Stores Group in 2015 increased primarily due to higher architectural paint sales volume across all end market segments. Net sales from stores open for more than twelve calendar months increased 4.2 percent for the full year. During 2015, the Paint Stores Group opened 113 new stores and closed 30 redundant locations for a net increase of 83 stores, increasing the total number of stores in operation at December 31, 2015 to 4,086 in the United States, Canada and the Caribbean. The Paint Stores Group’s objective is to expand its store base an average of two and a half percent each year, primarily through internal growth. Sales of products other than paint increased approximately 8.0 percent for the year over 2014. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold.
Net sales of the Consumer Group increased due primarily to a new agreement to sell architectural paint under the HGTV HOME ® by Sherwin-Williams brand through a large U.S. national retailer's stores network. Sales of wood care coatings, brushes, rollers, caulk and other paint related products, were all up at least mid to high-single digits as compared to 2014 while sales of aerosol products were down slightly. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of paint-related merchandise sold.
The Global Finishes Group’s net sales in 2015, when stated in U.S. dollars, decreased due primarily to unfavorable currency translation rate changes. Paint sales volume percentage increased slightly as compared to 2014. Unfavorable currency translation rate changes in the year decreased net sales by 7.5 percent for 2015. In 2015, the Global Finishes Group opened 3 new branches and closed 7 locations decreasing the total from 300 to 296 branches open in the United States, Canada, Mexico, South America, Europe and Asia at year-end.
The Latin America Coatings Group’s net sales in 2015, when stated in U.S. dollars, decreased due primarily to unfavorable currency translation rate changes and lower paint sales volume partially offset by selling price increases. Paint sales volume percentage decreased in the mid-single digits as compared to 2014. Unfavorable currency translation rate changes in the year decreased net sales by 19.3 percent for 2015. In 2015, the Latin America Coatings Group opened 17 new stores and closed 2 locations for a net increase of 15 stores, increasing the total to 291 stores open in North and South America at year-end.
Net sales in the Administrative segment, which primarily consist of external leasing revenue of excess headquarters space and leasing of facilities no longer used by the Company in its primary business, increased by an insignificant amount in 2015.


34  

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Consolidated gross profit increased $394.7 million in 2015 and improved as a percent to net sales to 49.0 percent from 46.4 percent in 2014 due primarily to higher paint sales volume, improved operating efficiencies, and decreasing raw material costs partially offset by unfavorable currency translation rate changes. Gross profit for 2014 included the 2014 TiO2 settlement of $21.4 million received by the Company in the fourth quarter of 2014. The Paint Stores Group’s gross profit for 2015 increased $329.3 million compared to 2014 due primarily to higher paint sales volume. The Paint Stores Group's gross profit margins increased for that same reason. The Consumer Group’s gross profit increased $133.6 million due primarily to improved operating efficiency and increased paint sales volume. The Consumer Group’s gross profit margins increased for those same reasons. The Global Finishes Group’s gross profit for 2015 decreased $29.0 million due primarily unfavorable currency translation rate changes partially offset by improved operating efficiencies and decreasing raw material costs. The Global Finishes Group’s gross profit increased as a percent of sales due primarily to improved operating efficiencies and decreasing raw material costs. Foreign currency translation rate fluctuations decreased Global Finishes Group’s gross profit by $51.4 million for 2015. The Latin America Coatings Group’s gross profit for 2015 decreased $43.9 million and decreased as a percent of sales, when stated in U.S. dollars, primarily due to unfavorable currency translation rate changes and increasing raw material costs. Unfavorable currency translation rate changes and lower volume sales were only partially offset by selling price increases in 2015 compared to 2014. Foreign currency translation rate fluctuations decreased gross profit by $41.5 million for 2015. The Administrative segment’s gross profit increased by $4.8 million.
SG&A increased by $90.6 million due primarily to increased expenses to support higher sales levels and net new store openings as well as the impact from a new paint program launch at a national retailer. SG&A increased as a percent of sales to 34.5 percent in 2015 from 34.3 percent in 2014 primarily due to those same reasons. In the Paint Stores Group, SG&A increased $95.4 million for the year due primarily to increased spending due to the number of new store openings and general comparable store expenses to support higher sales levels. The Consumer Group’s SG&A increased by $79.7 million for the year due to a new paint program launch at a national retailer. The Global Finishes Group’s SG&A decreased by $37.4 million for the year relating primarily to foreign currency translation rate fluctuations reducing SG&A by $44.2 million. The Latin America Coatings Group’s SG&A decreased by $22.0 million for the year relating primarily to foreign currency translation rate fluctuations of $27.9 million. The Administrative segment’s SG&A decreased $25.2 million primarily due to incentive compensation.
Other general expense - net decreased $7.2 million in 2015 compared to 2014. The decrease was mainly caused by a decrease of $6.1 million of expense in the Administrative segment, primarily due to a year-over-year decrease in
 
provisions for environmental matters of $5.0 million. See Note 13 , on page 68 and 69 of this report, for more information concerning Other general expense - net.
As required by the Goodwill and Other Intangibles Topic of the ASC, management performed an annual impairment test of goodwill and indefinite-lived intangible assets as of October 1, 2015. The impairment tests in 2015 and 2014 resulted in no impairment of goodwill and trademarks. See Note 4 , on pages 49 and 50 of this report, for more information concerning the impairment of intangible assets.
Interest expense, included in the Administrative segment, decreased $2.4 million in 2015 versus 2014 due primarily to lower borrowing rates partially offset by higher average debt levels.
Other expense (income) - net decreased to $6.1 million expense from $15.4 million income in 2014. This was primarily due to a $6.3 million gain on the early termination of a customer agreement recorded in the Global Finishes Group and a $6.2 million realized gain resulting from final asset valuations related to the acquisition of the U.S./Canada business of Comex recorded in the Administrative segment, both recorded in the third quarter of 2014. Additionally, foreign currency related transaction losses of $9.5 million in 2015 versus foreign currency related transaction losses of $3.6 million in 2014, primarily in the Global Finishes and Latin America Coatings Groups, were unfavorable comparisons. See Note 13 , on page 69 of this report, for more information concerning Other expense (income) - net.
Consolidated Income before income taxes in 2015 increased $290.7 million due primarily to an increase of $394.7 million in gross profit partially offset by an increase of $90.6 million in SG&A and an increase of $13.5 million in interest expense, interest and net investment income and other expenses. Income before income taxes increased $232.1 million in the Paint Stores Group, $56.0 million in the Consumer Group, and $0.8 million in the Global Finishes Group but decreased $22.0 million in the Latin America Coatings Group when compared to 2014. The Administrative segment had a favorable impact on Income before income taxes of $23.9 million when compared to 2014. Segment profit of all consolidated foreign subsidiaries decreased 34.5 percent to $75.8 million for 2015 versus $115.6 million for 2014. Segment profit of all operations other than consolidated foreign subsidiaries increased 28.9 percent to $1.473 billion for 2015 versus $1.143 billion for 2014.
Net income increased $188.0 million in 2015 due to the increase in Income before income taxes.
The effective income tax rate for 2015 was 32.0 percent. The effective income tax rate for 2014 was 31.2 percent. Diluted net income per common share increased 27.1 percent to $11.15 per share for 2015 from $8.77 per share a year ago. Unfavorable currency translation rate changes decreased diluted net income per common share by $.26 per share.


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, 2016 , 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, 2016 , 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, 2016 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.

MORIKISSIGNATUREA03.JPG
J. G. Morikis
Chairman, President and Chief Executive Officer

MISTYSYNSIGNATURESMALL.JPG
A. J. Mistysyn
Senior Vice President - Finance and Chief Financial Officer

JMCSIGNATUREFEB2017.JPG
J. M. Cronin
Senior Vice President - Corporate Controller

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
We have audited The Sherwin-Williams Company’s internal control over financial reporting as of December 31, 2016 , 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). The Sherwin-Williams 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
In our opinion, The Sherwin-Williams Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016 , based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Sherwin-Williams Company as of December 31, 2016 , 2015 and 2014 , and the related consolidated statements of income and comprehensive income, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2016 and our report dated February 22, 2017 expressed an unqualified opinion thereon.




EYA01A03A01A05.JPG
Cleveland, Ohio
February 22, 2017

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, 2016 , 2015 and 2014 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, 2016 .
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.
MORIKISSIGNATUREA03.JPG
J. G. Morikis
Chairman, President and Chief Executive Officer

MISTYSYNSIGNATURESMALL.JPG
A. J. Mistysyn
Senior Vice President - Finance and Chief Financial Officer

JMCSIGNATUREFEB2017A01.JPG
J. M. Cronin
Senior Vice President - Corporate Controller

38  


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE CONSOLIDATED FINANCIAL STATEMENTS


The Board of Directors and Shareholders of The Sherwin-Williams Company
We have audited the accompanying consolidated balance sheets of The Sherwin-Williams Company as of December 31, 2016 , 2015 and 2014 , and the related consolidated statements of income and comprehensive income, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2016 . These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Sherwin-Williams Company at December 31, 2016 , 2015 and 2014 , and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016 , 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, 2016 , 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, 2017 expressed an unqualified opinion thereon.


EYA01A03A01A05.JPG
Cleveland, Ohio
February 22, 2017
 


39

STATEMENTS OF CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
(thousands of dollars except per common share data)

 
Year Ended December 31,
 
2016
 
2015
 
2014
 
 
 
 
 
 
Net sales
$
11,855,602

 
$
11,339,304

 
$
11,129,533

Cost of goods sold
5,933,337

 
5,780,078

 
5,965,049

 
 
 
 
 
 
Gross profit
5,922,265

 
5,559,226

 
5,164,484

Percent to net sales
50.0
%
 
49.0
%
 
46.4
%
 
 
 
 
 
 
Selling, general and administrative expenses
4,159,435

 
3,913,518

 
3,822,966

Percent to net sales
35.1
%
 
34.5
%
 
34.3
%
 
 
 
 
 
 
Other general expense - net
12,368

 
30,268

 
37,482

Impairment of goodwill and trademarks
10,688

 
 
 
 
Interest expense
154,088

 
61,791

 
64,205

Interest and net investment income
(4,960
)
 
(1,399
)
 
(2,995
)
Other (income) expense - net
(4,587
)
 
6,082

 
(15,400
)
 
 
 
 
 
 
Income before income taxes
1,595,233

 
1,548,966

 
1,258,226

Income taxes
462,530

 
495,117

 
392,339

 
 
 
 
 
 
Net income
$
1,132,703

 
$
1,053,849

 
$
865,887

 
 
 
 
 
 
Net income per common share: (1)
 
 
 
 
 
Basic
$
12.33

 
$
11.43

 
$
9.00

Diluted
$
11.99

 
$
11.15

 
$
8.77

 
 
 
 
 
 
(1)  Presented under the treasury stock method. See Note 15.
 
 
 
 
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
 
 
 
 
 
Net income
$
1,132,703

 
$
1,053,849

 
$
865,887

 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(18,648
)
 
(128,245
)
 
(103,441
)
 
 
 
 
 
 
Pension and other postretirement benefit adjustments:
 
 
 
 
 
Amounts recognized in Other
 
 
 
 
 
comprehensive loss (1)
(28,385
)
 
7,974

 
(56,536
)
Amounts reclassified from Other
 
 
 
 
 
comprehensive loss (2)
7,635

 
5,847

 
8,980

 
(20,750
)
 
13,821

 
(47,556
)
 
 
 
 
 
 
Unrealized net gains (losses) on available-for-sale securities:
 
 
 
 
 
Amounts recognized in Other
 
 
 
 
 
comprehensive loss (3)
1,046

 
(1,191
)
 
366

Amounts reclassified from Other
 
 
 
 
 
comprehensive loss (4)
89

 
478

 
(283
)
 
1,135

 
(713
)
 
83

 
 
 
 
 
 
Unrealized net gains on cash flow hedges:
 
 
 
 
 
Amounts recognized in Other
 
 
 
 
 
comprehensive loss (5)
85,007

 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
46,744

 
(115,137
)
 
(150,914
)
 
 
 
 
 
 
Comprehensive income
$
1,179,447

 
$
938,712

 
$
714,973

(1) Net of taxes of $17,200 , $(3,399) and $24,954 , in 2016 , 2015 and 2014 , respectively.
(2) Net of taxes of $(4,691) , $(1,647) and $(2,712) , in 2016 , 2015 and 2014 , respectively.
(3) Net of taxes of $(643) , $736 and $(228) , in 2016 , 2015 and 2014 , respectively.
(4) Net of taxes of $(55) , $(296) and $178 in 2016 , 2015 and 2014 , respectively.
(5) Net of taxes of $(52,226) in 2016 .

See notes to consolidated financial statements.

40  

CONSOLIDATED BALANCE SHEETS
(thousands of dollars)

 
December 31,
 
2016
 
2015
 
2014
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
889,793

 
$
205,744

 
$
40,732

Accounts receivable, less allowance
1,230,987

 
1,114,275

 
1,130,565

Inventories:
 
 
 
 
 
Finished goods
898,627

 
840,603

 
841,784

Work in process and raw materials
169,699

 
177,927

 
191,743

 
1,068,326

 
1,018,530

 
1,033,527

Deferred income taxes
57,162

 
87,883

 
109,087

Other current assets
381,030

 
230,748

 
251,655

Total current assets
3,627,298

 
2,657,180

 
2,565,566

 
 
 
 
 
 
Goodwill
1,126,892

 
1,143,333

 
1,158,346

Intangible assets
255,010

 
255,371

 
289,127

Deferred pension assets
225,529

 
244,882

 
250,144

Other assets
421,904

 
436,309

 
415,120

Property, plant and equipment:
 
 
 
 
 
Land
115,555

 
119,530

 
125,691

Buildings
714,815

 
696,202

 
698,202

Machinery and equipment
2,153,437

 
2,026,617

 
1,952,037

Construction in progress
117,126

 
81,082

 
59,330

 
3,100,933

 
2,923,431

 
2,835,260

Less allowances for depreciation
2,005,045

 
1,881,569

 
1,814,230

 
1,095,888

 
1,041,862

 
1,021,030

Total Assets
$
6,752,521

 
$
5,778,937

 
$
5,699,333

 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term borrowings
$
40,739

 
$
39,462

 
$
679,436

Accounts payable
1,034,608

 
1,157,561

 
1,042,182

Compensation and taxes withheld
398,045

 
338,256

 
360,458

Accrued taxes
76,765

 
81,146

 
86,744

Current portion of long-term debt
700,475

 
3,154

 
3,265

Other accruals
578,547

 
522,280

 
508,581

Total current liabilities
2,829,179

 
2,141,859

 
2,680,666

 
 
 
 
 
 
Long-term debt
1,211,326

 
1,907,278

 
1,115,996

Postretirement benefits other than pensions
250,397

 
248,523

 
277,892

Other long-term liabilities
583,178

 
613,367

 
628,309

 
 
 
 
 
 
Shareholders’ equity:
 
 
 
 
 
Common stock - $1.00 par value:
 
 
 
 
 
93,013,031, 92,246,525, and 94,704,173 shares outstanding
 
 
 
 
 
at December 31, 2016, 2015 and 2014, respectively
116,563

 
115,761

 
114,525

Other capital
2,488,564

 
2,330,426

 
2,079,639

Retained earnings
4,049,497

 
3,228,876

 
2,424,674

Treasury stock, at cost
(4,235,832
)
 
(4,220,058
)
 
(3,150,410
)
Cumulative other comprehensive loss
(540,351
)
 
(587,095
)
 
(471,958
)
Total shareholders’ equity
1,878,441

 
867,910

 
996,470

 
 
 
 
 
 
Total Liabilities and Shareholders’ Equity
$
6,752,521

 
$
5,778,937

 
$
5,699,333

See notes to consolidated financial statements.

41

STATEMENTS OF CONSOLIDATED CASH FLOWS
(thousands of dollars)

 
Year Ended December 31,
Operating Activities
2016
 
2015
 
2014
Net income
$
1,132,703

 
$
1,053,849

 
$
865,887

Adjustments to reconcile net income to net operating cash:
 
 
 
 
 
Depreciation
172,074

 
170,323

 
169,087

Amortization of intangible assets
25,637

 
28,239

 
29,858

Impairment of goodwill and trademarks
10,688

 
 
 
 
Amortization of credit facility and debt issuance costs
63,759

 
3,096

 
3,224

Provisions for environmental-related matters
42,932

 
31,071

 
36,046

Provisions for qualified exit costs
3,038

 
9,761

 
13,578

Deferred income taxes
(68,241
)
 
4,976

 
(19,038
)
Defined benefit pension plans net cost
14,851

 
6,491

 
990

Stock-based compensation expense
72,109

 
72,342

 
64,735

Net decrease in postretirement liability
(12,373
)
 
(6,645
)
 
(718
)
Decrease in non-traded investments
64,689

 
65,144

 
63,365

(Gain) loss on sale or disposition of assets
(30,564
)
 
(803
)
 
1,436

Other
5,101

 
3,615

 
(3,021
)
Change in working capital accounts:
 
 
 
 
 
(Increase) in accounts receivable
(113,855
)
 
(56,873
)
 
(80,252
)
(Increase) in inventories
(52,577
)
 
(40,733
)
 
(101,112
)
(Decrease) increase in accounts payable
(118,893
)
 
160,111

 
78,603

(Decrease) increase in accrued taxes
(2,159
)
 
4,606

 
13,187

Increase (decrease) in accrued compensation and taxes withheld
60,632

 
(13,128
)
 
29,513

(Increase) decrease in refundable income taxes
(1,343
)
 
19,230

 
(36,601
)
Other
56,215

 
(955
)
 
(20,029
)
Costs incurred for environmental-related matters
(15,178
)
 
(11,995
)
 
(9,676
)
Costs incurred for qualified exit costs
(6,267
)
 
(11,200
)
 
(10,882
)
Other
5,594

 
(43,059
)
 
(6,652
)
Net operating cash
1,308,572

 
1,447,463

 
1,081,528

 
 
 
 
 
 
Investing Activities
 
 
 
 
 
Capital expenditures
(239,026
)
 
(234,340
)
 
(200,545
)
Proceeds from sale of assets
38,434

 
11,300

 
1,516

Increase in other investments
(103,182
)
 
(65,593
)
 
(111,021
)
Net investing cash
(303,774
)
 
(288,633
)
 
(310,050
)
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
Net (decrease) increase in short-term borrowings
(899
)
 
(630,226
)
 
591,423

Proceeds from long-term debt
500

 
797,514

 
1,474

Payments of long-term debt
(1,111
)
 
 
 
(500,661
)
Payments for credit facility and debt issuance costs
(65,119
)
 
 
 
 
Payments of cash dividends
(312,082
)
 
(249,647
)
 
(215,263
)
Proceeds from stock options exercised
86,831

 
89,990

 
100,069

Income tax effect of stock-based compensation exercises and vesting
 
 
89,691

 
68,657

Treasury stock purchased
 
 
(1,035,291
)
 
(1,488,663
)
Other
(15,473
)
 
(42,384
)
 
(24,111
)
Net financing cash
(307,353
)
 
(980,353
)
 
(1,467,075
)
Effect of exchange rate changes on cash
(13,396
)
 
(13,465
)
 
(8,560
)
Net increase (decrease) in cash and cash equivalents
684,049

 
165,012

 
(704,157
)
Cash and cash equivalents at beginning of year
205,744

 
40,732

 
744,889

Cash and cash equivalents at end of year
$
889,793

 
$
205,744

 
$
40,732

Taxes paid on income
$
477,786

 
$
335,119

 
$
310,039

Interest paid on debt
153,850

 
48,644

 
67,306


See notes to consolidated financial statements.

