UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the Period Ended June 30, 2017
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from              to             
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)
 
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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one:)
Large accelerated filer
x
 
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
 
 
Emerging growth company
o
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o   

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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $1.00 Par Value – 93,410,169 shares as of June 30, 2017 .




TABLE OF CONTENTS
 
 
 
 
 
 
 
EX-4.1
 
EX-4.2
 
EX-4.3
 
EX-4.4
 
EX-4.5
 
EX-4.6
 
EX-4.7
 
EX-4.8
 
EX-4.9
 
EX-4.10
 
EX-4.11
 
EX-4.12
 
EX-10.1
 
EX-10.2
 
EX-10.3
 
EX-31(a)
 
EX-31(b)
 
EX-32(a)
 
EX-32(b)
 
EX-101 INSTANCE DOCUMENT
 
EX-101 SCHEMA DOCUMENT
 
EX-101 PRESENTATION LINKBASE DOCUMENT
 
EX-101 CALCULATION LINKBASE DOCUMENT
 
EX-101 LABEL LINKBASE DOCUMENT
 
EX-101 DEFINITION LINKBASE DOCUMENT
 









PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
Thousands of dollars, except per share data
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net sales
$
3,735,817

 
$
3,219,525

 
$
6,497,204

 
$
5,793,549

Cost of goods sold
1,998,761

 
1,583,624

 
3,416,874

 
2,895,803

Gross profit
1,737,056

 
1,635,901

 
3,080,330

 
2,897,746

Percent to net sales
46.5
%
 
50.8
%
 
47.4
%
 
50.0
%
Selling, general and administrative expenses
1,145,492

 
1,048,496

 
2,155,667

 
2,045,169

Percent to net sales
30.7
%
 
32.6
%
 
33.2
%
 
35.3
%
Other general expense - net
1,775

 
2,733

 
2,051

 
20,287

Amortization
28,918

 
5,584

 
35,088

 
11,366

Interest expense
56,729

 
40,878

 
82,424

 
66,610

Interest and net investment income
(3,091
)
 
(952
)
 
(4,371
)
 
(1,439
)
Other (income) expense - net
(1,770
)
 
(52
)
 
(6,137
)
 
174

Income from continuing operations before income taxes
509,003

 
539,214

 
815,608

 
755,579

Income taxes
148,352

 
161,150

 
215,805

 
212,639

Net income from continuing operations
360,651

 
378,064

 
599,803

 
542,940

 
 
 
 
 
 
 
 
Loss from discontinued operations (see Note 3)


 
 
 


 
 
Income taxes
41,540

 
 
 
41,540

 
 
Net loss from discontinued operations
(41,540
)
 

 
(41,540
)
 

 
 
 
 
 
 
 
 
Net income
$
319,111

 
$
378,064

 
$
558,263

 
$
542,940

 
 
 
 
 
 
 
 
Basic net income per common share
 
 
 
 
 
 
 
Continuing operations
$
3.89

 
$
4.12

 
$
6.47

 
$
5.93

Discontinued operations
(.45
)
 
 
 
(.45
)
 
 
Net income per common share
$
3.44

 
$
4.12

 
$
6.02

 
$
5.93

 
 
 
 
 
 
 
 
Diluted net income per common share
 
 
 
 
 
 
 
Continuing operations
$
3.80

 
$
3.99

 
$
6.34

 
$
5.76

Discontinued operations
(.44
)
 
 
 
(.44
)
 
 
Net income per common share
$
3.36

 
$
3.99

 
$
5.90

 
$
5.76

 
 
 
 
 
 
 
 
Average shares outstanding - basic
92,841,148

 
91,788,734

 
92,695,853

 
91,632,297

Average shares and equivalents outstanding - diluted
94,968,636

 
94,669,751

 
94,697,439

 
94,305,997

Comprehensive income
$
349,288

 
$
284,060

 
$
579,378

 
$
467,946

See notes to condensed consolidated financial statements.

2



THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars
 
June 30,
2017
 
December 31,
2016
 
June 30,
2016
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
210,049

 
$
889,793

 
$
402,656

Accounts receivable, less allowance
2,377,874

 
1,230,987

 
1,473,078

Inventories:
 
 
 
 
 
Finished goods
1,468,671

 
898,627

 
975,366

Work in process and raw materials
386,266

 
169,699

 
176,866

 
1,854,937

 
1,068,326

 
1,152,232

Deferred income taxes
 
 
57,162

 
155,407

Other current assets
411,141

 
381,030

 
300,569

Total current assets
4,854,001

 
3,627,298

 
3,483,942

Goodwill
7,178,113

 
1,126,892

 
1,144,700

Intangible assets
6,002,534

 
255,010

 
247,070

Deferred pension assets
224,695

 
225,529

 
246,090

Other assets
568,138

 
421,904

 
471,618

Property, plant and equipment:
 
 
 
 
 
Land
259,415

 
115,555

 
119,608

Buildings
961,870

 
714,815

 
708,573

Machinery and equipment
2,595,633

 
2,153,437

 
2,109,786

Construction in progress
134,518

 
117,126

 
100,508

 
3,951,436

 
3,100,933

 
3,038,475

Less allowances for depreciation
2,061,519

 
2,005,045

 
1,966,218

 
1,889,917

 
1,095,888

 
1,072,257

Total Assets
$
20,717,398

 
$
6,752,521

 
$
6,665,677

 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term borrowings
$
51,904

 
$
40,739

 
$
59,203

Accounts payable
1,783,648

 
1,034,608

 
1,289,406

Compensation and taxes withheld
395,867

 
398,045

 
311,111

Accrued taxes
320,890

 
76,765

 
230,294

Current portion of long-term debt
701,101

 
700,475

 
2,179

Other accruals
898,503

 
578,547

 
733,020

Total current liabilities
4,151,913

 
2,829,179

 
2,625,213

Long-term debt
10,751,284

 
1,211,326

 
1,909,217

Postretirement benefits other than pensions
253,434

 
250,397

 
251,812

Deferred income taxes
2,467,348

 
73,833

 
131,447

Other long-term liabilities
702,159

 
509,345

 
501,359

Shareholders’ equity:
 
 
 
 
 
Common stock—$1.00 par value:
 
 
 
 
 
93,410,169, 93,013,031 and 92,221,707 shares outstanding
 
 
 
 
 
at June 30, 2017, December 31, 2016 and June 30, 2016, respectively
117,071

 
116,563

 
116,259

Other capital
2,606,757

 
2,488,564

 
2,412,599

Retained earnings
4,448,788

 
4,049,497

 
3,616,095

Treasury stock, at cost
(4,262,120
)
 
(4,235,832
)
 
(4,236,235
)
Cumulative other comprehensive loss
(519,236
)
 
(540,351
)
 
(662,089
)
Total shareholders' equity
2,391,260

 
1,878,441

 
1,246,629

Total Liabilities and Shareholders’ Equity
$
20,717,398

 
$
6,752,521

 
$
6,665,677


See notes to condensed consolidated financial statements.