42  

STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(thousands of dollars except per common share data)



 
Common
Stock
 
Preferred
Stock
 
Unearned
ESOP
Compen-sation
 
Other
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Cumulative
Other
Comprehensive
Loss
 
Total
Balance at January 1, 2014
$
112,902

 
$
40,406

 
$
(40,406
)
 
$
1,847,801

 
$
1,774,050

 
$
(1,639,174
)
 
$
(321,044
)
 
$
1,774,535

Net income
 
 
 
 
 
 
 
 
865,887

 
 
 
 
 
865,887

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(150,914
)
 
(150,914
)
Treasury stock purchased
 
 
 
 
 
 
 
 
 
 
(1,488,663
)
 
 
 
(1,488,663
)
Redemption of preferred stock
 
 
(40,406
)
 
40,406

 
 
 
 
 
 
 
 
 


Stock options exercised
1,423

 
 
 
 
 
98,646

 
 
 
(22,573
)
 
 
 
77,496

Income tax effect of stock compensation
 
 
 
 
 
 
68,657

 
 
 
 
 
 
 
68,657

Restricted stock and stock option grants
(net activity)
200

 
 
 
 
 
64,535

 
 
 
 
 
 
 
64,735

Cash dividends -- $2.20 per common share
 
 
 
 
 
 
 
 
(215,263
)
 
 
 
 
 
(215,263
)
Balance at December 31, 2014
114,525

 

 

 
2,079,639

 
2,424,674

 
(3,150,410
)
 
(471,958
)
 
996,470

Net income
 
 
 
 
 
 
 
 
1,053,849

 
 
 
 
 
1,053,849

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(115,137
)
 
(115,137
)
Treasury stock purchased
 
 
 
 
 
 
 
 
 
 
(1,035,291
)
 
 
 
(1,035,291
)
Stock options exercised
1,134

 
 
 
 
 
88,856

 
 
 
(34,357
)
 
 
 
55,633

Income tax effect of stock compensation
 
 
 
 
 
 
89,691

 
 
 
 
 
 
 
89,691

Restricted stock and stock option grants
(net activity)
102

 
 
 
 
 
72,240

 
 
 
 
 
 
 
72,342

Cash dividends -- $2.68 per common share
 
 
 
 
 
 
 
 
(249,647
)
 
 
 
 
 
(249,647
)
Balance at December 31, 2015
115,761

 

 

 
2,330,426

 
3,228,876

 
(4,220,058
)
 
(587,095
)
 
867,910

Net income
 
 
 
 
 
 
 
 
1,132,703

 
 
 
 
 
1,132,703

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
46,744

 
46,744

Stock options exercised
706

 
 
 
 
 
86,125

 
 
 
(15,774
)
 
 
 
71,057

Restricted stock and stock option grants
(net activity)
96

 
 
 
 
 
72,013

 
 
 
 
 
 
 
72,109

Cash dividends -- $3.36 per common share
 
 
 
 
 
 
 
 
(312,082
)
 
 
 
 
 
(312,082
)
Balance at December 31, 2016
$
116,563

 
$

 
$

 
$
2,488,564

 
$
4,049,497

 
$
(4,235,832
)
 
$
(540,351
)
 
$
1,878,441

 













See notes to consolidated financial statements.


43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The consolidated financial statements include the accounts of The Sherwin-Williams Company and its wholly owned subsidiaries (collectively, “the Company”). Inter-company accounts and transactions have been eliminated.
Use of estimates. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those amounts.
Nature of operations. The Company is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America, with additional operations in the Caribbean region, Europe and Asia.
Reportable segments. See Note 18 for further details.
Cash flows. Management considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Fair value of financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported for Cash and cash equivalents approximate fair value.
Short-term investments: The carrying amounts reported for Short-term investments approximate fair value.
Investments in securities: Investments classified as available-for-sale are carried at market value. See the recurring fair value measurement table on page 45 .
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.
 
However, because 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, the Company is not considered the primary beneficiary. In accordance with the Consolidation Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), the investments are not consolidated. For affordable housing investments entered into prior to the January 1, 2015 adoption of Accounting Standard Update (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 carrying amounts of the investments, included in Other assets, were $193,413 , $189,484 and $223,935 at December 31, 2016 , 2015 and 2014 , respectively. The liabilities recorded on the balance sheets for estimated future capital contributions to the investments were $178,584 , $172,899 and $198,776 at December 31, 2016 , 2015 and 2014 , respectively.
Short-term borrowings: The carrying amounts reported for Short-term borrowings approximate fair value.
Long-term debt (including current portion): The fair values of the Company’s publicly traded debt, shown below, are based on quoted market prices. The fair values of the Company’s non-traded debt, also shown below, are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The Company's publicly traded debt and non-traded debt are classified as level 1 and level 2, respectively, in the fair value hierarchy. See Note 7 .


 
December 31,
 
2016
 
2015
 
2014
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Amount
 
Value
 
Amount (1)
 
Value
 
Amount (1)
 
Value
Publicly traded debt
$
1,907,704

 
$
1,912,646

 
$
1,905,650

 
$
1,960,169

 
$
1,114,205

 
$
1,160,280

Non-traded debt
4,097

 
3,783

 
4,782

 
4,555

 
5,056

 
4,812

 
 
 
 
 
 
 
 
 
 
 
 
(1) Revised due to the adoption of ASU No. 2015-03. See Impact of recently issued accounting standards section.
Derivative instruments: The Company utilizes derivative instruments as part of its overall financial risk management policy. The Company entered into foreign currency option and forward currency exchange contracts with maturity dates of less than twelve months in 2016, 2015, and 2014, primarily to hedge against value changes
 
in foreign currency. See Note 13 . There were no material foreign currency option and forward contracts outstanding at December 31, 2016, 2015 and 2014.
In 2016, the Company entered into a series of interest rate lock agreements which were designated as cash flow hedges. See Note 7.


44  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

Fair value measurements. The following tables summarize the Company’s assets and liabilities measured on a
 
recurring and non-recurring basis in accordance with the Fair Value Measurements and Disclosures Topic of the ASC:


Assets and Liabilities Reported at Fair Value on a Recurring Basis

 
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)
Assets:
 
 
 
 
 
 
 
Deferred compensation plan asset (1)
$
27,452

 
$
3,802

 
$
23,650

 
 
Interest rate lock asset (2)
137,233

 
 
 
137,233

 
 
Total assets
$
164,685

 
$
3,802

 
$
160,883

 
 
Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liability (3)
$
37,717

 
$
37,717

 
 
 
 
(1)  
The deferred compensation plan asset consists of the investment funds maintained for the future payments under the Company’s executive deferred compensation plan, which is structured as a rabbi trust. The investments are marketable securities accounted for under the Debt and Equity Securities Topic of the ASC. The level 1 investments are valued using quoted market prices multiplied by the number of shares. The level 2 investments are valued based on vendor or broker models. The cost basis of the investment funds is $26,357 .
(2)  
The interest rate lock asset is measured at the present value of the expected future cash flows using market-based observable inputs. See note 7.
(3)  
The deferred compensation plan liability represents the value of the Company’s liability under its deferred compensation plan based on quoted market prices in active markets for identical assets.
Assets and Liabilities Reported at Fair Value on a Nonrecurring Basis. As a result of the 2016 annual goodwill impairment test performed in accordance with the Intangibles Topic of the ASC, goodwill with a carrying value of $10,455 was written-off, resulting in an impairment charge of $10,455 . As a result of the 2016 annual trademark impairment test performed in accordance with the Intangibles Topic of the ASC, a trademark with a carrying value of $2,114 was written-down to its calculated fair value of $1,881 , resulting in an impairment charge of $233 . These fair value measurements qualify as level 2 measurements. See Note 4.
Accounts receivable and allowance for doubtful accounts. Accounts receivable were recorded at the time of credit sales net of provisions for sales returns and allowances. The Company recorded an allowance for doubtful accounts of $40,450 , $49,420 and $53,770 at December 31, 2016 , 2015 and 2014 , respectively, to reduce Accounts receivable to their estimated net realizable value. The allowance was based on an analysis of historical bad debts, a review of the aging of Accounts receivable and the current creditworthiness of customers. Account receivable balances are written-off against the allowance if a final determination of uncollectibility is made. All provisions for allowances for doubtful collection of accounts are related to the creditworthiness of accounts and are included in Selling, general and administrative expenses.
Reserve for obsolescence. The Company recorded a reserve for obsolescence of $87,715 , $91,217 and $90,712 at December 31, 2016 , 2015 and 2014 , respectively, to reduce Inventories to their estimated net realizable value. 
 
Goodwill. Goodwill represents the cost in excess of fair value of net assets acquired in business combinations accounted for by the purchase method. In accordance with the Intangibles Topic of the ASC, goodwill is tested for impairment on an annual basis and in between annual tests if events or circumstances indicate potential impairment. See Note 4 .
Intangible assets. Intangible assets include trademarks, non-compete covenants and certain intangible property rights. As required by the Goodwill and Other Intangibles Topic of the ASC, indefinite-lived trademarks are not amortized, but instead are tested annually for impairment, and between annual tests whenever an event occurs or circumstances indicate potential impairment. See Note 4 . The cost of finite-lived trademarks, non-compete covenants and certain intangible property rights are amortized on a straight-line basis over the expected period of benefit as follows:
 
Useful Life
Finite-lived trademarks
5 years
Non-compete covenants
3 – 5 years
Certain intangible property rights
3 – 19 years
Impairment of long-lived assets. In accordance with the Property, Plant and Equipment Topic of the ASC, management evaluates the recoverability and estimated remaining lives of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. See Notes 4 and 5 .
Property, plant and equipment. Property, plant and equipment is stated on the basis of cost. Depreciation is


45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

provided by the straight-line method. Depreciation and amortization are included in the appropriate Cost of goods sold or Selling, general and administrative expense caption on the Statements of Consolidated Income. Included in Property, plant and equipment are leasehold improvements. The major classes of assets and ranges of annual depreciation rates are:
Buildings
4.0% – 20.0%
Machinery and equipment
10.0% – 20.0%
Furniture and fixtures
10.0% – 20.0%
Automobiles and trucks
10.0% – 33.3%
Standby letters of credit. The Company occasionally enters into standby letter of credit agreements to guarantee various operating activities. These agreements provide credit availability to the various beneficiaries if certain contractual events occur. Amounts outstanding under these agreements totaled $43,658 , $45,407 and $23,442 at December 31, 2016 , 2015 and 2014 , respectively.
Product warranties. The Company offers product warranties for certain products. 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 2016 , 2015 and 2014 , including customer satisfaction settlements during the year, were as follows:
 
2016
 
2015
 
2014
Balance at January 1
$
31,878

 
$
27,723

 
$
26,755

Charges to expense
38,954

 
43,484

 
37,879

Settlements
(36,413
)
 
(39,329
)
 
(36,911
)
Balance at December 31
$
34,419

 
$
31,878

 
$
27,723

Environmental matters. Capital expenditures for ongoing environmental compliance measures were recorded in Property, plant and equipment, and related expenses were included in the normal operating expenses of conducting business. The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned sites and at a number of third-party sites. The Company accrued for environmental-related activities for which commitments or clean-up plans have been developed and when such costs could be reasonably estimated based on industry standards and professional judgment. All accrued amounts were recorded on an undiscounted basis. Environmental-related expenses included direct costs of investigation and remediation and indirect costs such as
 
compensation and benefits for employees directly involved in the investigation and remediation activities and fees paid to outside engineering, consulting and law firms. See Notes 8 and 13 .
Employee Stock Purchase and Savings Plan. The Company accounts for the Employee Stock Purchase and Savings Plan (ESOP) in accordance with the Employee Stock Ownership Plans Subtopic of the Compensation – Stock Ownership Topic of the ASC. The Company recognized compensation expense for amounts contributed to the ESOP. See Note 11 .
Defined benefit pension and other postretirement benefit plans. The Company accounts for its defined benefit pension and other postretirement benefit plans in accordance with the Retirement Benefits Topic of the ASC, which requires the recognition of a plan’s funded status as an asset for overfunded plans and as a liability for unfunded or underfunded plans. See Note 6 .
Stock-based compensation. The cost of the Company’s stock-based compensation is recorded in accordance with the Stock Compensation Topic of the ASC. See Note 12 .
Foreign currency translation. All consolidated non-highly inflationary foreign operations use the local currency of the country of operation as the functional currency and translated the local currency asset and liability accounts at year-end exchange rates while income and expense accounts were translated at average exchange rates. The resulting translation adjustments were included in Cumulative other comprehensive loss, a component of Shareholders’ equity.
Cumulative other comprehensive loss. At December 31, 2016 , the ending balance of Cumulative other comprehensive loss included adjustments for foreign currency translation of $501,277 , net prior service costs and net actuarial losses related to pension and other postretirement benefit plans of $125,096 , unrealized net gains on marketable equity securities of $1,015 and unrealized net gains on interest rate lock cash flow hedges of $85,007 . At December 31, 2015 and 2014 , the ending balance of Cumulative other comprehensive loss included adjustments for foreign currency translation of $482,629 and $354,384 , respectively, net prior service costs and net actuarial losses related to pension and other postretirement benefit plans of $104,346 and $118,167 , respectively, and unrealized losses and gains on marketable equity securities of $120 and $593 , respectively.
Revenue recognition. The Company recognized revenue when products were shipped and title passed to unaffiliated customers. Collectibility of amounts recorded as revenue was reasonably assured at the time of recognition.
Third-party service revenue. The Company used subcontractors to provide installation services for customers. Under these arrangements, the Company invoiced the customer for both the product and installation and remitted payment to the subcontractor for the installation. Starting in


46  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

the third quarter of 2016, the Company recorded the installation revenue in Net sales and the payments to subcontractors in Cost of goods sold. Prior to the third quarter, these amounts were netted and immaterial.
Customer and vendor consideration. The Company offered certain customers rebate and sales incentive programs which were classified as reductions in Net sales. Such programs were in the form of volume rebates, rebates that constituted a percentage of sales or rebates for attaining certain sales goals. The Company received consideration from certain suppliers of raw materials in the form of volume rebates or rebates that constituted a percentage of purchases. These rebates were recognized on an accrual basis by the Company as a reduction of the purchase price of the raw materials and a subsequent reduction of Cost of goods sold when the related product was sold.
Costs of goods sold. Included in Costs of goods sold were costs for materials, manufacturing, distribution and related support. Distribution costs included all expenses related to the distribution of products including inbound freight charges, purchase and receiving costs, warehousing costs, internal transfer costs and all costs incurred to ship products. Also included in Costs of goods sold were total technical expenditures, which included research and development costs, quality control, product formulation expenditures and other similar items. Research and development costs included in technical expenditures were $58,041 , $57,667 and $50,019 for 2016 , 2015 and 2014 , respectively. The settlement gain related to the titanium dioxide litigation reduced 2014 Costs of goods sold by $21,420 . See Note 9 .
Selling, general and administrative expenses. Selling costs included advertising expenses, marketing costs, employee and store costs and sales commissions. The cost of advertising was expensed as incurred. The Company incurred $351,002 , $338,188 and $299,201 in advertising costs during 2016 , 2015 and 2014 , respectively. General and administrative expenses included human resources, legal, finance and other support and administrative functions.
Earnings per share. Common stock held in a revocable trust (see Note 10 ) was not included in outstanding shares for basic or diluted income per common share calculations. All references to “shares” or “per share” information throughout this report relate to common shares and are stated on a diluted per common share basis, unless otherwise indicated. Basic and diluted net income per common share were calculated using the treasury stock method in accordance with the Earnings Per Common Share Topic of the ASC. Basic net income per common share amounts were computed based on the weighted-average number of common shares outstanding during the year. Diluted net income per common share amounts were computed based on the weighted-average number of common shares outstanding plus all dilutive securities potentially outstanding during the year. See Note 15 .
 
Impact of recently issued accounting standards. During the second quarter of 2016, the Company early adopted, as permitted, ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies various provisions related to how share-based payments are accounted for and presented in the financial statements. Excess tax benefits for share-based payments are no longer recognized in other capital on the balance sheet and are instead recognized in the income tax provision on the income statement. As a result, excess tax benefits for share-based payments are now included in Net operating cash rather than Net financing cash. The changes have been applied prospectively beginning on January 1, 2016 in accordance with the ASU and prior years have not been restated. See Note 14 for additional information.
Effective January 1, 2016, the Company adopted ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires companies to present debt issuance costs associated with a debt liability as a deduction from the carrying amount of that debt liability on the balance sheet rather than being capitalized as an asset. The changes have been applied retrospectively. The adoption of this ASU did not have a material effect on the Company's results of operations, financial condition or liquidity.
Effective January 1, 2016, the Company adopted ASU No. 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per Share (Or Its Equivalent)." This ASU removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share (or its equivalent) practical expedient. The adoption of this ASU affects the Company's year-end disclosure of the fair value of pension assets, but there is no effect 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. Under the new standard, assets and liabilities arising from most leases will be recognized on the balance sheet. 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 an effective interest method (financing leases). The new standard is effective for interim and annual periods beginning after December 15, 2018.  A modified retrospective transition approach is required with certain practical expedients available.  The Company has made significant progress with its assessment process, and anticipates this standard will have a material impact on its consolidated balance sheet. While the Company continues to assess all potential impacts of the standard, it currently believes the most significant impact relates to recording lease assets and related liabilities on the balance sheet for the Paint Store Group's retail operations.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and


47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

Financial Liabilities,” which amends the guidance for certain aspects of recognition, measurement and disclosure of financial instruments. The standard is effective for interim and annual periods beginning after December 31, 2017, and early adoption is not permitted. The Company is in the process of evaluating the impact of the standard.
In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes," which eliminates the requirement for separate presentation of current and non-current portions of deferred tax. All deferred tax assets and deferred tax liabilities will be presented as non-current on the balance sheet. The standard is effective for interim and annual periods beginning after December 15, 2016. Either retrospective or prospective presentation can be used. The Company will adopt ASU No. 2015-17 as required. The ASU will not have a material effect on the Company's results of operations, financial condition or liquidity.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which consists of a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The issuance of ASU No. 2015-14 in August 2015 delays the effective date of the standard to interim and annual periods beginning after December 15, 2017. Either full retrospective adoption or modified retrospective adoption is permitted. In addition to expanded disclosures regarding revenue, this pronouncement may impact timing of recognition in some arrangements with variable consideration or contracts for the sale of goods or services. The Company has made significant progress with its assessment process. In addition, the Company is currently developing plans for enhancements to its information systems and internal controls in response to the new rule requirements. The Company plans to adopt the standard using the full retrospective method of adoption, which requires the restatement of prior periods presented. The Company expects to have expanded disclosures in the consolidated financial statements and is in process of evaluating the impact on the results of operations, financial condition and liquidity.
Reclassification. Certain amounts in the notes to the consolidated financial statements for 2014 and 2015 have been reclassified to conform to the 2016 presentation.

NOTE 2 – ACQUISITIONS
On March 19, 2016, the Company and The Valspar Corporation (Valspar) entered into a definitive agreement under which the Company will acquire Valspar for $113 per share in an all cash transaction, or a value of approximately $9.500 billion and assumption of Valspar debt and other considerations. The transaction is subject to certain conditions and regulatory approvals. If in connection with obtaining the
 
required regulatory approvals, the parties are required to divest assets of Valspar or the Company representing, in the aggregate, more than $650,000 in net sales, then the per share consideration will be $105 in cash. The Company is not required to consummate the acquisition if regulatory authorities require the divestiture of assets of Valspar or the Company representing, in the aggregate, more than $1.500 billion . Valspar's architectural coatings assets in Australia are excluded from the calculation of the $650,000 and/or $1.500 billion threshold if such assets are required to be divested. A divestiture below the $650,000 threshold is expected in order to obtain the necessary regulatory approvals. The Company expects to negotiate the divestiture and complete the Valspar transaction at $113 per share in early 2017.
During the year ended December 31, 2016 , the Company incurred SG&A and interest expense of $58,409 and $72,844 , respectively, related to the anticipated acquisition of Valspar. See Note 7. The acquisition-related expenses reduced basic and diluted net income per common share by $.89 and $.86 , respectively, for the year ended December 31, 2016. The acquisition will expand Sherwin-Williams diversified array of brands and technologies, expand its global platform and add new capabilities in the packaging and coil segments.

NOTE 3 – INVENTORIES
Inventories were stated at the lower of cost or market with cost determined principally on the last-in, first-out (LIFO) method. The following presents the effect on inventories, net income and net income per common share had the Company used the first-in, first-out (FIFO) inventory valuation method adjusted for income taxes at the statutory rate 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. During 2014 , certain inventories accounted for on the LIFO method were reduced, resulting in the liquidation of certain quantities carried at costs prevailing in prior years. The 2014 liquidation increased net income by $196 .
 
2016
 
2015
 
2014
Percentage of total
inventories on LIFO
79
%
 
78
%
 
76
%
Excess of FIFO over
LIFO
$
253,353

 
$
251,060

 
$
331,867

(Decrease) increase in net
income due to LIFO
(1,421
)
 
49,658

 
3,230

(Decrease) increase in net
income per common
share due to LIFO
(.02
)
 
.53

 
.03




48  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

NOTE 4 – GOODWILL, INTANGIBLE AND LONG-LIVED ASSETS
In accordance with the Property, Plant and Equipment Topic of the ASC, whenever events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable or the useful life may have changed, impairment tests are to be performed. Undiscounted cash flows are to be used to calculate the recoverable value of long-lived assets to determine if such assets are impaired. Where impairment is identified, a discounted cash flow valuation model, incorporating discount rates commensurate with the risks involved for each group of assets, is to be used to determine the fair value for the assets to measure any potential impairment. No material impairments were recorded in 2016, 2015 and 2014.
In accordance with the Goodwill and Other Intangibles Topic of the ASC, goodwill and indefinite-lived intangible assets are tested for impairment annually, and interim impairment tests are performed whenever an event occurs or
 
circumstances change that indicate an impairment has more likely than not occurred. October 1 has been established for the annual impairment review. At the time of impairment testing, values are estimated separately for goodwill and trademarks with indefinite lives using a discounted cash flow valuation model, incorporating discount rates commensurate with the risks involved for each group of assets. An optional qualitative assessment may alleviate the need to perform the quantitative goodwill impairment test when impairment is unlikely.
The annual impairment review performed as of October 1, 2016 resulted in goodwill and trademark impairment in the Latin America Coatings Group of $10,455 and $233 , respectively. The goodwill impairment charge related primarily to lower than anticipated cash flow in the Latin America Coatings Group. The trademark impairment related to lower than anticipated sales of an acquired brand. The annual impairment reviews performed as of October 1, 2015 and 2014 did not result in any goodwill or trademark impairment.


A summary of changes in the Company’s carrying value of goodwill by Reportable Segment is as follows:
Goodwill
Paint Stores
Group
 
Consumer
Group
 
Global
Finishes
Group
 
Latin America
Coatings Group
 
Consolidated
Totals
Balance at January 1, 2014 (1)
$
287,300

 
$
703,351

 
$
178,298

 
$
9,738

 
$
1,178,687

Currency and other adjustments
(1,866
)
 
(1,145
)
 
(17,287
)
 
(43
)
 
(20,341
)
Balance at December 31, 2014 (1)
285,434

 
702,206

 
161,011

 
9,695

 
1,158,346

Currency and other adjustments
(28
)
 
(1,135
)
 
(13,801
)
 
(49
)
 
(15,013
)
Balance at December 31, 2015 (1)
285,406

 
701,071

 
147,210

 
9,646

 
1,143,333

Impairment charged to operations
 
 
 
 
 
 
(10,455
)
 
(10,455
)
Currency and other adjustments
4

 
(1,197
)
 
(5,602
)
 
809

 
(5,986
)
Balance at December 31, 2016 (2)
$
285,410

 
$
699,874

 
$
141,608

 
$

 
$
1,126,892

(1)  
Net of accumulated impairment losses of $8,904 ( $8,113 in the Consumer Group and $791 in the Global Finishes Group).
(2)  
Net of accumulated impairment losses of $19,359 ( $8,113 in the Consumer Group, $791 in the Global Finishes Group and $10,455 in the Latin America Coatings Group).

49

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
 
Trademarks
with indefinite
lives
 
Total
intangible
assets
 
Software
 
All other
 
Subtotal
 
December 31, 2016
 
 
 
 
 
 
 
 
 
Weighted-average amortization period
7 years

 
11 years

 
10 years

 
 
 
 
Gross
$
144,557

 
$
313,613

 
$
458,170

 
 
 
 
Accumulated amortization
(103,735
)
 
(240,217
)
 
(343,952
)
 
 
 
 
Net value
$
40,822

 
$
73,396

 
$
114,218

 
$
140,792

 
$
255,010

 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
Weighted-average amortization period
8 years

 
12 years

 
11 years

 
 
 
 
Gross
$
123,863

 
$
312,119

 
$
435,982

 
 
 
 
Accumulated amortization
(95,008
)
 
(228,921
)
 
(323,929
)
 
 
 
 
Net value
$
28,855

 
$
83,198

 
$
112,053

 
$
143,318

 
$
255,371

 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
Weighted-average amortization period
8 years

 
12 years

 
11 years

 
 
 
 
Gross
$
126,258

 
$
317,005

 
$
443,263

 
 
 
 
Accumulated amortization
(88,384
)
 
(215,518
)
 
(303,902
)
 
 
 
 
Net value
$
37,874

 
$
101,487

 
$
139,361

 
$
149,766

 
$
289,127

Amortization of finite-lived intangible assets is as follows for the next five years: $18,958 in 2017 , $18,390 in 2018 , $16,209 in 2019 , $14,985 in 2020 and $13,177 in 2021 .

NOTE 5 – EXIT OR DISPOSAL ACTIVITIES
Management is continually re-evaluating the Company’s operating facilities, including acquired 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. Provisions for qualified exit costs are made at the time a facility is no longer operational. Qualified exit costs 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 becomes available upon which more accurate amounts can be reasonably estimated. Concurrently, property, plant and equipment is tested for impairment in accordance with the Property, Plant and Equipment Topic of the ASC, and if impairment exists, the carrying value of the related assets is reduced to estimated fair value. Additional impairment may be recorded for subsequent revisions in estimated fair value. Adjustments to prior provisions and additional impairment charges for property, plant and equipment of closed sites being held for disposal are recorded in Other general expense – net.
During 2016, 15 stores in Paint Stores Group, 13 branches in the Global Finishes Group, 2 facilities in Consumer Group and 1 store in the Latin America Coatings Group were closed due to lower demand or redundancy. Provisions for severance and
 
other qualified exit costs of $1,020 and $505 were charged to the Consumer Group and Global Finish Group, respectively. Provisions for severance and other qualified exit costs related to manufacturing facilities, distribution facilities, stores and branches closed prior to 2016 of $1,513 were recorded.
During 2015, 30 stores in the Paint Stores Group, 7 branches in the Global Finishes Group and 2 stores in the Latin America Coatings Group were closed due to lower demand or redundancy. In addition, the Global Finishes Group exited a business in Europe. Provisions for severance and other qualified exit cost of $168 and $8,329 were charged to the Paint Stores Group and Global Finishes Group, respectively. Provisions for severance and other qualified exit costs related to manufacturing facilities, distribution facilities, stores and branches closed prior to 2015 of $1,264 were recorded.
During 2014, 7 facilities and 24 stores and branches were closed due to lower demand or redundancy. In addition, the Global Finishes Group exited its business in Venezuela. Provisions for severance and other qualified exit cost of $280 , $4,809 and $4,767 were charged to the Paint Stores Group, Consumer Group and Global Finishes Group, respectively. Provisions for severance and other qualified exit costs related to manufacturing facilities, distribution facilities, stores and branches closed prior to 2014 of $3,722 were recorded.
At December 31, 2016 , a portion of the remaining accrual for qualified exit costs relating to facilities shutdown prior to


50  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

2014 is expected to be incurred by the end of 2017 . The remaining portion of the ending accrual for facilities shutdown prior to 2014 primarily represented post-closure contractual expenses related to certain owned facilities which are closed
 
and being held for disposal. The Company cannot reasonably estimate when such matters will be concluded to permit disposition.

The following tables summarize the activity and remaining liabilities associated with qualified exit costs:
(Thousands of dollars)
 
Exit Plan
 
Balance at December 31, 2015
 
Provisions in
Cost of goods
sold or SG&A
 
Actual
expenditures
charged to
accrual
 
Balance at December 31, 2016
Consumer Group facilities shutdown in 2016:
 
 
 
 
 
 
 
 
Severance and related costs
 
 
 
$
1,020

 
$
(113
)
 
$
907

Global Finishes Group stores shutdown in 2016:
 
 
 
 
 
 
 
 
Severance and related costs
 
 
 
136

 
 
 
136

Other qualified exit costs
 
 
 
369

 
(100
)
 
269

Paint Stores Group stores shutdown in 2015:
 
 
 
 
 
 
 

Other qualified exit costs
 
$
12

 
481

 
(298
)
 
195

Global Finishes Group stores shutdown in 2015:
 
 
 
 
 
 
 

Severance and related costs
 
1,096

 
 
 
(1,096
)
 

Other qualified exit costs
 
2,750

 
499

 
(2,816
)
 
433

Paint Stores Group stores shutdown in 2014:
 
 
 
 
 
 
 

Other qualified exit costs
 
184

 
 
 
(81
)
 
103

Consumer Group facilities shutdown in 2014:
 
 
 
 
 
 
 

Severance and related costs
 
445

 
 
 
(46
)
 
399

Other qualified exit costs
 
52

 
 
 
(39
)
 
13

Global Finishes Group exit of business in 2014:
 
 
 
 
 
 
 
 
Severance and related costs
 
430

 
 
 
(430
)
 

Other qualified exit costs
 
353

 
430

 
(600
)
 
183

Severance and other qualified exit costs for facilities shutdown prior to 2014
 
1,755

 
103

 
(648
)
 
1,210

Totals
 
$
7,077

 
$
3,038

 
$
(6,267
)
 
$
3,848


51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

(Thousands of dollars)
 
Exit Plan
 
Balance at December 31, 2014
 
Provisions in
Cost of goods
sold or SG&A
 
Actual
expenditures
charged to
accrual
 
Balance at December 31, 2015
Paint Stores Group stores shutdown in 2015:
 
 
 
 
 
 
 
 
Other qualified exit costs
 
 
 
$
168

 
$
(156
)
 
$
12

Global Finishes Group stores shutdown in 2015:
 
 
 
 
 
 
 
 
Severance and related costs
 

 
1,341

 
(245
)
 
1,096

Other qualified exit costs
 

 
6,988

 
(4,238
)
 
2,750

Paint Stores Group stores shutdown in 2014:
 
 
 
 
 
 
 
 
Other qualified exit costs
 
$
280

 
142

 
(238
)
 
184

Consumer Group facilities shutdown in 2014:
 
 
 
 
 
 
 
 
Severance and related costs
 
2,732

 
466

 
(2,753
)
 
445

Other qualified exit costs
 
781

 
6

 
(735
)
 
52

Global Finishes Group exit of business in 2014:
 
 
 
 
 
 
 
 
Severance and related costs
 
104

 
326

 
 
 
430

Other qualified exit costs
 
1,080

 
324

 
(1,051
)
 
353

Paint Stores Group facility shutdown in 2013:
 
 
 
 
 
 
 
 
Severance and related costs
 
654

 
 
 
(654
)
 

Other qualified exit costs
 
1,205

 
 
 
(411
)
 
794

Global Finishes Group stores shutdown in 2013:
 
 
 
 
 
 
 
 
Severance and related costs
 
28

 
 
 
(28
)
 

Other qualified exit costs
 
138

 
 
 
(138
)
 

Severance and other qualified exit costs for facilities shutdown
   prior to 2013
 
1,514

 
 
 
(553
)
 
961

Totals

$
8,516

 
$
9,761

 
$
(11,200
)
 
$
7,077



52  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

Exit Plan
 
Balance at December 31, 2013
 
Provisions in
Cost of goods
sold or SG&A
 
Actual
expenditures
charged to
accrual
 
Balance at December 31, 2014
Paint Stores Group stores shutdown in 2014:
 
 
 
 
 
 
 
 
Other qualified exit costs
 
 
 
$
280

 
 
 
$
280

Consumer Group facilities shutdown in 2014:
 
 
 
 
 
 
 
 
Severance and related costs
 
 
 
4,028

 
$
(1,296
)
 
2,732

Other qualified exit costs
 
 
 
781

 
 
 
781

Global Finishes Group exit of business in 2014:
 
 
 
 
 
 
 
 
Severance and related costs
 
 
 
2,500

 
(2,396
)
 
104

Other qualified exit costs
 
 
 
2,267

 
(1,187
)
 
1,080

Paint Stores Group facility shutdown in 2013:
 
 
 
 
 
 
 
 
Severance and related costs
 
$
977

 
2,126

 
(2,449
)
 
654

Other qualified exit costs
 
 
 
1,499

 
(294
)
 
1,205

Consumer Group facilities shutdown in 2013:
 
 
 
 
 
 
 


Severance and related costs
 
598

 
97

 
(695
)
 


Global Finishes Group stores shutdown in 2013:
 
 
 
 
 
 
 
 
Severance and related costs
 
33

 
 
 
(5
)
 
28

Other qualified exit costs
 
220

 
 
 
(82
)
 
138

Latin America Coatings Group facilities shutdown in 2013:
 
 
 
 
 
 
 
 
Severance and related costs
 
123

 
 
 
(123
)
 


Paint Stores Group stores shutdown in 2012:
 
 
 
 
 
 
 
 
Other qualified exit costs
 
244

 
 
 
(51
)
 
193

Global Finishes Group facilities shutdown in 2012:
 
 
 
 
 
 
 
 
Severance and related costs
 
2,177

 
 
 
(1,863
)
 
314

Other qualified exit costs
 
83

 
 
 
 
 
83

Other qualified exit costs for facilities shutdown prior to 2012
 
1,365

 
 
 
(441
)
 
924

Totals

$
5,820

 
$
13,578

 
$
(10,882
)
 