3



THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
 
Six Months Ended
 
June 30,
2017
 
June 30,
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
558,263

 
$
542,940

Adjustments to reconcile net income to net operating cash:
 
 
 
Loss from discontinued operations
41,540

 
 
Depreciation
94,965

 
86,724

Amortization of intangible assets
35,088

 
11,366

Amortization of inventory step-up
36,278

 
 
Stock-based compensation expense
35,866

 
31,948

Amortization of credit facility and debt issuance costs
2,940

 
25,691

Provisions for qualified exit costs
12,828

 
1,422

Provisions for environmental-related matters
1,629

 
20,536

Defined benefit pension plans net cost
10,554

 
9,948

Net change in postretirement liability
(7,422
)
 
961

Other
(7,598
)
 
1,833

Change in working capital accounts - net
(239,495
)
 
(211,572
)
Costs incurred for environmental-related matters
(6,059
)
 
(6,716
)
Costs incurred for qualified exit costs
(8,904
)
 
(4,155
)
Other
25,660

 
(943
)
Net operating cash
586,133

 
509,983

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(83,635
)
 
(114,081
)
Acquisitions of businesses, net of cash acquired and divestiture (see Note 3)
(8,806,282
)
 
 
Proceeds from sale of assets
37,131

 
2,039

Increase in other investments
(11,444
)
 
(36,950
)
Net investing cash
(8,864,230
)
 
(148,992
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Net (decrease) increase in short-term borrowings
(228,785
)
 
15,318

Proceeds from long-term debt
7,984,375

 
 
Payments of long-term debt
(176
)
 
(84
)
Payments for credit facility and debt issuance costs
(45,454
)
 
(61,433
)
Payments of cash dividends
(158,934
)
 
(155,721
)
Proceeds from stock options exercised
79,157

 
43,708

Other
(26,420
)
 
(12,645
)
Net financing cash
7,603,763

 
(170,857
)
 
 
 
 
Effect of exchange rate changes on cash
(5,410
)
 
6,778

Net (decrease) increase in cash and cash equivalents
(679,744
)
 
196,912

Cash and cash equivalents at beginning of year
889,793

 
205,744

Cash and cash equivalents at end of period
$
210,049

 
$
402,656

 
 
 
 
Income taxes paid
$
121,115

 
$
73,636

Interest paid
31,816

 
66,583


See notes to condensed consolidated financial statements.

4



THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended June 30, 2017 and 2016
NOTE 1—BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
There have been no significant changes in critical accounting policies since December 31, 2016 . Accounting estimates were revised as necessary during the first six months of 2017 based on new information and changes in facts and circumstances. Certain amounts in the 2016 condensed consolidated financial statements have been reclassified to conform to the 2017 presentation. See Note 14 for information on the changes in the Company's reportable segments.
The Company primarily uses the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs are subject to the final year-end LIFO inventory valuation. In addition, interim inventory levels include management’s estimates of annual inventory losses due to shrinkage and other factors. The final year-end valuation of inventory is based on a cycle count program or an annual physical inventory count performed during the third and fourth quarters. For further information on inventory valuations and other matters, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2016 .
The consolidated results for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 .
NOTE 2—IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2017, the Company adopted the Accounting Standard Update (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. Subsequent to adoption, all deferred tax assets and deferred tax liabilities are presented as non-current on the balance sheet. The changes have been applied prospectively as permitted by the ASU and prior years have not been restated. The adoption of this ASU does not have a material effect on the Company's results of operations, financial condition or liquidity.
In March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs." The standard requires the service component of pension and other postretirement benefit expense to be presented in the same income statement lines as other employee compensation costs, however, the other components will be presented outside of operating income. In addition, only the service cost component will be eligible for capitalization in assets. The standard is effective starting in 2018, with early adoption permitted. Retrospective application is required for the guidance on the income statement presentation. Prospective application is required for the guidance on the cost capitalization in assets. The Company is in the process of evaluating the impact of the standard.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” This standard simplifies the accounting for goodwill impairment by eliminating the Step 2 requirement to calculate the implied fair value of goodwill. Instead, if a reporting unit's carrying amount exceeds its fair value, an impairment charge will be recorded based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard will be applied prospectively and is effective for impairment tests performed after December 15, 2019, with early adoption permitted. The standard is not expected to have a material 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 starting in 2019. A modified retrospective transition approach is required with certain practical

5



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 its retail operations in The Americas Group.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends the guidance for certain aspects of recognition, measurement and disclosure of financial instruments. The standard is effective for interim and annual periods starting in 2018, and early adoption is not permitted. Although the Company continues to assess the potential impacts of the standard, it currently believes that the main impact will be that changes in fair value of marketable securities currently classified as available-for-sale will be recognized in earnings rather than in other comprehensive income. The standard is not expected to 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 standard is effective for interim and annual periods beginning after December 15, 2017. 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. Although the Company previously disclosed that it planned to adopt the standard using the full retrospective method of adoption, due to the recent acquisition of The Valspar Corporation (Valspar) (see Note 3), the Company now expects to adopt the standard using the modified retrospective method. The Company is in the process of evaluating the impact on the results of operations, financial condition, liquidity and disclosures. 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.