$
8,516




53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

NOTE 6 – PENSION, HEALTH CARE AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides pension benefits to substantially all employees through primarily noncontributory defined contribution or defined benefit plans and certain health care and life insurance benefits to domestic active employees and eligible retirees. In accordance with the Retirement Benefits Topic of the ASC, the Company recognizes an asset for overfunded defined benefit pension or other postretirement benefit plans and a liability for unfunded or underfunded plans. In addition, actuarial gains and losses and prior service costs of such plans are recorded in Cumulative other comprehensive loss, a component of Shareholders’ equity. The amounts recorded in Cumulative other comprehensive loss will continue to be modified as actuarial assumptions and service costs change, and all such amounts will be amortized to expense over a period of years through the net pension cost (credit) and net periodic benefit cost.
Health care plans. The Company provides certain domestic health care plans that are contributory and contain cost-sharing features such as deductibles and coinsurance. There were 22,708 , 21,918 and 21,239 active employees entitled to receive benefits under these plans at December 31, 2016 , 2015 and 2014 , respectively. The cost of these benefits for active employees, which includes claims incurred and claims incurred but not reported, amounted to $220,589 , $217,781 and $202,787 for 2016 , 2015 and 2014 , respectively.
Defined contribution pension plans. The Company’s annual contribution for its domestic defined contribution pension plan was $36,731 , $35,435 and $32,384 for 2016 , 2015 and 2014 , respectively. The contribution percentage ranges from two percent to seven percent of compensation for covered employees based on an age and service formula. Assets in employee accounts of the domestic defined contribution pension plan are invested in various investment funds as directed by the participants. These investment funds did not own a significant number of shares of the Company’s common stock for any year presented.
The Company’s annual contributions for its foreign defined contribution pension plans, which are based on various percentages of compensation for covered employees up to certain limits, were $6,676 , $5,888 and $4,592 for 2016 , 2015 and 2014 , respectively. Assets in employee accounts of the foreign defined contribution pension plans are invested in various investment funds. These investment funds did not own a significant number of shares of the Company’s common stock for any year presented.
Defined benefit pension plans. The Company has one salaried and one hourly domestic defined benefit pension plan, and twenty-one foreign defined benefit pension plans. All participants in the domestic salaried defined benefit pension plan prior to January 1, 2002 retain the previous defined
 
benefit formula for computing benefits with certain modifications for active employees. Employees who became participants on or after January 1, 2002 are credited with certain contribution credits that range from two percent to seven percent of compensation based on an age and service formula. Contribution credits are converted into units to account for each participant’s benefits. Participants will receive a variable annuity benefit upon retirement or a lump sum distribution upon termination (if vested). Contribution credits earned prior to January 1, 2017 are subject to the hypothetical returns achieved on each participant’s allocation of units from investments in various investment funds as directed by the participant. Effective January 1, 2017, contribution credits are credited interest at an annual fixed rate equal to the Internal Revenue Service (IRS) 24-month average second segment rate. Contribution credits to the revised domestic salaried defined benefit pension plan are being funded through existing plan assets. Effective October 1, 2011, the domestic salaried defined benefit pension plan was frozen for new hires, and all newly hired U.S. non-collectively bargained employees are eligible to participate in the Company’s domestic defined contribution plan.
At December 31, 2016 , the domestic salaried and hourly defined benefit pension plans were overfunded, with a projected benefit obligation of $632,797 , fair value of plan assets of $847,013 and excess plan assets of $214,216 . The plans are funded in accordance with all applicable regulations at December 31, 2016 and no funding will be required in 2017 . At December 31, 2015 , the domestic salaried and hourly defined benefit pension plans were overfunded, with a projected benefit obligation of $624,791 , fair value of plan assets of $858,605 and excess plan assets of $233,814 . At December 31, 2014 , the domestic salaried and hourly defined benefit pension plan were overfunded, with a projected benefit obligation of $653,338 , fair value of plan assets of $896,071 and excess plan assets of $242,733 .
At December 31, 2016 , eighteen of the Company’s foreign defined benefit pension plans were unfunded or underfunded, with combined accumulated benefit obligations, projected benefit obligations, fair values of net assets and deficiencies of plan assets of $121,926 , $156,645 , $103,468 and $53,177 , respectively. An increase of $5,018 from 2015 in the combined projected benefit obligations of all foreign defined benefit pension plans was primarily due to changes in plan assumptions partially offset by the impact of the termination of an acquired Canada plan.
The Company expects to make the following benefit payments for all domestic and foreign defined benefit pension plans: $53,827 in 2017 ; $54,357 in 2018 ; $53,810 in 2019 ; $54,671 in 2020 ; $55,387 in 2021 ; and $276,011 in 2022 through 2026 . The Company expects to contribute $3,676 to the foreign plans in 2017 .


54  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

The estimated net actuarial losses and prior service costs for the defined benefit pension plans that are expected to be
 
amortized from Cumulative other comprehensive loss into the net pension costs in 2017 are $8,585 and $1,362 , respectively.


The following table summarizes the components of the net pension costs and Cumulative other comprehensive loss related to the defined benefit pension plans:
 
Domestic
Defined Benefit Pension Plans
 
Foreign
Defined Benefit Pension Plans
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
Net pension costs (credits):
 
 
 
 
 
 
 
 
 
 
 
Service costs
$
22,291

 
$
21,120

 
$
21,342

 
$
4,225

 
$
5,071

 
$
5,261

Interest costs
26,498

 
24,535

 
26,266

 
7,441

 
8,719

 
10,422

Expected returns on plan assets
(50,197
)
 
(52,095
)
 
(51,293
)
 
(6,915
)
 
(9,296
)
 
(10,836
)
Amortization of prior service costs
1,205

 
1,310

 
1,837

 
 
 
 
 
 
Amortization of actuarial losses
4,532

 
1,962

 
 
 
1,540

 
1,910

 
1,413

Ongoing pension costs (credits)
4,329

 
(3,168
)
 
(1,848
)
 
6,291

 
6,404

 
6,260

Settlement costs (credits)
 
 
 
 
 
 
4,231

 
3,255

 
(3,422
)
Net pension costs (credits)
4,329

 
(3,168
)
 
(1,848
)
 
10,522

 
9,659

 
2,838

Other changes in plan assets and projected benefit
obligation recognized in Cumulative other comprehensive loss (before taxes):
 
 
 
 
 
 
 
 
 
 
 
Net actuarial losses arising during the year
18,926

 
15,359

 
47,785

 
17,030

 
1,907

 
21,792

Prior service costs arising during the year
2,081

 
 
 
2,242

 
 
 
 
 
 
Amortization of actuarial losses
(4,532
)
 
(1,962
)
 
 
 
(1,540
)
 
(1,910
)
 
(1,413
)
Amortization of prior service costs
(1,205
)
 
(1,310
)
 
(1,837
)
 
 
 
 
 
 
Exchange rate loss recognized during year
 
 
 
 
 
 
(11,627
)
 
(5,830
)
 
(7,988
)
Total recognized in Cumulative other
comprehensive loss
15,270

 
12,087

 
48,190

 
3,863

 
(5,833
)
 
12,391

Total recognized in net pension costs (credits)
and Cumulative other comprehensive loss
$
19,599

 
$
8,919

 
$
46,342

 
$
14,385

 
$
3,826

 
$
15,229

 
 
 
 
 
 
 
 
 
 
 
 
The Company employs a total return investment approach for the domestic and foreign defined benefit pension plan assets. A mix of equities and fixed income investments are used to maximize the long-term return of assets for a prudent level of risk. In determining the expected long-term rate of return on defined benefit pension plan assets,
 
management considers the historical rates of return, the nature of investments and an expectation of future investment strategies. The target allocations for plan assets are 45 65 percent equity securities and 30 40 percent fixed income securities.


55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

The following tables summarize the fair value of the defined benefit pension plan assets at December 31, 2016 , 2015 and 2014 . 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, 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:
 
 
 
 
 
 
 
Equity investments (1)
$
393,045

 
$
321,152

 
$
71,893

 
 
Fixed income investments (2)
294,103

 
144,668

 
149,435

 
 
Other assets (3)
14,643

 
 
 
14,643

 
 
Total investments in fair value hierarchy
701,791

 
$
465,820

 
$
235,971

 

Investments measured at NAV or its equivalent (4)
310,230

 
 
 
 
 
 
Investments at fair value
$
1,012,021

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value at December 31, 2015
 
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)
$
435,690

 
$
372,033

 
$
63,657

 
 
Fixed income investments (2)
290,470

 
141,448

 
149,022

 
 
Other assets (3)
16,361

 
 
 
16,361

 
 
Total investments in fair value hierarchy
742,521

 
$
513,481

 
$
229,040

 

Investments measured at NAV or its equivalent (4)
278,423

 
 
 
 
 
 
Investments at fair value
$
1,020,944

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value at December 31, 2014
 
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)
$
487,357

 
$
404,542

 
$
82,815

 
 
Fixed income investments (2)
285,042

 
141,529

 
143,513

 
 
Other assets (3)
28,435

 
 
 
28,435

 
 
Total investments in fair value hierarchy
800,834

 
$
546,071

 
$
254,763

 

Investments measured at NAV or its equivalent (4)
282,882

 
 
 
 
 
 
Investments at fair value
$
1,083,716

 
 
 
 
 
 

(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 pension plan assets at December 31, 2016 were 300,000 shares of the Company’s common stock with a
 
market value of $80,622 , representing 9.5 percent of total domestic plan assets. Dividends received on the Company’s common stock during 2016 totaled $1,008 .


56  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

The following table summarizes the obligations, plan assets and assumptions used for the defined benefit pension plans, which are all measured as of December 31:
 
Domestic
Defined Benefit Pension Plans
 
Foreign
Defined Benefit Pension Plans
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
Accumulated benefit obligations
at end of year
$
630,159

 
$
621,873

 
$
648,480

 
$
172,047

 
$
172,426

 
$
203,610

Projected benefit obligations:
 
 
 
 
 
 
 
 
 
 
 
Balances at beginning of year
$
624,791

 
$
653,338

 
$
582,036

 
$
201,854

 
$
234,524

 
$
222,996

Service costs
22,291

 
21,120

 
21,342

 
4,225

 
5,071

 
5,261

Interest costs
26,498

 
24,535

 
26,266

 
7,441

 
8,719

 
10,422

Actuarial losses (gains)
8,132

 
(40,602
)
 
68,748

 
43,736

 
(3,045
)
 
32,551

Contributions and other
2,081

 
 
 
2,242

 
947

 
1,072

 
(6,692
)
Settlements
 
 
 
 
 
 
(14,862
)
 
(18,707
)
 
(3,370
)
Effect of foreign exchange
 
 
 
 
 
 
(30,360
)
 
(17,211
)
 
(18,987
)
Benefits paid
(50,996
)
 
(33,600
)
 
(47,296
)
 
(6,108
)
 
(8,569
)
 
(7,657
)
Balances at end of year
632,797

 
624,791

 
653,338

 
206,873

 
201,854

 
234,524

Plan assets:
 
 
 
 
 
 
 
 
 
 
 
Balances at beginning of year
858,605

 
896,071

 
870,386

 
162,339

 
187,645

 
184,963

Actual returns on plan assets
39,404

 
(3,866
)
 
72,256

 
33,569

 
4,844

 
20,240

Contributions and other
 
 
 
 
725

 
15,019

 
11,424

 
7,328

Settlements
 
 
 
 
 
 
(14,862
)
 
(18,707
)
 
(3,370
)
Effect of foreign exchange
 
 
 
 
 
 
(24,949
)
 
(14,298
)
 
(13,859
)
Benefits paid
(50,996
)
 
(33,600
)
 
(47,296
)
 
(6,108
)
 
(8,569
)
 
(7,657
)
Balances at end of year
847,013

 
858,605

 
896,071

 
165,008

 
162,339

 
187,645

Excess (deficient) plan assets over
projected benefit obligations
$
214,216

 
$
233,814

 
$
242,733

 
$
(41,865
)
 
$
(39,515
)
 
$
(46,879
)
Assets and liabilities recognized in the
Consolidated Balance Sheets:
 
 
 
 
 
 
 
 

 
 
Deferred pension assets
$
214,216

 
$
233,814

 
$
242,733

 
$
11,313

 
$
11,068

 
$
7,411

Other accruals
 
 
 
 
 
 
(1,522
)
 
(1,442
)
 
(810
)
Other long-term liabilities
 
 

 


 
(51,656
)
 
(49,141
)
 
(53,480
)
 
$
214,216

 
$
233,814

 
$
242,733

 
$
(41,865
)
 
$
(39,515
)
 
$
(46,879
)
Amounts recognized in Cumulative other
comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial losses
$
(134,847
)
 
$
(120,454
)
 
$
(107,057
)
 
$
(45,604
)
 
$
(41,741
)
 
$
(47,574
)
Prior service costs
(6,015
)
 
(5,138
)
 
(6,448
)
 
 
 
 
 
 
 
$
(140,862
)
 
$
(125,592
)
 
$
(113,505
)
 
$
(45,604
)
 
$
(41,741
)
 
$
(47,574
)
Weighted-average assumptions used to
determine projected benefit obligations:
 
 
 
 
 
 
 
 
 
 
 
Discount rate
4.20
%
 
4.40
%
 
3.95
%
 
3.21
%
 
4.20
%
 
3.92
%
Rate of compensation increase
3.38
%
 
3.14
%
 
4.00
%
 
4.43
%
 
4.00
%
 
3.70
%
Weighted-average assumptions used to
determine net pension costs:
 
 
 
 
 
 
 
 
 
 
 
Discount rate
4.40
%
 
3.95
%
 
4.65
%
 
4.20
%
 
3.92
%
 
4.89
%
Expected long-term rate of
return on assets
6.00
%
 
6.00
%
 
6.00
%
 
4.70
%
 
4.84
%
 
5.58
%
Rate of compensation increase
3.14
%
 
4.00
%
 
4.00
%
 
4.00
%
 
3.70
%
 
4.31
%
 

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

Postretirement Benefits Other Than Pensions. Employees of the Company hired in the United States prior to January 1, 1993 who are not members of a collective bargaining unit, and certain groups of employees added through acquisitions, are eligible for health care and life
insurance benefits upon
 
retirement, subject to the terms of the unfunded plans. There were 4,524 , 4,442 and 4,443 retired employees entitled to receive such postretirement benefits at December 31, 2016 , 2015 and 2014 , respectively.




The following table summarizes the obligation and the assumptions used for postretirement benefits other than pensions:
 
Postretirement Benefits Other than Pensions
 
2016
 
2015
 
2014
Benefit obligation:
 
 
 
 
 
Balance at beginning of year - unfunded
$
263,383

 
$
295,149

 
$
286,651

Service cost
2,244

 
2,485

 
2,434

Interest cost
11,009

 
11,182

 
12,782

Actuarial loss (gain)
7,548

 
(19,370
)
 
27,757

Plan amendments
 
 
(9,269
)
 
(19,043
)
Benefits paid
(19,047
)
 
(16,794
)
 
(15,432
)
Balance at end of year - unfunded
$
265,137

 
$
263,383

 
$
295,149

Liabilities recognized in the Consolidated Balance Sheets:
 
 
 
 
 
Postretirement benefits other than pensions
$
(250,397
)
 
$
(248,523
)
 
$
(277,892
)
Other accruals
(14,740
)
 
(14,860
)
 
(17,257
)
 
$
(265,137
)
 
$
(263,383
)
 
$
(295,149
)
Amounts recognized in Cumulative other comprehensive loss:
 
 
 
 
 
Net actuarial losses
$
(23,211
)
 
$
(15,664
)
 
$
(36,044
)
Prior service credits
19,205

 
25,784

 
21,043

 
$
(4,006
)
 
$
10,120

 
$
(15,001
)
Weighted-average assumptions used to determine benefit obligation:
 
 
 
 
 
Discount rate
4.10
%
 
4.30
%
 
3.90
%
Health care cost trend rate - pre-65
6.00
%
 
6.00
%
 
7.00
%
Health care cost trend rate - post-65
5.50
%
 
5.00
%
 
6.50
%
Prescription drug cost increases
10.50
%
 
11.50
%
 
6.50
%
Employer Group Waiver Plan (EGWP) trend rate
10.60
%
 
11.50
%
 
8.00
%
Weighted-average assumptions used to determine net periodic benefit cost:
 
 
 
 
 
Discount rate
4.30
%
 
3.90
%
 
4.60
%
Health care cost trend rate - pre-65
6.00
%
 
7.00
%
 
7.50
%
Health care cost trend rate - post-65
5.00
%
 
6.50
%
 
6.50
%
Prescription drug cost increases
11.50
%
 
6.50
%
 
7.00
%



58  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

The following table summarizes the components of the net periodic benefit cost and Cumulative other comprehensive loss related to postretirement benefits other than pensions:
 
Postretirement Benefits Other than Pensions
 
2016
 
2015
 
2014
Net periodic benefit cost:
 
 
 
 
 
Service cost
$
2,244

 
$
2,485

 
$
2,434

Interest cost
11,009

 
11,182

 
12,782

Amortization of actuarial losses
 
 
1,011

 
 
Amortization of prior service credit
(6,578
)
 
(4,529
)
 
(503
)
Net periodic benefit cost
6,675

 
10,149

 
14,713

Other changes in projected benefit obligation recognized in
Cumulative other comprehensive loss (before taxes):
 
 
 
 
 
Net actuarial loss (gain) arising during the year
7,548

 
(19,370
)
 
27,757

Prior service credit arising during the year
 
 
(9,269
)
 
(19,043
)
Amortization of actuarial losses
 
 
(1,011
)
 
 
Amortization of prior service credit
6,578

 
4,529

 
503

Total recognized in Cumulative other comprehensive loss
14,126

 
(25,121
)
 
9,217

Total recognized in net periodic benefit cost and
Cumulative other comprehensive loss
$
20,801

 
$
(14,972
)
 
$
23,930




The estimated net actuarial losses and prior service (credits) for postretirement benefits other than pensions that are expected to be amortized from Cumulative other comprehensive loss into net periodic benefit cost in 2017 are $43 and $(6,579) , 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 2017 both decrease in each successive year until reaching 4.5 percent in 2025 . 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, 2016 :

 
One-Percentage Point
 
Increase
 
(Decrease)
Effect on total of service and interest cost components
$
86

 
$
(131
)
Effect on the postretirement benefit obligation
$
552

 
$
(1,221
)











 


The Company expects to make retiree health care benefit cash payments as follows:
 
Expected Cash
Payments
2017
$
14,740

2018
16,551

2019
17,398

2020
17,990

2021
18,334

2022 through 2026
93,300

Total expected benefit cash payments
$
178,313



59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

NOTE 7 – DEBT
Long-term debt
 
Due Date
 
2016
 
2015 (1)
 
2014 (1)
3.45% Senior Notes
2025
 
$
396,898

 
$
396,536

 
 
4.55% Senior Notes
2045
 
393,637

 
393,414

 
 
4.00% Senior Notes
2042
 
295,938

 
295,781

 
$
295,624

1.35% Senior Notes
2017
 
 
 
697,530

 
696,240

7.375% Debentures
2027
 
118,936

 
118,889

 
118,841

7.45% Debentures
2097
 
3,500

 
3,500

 
3,500

2.00% to 8.00% Promissory Notes
Through 2027
 
2,417

 
1,628

 
1,791

 
 
 
$
1,211,326

 
$
1,907,278

 
$
1,115,996

 
 
 
 
 
 
 
 
(1)  Revised due to the adoption of ASU No. 2015-03. See Note 1.
 
 
 
 
 
 
Maturities of long-term debt are as follows for the next five years: $701,679 in 2017 ; $754 in 2018 ; $248 in 2019 , $252 in 2020 and $256 in 2021 . Interest expense on long-term debt was $75,509 , $54,634 and $56,408 for 2016 , 2015 and 2014 , respectively.
Among other restrictions, the Company’s Notes, Debentures and revolving credit agreement contain certain covenants relating to liens, ratings changes, merger and sale of assets, consolidated leverage and change of control as defined in the agreements. 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. The Company was in compliance with all covenants for all years presented.
On July 28, 2015, the Company issued $400,000 of 3.45% Senior Notes due 2025 and $400,000 of 4.55% Senior Notes due 2045. The notes are covered under a shelf registration filed with the Securities and Exchange Commission (SEC) on July 28, 2015. The proceeds were used for general corporate purposes, including repayment of a portion of the Company’s outstanding short-term borrowings.
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 Valspar acquisition as disclosed in Note 2. No balances were drawn against these facilities as of December 31, 2016 . Debt issuance costs of $65,100 related to these facilities were incurred and recorded in Other current assets. Of this amount, $61,104 was amortized and included in Interest expense for year ended December 31, 2016 . Periodic fees related to these facilities totaling $11,740 were also included in interest expense for this period.
During the first six months of 2016, in anticipation of a probable issuance of new long-term fixed rate debt within the next twelve months, the Company entered into a series of interest rate lock agreements (collectively, the interest rate locks) on a combined notional amount of $3.575 billion . The objective of the interest rate locks is to hedge the variability in the future semi-annual payments on the anticipated debt
 
attributable to changes in the benchmark interest rate (U.S. Treasury) during the hedge periods. The future semi-annual interest payments are exposed to interest rate risk due to changes in the benchmark interest rate from the inception of the hedge to the time of issuance. The interest rate locks were evaluated for hedge accounting treatment and were designated as cash flow hedges. Therefore, the interest rate locks are recognized at fair value on the Consolidated Balance Sheet, and changes in fair value (to the extent effective) are recognized in Cumulative other comprehensive loss. Amounts recognized in Cumulative other comprehensive loss will be reclassified to Interest expense in periods following the settlement of the interest rate locks. The Company will evaluate hedge effectiveness each period until settlement. At December 31, 2016 , an interest rate lock asset of $137,233 was included in Other current assets, and the related pretax gain of $137,233 was recognized in Cumulative other comprehensive loss.
Short-term borrowings. On July 16, 2015, the Company and three of its wholly owned subsidiaries, Sherwin-Williams Canada, Inc. (SW Canada), Sherwin-Williams Luxembourg S.à r.l. (SW Lux) and Sherwin-Williams UK Holding Limited, entered into a multi-currency five -year $1.350 billion credit agreement (multi-currency credit agreement). The multi-currency credit agreement is being used for general corporate purposes, including the financing of working capital requirements. The multi-currency credit agreement allows the Company to extend the maturity of the facility with two one -year extension options and to increase the aggregate amount of the facility to $1.850 billion , both of which are subject to the discretion of each lender. The multi-currency credit agreement replaced the previous credit agreements for the Company, SW Canada and SW Lux in the amounts of $1.050 billion , CAD 150,000 and €95,000 (Euro), respectively. At December 31, 2016 , short-term borrowings under the multi-currency credit agreement were $15,780 with a weighted average interest rate of 0.9% . Borrowings outstanding under various foreign programs were $24,959 at December 31, 2016 with a weighted average interest rate of 12.3% .


60  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

There were no borrowings outstanding under the Company's domestic commercial paper program at December 31, 2016 and 2015. At December 31, 2014 borrowings outstanding under the domestic commercial paper program totaled $625,860 . The weighted average interest rate of these borrowings was 0.3% .
On May 9, 2016, the Company entered into a five -year credit agreement, subsequently amended on multiple dates, which gives the Company the right to borrow and to obtain the issuance, renewal, extension and increase of a letter of credit up to an aggregate availability of $200,000 . At December 31, 2016 , 2015 and 2014 , there were no borrowings outstanding under any of these credit agreements. On November 14, 2012, the Company entered into a three -year credit agreement, subsequently amended on multiple dates, which gave the Company the right to borrow and to obtain the issuance, renewal, extension and increase of a letter of credit up to an aggregate availability of $250,000 . The November 14, 2012 credit agreement matured in 2015. On April 23, 2012, the Company entered into a five -year credit agreement, subsequently amended on multiple dates, which gives the Company the right to borrow and to obtain the issuance, renewal, extension and increase of a letter of credit up to an aggregate availability of $250,000 . On January 30, 2012, the Company entered into a five -year credit agreement, subsequently amended on multiple dates, which gives the Company the right to borrow and to obtain the issuance, renewal, extension and increase of a letter of credit of up to an aggregate availability of $500,000 .

NOTE 8 – OTHER LONG-TERM LIABILITIES
The operations of the Company, like those of other companies in our industry, are subject to various domestic and foreign 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 Company conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance.
The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned sites (including sites which were previously owned and/or operated by businesses acquired by the Company). In addition, the Company, together with other parties, has been designated a potentially responsible party under federal and state environmental protection laws for the investigation and remediation of environmental contamination and hazardous waste at a number of third-party sites, primarily Superfund sites. In general, these laws provide that potentially responsible
 
parties may be held jointly and severally liable for investigation and remediation costs regardless of fault. The Company may be similarly designated with respect to additional third-party sites in the future.
The Company initially provides for estimated costs of environmental-related activities relating to its past operations and third-party sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs are determined based on currently available facts regarding each site. If the best estimate of costs can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is provided. The Company continuously assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Included in Other long-term liabilities at December 31, 2016 , 2015 and 2014 were accruals for extended environmental-related activities of $163,847 , $129,856 and $114,281 , respectively. Included in Other accruals at December 31, 2016 , 2015 and 2014 were accruals for estimated costs of current investigation and remediation activities of $19,969 , $22,493 and $16,868 , respectively.
Actual costs incurred may vary from the accrued estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to any given site, the volumetric contribution which may be attributed to the Company relative to that attributed to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site. If the Company’s future loss contingency is ultimately determined to be at the unaccrued maximum of the estimated range of possible outcomes for every site for which costs can be reasonably estimated, the Company’s accrual for environmental-related activities would be $87,021 higher than the minimum accruals at December 31, 2016 .
Three 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, 2016 . At December 31, 2016 , $153,299 , or 83.4 percent of the total accrual, related directly to these three sites. In the aggregate unaccrued maximum of $87,021 at December 31, 2016 , $70,513 , or 81.0 percent , related to the three 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.


61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

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, distribution and store facilities. These obligations relate primarily to asbestos abatement, hazardous waste Resource Conservation and Recovery Act (RCRA) closures, well abandonment, transformers and used oil disposals and underground storage tank closures. Using investigative, remediation and disposal methods that are currently available to the Company, the estimated costs of 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 9 – 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.
Lead pigment and lead-based paint litigation. The Company’s past operations included the manufacture and sale of lead pigments and lead-based paints. The Company, along with other companies, is and has been a defendant in a number of legal proceedings, including individual personal injury actions, purported class actions, and actions brought by various counties, cities, school districts and other government-related entities, arising from the manufacture and sale of lead pigments and lead-based paints. The plaintiffs’ claims have been based upon various legal theories, including negligence, strict liability, breach of warranty, negligent misrepresentations and omissions, fraudulent 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


62  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

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 administrative regulations may have on the litigation or against the Company. In addition, management cannot reasonably determine the scope or amount of the potential costs and liabilities related to such litigation, or resulting from any such legislation and regulations. The Company has not accrued any amounts for such litigation. With respect to such litigation, including the public nuisance litigation, the Company does not believe that it is probable that a loss has occurred, and it is not possible to estimate the range of potential losses as there is no prior history of a loss of this nature and there is no substantive information upon which an estimate could be based. In addition, any potential liability that may result from any 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, 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 and the County of Santa Clara, California and other public entities in the State of California. Except for the Santa Clara County, California proceeding, all of these legal proceedings have been concluded in favor of the Company and other defendants at various stages in the proceedings.
The proceedings initiated by the State of Rhode Island included two jury trials. At the conclusion of the second trial, the jury returned a verdict finding that (i) the cumulative presence of lead pigment in paints and coatings on buildings in the State of Rhode Island constitutes a public nuisance, (ii) the Company, along with two other defendants, caused or substantially contributed to the creation of the public nuisance and (iii) the Company and two other defendants should be ordered to abate the public nuisance. The Company and two other defendants appealed and, on July 1, 2008, the Rhode Island Supreme Court, among other determinations, reversed the judgment of abatement with respect to the Company and two other defendants. The Rhode Island Supreme Court’s decision reversed the public nuisance liability judgment against the Company on the basis that the complaint failed to state a public nuisance claim as a matter of law.
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 Amended Complaint, filed on March 16, 2011, are the Counties of Santa Clara, Alameda, Los Angeles, Monterey, San Mateo, Solano and Ventura, the Cities of Oakland and San Diego and the City and County of San Francisco. The Fourth Amended Complaint asserted a sole claim for public nuisance, alleging that the presence of lead pigments for use in paint and


63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

coatings in, on and around residences in the plaintiffs’ jurisdictions constitutes a public nuisance. The plaintiffs sought the abatement of the alleged public nuisance that exists within the plaintiffs’ jurisdictions. A trial commenced on July 15, 2013 and ended on August 22, 2013. The court entered final judgment on January 27, 2014, finding in favor of the plaintiffs and against the Company and two other defendants (ConAgra Grocery Products Company and NL Industries, Inc.). The final judgment held the Company jointly and severally liable with the other two defendants to pay $1.15 billion into a fund to abate the public nuisance. The Company strongly disagrees with the judgment.
On February 18, 2014, the Company filed a motion for new trial and a motion to vacate the judgment. The court denied these motions on March 24, 2014. On March 28, 2014, the Company filed a notice of appeal to the Sixth District Court of Appeal for the State of California. The filing of the notice of appeal effects an automatic stay of the judgment without the requirement to post a bond. The appeal is fully briefed, and the parties are waiting for the Sixth District Court of Appeal to set a date for oral argument. The date for oral argument is at the discretion of the Sixth District Court of Appeal. The Company expects the Sixth District Court of Appeal to issue its ruling within 90 days following oral argument. The Company believes that the judgment conflicts with established principles of law and is unsupported by the evidence. The Company has had a favorable history with respect to lead pigment and lead-based paint litigation, particularly other public nuisance litigation, and accordingly, the Company believes that it is not probable that a loss has occurred and it is not possible to estimate the range of potential loss with respect to the case.
Litigation seeking damages from alleged personal injury . The Company and other companies are defendants in a number of legal proceedings seeking monetary damages and other relief from alleged personal injuries. These proceedings include claims by children allegedly injured from ingestion of lead pigment or lead-containing paint and claims for damages allegedly incurred by the children’s parents or guardians. These proceedings generally seek compensatory and punitive damages, and seek other relief including medical monitoring costs. These proceedings include purported claims by individuals, groups of individuals and class actions.
The plaintiff in Thomas v. Lead Industries Association, et al., initiated an action in state court against the Company, other alleged former lead pigment manufacturers and the Lead Industries Association in September 1999. The claims against the Company and the other defendants included strict liability, negligence, negligent misrepresentation and omissions, fraudulent misrepresentation and omissions, concert of action, civil conspiracy and enterprise liability. Implicit within these claims is the theory of “risk contribution” liability (Wisconsin’s theory which is similar to market share liability, except that liability can be joint and several) due to the plaintiff’s inability
 
to identify the manufacturer of any product that allegedly injured the plaintiff. The case ultimately proceeded to trial and, on November 5, 2007, the jury returned a defense verdict, finding that the plaintiff had ingested white lead carbonate, but was not brain damaged or injured as a result. The plaintiff appealed and, on December 16, 2010, the Wisconsin Court of Appeals affirmed the final judgment in favor of the Company and other defendants.
Wisconsin is the only jurisdiction to date to apply a theory of liability with respect to alleged personal injury (i.e., risk contribution/market share liability) that does not require the plaintiff to identify the manufacturer of the product that allegedly injured the plaintiff in the lead pigment and lead-based paint litigation. Although the risk contribution liability theory was applied during the Thomas trial, the constitutionality of this theory as applied to the lead pigment cases has not been judicially determined by the Wisconsin state courts. However, in an unrelated action filed in the United States District Court for the Eastern District of Wisconsin, Gibson v. American Cyanamid, et al., on November 15, 2010, the District Court held that Wisconsin’s risk contribution theory as applied in that case violated the defendants’ right to substantive due process and is unconstitutionally retroactive. The District Court's decision in Gibson v. American Cyanamid, et al., was appealed by the plaintiff to the United States Court of Appeals for the Seventh Circuit. On July 24, 2014, the United States Court of Appeals for the Seventh Circuit reversed the judgment and remanded the case back to the District Court for further proceedings. On January 16, 2015, the defendants filed a petition for certiorari in the United States Supreme Court seeking that Court's review of the Seventh Circuit's decision, and on May 18, 2015, the United States Supreme Court denied the defendants' petition. The case is currently pending in the District Court. Three cases also currently pending in the United States District Court for the Eastern District of Wisconsin (Ravon Owens v. American Cyanamid, et al., Cesar Sifuentes v. American Cyanamid, et al., and Glenn Burton, Jr. v. American Cyanamid, et al.) are being prepared for trial, although no trial dates have been set by the District Court.
In Yasmine Clark v. The Sherwin-Williams Company, et al., the Wisconsin Circuit Court, Milwaukee County, on March 25, 2014, held that the application to a pending case of Section 895.046 of the Wisconsin Statutes (which clarifies the application of the risk contribution theory) is unconstitutional as a violation of the plaintiff’s right to due process of law under the Wisconsin Constitution. On August 21, 2014, the Wisconsin Court of Appeals granted defendants' petition to hear the issue as an interlocutory appeal. On September 29, 2015, the Wisconsin Court of Appeals certified the appeal to the Wisconsin Supreme Court for its determination. Oral argument before the Wisconsin Supreme Court occurred on April 5, 2016. On April 15, 2016, the Wisconsin Supreme Court published its decision, deciding in a 3 to 3 split decision to remand the case


64  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

back to the Wisconsin Court of Appeals for its consideration. The Wisconsin Court of Appeals dismissed the appeal on September 20, 2016 and remanded the case back to the Wisconsin Circuit Court for further proceedings. A trial in the Wisconsin Circuit Court is currently scheduled to begin in October 2017.
Insurance coverage litigation . The Company and its liability insurers, including certain underwriters at Lloyd’s of London, initiated legal proceedings against each other to primarily determine, among other things, whether the costs and liabilities associated with the abatement of lead pigment are covered under certain insurance policies issued to the Company. The Company’s action, filed on March 3, 2006 in the Common Pleas Court, Cuyahoga County, Ohio, is currently stayed and inactive. The liability insurers’ action, which was filed on February 23, 2006 in the Supreme Court of the State of New York, County of New York, has been dismissed. An ultimate loss in the insurance coverage litigation would mean that insurance proceeds could be unavailable under the policies at issue to mitigate any ultimate abatement related costs and liabilities. The Company has not recorded any assets related to these insurance policies or otherwise assumed that proceeds from these insurance policies would be received in estimating any contingent liability accrual. Therefore, an ultimate loss in the insurance coverage litigation without a determination of
 
liability against the Company in the lead pigment or lead-based paint litigation will have no impact on the Company’s results of operation, liquidity or financial condition. As previously stated, however, the Company has not accrued any amounts for the lead pigment or lead-based paint litigation and any significant liability ultimately determined to be attributable to the Company relating to such litigation 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.
Titanium dioxide suppliers antitrust class action lawsuit. The Company was a member of the plaintiff class related to Titanium Dioxide Antitrust Litigation that was initiated in 2010 against certain suppliers alleging various theories of relief arising from purchases of titanium dioxide made from 2003 through 2012. The Court approved a settlement less attorney fees and expense, and the Company timely submitted claims to recover its pro-rata portion of the settlement. There was no specified deadline for the claims administrator to complete the review of all claims submitted. In October 2014, the Company was notified that it would receive a disbursement of settlement funds, and the Company received a pro-rata disbursement net of all fees of approximately $21,420 . The Company recorded this settlement gain in the fourth quarter of 2014.



65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

NOTE 10 – CAPITAL STOCK
At December 31, 2016 , there were 300,000,000 shares of common stock and 30,000,000 shares of serial preferred stock authorized for issuance. Of the authorized serial preferred stock, 3,000,000 shares are designated as cumulative redeemable serial preferred and 1,000,000 shares are designated as convertible serial preferred stock. See Note 11 . Under the amended and restated 2006 Equity and Performance Incentive Plan (2006 Employee Plan), 19,200,000 common shares may be issued or transferred. See Note 12 . An aggregate of 7,720,815 , 8,824,943 and 10,304,816 shares of common stock at December 31, 2016 , 2015 and 2014 , respectively, were reserved for the exercise and
 
future grants of option rights and future grants of restricted stock and restricted stock units. See Note 12 . Common shares outstanding shown in the following table included 488,714 , 487,900 and 487,075 shares of common stock held in a revocable trust at December 31, 2016 , 2015 and 2014 , respectively. The revocable trust is used to accumulate assets for the purpose of funding the ultimate obligation of certain non-qualified benefit plans. Transactions between the Company and the trust are accounted for in accordance with the Deferred Compensation – Rabbi Trusts Subtopic of the Compensation Topic of the ASC, which requires the assets held by the trust be consolidated with the Company’s accounts.