6



NOTE 3 ACQUISITIONS
On June 1, 2017, the Company completed the acquisition of Valspar at $113 per share in an all cash transaction for a total purchase price of $8.9 billion , net of divestiture proceeds of $431.0 million . As previously disclosed, on April 11, 2017, the Company and Valspar entered into a definitive agreement with Axalta Coating Systems Ltd. to divest the assets related to Valspar's North American industrial wood coatings business. The divestiture was also completed on June 1, 2017, and is reported as a discontinued operation with no pre-tax gain or loss but includes the tax expense effect of this separate transaction. Proceeds of $431.0 million were received for the divested assets sold. The divestiture resulted in a tax provision of $41.5 million , which reduced basic and diluted net income per common share for the three and six months ended June 30, 2017 by $.45 and $.44 , respectively. The Valspar acquisition expands the Company's diversified array of brands and technologies, expands its global platform and adds new capabilities in its packaging and coil segments.
The preliminary allocation of the fair value of the Valspar acquisition is summarized in the table below. Allocations are based on the acquisition method of accounting and in-process third-party valuation appraisals. The allocation of the fair value will be finalized within the allowable measurement period.
(Millions of dollars)
 
 
 
Cash
$
127.8

Accounts receivable
817.5

Inventories
695.5

Indefinite-lived trademarks
1,140.0

Finite-lived intangible assets
4,629.8

Goodwill
6,067.7

Property, plant and equipment
824.8

All other assets
253.6

Accounts payable
(553.2
)
Long-term debt
(1,603.7
)
Deferred taxes
(2,461.9
)
All other liabilities
(1,003.8
)
Total
$
8,934.1

Total, net of cash
$
8,806.3

Finite-lived intangible assets include customer relationships of $3.0 billion and intellectual property and technology of $1.6 billion , which are being amortized over weighted average amortization periods ranging from 15 to 22 years. Based on the preliminary purchase accounting, goodwill of $4.6 billion and $1.5 billion was recognized in the Performance Coatings Group and the Consumer Brands Group, respectively, and relates primarily to expected synergies.
The Company's Net sales and Income from continuing operations for the three months ended June 30, 2017  include sales of $381.0 million and a profit before tax of $46.6 million related to the Valspar acquisition. Net income from continuing operations includes approximately $23.0 million of intangibles amortization expense and $36.3 million of inventory step-up amortization included in cost of sales. During the six months ended June 30, 2017 and 2016 , the Company incurred transaction and integration related SG&A expense of $31.6 million and $35.6 million , respectively, and interest expense of $41.5 million and $26.6 million , respectively, related to the acquisition of Valspar.
The following pro forma information presents consolidated financial information as if Valspar had been acquired at the beginning of 2016. Pro forma adjustments have been made to exclude Valspar's North American industrial wood coatings business results and certain transaction and integration costs from all periods presented. Interest expense has been adjusted as though total debt outstanding at June 30, 2017 had been outstanding at January 1, 2016. Each quarter presented includes intangible amortization expense of approximately $68.9 million resulting from the preliminary purchase accounting. The full $108.8 million of inventory step-up amortization resulting from the preliminary purchase accounting asset step-up has been included in the first quarter of 2016 to reflect the pro forma transaction date of January 1, 2016, and thus the inventory step-up amortization of $36.3 million recorded in the second quarter of 2017 has been excluded. The unaudited pro forma consolidated financial information does not necessarily reflect the actual results that would have occurred had the acquisition taken place on January 1, 2016, nor is it it meant to be indicative of future results of operations of the combined companies under the ownership and operation of the Company.

7



(Thousands of dollars except per share data)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net sales
$
4,439,801

 
$
4,315,822

 
$
8,148,329

 
$
7,794,545

Net income from continuing operations
402,503

 
402,810

 
600,970

 
477,581

Net income per common share from
continuing operations:
 
 
 
 
 
 
 
Basic
$
4.34

 
$
4.39

 
$
6.48

 
$
5.21

Diluted
$
4.24

 
$
4.25

 
$
6.35

 
$
5.06


NOTE 4—DIVIDENDS
Dividends paid on common stock for each of the first two quarters of 2017 and 2016 were $.85 per common share and $.84 per common share, respectively.
NOTE 5—CHANGES IN CUMULATIVE OTHER COMPREHENSIVE LOSS
The following tables summarize the changes in Cumulative other comprehensive loss for the six months ended June 30, 2017 and 2016 :
 
 
 
 
 
 
 
 
 
 
(Thousands of dollars)
Foreign Currency Translation Adjustments
 
Pension and Other Postretirement Benefit Adjustments
 
Unrealized Net Gains on Available-for-Sale Securities
 
Unrealized Net Gains (Losses) on Cash Flow Hedges
 
Total Cumulative Other Comprehensive (Loss) Income
Balance at December 31, 2016
$
(501,277
)
 
$
(125,096
)
 
$
1,015

 
$
85,007

 
$
(540,351
)
Amounts recognized in Other comprehensive loss  (1)
51,250

 
 
 
870

 
(30,754
)
 
21,366

Amounts reclassified from Other comprehensive loss (2)


 
385

 
8

 
(644
)
 
(251
)
Net change
51,250

 
385

 
878

 
(31,398
)
 
21,115

Balance at June 30, 2017
$
(450,027
)
 
$
(124,711
)
 
$
1,893

 
$
53,609

 
$
(519,236
)

(1) Net of taxes of $(537) for unrealized net gains on available-for-sale securities and $18,895 for unrealized net losses on cash flow hedges.

(2) Net of taxes of $(195) for pension and other postretirement benefit adjustments, $(5) for realized losses on the sale of available-for-sale securities and $396 for realized gains on cash flow hedges.