 
 
Common Shares
in Treasury
 
Common Shares
Outstanding
Balance at January 1, 2014
12,772,498

 
100,129,380

Shares tendered as payment for option rights exercised
7,229

 
(7,229
)
Shares issued for exercise of option rights
 
 
1,423,395

Shares tendered in connection with grants of restricted stock
108,352

 
(108,352
)
Net shares issued for grants of restricted stock
 
 
191,979

Treasury stock purchased
6,925,000

 
(6,925,000
)
Balance at December 31, 2014
19,813,079

 
94,704,173

Shares tendered as payment for option rights exercised
14,542

 
(14,542
)
Shares issued for exercise of option rights
 
 
1,133,050

Shares tendered in connection with grants of restricted stock
111,433

 
(111,433
)
Net shares issued for grants of restricted stock
 
 
110,277

Treasury stock purchased
3,575,000

 
(3,575,000
)
Balance at December 31, 2015
23,514,054

 
92,246,525

Shares tendered as payment for option rights exercised
3,441

 
(3,441
)
Shares issued for exercise of option rights
 
 
733,876

Shares tendered in connection with grants of restricted stock
59,916

 
(59,916
)
Net shares issued for grants of restricted stock
 
 
95,987

Balance at December 31, 2016
23,577,411

 
93,013,031


NOTE 11 – STOCK PURCHASE PLAN
As of December 31, 2016 , 36,013 employees contributed to the Company’s ESOP, a voluntary defined contribution plan available to all eligible salaried employees. Participants are allowed to contribute, on a pretax or after-tax basis, 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 one hundred percent of all contributions up to six percent of eligible employee contributions. Such participant contributions may be invested in a variety of investment funds or a Company common stock fund and may be exchanged between investments as directed by the participant. Participants are permitted to diversify both future and prior Company matching contributions previously allocated to the Company common stock fund into a variety of investment funds.
 

The Company made contributions to the ESOP on behalf of participating employees, representing amounts authorized by employees to be withheld from their earnings, of $127,697 , $120,514 and $109,036 in 2016 , 2015 and 2014 , respectively. The Company’s matching contributions to the ESOP charged to operations were $85,525 , $80,356 and $74,574 for 2016 , 2015 and 2014 , respectively.
At December 31, 2016 , there were 10,710,973 shares of the Company’s common stock being held by the ESOP, representing 11.5 percent of the total number of voting shares outstanding. Shares of Company common stock credited to each member’s account under the ESOP are voted by the trustee under instructions from each individual plan member. Shares for which no instructions are received are voted by the trustee in the same proportion as those for which instructions are received.



66  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

NOTE 12 – STOCK-BASED COMPENSATION
The amended and restated 2006 Employee Plan authorizes the Board of Directors, or a committee of the Board of Directors, to issue or transfer up to an aggregate of 19,200,000 shares of common stock, plus any shares relating to awards that expire, are forfeited or canceled. The Employee Plan permits the granting of option rights, appreciation rights, restricted stock, restricted stock units (RSUs), performance shares and performance units to eligible employees. At December 31, 2016 , no appreciation rights, performance shares or performance units had been granted under the 2006 Employee Plan.
The 2006 Stock Plan for Nonemployee Directors (Nonemployee Director Plan) authorizes the Board of Directors, or a committee of the Board of Directors, to issue or transfer up to an aggregate of 200,000 shares of common stock, plus any shares relating to awards that expire, are forfeited or are canceled. The Nonemployee Director Plan permits the granting of option rights, appreciation rights, restricted stock and RSUs to members of the Board of Directors who are not employees of the Company. At December 31, 2016 , no option rights or appreciation rights had been granted under the Nonemployee Director Plan.
The cost of the Company’s stock-based compensation is recorded in accordance with the Stock Compensation Topic of the ASC. The tax benefits associated with these share-based payments are classified as financing activities in the Statements of Consolidated Cash Flows. At December 31, 2016 , the Company had total unrecognized stock-based compensation expense of $98,080 that is expected to be recognized over a weighted-average period of 1.05 years. Stock-based compensation expense during 2016 , 2015 and 2014 was $72,109 , $72,342 and $64,735 , respectively. The related tax benefit was $27,442 , $27,634 and $24,816 during 2016 , 2015 and 2014 , respectively. Subsequent to the adoption of ASU No. 2016-09, excess tax benefits from share-based payments are recognized in the income tax provision rather than other capital (see Note 1). Therefore, in 2016 , the Company's $44,233 tax benefit from options exercised was recognized in the income tax provision. The Company issues new shares upon exercise of option rights, granting of restricted stock and vesting of RSUs.
 
Option rights. The fair value of the Company’s option rights was estimated at the date of grant using a Black-Scholes-Merton option-pricing model with the following weighted-average assumptions for all options granted:

 
2016
 
2015
 
2014
Risk-free interest rate
1.24%
 
1.37%
 
1.47%
Expected life of option rights
5.05 years
 
5.05 years
 
5.10 years
Expected dividend yield
of stock
1.06%
 
1.13%
 
1.19%
Expected volatility of stock
.212
 
.245
 
.223
The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant. The expected life of option rights was calculated using a scenario analysis model. Historical data was used to aggregate the holding period from actual exercises, post-vesting cancellations and hypothetical assumed exercises on all outstanding option rights. The expected dividend yield of stock is the Company’s best estimate of the expected future dividend yield. Expected volatility of stock was calculated using historical and implied volatilities. The Company applied an estimated forfeiture rate of 2.00 percent to the 2016 grants. This rate was calculated based upon historical activity and is an estimate of granted shares not expected to vest. If actual forfeitures differ from the expected rate, the Company may be required to make additional adjustments to compensation expense in future periods.
Grants of option rights for non-qualified and incentive stock options have been awarded to certain officers and key employees under the 2006 Employee Plan and the 2003 Stock Plan. The option rights generally become exercisable to the extent of one-third of the optioned shares for each full year following the date of grant and generally expire ten years after the date of grant. Unrecognized compensation expense with respect to option rights granted to eligible employees amounted to $42,622 at December 31, 2016 . The unrecognized compensation expense is being amortized on a straight-line basis over the three -year vesting period and is expected to be recognized over a weighted-average period of 1.08 years.
The weighted-average per share grant date fair value of options granted during 2016 , 2015 and 2014 , respectively, was $49.36 , $50.73 and $43.11 . The total intrinsic value of exercised option rights for employees was $129,230 , $223,417 and $195,097 . The total fair value of options vested during the year was $32,476 , $32,655 and $32,313 during 2016 , 2015 and 2014 , respectively. There were no outstanding option rights for nonemployee directors for 2016 , 2015 and 2014 .


67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

A summary of the Company’s non-qualified and incentive stock option right activity is shown in the following table:
 
2016
 
2015
 
2014
 
Optioned
Shares
 
Weighted-
Average
Exercise
Price
Per Share
 
Aggregate
Intrinsic
Value
 
Optioned
Shares
 
Weighted-
Average
Exercise
Price
Per Share
 
Aggregate
Intrinsic
Value
 
Optioned
Shares
 
Weighted-
Average
Exercise
Price
Per Share
 
Aggregate
Intrinsic
Value
Outstanding beginning
of year
5,219,506

 
$
141.58

 
 
 
5,699,892

 
$
117.31

 
 
 
6,484,592

 
$
96.25

 
 
Granted
712,967

 
271.46

 
 
 
697,423

 
241.84

 
 
 
672,565

 
224.65

 
 
Exercised
(733,876
)
 
108.81

 
 
 
(1,133,287
)
 
79.41

 
 
 
(1,421,045
)
 
70.71

 
 
Forfeited
(26,653
)
 
232.83

 
 
 
(43,632
)
 
193.60

 
 
 
(31,617
)
 
158.92

 
 
Expired
(8,235
)
 
176.28

 
 
 
(890
)
 
87.59

 
 
 
(4,603
)
 
86.66

 
 
Outstanding end of year
5,163,709

 
$
163.61

 
$
545,531

 
5,219,506

 
$
141.58

 
$
616,866

 
5,699,892

 
$
117.31

 
$
830,647

Exercisable at end of year
3,783,755

 
$
130.59

 
$
522,921

 
3,807,351

 
$
110.96

 
$
565,934

 
4,095,246

 
$
87.79

 
$
717,691

 
The weighted-average remaining term for options outstanding at the end of 2016 , 2015 and 2014 , respectively, was 6.25 , 6.44 and 6.57 years. The weighted-average remaining term for options exercisable at the end of 2016 , 2015 and 2014 , respectively, was 5.20 , 5.47 and 5.63 years. Shares reserved for future grants of option rights, restricted stock and RSUs were 2,557,106 , 3,605,437 and 4,604,924 at December 31, 2016 , 2015 and 2014 , respectively.
Restricted stock and RSUs. Grants of restricted stock and RSUs, which generally require three years of continuous employment from the date of grant before vesting and receiving the stock without restriction, have been awarded to certain officers and key employees under the 2006 Employee Plan. The February 2016 grant consisted of performance-based awards that vest at the end of a three -year period based on the Company’s achievement of specified financial goals relating to earnings per share and return on net assets employed. The February 2015 and 2014 grants consisted of a combination of performance-based awards and time-based awards. The performance based awards vest at the end of a three -year period based on the Company’s achievement of specified financial goals relating to earnings per share. The time-based awards vest at the end of a three -year period based on continuous employment. Unrecognized compensation expense with respect to grants of restricted stock and RSUs to eligible employees amounted to $53,995 at December 31, 2016 and is being amortized on a straight-line basis over the vesting period and is expected to be recognized over a weighted-average period of 0.92 years.
Grants of restricted stock and RSUs have been awarded to nonemployee directors under the Nonemployee Plan. These grants generally vest and stock is received without restriction to the extent of one-third of the granted stock for each year following the date of grant. Unrecognized compensation expense with respect to grants of restricted stock and RSUs to nonemployee directors amounted to $1,463 at
 
December 31, 2016 and is being amortized on a straight-line basis over the three -year vesting period and is expected to be recognized over a weighted-average period of 0.89 years.
A summary of the Company’s restricted stock and RSU activity for the years ended December 31 is shown in the following table:
 
2016
 
2015
 
2014
Outstanding at beginning
of year
467,744

 
655,276

 
749,382

Granted
99,662

 
112,494

 
201,412

Vested
(166,405
)
 
(290,901
)
 
(294,438
)
Forfeited
(3,675
)
 
(9,125
)
 
(1,080
)
Outstanding at end of year
397,326

 
467,744

 
655,276

The weighted-average per share fair value of restricted stock and RSUs granted during the year was $257.99 , $285.88 and $191.60 in 2016 , 2015 and 2014 , respectively.

NOTE 13 – OTHER
Other general expense - net . Included in Other general expense - net were the following:
 
2016
 
2015
 
2014
Provisions for environmental
matters - net
$
42,932

 
$
31,071

 
$
36,046

(Gain) loss on sale or disposition of assets
(30,564
)
 
(803
)
 
1,436

Total
$
12,368

 
$
30,268

 
$
37,482

Provisions for environmental matters–net represent initial provisions for site-specific estimated costs of environmental


68  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

investigation or remediation and increases or decreases to environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Environmental-related accruals are not recorded net of insurance proceeds in accordance with the Offsetting Subtopic of the Balance Sheet Topic of the ASC. See Note 8 for further details on the Company’s environmental-related activities.
The (gain) loss on sale or disposition of assets represents the net realized (gain) loss associated with the sale or disposal of property, plant and equipment and intangible assets previously used in the conduct of the primary business of the Company. The 2016 gain primarily relates to the sale of a closed domestic facility.
Other (income) expense - net . Included in Other (income) expense - net were the following:
 
2016
 
2015
 
2014
Dividend and royalty income
$
(4,573
)
 
$
(3,668
)
 
$
(4,864
)
Net expense from
financing activities
8,667

 
11,091

 
11,367

Foreign currency transaction related losses
7,335

 
9,503

 
3,603

Other income
(25,279
)
 
(23,880
)
 
(37,524
)
Other expense
9,263

 
13,036

 
12,018

Total
$
(4,587
)
 
$
6,082

 
$
(15,400
)
The Net expense from financing activities includes the net expense relating to changes in the Company’s financing fees.
Foreign currency transaction related losses represent net realized losses on U.S. dollar-denominated liabilities of foreign subsidiaries and net realized and unrealized losses from foreign currency option and forward contracts. There were no material foreign currency option and forward contracts outstanding at December 31, 2016 , 2015 and 2014 .
Other income and Other expense included items of revenue, gains, expenses and losses that were unrelated to the primary business purpose of the Company. Other income for the year ended December 31, 2014 included a $6,336 gain on the early termination of a customer agreement recorded in the Global Finishes Group and a $6,198 realized gain resulting from final asset valuations related to the acquisition of the U.S./Canada business of Comex recorded in the Administrative segment. There were no other items within Other income or Other expense that were individually significant.
NOTE 14 – INCOME TAXES
As disclosed in Note 1, during the second quarter of 2016, the Company adopted ASU No. 2016-09. Therefore, effective January 1, 2016, excess tax benefits for share-based payments are recognized in the income tax provision rather than in
 
additional paid-in capital. The impact on the Company's financial statements for the year ended December 31, 2016 is summarized below:
 
 
2016
Decrease in Other capital
 
$
44,233

Decrease in Income taxes and increase in Net income
 
$
44,233

Increase in Average shares and equivalents outstanding - diluted
 
588,708

Increase in Basic net income per common share
 
$
.48

Increase in Diluted net income per common share
 
$
.40

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using the enacted tax rates and laws that are currently in effect. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2016 , 2015 and 2014 were as follows:
 
2016
 
2015
 
2014
Deferred tax assets:
 
 
 
 
 
Exit costs, environ-mental and other
similar items
$
74,535

 
$
63,851

 
$
56,441

Employee related and benefit items
166,313

 
141,974

 
141,670

Other items
148,910

 
116,302

 
112,149

Total deferred
tax assets
389,758

 
322,127

 
310,260

Deferred tax liabilities:
 
 
 
 
 
Depreciation and
amortization
254,430

 
241,101

 
227,765

LIFO inventories
83,659

 
89,330

 
67,835

Other items
59,746

 
33,433

 
44,378

Total deferred
tax liabilities
397,835

 
363,864

 
339,978

Net deferred tax
   liabilities
$
8,077

 
$
41,737

 
$
29,718

Netted against the Company’s other deferred tax assets were valuation allowances of $17,292 , $14,663 and $9,071 at December 31, 2016 , 2015 and 2014 , respectively. These reserves resulted from the uncertainty as to the realization of the tax benefits from foreign net operating losses and other foreign assets. The Company has $26,980 of domestic net operating loss carryforwards acquired through acquisitions that have expiration dates through the tax year 2037 and foreign net operating losses of $83,354 . 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 2016 to 2036.


69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

Significant components of the provisions for income taxes were as follows:
 
2016
 
2015
 
2014
Current:
 
 
 
 
 
Federal
$
438,244

 
$
399,677

 
$
308,283

Foreign
31,125

 
30,145

 
53,045

State and local
61,402

 
60,319

 
50,049

Total current
530,771

 
490,141

 
411,377

Deferred:
 
 
 
 
 
Federal
(56,891
)
 
13,505

 
(14,974
)
Foreign
(2,121
)
 
(10,752
)
 
(7,361
)
State and local
(9,229
)
 
2,223

 
3,297

Total deferred
(68,241
)
 
4,976

 
(19,038
)
Total provisions for
income taxes
$
462,530

 
$
495,117

 
$
392,339

The provisions for income taxes included estimated taxes payable on that portion of retained earnings of foreign subsidiaries expected to be received by the Company. The effect of the repatriation provisions of the American Jobs Creation Act of 2004 and the provisions of the Income Taxes Topic of the ASC was $313 in 2016 , $(5,895) in 2015 and $(1,887) in 2014 .
Significant components of income before income taxes as used for income tax purposes, were as follows:
 
2016
 
2015
 
2014
Domestic
$
1,504,990

 
$
1,440,511

 
$
1,113,528

Foreign
90,243

 
108,455

 
144,698

 
$
1,595,233

 
$
1,548,966

 
$
1,258,226

A reconciliation of the statutory federal income tax rate to the effective tax rate follows: 
 
2016
 
2015
 
2014
Statutory federal
income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
Effect of:
 
 
 
 
 
State and local
income taxes
2.3

 
2.6

 
2.8

Investment vehicles
(1.5
)
 
(1.6
)
 
(2.5
)
Domestic production
activities
(2.9
)
 
(2.2
)
 
(2.5
)
Employee share-based payments
(2.8
)
 
 
 
 
Other - net
(1.1
)
 
(1.8
)
 
(1.6
)
Effective tax rate
29.0
 %
 
32.0
 %
 
31.2
 %
The 2016 state and local income taxes and investment vehicles components of the effective tax rate were consistent with the 2015 tax year. The tax benefit related to domestic production activities increased in 2016 compared to 2015 due
 
to a significant increase in domestic taxable income and qualified production activity income in 2016 compared to 2015 . The Company received a tax benefit in 2016 compared to 2015 by adopting ASU No. 2016-09.
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 refund claims that the Company filed for the 2010, 2011 and 2012 tax years. As of December 31, 2016 , there were no other income tax examinations being conducted by the IRS, however, the statute of limitations has not expired for the 2013, 2014 and 2015 tax years.
As of December 31, 2016 , the Company is subject to non-U.S. income tax examinations for the tax years of 2009 through 2016 . In addition, the Company is subject to state and local income tax examinations for the tax years 2003 through 2016 .
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 
2016
 
2015
 
2014
Balance at beginning
of year
$
33,873

 
$
31,560

 
$
30,997

Additions based on
tax positions related
to the current year
5,674

 
4,228

 
3,370

Additions for tax
positions of prior
years
3,890

 
8,450

 
4,428

Reductions for tax
positions of prior
years
(5,901
)
 
(4,862
)
 
(2,349
)
Settlements
(3,763
)
 
(968
)
 
(4,089
)
Lapses of Statutes
of Limitations
(968
)
 
(4,535
)
 
(797
)
Balance at end of year
$
32,805

 
$
33,873

 
$
31,560

Included in the balance of unrecognized tax benefits at December 31, 2016 , 2015 and 2014 is $27,686 , $30,007 and $28,208 in unrecognized tax benefits, the recognition of which would have an effect on the effective tax rate.
Included in the balance of unrecognized tax benefits at December 31, 2016 is $2,607 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 years ended December 31, 2016 , 2015 and 2014 , there was an increase in income tax interest and penalties of $1,410 , $2,918 and $2,144 , respectively. At December 31, 2016 , 2015 and 2014 , the Company accrued $9,275 , $8,550 and $5,732 , respectively, for the potential payment of interest and penalties.