8



 
 
 
 
 
 
 
 
 
 
(Thousands of dollars)
Foreign Currency Translation Adjustments
 
Pension and Other Postretirement Benefit Adjustments
 
Unrealized Net (Losses) Gains on Available-for-Sale Securities
 
Unrealized Net Losses on Cash Flow Hedges
 
Total Cumulative Other Comprehensive (Loss) Income
Balance at December 31, 2015
$
(482,629
)
 
$
(104,346
)
 
$
(120
)
 
 
 
$
(587,095
)
Amounts recognized in Other comprehensive loss  (3)
31,935

 
 
 
455

 
$
(107,948
)
 
(75,558
)
Amounts reclassified from Other comprehensive loss (4)
 
 
439

 
125

 
 
 
564

Net change
31,935

 
439

 
580

 
(107,948
)
 
(74,994
)
Balance at June 30, 2016
$
(450,694
)
 
$
(103,907
)
 
$
460

 
$
(107,948
)
 
$
(662,089
)

(3) Net of taxes of $(282) for unrealized net gains on available-for-sale securities and $66,721 for unrealized net losses on cash flow hedges.
(4) Net of taxes of $(45) for pension and other postretirement benefit adjustments and $(78) for realized losses on the sale of available-for-sale securities.
NOTE 6—PRODUCT WARRANTIES
Changes in the Company’s accrual for product warranty claims during the first six months of 2017 and 2016 , including customer satisfaction settlements, were as follows:
 
(Thousands of dollars)
 
 
 
 
2017
 
2016
Balance at January 1
$
34,419

 
$
31,878

Charges to expense
16,434

 
15,763

Settlements
(16,698
)
 
(14,755
)
Acquisition
110,461

 
 
Balance at June 30
$
144,616

 
$
32,886

Warranty accruals of $110.5 million were acquired in connection with the Valspar acquisition. This amount includes warranties for certain products under extended furniture protection plans. In the U.S., revenue related to furniture protection plans is deferred and recognized over the contract life.
For further details on the Company’s accrual for product warranty claims, see Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .


9



NOTE 7—EXIT OR DISPOSAL ACTIVITIES
Liabilities associated with exit or disposal activities are recognized as incurred in accordance with the Exit or Disposal Cost Obligations Topic of the ASC. Qualified exit costs primarily include post-closure rent expenses, incremental post-closure costs 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.
In the six months ended June 30, 2017 , four stores in The Americas Group and two branches in the Performance Coatings Group were closed due to lower demand or redundancy. Due to the Valspar acquisition, the Company has acquired exit or disposal cost reserve accruals and recorded severance and related cost provisions in the month of June.
The following table summarizes the activity and remaining liabilities associated with qualified exit costs at June 30, 2017 :
(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
Exit Plan
 
Balance at December 31, 2016
 
Acquired Balances
 
Provisions in Cost of Goods Sold or SG&A
 
 Actual Expenditures Charged to Accrual
 
Balance at June 30, 2017
Administrative segment acquisition-related restructuring in 2017:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
 
 
 
 
$
9,883

 
$
(3,761
)
 
$
6,122

Consumer Brands Group facilities shutdown in 2016:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
$
907

 
$
4

 
2,823

 
(3,632
)
 
102

Performance Coatings Group stores shutdown in 2016:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
136

 
2,271

 
8

 
(296
)
 
2,119

Other qualified exit costs
 
269

 
5

 
94

 
(143
)
 
225

The Americas Group stores shutdown in 2015:
 
 
 
 
 
 
 
 
 
 
Other qualified exit costs
 
195

 
 
 
10

 
(205
)
 

Consumer Brands Group facilities shutdown in 2015:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
 
 
632

 
 
 
(3
)
 
629

Other qualified exit costs
 
 
 
629

 
 
 
(3
)
 
626

Performance Coatings Group stores shutdown in 2015:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
 
 
396

 
10

 
 
 
406

Other qualified exit costs
 
433

 
427

 
 
 
(405
)
 
455

Severance and other qualified exit costs for facilities shutdown prior to 2015
 
1,908

 
92

 
 
 
(456
)
 
1,544

Totals
 
$
3,848

 
$
4,456

 
$
12,828


$
(8,904
)
 
$
12,228

For further details on the Company’s exit or disposal activities, see Note 5 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .


10



NOTE 8 HEALTH CARE, PENSION AND OTHER BENEFITS
Shown below are the components of the Company’s net periodic benefit cost (credit) for domestic defined benefit pension plans, foreign defined benefit pension plans and postretirement benefits other than pensions:
 
(Thousands of dollars)
Domestic Defined
Benefit Pension Plans
 
Foreign Defined
Benefit Pension Plans
 
Postretirement
Benefits Other than
Pensions
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Three Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
5,459

 
$
5,489

 
$
2,287

 
$
1,198

 
$
471

 
$
561

Interest cost
7,191

 
6,643

 
1,864

 
2,081

 
2,593

 
2,753

Expected return on assets
(11,299
)
 
(12,567
)
 
(2,008
)
 
(1,846
)
 
 
 
 
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
340

 
301

 
 
 
 
 
(1,645
)
 
(1,645
)
Actuarial loss (gain)
1,662

 
1,153

 
(97
)
 
504

 
5

 
 
Settlement gain
 
 
 
 
 
 
 
 
(9,332
)
 
 
Net periodic benefit cost
$
3,353

 
$
1,019

 
$
2,046

 
$
1,937

 
$
(7,908
)
 
$
1,669

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit cost (credit):
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
10,772

 
$
10,978

 
$
4,205

 
$
2,539

 
$
1,014

 
$
1,122

Interest cost
13,601

 
13,286

 
3,502

 
4,161

 
5,236

 
5,505

Expected return on assets
(21,608
)
 
(25,134
)
 
(3,772
)
 
(3,692
)
 
 
 
 
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
681

 
602

 
 
 
 
 
(3,290
)
 
(3,290
)
Actuarial loss (gain)
3,323

 
2,305

 
(150
)
 
865

 
16

 
 
Settlement (gain) loss
 
 
 
 


 
4,038

 
(9,332
)
 
 
Net periodic benefit cost (credit)
$
6,769

 
$
2,037

 
$
3,785

 
$
7,911

 
$
(6,356
)
 
$
3,337

The Company acquired new benefit plans in each category above as a result of the Valspar acquisition. The costs (credits) for these plans for the month of June 2017 are included in the tables above and are not significant. The settlement gain recognized in the second quarter of 2017 relates to the termination of a life insurance benefit plan. The settlement loss recognized in the first quarter of 2016 relates to the wind up of an acquired Canada plan. For further details on the Company’s health care, pension and other benefits, see Note 6 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .
NOTE 9—OTHER LONG-TERM LIABILITIES
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. At June 30, 2017 , the unaccrued maximum of the estimated range of possible outcomes is $86.1 million higher than the minimum.
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. Actual costs incurred may vary from these 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.
Included in Other long-term liabilities at June 30, 2017 and 2016 were accruals for extended environmental-related activities of $160.2 million and $143.0 million , respectively. Estimated costs of current investigation and remediation activities of $30.4

11



million and $22.5 million are included in Other accruals at June 30, 2017 and 2016 , respectively. Other accruals in the second quarter of 2017 increased $10.5 million due to environmental-related liabilities the Company assumed as a part of the preliminary opening balance sheet of Valspar and is subject to measurement period adjustments.
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 June 30, 2017 . At June 30, 2017 , $149.9 million , or 78.6 percent of the total accrual, related directly to these three sites. In the aggregate unaccrued maximum of $86.1 million at June 30, 2017 , $70.5 million , or 81.8 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.
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.
For further details on the Company’s Other long-term liabilities, see Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .
NOTE 10 – LITIGATION
In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, the Company accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and the amount of any such loss cannot be reasonably estimated, any potential liability ultimately determined to be attributable to the Company may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. In those cases where no accrual is recorded or exposure to loss exists in excess of the amount accrued, the Contingencies Topic of the ASC requires disclosure of the contingency when there is a reasonable possibility that a loss or additional loss may have been incurred.
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 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

12



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 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

13



judgment without the requirement to post a bond. The appeal is fully briefed. On July 14, 2017, the Sixth District Court of Appeal scheduled the date for oral argument on the appeal for August 24, 2017. 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 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. On April 18, 2017, the parties entered into a stipulation and order of dismissal without prejudice. On April 26, 2017, the Wisconsin Circuit Court dismissed the case without prejudice.
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

14



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.
NOTE 11—OTHER
Other general expense - net
Included in Other general expense - net were the following:
(Thousands of dollars)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Provisions for environmental matters - net
$
1,110

 
$
2,507

 
$
1,629

 
$
20,536

Loss (gain) on sale or disposition of assets
665

 
226

 
422

 
(249
)
Total
$
1,775

 
$
2,733

 
$
2,051

 
$
20,287

Provisions for environmental matters - net represent site-specific 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 9 for further details on the Company’s environmental-related activities.
The loss (gain) on disposition of assets represents net realized losses (gains) associated with the sale or disposal of fixed assets previously used in the conduct of the primary business of the Company.
Other (income) expense - net
Included in Other (income) expense - net were the following:
 
(Thousands of dollars)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Dividend and royalty income
$
(1,198
)
 
$
(999
)
 
$
(3,042
)
 
$
(2,165
)
Net expense from banking activities
2,513

 
2,108

 
4,985

 
4,371

Foreign currency transaction related losses (gains)
976

 
1,819

 
(2,610
)
 
3,509

Other income
(5,937
)
 
(5,450
)
 
(10,897
)
 
(10,330
)
Other expense
1,876

 
2,470

 
5,427

 
4,789

Total
$
(1,770
)
 
$
(52
)
 
$
(6,137
)
 
$
174

Foreign currency transaction related losses (gains) represent net realized losses (gains) on U.S. dollar-denominated liabilities of foreign subsidiaries and net realized and unrealized losses (gains) from foreign currency option and forward contracts. There were no material foreign currency option and forward contracts outstanding at June 30, 2017 and 2016 .
Other income and Other expense included items of revenue, gains, expenses and losses that were unrelated to the primary business purpose of the Company. There were no other items within the other income or other expense caption that were individually significant.

15



NOTE 12—INCOME TAXES
The effective tax rate for income from continuing operations was 29.1 percent and 26.5 percent for the second quarter and first six months of 2017 , respectively, compared to 29.9 percent and 28.1 percent for the second quarter and first six months of 2016 , respectively. The Company recorded an income tax provision of $41.5 million in the second quarter of 2017 related to the divestiture of Valspar's North American industrial wood coatings business, which is reported as a discontinued operation. See Note 3. Excluding the impact of share-based payments, the effective tax rate was 32.7 percent for both the second quarter and first six months of 2017 compared to 32.1 percent for both the second quarter and first six months of 2016 .
During the second quarter of 2017, the Company recorded a preliminary deferred income tax liability of approximately $2.4 billion based on the preliminary purchase price accounting for Valspar and is subject to measurement period adjustments.
At December 31, 2016 , the Company had $32.8 million in unrecognized tax benefits, the recognition of which would have an effect of $27.7 million on the effective tax rate. Included in the balance of unrecognized tax benefits at December 31, 2016 was $2.6 million 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. In the second quarter of 2017, the Company acquired $19.9 million of unrecognized tax benefits as a part of the preliminary opening balance sheet of Valspar and is subject to measurement period adjustments.
The Company classifies all income tax related interest and penalties as income tax expense. At December 31, 2016 , the Company had accrued $9.3 million for the potential payment of income tax interest and penalties.
There were no significant changes to any of the balances of unrecognized tax benefits at December 31, 2016 during the first six months of 2017 with the exception of the unrecognized tax benefits recorded as a part of the acquisition of Valspar.
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 and the 2014 and 2015 tax years of a Valspar subsidiary. During the second quarter of 2017, the IRS informed the Company that it will commence an audit of the 2014 and 2015 tax years by the end of 2017. As of June 30, 2017 , the federal statute of limitations has not expired for the 2013, 2014 and 2015 tax years.
As of June 30, 2017 , the Company is subject to non-U.S. income tax examinations for the tax years of 2010 through 2016. In addition, the Company is subject to state and local income tax examinations for the tax years 2003 through 2016.


16



NOTE 13—NET INCOME PER COMMON SHARE

Basic and diluted earnings per share are calculated using the treasury stock method.
(Thousands of dollars except per share data)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Basic
 
 
 
 
 
 
 
Average common shares outstanding
92,841,148

 
91,788,734

 
92,695,853

 
91,632,297

Net income
 
 
 
 
 
 
 
Continuing operations
$
360,651

 
$
378,064

 
$
599,803

 
$
542,940

Discontinued operations (2)
(41,540
)
 

 
(41,540
)
 

Net income
$
319,111

 
$
378,064

 
$
558,263

 
$
542,940

Basic net income per common share
 
 
 
 
 
 
 
Continuing operations
$
3.89

 
$
4.12

 
$
6.47

 
$
5.93

Discontinued operations (2)
(0.45
)
 

 
(0.45
)
 

Net income per common share
$
3.44

 
$
4.12

 
$
6.02

 
$
5.93

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Average common shares outstanding
92,841,148