70  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

NOTE 15 – NET INCOME PER COMMON SHARE  
 
2016
 
2015
 
2014
Basic
 
 
 
 
 
Average common shares outstanding
91,838,603

 
92,197,207

 
96,190,101

Net income
$
1,132,703

 
$
1,053,849

 
$
865,887

Net income per common share
$
12.33

 
$
11.43

 
$
9.00

 
 
 
 
 
 
Diluted
 
 
 
 
 
Average common shares outstanding
91,838,603

 
92,197,207

 
96,190,101

Stock options and other contingently issuable shares (1)
2,089,921

 
1,826,885

 
1,885,334

Non-vested restricted stock grants
559,562

 
519,451

 
665,086

Average common shares outstanding assuming dilution
94,488,086

 
94,543,543

 
98,740,521

 
 
 
 
 
 
Net income
$
1,132,703

 
$
1,053,849

 
$
865,887

Net income per common share
$
11.99

 
$
11.15

 
$
8.77


(1)  
Stock options and other contingently issuable shares excludes 62,935 , 34,463 and 608,477 shares at December 31, 2016 , 2015 and 2014 , respectively, due to their anti-dilutive effect.

Prior to 2016, the Company used the two-class method of calculating basic and diluted earnings per share as time-based restricted shares were considered a separate class of participating securities since they received non-forfeitable dividends. The time-based restricted shares represented less than 1% of outstanding shares, and therefore, the difference between basic and diluted earnings per share under the two-class method and treasury stock method was not
 
significant. Starting in 2016, there will be no additional grants of time-based restricted shares. Accordingly, 2016 basic and diluted earnings per share are calculated using the treasury stock method, and the 2015 and 2014 calculations are presented under the treasury stock method for comparability. See Notes 2 and 14 for the impact of acquisition-related expenses and the adoption of ASU 2016-09, respectively, on 2016 basic and diluted net income per common share.

NOTE 16 – SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)  
 
2016
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 
Full Year
Net sales
$
2,574,024

 
$
3,219,525

 
$
3,279,462

 
$
2,782,591

 
$
11,855,602

Gross profit
1,261,745

 
1,635,793

 
1,636,289

 
1,388,438

 
5,922,265

Net income (1)
164,876

 
378,064

 
386,733

 
203,030

 
1,132,703

Net income per common share - basic (1), (2)
1.80

 
4.12

 
4.20

 
2.20

 
12.33

Net income per common share - diluted (1), (2)
1.75

 
3.99

 
4.08

 
2.15

 
11.99

 
2015
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 
Full Year
Net sales
$
2,450,284

 
$
3,132,139

 
$
3,152,285

 
$
2,604,596

 
$
11,339,304

Gross profit
1,132,449

 
1,529,986

 
1,574,552

 
1,322,239

 
5,559,226

Net income
131,404

 
349,937

 
374,491

 
198,017

 
1,053,849

Net income per common share - basic (2)
1.42

 
3.79

 
4.06

 
2.16

 
11.43

Net income per common share - diluted (2)
1.38

 
3.70

 
3.97

 
2.11

 
11.15

 
 
 
 
 
 
 
 
 
 
(1) First quarter 2016 net income and basic and diluted net income per common share are restated due to the early adoption of ASU No. 2016-09 in the second quarter. See Notes 1 and 14.
(2) Presented under the treasury stock method. See Note 15.
Net income in the fourth quarter of 2016 included a gain on sale of assets of $30,916 , increased provisions for environmental matters of $9,330 and impairment of goodwill
 
and trademarks of $10,688 . These non-operating items resulted in a net increase of $.03 in basic and diluted net income per common share.


71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

NOTE 17 – OPERATING LEASES
The Company leases certain stores, warehouses, manufacturing facilities, office space and equipment. Renewal options are available on the majority of leases and, under certain conditions, options exist to purchase certain properties. Rental expense for operating leases, recognized on a straight-line basis over the lease term in accordance with the Leases Topic of the ASC was $417,549 , $394,359 and $376,914 for 2016 , 2015 and 2014 , respectively. Certain store leases require the payment of contingent rentals based on sales in excess of specified minimums. Contingent rentals included in rent expense were $58,865 , $55,890 and $52,379 in 2016 , 2015 and 2014 , respectively. Rental income, as lessor, from real estate leasing activities and sublease rental income for all years presented was not significant. The 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, 2016 :
2017
$
342,565

2018
301,546

2019
257,466

2020
214,084

2021
158,427

Later years
326,241

Total minimum lease payments
$
1,600,329

NOTE 18 – REPORTABLE SEGMENT INFORMATION
The Company reports its segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources in accordance with the Segment Reporting Topic of the ASC. The Company has determined that it has four reportable operating segments: Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group (individually, a "Reportable Segment" and collectively, the “Reportable Segments”). Factors considered in determining the four Reportable Segments of the Company include the nature of business activities, the management structure directly accountable to the Company’s chief operating decision maker (CODM) for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors. The Company reports all other business activities and immaterial operating segments that are not reportable in the Administrative segment. See pages 8 through 17 of this report for more information about the Reportable Segments.
The Company’s CODM has been identified as the Chief Executive Officer because he has final authority over performance assessment and resource allocation decisions. Because of the diverse operations of the Company, the CODM regularly receives discrete financial information about each
 
Reportable Segment as well as a significant amount of additional financial information about certain divisions, business units or subsidiaries of the Company. The CODM uses all such financial information for performance assessment and resource allocation decisions. The CODM evaluates the performance of and allocates resources to the Reportable Segments based on profit or loss before income taxes and cash generated from operations. The accounting policies of the Reportable Segments are the same as those described in Note 1 of this report.
The Paint Stores Group consisted of 4,180 company-operated specialty paint stores in the United States, Canada, Puerto Rico, Virgin Islands, Grenada, Trinidad and Tobago, St. Maarten, Jamaica, Curacao, Aruba, St. Lucia and Barbados at December 31, 2016 . Each store in this segment is engaged in the related business activity of selling paint, coatings and related products to end-use customers. The Paint Stores Group markets and sells Sherwin-Williams ® branded architectural paint and coatings, protective and marine products, OEM product finishes and related items. These products are produced by manufacturing facilities in the Consumer Group. In addition, each store sells select purchased associated products. The loss of any single customer would not have a material adverse effect on the business of this segment. During 2016 , this segment opened 94 net new stores, consisting of 109 new stores opened ( 86 in the United States, 21 in Canada, 1 in Aruba and 1 in Barbados) and 15 stores closed ( 9 in the United States and 6 in Canada). In 2015 and 2014 , this segment opened 83 and 95 net new stores, respectively. A map on the cover flap of this report shows the number of paint stores and their geographic location. The CODM uses discrete financial information about the Paint Stores Group, supplemented with information by geographic region, product type and customer type, to assess performance of and allocate resources to the Paint Stores Group as a whole. In accordance with ASC 280-10-50-9, the Paint Stores Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment.
The Consumer Group develops, manufactures and distributes a variety of paint, coatings and related products to third-party customers primarily in the United States and Canada and the Paint Stores Group. Approximately 64 percent of the total sales of the Consumer Group in 2016 were intersegment transfers of products primarily sold through the Paint Stores Group. Sales and marketing of certain controlled brand and private labeled products is performed by a direct sales staff. The products distributed through third-party customers are intended for resale to the ultimate end-user of the product. The Consumer Group had sales to certain customers that, individually, may be a significant portion of the sales of the segment. However, the loss of any single customer would not have a material adverse effect on the overall


72  

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)

profitability of the segment. This segment incurred most of the Company’s capital expenditures related to ongoing environmental compliance measures at sites currently in operation. The CODM uses discrete financial information about the Consumer Group, supplemented with information by product type and customer type, to assess performance of and allocate resources to the Consumer Group as a whole. In accordance with ASC 280-10-50-9, the Consumer Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment.
The Global Finishes Group develops, licenses, manufactures, distributes and sells a variety of protective and marine products, automotive finishes and refinish products, OEM product finishes and related products in North and South America, Europe and Asia. This segment meets the demands of its customers for a consistent worldwide product development, manufacturing and distribution presence and approach to doing business. This segment licenses certain technology and trade names worldwide. Sherwin-Williams ® and other controlled brand products are distributed through the Paint Stores Group and this segment’s 288 company-operated branches and by a direct sales staff and outside sales representatives to retailers, dealers, jobbers, licensees and other third-party distributors. During 2016 , this segment opened 5 new branches ( 3 in the United States and 2 in Canada) and closed 13 branches ( 10 in the United States, 2 in Canada and 1 in Chile) for a net decrease of 8 branches. At December 31, 2016 , the Global Finishes Group consisted of operations in the United States and subsidiaries in 34 foreign countries. The CODM uses discrete financial information about the Global Finishes Group reportable segment, supplemented with information about geographic divisions, business units and subsidiaries, to assess performance of and allocate resources to the Global Finishes Group as a whole. In accordance with ASC 280-10-50-9, the Global Finishes Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment. A map on the cover flap of this report shows the number of branches and their geographic locations.
The Latin America Coatings Group develops, licenses, manufactures, distributes and sells a variety of architectural paint and coatings, protective and marine products, OEM product finishes and related products in North and South America. This segment meets the demands of its customers for consistent regional product development, manufacturing and distribution presence and approach to doing business. Sherwin-Williams ® and other controlled brand products are distributed through this segment’s 339 company-operated stores and by a direct sales staff and outside sales representatives to retailers, dealers, licensees and other third-party distributors. During 2016 , this segment opened 49 new stores ( 31 in South America and 18 in Mexico) and closed 1 store
 
in South America for a net increase of 48 stores. At December 31, 2016 , the Latin America Coatings Group consisted of operations from subsidiaries in 9 foreign countries and 4 foreign joint ventures. The CODM uses discrete financial information about the Latin America Coatings Group, supplemented with information about geographic divisions, business units and subsidiaries, to assess performance of and allocate resources to the Latin America Coatings Group as a whole. In accordance with ASC 280-10-50-9, the Latin America Coatings Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment. A map on the cover flap of this report shows the number of stores and their geographic locations.
The Administrative segment includes the administrative expenses of the Company’s corporate headquarters site. Also included in the Administrative segment was interest expense, interest and investment income, certain expenses related to closed facilities and environmental-related matters, and other expenses which were not directly associated with the Reportable Segments. The Administrative segment did not include any significant foreign operations. Also included in the Administrative segment was a real estate management unit that is responsible for the ownership, management and leasing of non-retail properties held primarily for use by the Company, including the Company’s headquarters site, and disposal of idle facilities. Sales of this segment represented external leasing revenue of excess headquarters space or leasing of facilities no longer used by the Company in its primary businesses. Material gains and losses from the sale of property are infrequent and not a significant operating factor in determining the performance of the Administrative segment.
Net external sales of all consolidated foreign subsidiaries were $1,722,246 , $1,788,955 and $2,203,804 for 2016 , 2015 and 2014 , respectively. Segment profit of all consolidated foreign subsidiaries was $60,059 , $75,773 and $115,629 for 2016 , 2015 and 2014 , respectively. Net external sales and segment profit were adversely affected by unfavorable currency translation rate changes. Domestic operations accounted for the remaining net external sales and segment profits. Long-lived assets consisted of Property, plant and equipment, Goodwill, Intangible assets, Deferred pension assets and Other assets. The aggregate total of long-lived assets for the Company was $3,125,222 , $3,132,981 and, $3,139,272 at December 31, 2016 , 2015 and 2014 , respectively. Long-lived assets of consolidated foreign subsidiaries totaled $477,889 , $497,528 and $551,364 at December 31, 2016 , 2015 and 2014 , respectively. Total Assets of the Company were $6,752,521 , $5,778,937 and $5,699,333 at December 31, 2016 , 2015 and 2014 , respectively. Total assets of consolidated foreign subsidiaries were $1,233,666 , $1,172,064 and $1,359,991 , which represented 18.3 percent , 20.3 percent and 23.9 percent of the Company’s total assets at December 31, 2016 , 2015 and 2014 , respectively. No single geographic area


73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

outside the United States was significant relative to consolidated net sales or operating profits. Export sales and sales to any individual customer were each less than 10 percent of consolidated sales to unaffiliated customers during all years presented.
In the reportable segment financial information that follows, Segment profit was total net sales and intersegment transfers less operating costs and expenses. Identifiable assets were those directly identified with each reportable segment. The Administrative segment assets consisted primarily of cash and cash equivalents, investments, deferred pension assets and
 
headquarters property, plant and equipment. The margin for each reportable segment was based upon total net sales and intersegment transfers. Domestic intersegment transfers were primarily accounted for at the approximate fully absorbed manufactured cost, based on normal capacity volumes, plus customary distribution costs for paint products. Non-paint domestic and all international intersegment transfers were accounted for at values comparable to normal unaffiliated customer sales. All intersegment transfers are eliminated within the Administrative segment.


(millions of dollars)
2016
 
Paint Stores
Group
 
Consumer
Group
 
Global
Finishes
Group
 
Latin America
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
7,790

 
$
1,585

 
$
1,889

 
$
587

 
$
5

 
$
11,856

Intersegment transfers
 
 
2,775

 
15

 
39

 
(2,829
)
 
 
Total net sales and
intersegment transfers
$
7,790

 
$
4,360

 
$
1,904

 
$
626

 
$
(2,824
)
 
$
11,856

Segment profit (loss) (1)
$
1,623

 
$
319

 
$
239

 
$
(17
)
 
 
 
$
2,164

Interest expense (2)
 
 
 
 
 
 
 
 
$
(154
)
 
(154
)
Administrative expenses and other (3)
 
 
 
 
 
 
 
 
(415
)
 
(415
)
Income before income taxes
$
1,623

 
$
319

 
$
239

 
$
(17
)
 
$
(569
)
 
$
1,595

Reportable segment margins
20.8
%
 
7.3
%
 
12.6
%
 
(2.7
)%
 
 
 
 
Identifiable assets
$
1,779

 
$
2,005

 
$
818

 
$
369

 
$
1,782

 
$
6,753

Capital expenditures
80

 
99

 
19

 
19

 
22

 
239

Depreciation
69

 
47

 
20

 
7

 
29

 
172

 
 
 
 
 
 
 
 
 
 
 
 
(1)  Latin America Coatings Group's segment loss includes goodwill and trademark impairment of $10.7 million.
(2)  Includes costs associated with the anticipated acquisition of Valspar totaling $72.8 million.
(3) Includes costs associated with the anticipated acquisition of Valspar totaling $58.4 million.
 
 
 
2015
 
Paint Stores
Group
 
Consumer
Group
 
Global
Finishes
Group
 
Latin America
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
7,209

 
$
1,578

 
$
1,916

 
$
631

 
$
5

 
$
11,339

Intersegment transfers
 
 
2,736

 
5

 
40

 
(2,781
)
 
 
Total net sales and
intersegment transfers
$
7,209

 
$
4,314

 
$
1,921

 
$
671

 
$
(2,776
)
 
$
11,339

Segment profit
$
1,434

 
$
309

 
$
202

 
$
18

 
 
 
$
1,963

Interest expense
 
 
 
 
 
 
 
 
$
(62
)
 
(62
)
Administrative expenses and other
 
 
 
 
 
 
 
 
(352
)
 
(352
)
Income before income taxes
$
1,434

 
$
309

 
$
202

 
$
18

 
$
(414
)
 
$
1,549

Reportable segment margins
19.9
%
 
7.2
%
 
10.5
%
 
2.7
 %
 
 
 
 
Identifiable assets
$
1,685

 
$
1,925

 
$
814

 
$
352

 
$
1,003

 
$
5,779

Capital expenditures
119

 
61

 
21

 
14

 
19

 
234

Depreciation
64

 
47

 
25

 
8

 
26

 
170

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

74  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(thousands of dollars unless otherwise indicated)
 

 
2014
 
Paint Stores
Group
 
Consumer
Group
 
Global
 Finishes
Group
 
Latin America
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
6,852

 
$
1,421

 
$
2,081

 
$
771

 
$
5

 
$
11,130

Intersegment transfers
 
 
2,745

 
8

 
40

 
(2,793
)
 
 
Total net sales and
intersegment transfers
$
6,852

 
$
4,166

 
$
2,089

 
$
811

 
$
(2,788
)
 
$
11,130

Segment profit
$
1,201

 
$
253

 
$
201

 
$
40

 
 
 
$
1,695

Interest expense
 
 
 
 
 
 
 
 
$
(64
)
 
(64
)
Administrative expenses and other
 
 
 
 
 
 
 
 
(373
)
 
(373
)
Income before income taxes
$
1,201

 
$
253

 
$
201

 
$
40

 
$
(437
)
 
$
1,258

Reportable segment margins
17.5
%
 
6.1
%
 
9.6
%
 
4.9
 %
 
 
 
 
Identifiable assets
$
1,602

 
$
1,883

 
$
874

 
$
427

 
$
913

 
$
5,699

Capital expenditures
87

 
45

 
16

 
8

 
45

 
201

Depreciation
58

 
48

 
28

 
9

 
26

 
169



75


CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Letter to Shareholders” and elsewhere in this report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon management’s current expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth, future business plans and the costs and potential liability for environmental-related matters and the lead pigment and lead-based paint litigation. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “expects,” “anticipates,” “believes,” “will,” “will likely result,” “will continue,” “plans to” and similar expressions.
Readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the Company, that could cause actual results to differ materially from such statements and from the Company’s historical results and experience. These risks, uncertainties and other factors include such things as: (a) general business conditions, strengths of retail and manufacturing economies and the growth in the coatings industry; (b) legal, regulatory and other matters that may affect the timing of our ability to complete the planned acquisition of The Valspar Corporation, or Valspar, if at all, including the potential for regulatory authorities to require divestitures in connection with the proposed transaction; (c) the Company’s ability to successfully integrate past and future acquisitions into its existing operations, including Valspar, as well as the performance of the businesses acquired; (d) risks inherent in the achievement of cost synergies and the timing thereof for the planned acquisition of Valspar; (e) competitive factors, including pricing pressures and product innovation and quality;
 
(f) changes in raw material and energy supplies and pricing; (g) changes in the Company’s relationships with customers and suppliers; (h) the Company’s ability to attain cost savings from productivity initiatives; (i) changes in general domestic economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions, and changing government policies, laws and regulations; (j) risks and uncertainties associated with the Company’s expansion into and its operations in Asia, Europe, South America and other foreign markets, including general economic conditions, inflation rates, recessions, foreign currency exchange rates, foreign investment and repatriation restrictions, legal and regulatory constraints, civil unrest and other external economic and political factors; (k) the achievement of growth in foreign markets, such as Asia, Europe and South America; (l) increasingly stringent domestic and foreign governmental regulations including those affecting health, safety and the environment; (m) inherent uncertainties involved in assessing the Company’s potential liability for environmental-related activities; (n) other changes in governmental policies, laws and regulations, including changes in accounting policies and standards and taxation requirements (such as new tax laws and new or revised tax law interpretations); (o) the nature, cost, quantity and outcome of pending and future litigation and other claims, including the lead pigment and lead-based paint litigation, and the effect of any legislation and administrative regulations relating thereto; and (p) unusual weather conditions.
Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the above list should not be considered to be a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.



76  


SHAREHOLDER INFORMATION

Annual Meeting
The annual meeting of shareholders
will be held in the Landmark
Conference Center, 927 Midland
Building, 101 W. Prospect Avenue,
Cleveland, Ohio on Wednesday,
April 19, 2017 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
 
Independent Registered
Public Accounting Firm
Ernst & Young LLP
Cleveland, Ohio

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
Wells Fargo Shareowner Services.

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.
 
Transfer Agent & Registrar
Our transfer agent, Wells Fargo
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:
Wells Fargo 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




COMMON STOCK TRADING STATISTICS
 
2016
 
2015
 
2014
 
2013
 
2012
High
$
312.10

 
$
292.44

 
$
266.25

 
$
195.32

 
$
159.80

Low
239.35

 
218.94

 
174.29

 
153.94

 
90.21

Close December 31
268.74

 
259.60

 
263.04

 
183.50

 
153.82

Shareholders of record
6,787

 
6,996

 
7,250

 
7,555

 
7,954

Shares traded (thousands)
212,100

 
195,560

 
152,913

 
186,854

 
282,397



QUARTERLY STOCK PRICES AND DIVIDENDS
2016
 
2015
Quarter
 
High
 
Low
 
Dividend
 
Quarter
 
High
 
Low
 
Dividend
1st
 
$
288.69

 
$
239.35

 
$
.840

 
1st
 
$
290.89

 
$
260.87

 
$
.670

2nd
 
300.12

 
280.32

 
.840

 
2nd
 
292.44

 
274.93

 
.670

3rd
 
312.10

 
273.53

 
.840

 
3rd
 
285.07

 
218.94

 
.670

4th
 
277.88

 
240.63

 
.840

 
4th
 
277.56

 
231.92

 
.670



77


CORPORATE OFFICERS AND
OPERATING MANAGEMENT


Corporate Officers
 
Operating Management
 
 
 
 
 
 
 
John G. Morikis, 53*
 
Joel D. Baxter, 56*
 
Bruce G. Irussi, 56
Chairman, President and Chief
 
President & General Manager
 
President & General Manager
Executive Officer
 
Global Supply Chain Division
 
Product Finishes Division
 
 
Consumer Group
 
Global Finishes Group
Allen J. Mistysyn, 48*
 
 
 
 
Senior Vice President - Finance and
 
Justin T. Binns, 41
 
Dennis H. Karnstein, 50
Chief Financial Officer
 
President & General Manager
 
Senior Vice President
 
 
Eastern Division
 
Global Integration
Jane M. Cronin, 49*
 
The Americas Group
 
 
Senior Vice President -
 
 
 
Cheri M. Phyfer, 45
Corporate Controller
 
Paul R. Clifford, 53
 
President & General Manager
 
 
President & General Manager
 
Diversified Brands Division
Thomas P. Gilligan, 56*
 
Canada Division
 
Consumer Group
Senior Vice President -
 
The Americas Group
 
 
Human Resources
 
 
 
Ronald B. Rossetto, 50
 
 
Robert J. Davisson, 56*
 
President & General Manager
Sean P. Hennessy, 59*
 
President
 
Protective & Marine Coatings Division
Senior Vice President -
 
The Americas Group
 
Global Finishes Group
Corporate Planning, Development
 
 
 
 
and Administration
 
Pablo Garcia-Casas, 56
 
David B. Sewell, 48*
 
 
President & General Manager
 
President
Catherine M. Kilbane, 53*
 
Latin America Division
 
Global Finishes Group
Senior Vice President, General
 
The Americas Group
 
 
Counsel and Secretary
 
 
 
Todd V. Wipf, 52
 
 
Monty J. Griffin, 56
 
President & General Manager
Robert J. Wells, 59*
 
President & General Manager
 
Southeastern Division
Senior Vice President - Corporate
 
South Western Division
 
The Americas Group
Communications and Public Affairs
 
The Americas Group
 
 
 
 
 
 
 
Michael T. Cummins, 58
 
Thomas C. Hablitzel, 54
 
 
Vice President - Taxes and
 
President & General Manager
 
 
Assistant Secretary
 
Automotive Division
 
 
 
 
Global Finishes Group
 
 
John D. Hullibarger, 36
 
 
 
 
Vice President - Corporate Audit
 
Peter J. Ippolito, 52
 
 
and Loss Prevention
 
President & General Manager
 
 
 
 
Mid Western Division
 
 
Jeffrey J. Miklich, 42
 
The Americas Group
 
 
Vice President and Treasurer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Executive Officer as defined by the Securities Exchange Act of 1934

78  


SW2016ARDIRECTORSA01.JPG





SW2016ARBACKCOVER.JPG




EXHIBIT 21

The Sherwin-Williams Company
Subsidiaries

Domestic


Subsidiary
State of
 
Incorporation
 
 
Comex North America, Inc.
DE
Contract Transportation Systems Co.
DE
CTS National Corporation
DE
Omega Specialty Products & Services LLC
OH
Sherwin-Williams Realty Holdings, Inc.
IL
SWIMC, Inc.
DE
The Sherwin-Williams Acceptance Corporation
NV
        

Foreign


Subsidiary
Country of
 
Incorporation
 
 
Compania Sherwin-Williams, S.A. de C.V.
Mexico
Geocel Limited
UK
Jiangsu Pulanna Coating Co., Ltd.
China
Oy Sherwin-Williams Finland Ab
Finland
Pinturas Condor S.A.
Ecuador
Pinturas Industriales S.A.
Uruguay
Productos Quimicos y Pinturas, S.A. de C.V.
Mexico
PT Sherwin-Williams Indonesia
Indonesia
Quetzal Pinturas, S.A. de C.V.
Mexico
Resin Surfaces Limited
UK
Ronseal (Ireland) Limited
Ireland
Sherwin-Williams Argentina I.y C.S.A.
Argentina
Sherwin-Williams Aruba VBA
Aruba
Sherwin-Williams (Australia) Pty. Ltd.
Australia
Sherwin-Williams Automotive Mexico S. de R.L. de C.V.
Mexico    
Sherwin-Williams Balkan S.R.L.
Romania
Sherwin-Williams Bel
Belarus
Sherwin-Williams (Belize) Limited
Belize
Sherwin-Williams Benelux NV
Belgium
Sherwin-Williams Canada Inc.
Canada
Sherwin-Williams (Caribbean) N.V.
Curacao





Sherwin-Williams Cayman Islands Limited
Grand Cayman
Sherwin-Williams Chile S.A.
Chile
Sherwin-Williams Coatings India Private Limited
India
Sherwin-Williams Coatings S.a r.l.
Luxembourg
Sherwin Williams Colombia S.A.S.
Colombia
Sherwin-Williams Czech Republic spol. s r.o
Czech Republic
Sherwin-Williams Denmark A/S    
Denmark
Sherwin-Williams Deutschland GmbH
Germany
Sherwin-Williams Diversified Brands (Australia) Pty Ltd
Australia
Sherwin-Williams Diversified Brands Limited
UK
Sherwin-Williams do Brasil Industria e Comercio Ltda.
Brazil
Sherwin-Williams France Finishes SAS
France
Sherwin-Williams (Ireland) Limited
Ireland
Sherwin-Williams Italy S.r.l.
Italy
Sherwin-Williams Luxembourg Investment Management
                   Company S.a r.l.
Luxembourg
Sherwin-Williams (Malaysia) Sdn. Bhd.
Malaysia
Sherwin-Williams (Nanatong) Company Limited
China
Sherwin-Williams Norway AS
Norway
Sherwin-Williams Paints Limited Liability Company
Russia
Sherwin-Williams Peru S.R.L.
Peru
Sherwin-Williams Pinturas de Venezuela S.A.
Venezuela
Sherwin-Williams Poland Sp. z o.o
Poland
Sherwin-Williams Protective & Marine Coatings    
UK
Sherwin-Williams (S) Pte. Ltd.
Singapore
Sherwin-Williams Services (Malaysia) Sdn. Bhd.
Malaysia
Sherwin-Williams (Shanghai) Limited
China
Sherwin-Williams (South China) Co., Ltd.
China
Sherwin-Williams Spain Coatings S.L.
Spain
Sherwin-Williams Sweden AB
Sweden    
Sherwin-Williams (Thailand) Co., Ltd.
Thailand
Sherwin-Williams UK Automotive Limited
UK
Sherwin-Williams Uruguay S.A.
Uruguay
Sherwin-Williams (Vietnam) Limited
Vietnam
Sherwin-Williams (West Indies) Limited
Jamaica    
SWIPCO - Sherwin Williams do Brasil Propriedade
                   Intelectual Ltda.    
Brazil
Syntema I Vaggeryd AB
Sweden
TOB Becker Acroma Ukraine
Ukraine
UAB Sherwin-Williams Baltic
Lithuania
ZAO Sherwin-Williams    
Russia




EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
 
We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Sherwin-Williams Company of our reports dated February 22, 2017 , with respect to the consolidated financial statements of The Sherwin-Williams Company and the effectiveness of internal control over financial reporting of The Sherwin-Williams Company, included in the 2016 Annual Report to Shareholders of The Sherwin-Williams Company.
 
Our audits also included the financial statement schedule of The Sherwin-Williams Company listed in Item 15(a). This schedule is the responsibility of The Sherwin-Williams Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, as to which the date is February 22, 2017 , the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
We consent to the incorporation by reference in the following Registration Statements of our reports dated February 22, 2017 with respect to the consolidated financial statements and schedule of The Sherwin-Williams Company and the effectiveness of internal control over financial reporting of The Sherwin-Williams Company, incorporated by reference herein, and our report included in the preceding paragraph with respect to the financial statement schedule of The Sherwin-Williams Company included in this Annual Report (Form 10-K) of The Sherwin-Williams Company:

Registration Number
Description
333-205897
333-166365
The Sherwin-Williams Company Form S-3 Registration Statement
The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (as Amended and Restated as of February 17, 2015) Form S-8 Registration Statement
333-152443
The Sherwin-Williams Company Employee Stock Purchase and Savings Plan Form S-8 Registration Statement
333-133419
The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan and The Sherwin-Williams Company 2006 Stock Plan for Nonemployee Directors Form S-8 Registration Statement
333-129582
The Sherwin-Williams Company 2005 Deferred Compensation Savings and Pension Equalization Plan, The Sherwin-Williams 2005 Key Management Deferred Compensation Plan and The Sherwin-Williams Company 2005 Director Deferred Fee Plan Form S-8 Registration Statement
333-105211
The Sherwin-Williams Company Employee Stock Purchase and Savings Plan Form S-8 Registration Statement
333-66295
The Sherwin-Williams Company Deferred Compensation Savings Plan, The Sherwin-Williams Company Key Management Deferred Compensation Plan and The Sherwin-Williams Company Director Deferred Fee Plan Form S-8 Registration Statement




EYA01A03A01A05.JPG

Cleveland, Ohio
February 22, 2017





EXHIBIT 24(a)

POWER OF ATTORNEY

THE SHERWIN-WILLIAMS COMPANY


KNOW ALL BY THESE PRESENTS, that each of the undersigned directors and/or officers of The Sherwin-Williams Company, an Ohio corporation (the “Company”), hereby constitutes and appoints each of John G. Morikis, Allen J. Mistysyn and Catherine M. Kilbane, with full power of substitution and resubstitution, as the true and lawful attorney-in-fact or attorneys-in-fact of the undersigned to execute and file with the Securities and Exchange Commission under the Securities Exchange Act of 1934 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 , with any and all amendments, supplements and exhibits thereto, and any and all other documents in connection therewith, with full power and authority to do and perform any and all acts and things necessary, appropriate or desirable to be done in the premises, or in the name, place and stead of the undersigned, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and approving all that said attorneys-in-fact or any of them and any substitute therefor may lawfully do or cause to be done by virtue thereof.

This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original with respect to the person executing it.

Executed as of this 15 th day of February, 2017.
Signature
 
 
 
Title
 
 
 
 
 
  /s/ John G. Morikis
 
 
 
Chairman, President and Chief Executive Officer, Director (Principal Executive Officer)
John G. Morikis
 
 
 
 
 
 
 
 
  /s/ Allen J. Mistysyn 
 
 
 
Senior Vice President – Finance and Chief
Financial Officer (Principal Financial Officer)
Allen J. Mistysyn
 
 
 
 
 
 
 
 
  /s/ Jane M. Cronin
 
 
 
Senior Vice President – Corporate Controller
(Principal Accounting Officer)
Jane M. Cronin
 
 
 
 
 
 
 
 
  /s/ Arthur F. Anton
 
 
 
Director
Arthur F. Anton
 
 
 
 
 
 
 
 
  /s/ Christopher M. Connor
 
 
 
Director
Christopher M. Connor
 
 
 
 
 
 
 
 
  /s/ David F. Hodnik
 
 
 
Director
David F. Hodnik
 
 
 






  /s/ Thomas G. Kadien
 
 
 
Director
Thomas G. Kadien
 
 
 
 
 
 
 
 
  /s/ Richard J. Kramer
 
 
 
Director
Richard J. Kramer
 
 
 
 
 
 
 
 
  /s/ Susan J. Kropf
 
 
 
Director
Susan J. Kropf
 
 
 
 
 
 
 
 
  /s/ Christine A. Poon
 
 
 
Director
Christine A. Poon
 
 
 
 
 
 
 
 
  /s/ John M. Stropki
 
 
 
Director
John M. Stropki
 
 
 
 
 
 
 
 
  /s/ Matthew Thornton III
 
 
 
Director
Matthew Thornton III
 
 
 
 
 
 
 
 
  /s/ Steven H. Wunning
 
 
 
Director
Steven H. Wunning
 
 
 





EXHIBIT 24(b)


CERTIFICATE


I, the undersigned, Secretary of The Sherwin-Williams Company (the “Company”), hereby certify that attached hereto is a true and complete copy of a resolution of the Board of Directors of the Company, duly adopted at a meeting held on February 15, 2017, and that such resolution is in full force and effect and has not been amended, modified, revoked or rescinded as of the date hereof.

IN WITNESS WHEREOF, I have executed this certificate as of this 15th day of February, 2017.



/s/ Catherine M. Kilbane                 
Catherine M. Kilbane
Secretary









RESOLVED, that the appropriate officers of the Company are each hereby authorized to execute and deliver a power of attorney appointing John G. Morikis, Allen J. Mistysyn and Catherine M. Kilbane or any of them, with full power of substitution and resubstitution, to act as attorneys-in-fact for the Company and for such officers for the purpose of executing and filing with the Securities and Exchange Commission and any national securities exchange, on behalf of the Company, the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and any and all amendments, exhibits and other documents in connection therewith, and to take other action deemed necessary and appropriate to effect the filing of such Annual Report on Form 10-K and any and all such amendments, exhibits and other documents in connection therewith.




EXHIBIT 31(a)

CERTIFICATION

I, John G. Morikis, certify that:

1.
I have reviewed this annual report on Form 10-K of The Sherwin-Williams Company;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
February 22, 2017
 
 
/s/ John G. Morikis   
 
 
 
 
John G. Morikis
Chairman, President and
    Chief Executive Officer




EXHIBIT 31(b)

CERTIFICATION

I, Allen J. Mistysyn, certify that:

1.
I have reviewed this annual report on Form 10-K of The Sherwin-Williams Company;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
February 22, 2017
 
 
/s/ Allen J. Mistysyn
 
 
 
 
Allen J. Mistysyn
Senior Vice President – Finance and
    Chief Financial Officer




EXHIBIT 32(a)

SECTION 1350 CERTIFICATION
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of The Sherwin-Williams Company (the “Company”) for the fiscal year ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John G. Morikis, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:
February 22, 2017
 
 
/s/ John G. Morikis   
 
 
 
 
John G. Morikis
Chairman, President and
    Chief Executive Officer


A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to The Sherwin-Williams Company and will be retained by The Sherwin-Williams Company and furnished to the Securities and Exchange Commission or its staff upon request.





EXHIBIT 32(b)

SECTION 1350 CERTIFICATION
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of The Sherwin-Williams Company (the “Company”) for the fiscal year ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Allen J. Mistysyn, Senior Vice President – Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Dated:
February 22, 2017
 
 
/s/ Allen J. Mistysyn
 
 
 
 
Allen J. Mistysyn
Senior Vice President – Finance and
    Chief Financial Officer


A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to The Sherwin-Williams Company and will be retained by The Sherwin-Williams Company and furnished to the Securities and Exchange Commission or its staff upon request.