 
91,788,734

 
92,695,853

 
91,632,297

Stock options and other contingently issuable shares (1)
2,055,422

 
2,318,192

 
1,935,690

 
2,114,844

Non-vested restricted stock grants
72,066

 
562,825

 
65,896

 
558,856

Average common shares outstanding assuming dilution
94,968,636

 
94,669,751

 
94,697,439

 
94,305,997

Net income
 
 
 
 
 
 
 
Continuing operations
$
360,651

 
$
378,064

 
$
599,803

 
$
542,940

Discontinued operations (2)
(41,540
)
 

 
(41,540
)
 

Net income
$
319,111

 
$
378,064

 
$
558,263

 
$
542,940

Diluted net income per common share
 
 
 
 
 
 
 
Continuing operations
$
3.80

 
$
3.99

 
$
6.34

 
$
5.76

Discontinued operations (2)
(0.44
)
 

 
(0.44
)
 

Net income per common share
$
3.36

 
$
3.99

 
$
5.90

 
$
5.76

 
(1)  
Stock options and other contingently issuable shares excludes 16,013 and 47,273 shares due to their anti-dilutive effect for the three and six months ended June 30, 2016 . There are no shares excluded for the three and six months ended June 30, 2017 .
(2)  
Relates to the divestiture of Valspar's North American industrial wood coatings business. See Note 3.
NOTE 14—REPORTABLE SEGMENT INFORMATION
The Company reports 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 Disclosures Topic of the ASC. Upon completion of the Valspar acquisition in the second quarter of 2017 (see Note 3), the Company made important changes to its organizational and reporting structure that resulted in establishing three new reportable segments. The Americas Group reportable segment includes the Company's previous Paint Stores Group and Latin America Coatings Group, along with a specialty retail business of Valspar. The Americas Group operates stores in the United States, Canada, Latin America, and the Caribbean islands servicing the needs of architectural and industrial painting contractors and do-it-yourself homeowners. The Americas Group sells a variety of architectural paints, coatings and related products through dedicated dealers, home centers, distributors, hardware stores and other retailers throughout Latin America. The Consumer Brands Group reportable segment includes the Company's previous Consumer Group along with Valspar's previous Consumer Paints segment, excluding Valspar's automotive refinishes products business. The Consumer Brands Group supplies a broad portfolio of branded and private-label architectural paints, stains, varnishes, industrial products, wood finishes products, wood preservatives, applicators, corrosion inhibitors, aerosols, caulks and adhesives to retailers and distributors throughout North America, as well as in Australia, China and Europe. The Consumer Brands Group also supports the Company's other businesses around the world with new product research and development, manufacturing, distribution and logistics. The Performance Coatings Group

17



reportable segment includes the Company's previous Global Finishes Group and Valspar's previous Coatings Group segment. The Performance Coatings Group also includes Valspar's automotive refinishes products business, which was previously reported under Valspar's Consumer Paints segment. Valspar’s North American industrial wood coatings business, which was previously reported under the Valspar's Coatings Group segment, was divested. The Performance Coatings Group develops and sells industrial coatings for wood finishing and general industrial (metal and plastic) applications, automotive refinish, protective and marine coatings, coil coatings, packaging coatings and performance-based resins and colorants worldwide. In addition, a specialty coatings business previously in the Company's Consumer Group is now included in the Performance Coatings Group. Prior period segment reporting has been adjusted to reflect the updated reportable segments.
(Thousands of dollars)
Three Months Ended June 30, 2017
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
2,437,655

 
$
536,441

 
$
761,094

 
$
627

 
$
3,735,817

Intersegment transfers
2,020

 
864,337

 
7,231

 
(873,588
)
 
 
Total net sales and intersegment transfers
$
2,439,675

 
$
1,400,778

 
$
768,325

 
$
(872,961
)
 
$
3,735,817

 
 
 
 
 
 
 
 
 
 
Segment profit
$
532,687

 
$
76,064

 
$
62,345

 

 
$
671,096

Interest expense

 
 
 
 
 
$
(56,729
)
 
(56,729
)
Administrative expenses and other
 
 
 
 
 
 
(105,364
)
 
(105,364
)
Income from continuing operations
     before income taxes *
$
532,687

 
$
76,064

 
$
62,345

 
$
(162,093
)
 
$
509,003


* Income from continuing operations before income taxes for the Consumer Brands Group and Performance Coatings Group includes inventory step-up amortization of $14.5 million and $21.8 million , respectively, and intangibles amortization of $5.7 million and $17.2 million , respectively, based on the preliminary purchase accounting. Income from continuing operations before income taxes for the Administrative segment includes $26.6 million of acquisition-related expenses included in SG&A.

 
Three Months Ended June 30, 2016
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
2,241,566

 
$
462,473

 
$
514,198

 
$
1,288

 
$
3,219,525

Intersegment transfers
9,960

 
763,956

 
6,025

 
(779,941
)
 
 
Total net sales and intersegment transfers
$
2,251,526

 
$
1,226,429

 
$
520,223

 
$
(778,653
)
 
$
3,219,525

 
 
 
 
 
 
 
 
 
 
Segment profit
$
499,347

 
$
103,157

 
$
70,377

 
 
 
$
672,881

Interest expense

 
 
 
 
 
$
(40,878
)
 
(40,878
)
Administrative expenses and other
 
 
 
 
 
 
(92,789
)
 
(92,789
)
Income from continuing operations
before income taxes
$
499,347

 
$
103,157

 
$
70,377

 
$
(133,667
)
 
$
539,214


18



 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
4,389,401

 
$
859,807

 
$
1,245,548

 
$
2,448

 
$
6,497,204

Intersegment transfers
4,361

 
1,560,175

 
11,031

 
(1,575,567
)
 
 
Total net sales and intersegment transfers
$
4,393,762

 
$
2,419,982

 
$
1,256,579

 
$
(1,573,119
)
 
$
6,497,204

 
 
 
 
 
 
 
 
 
 
Segment profit
$
837,911

 
$
131,978

 
$
119,457

 
 
 
$
1,089,346

Interest expense
 
 
 
 
 
 
$
(82,424
)
 
(82,424
)
Administrative expenses and other
 
 
 
 
 
 
(191,314
)
 
(191,314
)
Income from continuing operations
before income taxes **
$
837,911

 
$
131,978

 
$
119,457

 
$
(273,738
)
 
$
815,608


** Income from continuing operations before income taxes for the Consumer Brands Group and Performance Coatings Group includes inventory step-up amortization of $14.5 million and $21.8 million , respectively, and intangibles amortization of $5.7 million and $17.2 million , respectively, based on the preliminary purchase accounting. Income from continuing operations before income taxes for the Administrative segment includes $31.6 million of acquisition-related expenses included in SG&A.

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
3,982,060

 
$
827,093

 
$
981,830

 
$
2,566

 
$
5,793,549

Intersegment transfers
18,653

 
1,377,586

 
7,981

 
(1,404,220
)
 
 
Total net sales and intersegment transfers
$
4,000,713

 
$
2,204,679

 
$
989,811

 
$
(1,401,654
)
 
$
5,793,549

 
 
 
 
 
 
 
 
 
 
Segment profit
$
751,953

 
$
163,030

 
$
123,050

 
 
 
$
1,038,033

Interest expense
 
 
 
 
 
 
$
(66,610
)
 
(66,610
)
Administrative expenses and other
 
 
 
 
 
 
(215,844
)
 
(215,844
)
Income from continuing operations
before income taxes
$
751,953

 
$
163,030

 
$
123,050

 
$
(282,454
)
 
$
755,579

In the reportable segment financial information, Segment profit was total net sales and intersegment transfers less operating costs and expenses. Domestic intersegment transfers were accounted for at the approximate fully absorbed manufactured cost, based on normal capacity volumes, plus customary distribution costs. International intersegment transfers were accounted for at values comparable to normal unaffiliated customer sales. 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. Gains and losses from the sale of property were not a significant operating factor in determining the performance of the Administrative segment.
As of June 30, 2017, identifiable assets for The Americas Group, Consumer Brands Group, Performance Coatings Group and Administrative segments were $2.262 billion , $5.739 billion , $11.239 billion and $1.477 billion , respectively. These amounts include preliminary purchase accounting adjustments for Goodwill and Intangibles. The allocation of the fair value will be finalized within the allowable measurement period. As of June 30, 2016, identifiable assets for The Americas Group, Consumer Brands Group, Performance Coatings Group and Administrative segments were $2.142 billion , $2.328 billion , $829.0 million and $1.367 billion , respectively.
Net external sales and segment profit of all consolidated foreign subsidiaries were $603.3 million and $.7 million , respectively, for the second quarter of 2017 , and $454.5 million and $17.1 million , respectively, for the second quarter of 2016 . Net external sales and segment profit of all consolidated foreign subsidiaries were $1.022 billion and $14.5 million , respectively, for the six months of 2017 , and $855.2 million and $27.3 million , respectively, for the six months of 2016 . Long-lived assets of these

19



subsidiaries totaled $1.698 billion and $506.8 million at June 30, 2017 and June 30, 2016 , respectively. The increase in net external sales and long-lived assets is primarily due to the Valspar acquisition. Domestic operations accounted for the remaining net external sales, segment profits and long-lived assets. No single geographic area outside the United States was significant relative to consolidated net external sales, income before taxes, or consolidated long-lived assets.
Export sales and sales to any individual customer were each less than 10 percent of consolidated sales to unaffiliated customers during all periods presented.
NOTE 15 FAIR VALUE MEASUREMENTS
The Fair Value Measurements and Disclosures Topic of the ASC applies to the Company’s financial and non-financial assets and liabilities. The guidance applies when other standards require or permit the fair value measurement of assets and liabilities. The Company did not have any fair value measurements unrelated to purchase accounting for its non-financial assets and liabilities during the second quarter . Deferred compensation assets and liabilities of $23,830 were acquired in connection with the Valspar acquisition. See Note 3. The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis, categorized using the fair value hierarchy:
(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
Quoted Prices
 
 
 
 
 
 
 
in Active
 
 
 
Significant
 
Fair Value at
 
Markets for
 
Significant Other
 
Unobservable
 
June 30,
 
Identical Assets
 
Observable Inputs
 
Inputs
 
2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets (1)
$
53,562

 
$
28,700

 
$
24,862

 

Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liabilities (2)
$
64,001

 
$
64,001

 

 

 
(1)  
The deferred compensation plan assets consist of the investment funds maintained for the future payments under the Company’s executive deferred compensation plans, which are structured as rabbi trusts. The investments are marketable securities accounted for under the Debt and Equity Securities Topic of the ASC. The level 1 investments are valued using quoted market prices multiplied by the number of shares. The level 2 investments are valued based on vendor or broker models. The cost basis of the investment funds is $49,638 .

(2) The deferred compensation plan liabilities are the Company’s liabilities under its executive deferred compensation plan. The liabilities represent the fair value of the participant shadow accounts, and the value is based on quoted market prices.

NOTE 16 DEBT
The table below summarizes the carrying amount and fair value of the Company’s publicly traded debt and non-publicly traded debt in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. The fair values of the Company’s publicly traded debt are based on quoted market prices. The fair values of the Company’s non-publicly traded debt 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-publicly traded debt are classified as level 1 and level 2, respectively, in the fair value hierarchy.
(Thousands of dollars)
 
 
 
 
 
 
 
 
June 30, 2017
 
June 30, 2016
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Publicly traded debt
$
9,448,274

 
$
9,660,353

 
$
1,906,672

 
$
2,021,174

Non-publicly traded debt
2,004,111

 
1,863,095

 
4,724

 
4,451

On June 2, 2017 the Company closed its previously announced exchange offers and consent solicitations (collectively, the "Exchange Offer") for the outstanding senior notes of Valspar. Pursuant to the Exchange Offer, the Company issued an aggregate principal amount of approximately $1.478 billion (collectively the "Exchange Notes"). The Exchange Notes are

20



unsecured senior obligations of the Company. The Company did not receive any cash proceeds from the issuance of the Exchange Notes. The Exchange Notes are summarized in the table below.
(Thousands of dollars)
 
 
 
 
Due Date
 
Principal
7.250% Senior Notes
2019
 
$
277,176

4.200% Senior Notes
2022
 
385,909

3.300% Senior Notes
2025
 
235,324

3.950% Senior Notes
2026
 
331,342

4.400% Senior Notes
2045
 
248,354

 
 
 
$
1,478,105

On May 16, 2017, the Company issued $6.0 billion of senior notes (collectively the "New Notes") in a public offering. The net proceeds from the issuance of the New Notes were used to fund the acquisition of Valspar. The New Notes are summarized in the table below.
(Thousands of dollars)
 
 
 
 
Due Date
 
Principal
2.250% Senior Notes
2020
 
$
1,500,000

2.750% Senior Notes
2022
 
1,250,000

3.125% Senior Notes
2024
 
500,000

3.450% Senior Notes
2027
 
1,500,000

4.500% Senior Notes
2047
 
1,250,000

 
 
 
$
6,000,000

As previously disclosed, the interest rate locks entered into in 2016 settled in March 2017 resulting in a pretax gain of $87.6 million recognized in Cumulative other comprehensive loss. This gain is being amortized from Cumulative other comprehensive loss to a reduction of interest expense over the terms of the New Notes. For the three months ended June 30, 2017 , the amortization of the unrealized gain reduced interest expense by $1.0 million .
In April 2016, the Company entered into agreements for a $7.3 billion Bridge Loan and a $2.0 billion Term Loan as committed financing for the Valspar acquisition. See Note 3. On June 1, 2017, the Company terminated the agreement for the Bridge Loan and borrowed the full $2.0 billion on the Term Loan. The Term Loan is pre-payable without penalty and carries a 5 year maturity with a variable interest rate of London Interbank Offered Rate plus an additional 1.25% or approximately 2.36% interest rate for the month of June 2017.
During the first six months of 2017, the Company amended the five -year credit agreement entered into in May 2016 to increase the aggregate availability to $500.0 million . The credit agreement will be used for general corporate purposes. There were no borrowings outstanding under this credit agreement at June 30, 2017.
NOTE 17 NON-TRADED INVESTMENTS
The Company has invested in the U.S. affordable housing and historic renovation real estate markets. These non-traded investments 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 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 carrying amount of the affordable housing and historic renovation investments, included in Other assets, was $212.1 million and $226.3 million at June 30, 2017 and 2016 , respectively. The liability for estimated future capital contributions to the investments was $170.4 million and $186.9 million at June 30, 2017 and 2016 , respectively.

21



Item 2. 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 paints, 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, Asia and Australia. The Company is structured into three reportable segments—The Americas Group, Consumer Brands Group and Performance 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 Note 14 for more information.
The Company’s financial condition, liquidity and cash flow continued to be strong through the first six months of 2017 primarily due to improved operating results in The Americas and Performance Coatings Groups and lower expenses in the Administrative segment. Net working capital decreased $156.6 million at June 30, 2017 compared to the end of the second quarter of 2016 due to a significant increase in current liabilities partially offset by a significant increase in current assets primarily due to the acquisition of The Valspar Corporation (Valspar or the Acquisition) (see Note 3). Cash and cash equivalents decreased $192.6 million while current portion of long-term debt increased $698.9 million resulting from 1.35% senior notes becoming due in 2017. The Company has been able to arrange sufficient short-term borrowing capacity at reasonable rates, and the Company continues to have sufficient total available borrowing capacity to fund its current operating needs. Net operating cash improved $76.2 million in the first six months of 2017 to a cash source of $586.1 million from a cash source of $510.0 million in 2016 .
Consolidated net sales increased 16.0 percent in the second quarter of 2017 to $3.736 billion from $3.220 billion in the second quarter of 2016 and increased 12.1 percent in the first six months of 2017 to $6.497 billion from $5.794 billion . The increase was due primarily to the Acquisition which increased sales 11.8 percent in the second quarter and 6.6 percent in the first six months . In addition, strong paint sales volume in The Americas Group and the impact of a change in revenue classification beginning in the third quarter 2016 related to grossing up third-party service revenue and related costs, which were previously netted and immaterial in prior periods, more than offset a decrease in the Consumer Brands Group. Consolidated gross profit as a percent of consolidated net sales decreased in the second quarter of 2017 to 46.5 percent compared to 2016 at 50.8 percent and decreased in the first six months to 47.4 percent from 50.0 percent due primarily to the Acquisition and related purchase accounting fair value adjustments, the impact of the change in revenue classification and higher raw material costs partially offset by increased paint volume. Selling, general and administrative expenses (SG&A) decreased as a percent of consolidated net sales to 30.7 percent from 32.6 percent in the second quarter of 2016 and decreased to 33.2 percent from 35.3 percent in the first six months primarily due to the impact from Valspar operations in June. Amortization expense increased just over $23 million in both the second quarter and first six months of 2017 versus 2016 due primarily to the Acquisition and related purchase accounting fair value adjustments and one month of amortization expense.
Interest expense increased $15.9 million and $15.8 million , respectively, in the second quarter and first six months of 2017 versus 2016 primarily due to increased debt levels to fund the Acquisition. The effective income tax rate for the second quarter of 2017 was 29.1 percent compared to 29.9 percent in 2016 and the rate for the first six months of 2017 was 26.5 percent compared to 28.1 percent in 2016 . The decrease in the effective tax rate for the second quarter and six months of 2017 compared to 2016 was primarily due to the impact of the Acquisition. Excluding the impact of the Acquisition, the effective income tax rate was 28.2 percent and 30.3 percent for the second quarter of 2017 and 2016 , respectively, and 26.2 percent and 29.0 percent for the first six months of 2017 and 2016 , respectively. Diluted net income per common share in the quarter decreased to $3.36 per share from $3.99 per share in 2016 . Diluted net income per common share in six months increased to $5.90 per share from $5.76 per share in 2016 . Diluted net income per common share from continuing operations (excluding the $.44 per share charge related to the divestiture) in the quarter and six months was $3.80 and $6.34 per share, respectively. Second quarter and six months 2017 diluted net income per common share include a $.72 and $.80 per share charge, respectively, from Acquisition related costs, inventory purchase accounting adjustment amortization and increased amortization of intangibles. Second quarter and six months 2016 diluted net income per common share included a $.16 and $.40 per share charge from Acquisition costs, respectively.

22



CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation and fair presentation of the consolidated unaudited interim financial statements and accompanying notes included in this report are the responsibility of management. The financial statements and footnotes have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and contain certain amounts that were based upon management’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances. Management considered the impact of the uncertain economic environment and utilized certain outside sources of economic information when developing the basis for their estimates and assumptions. The impact of the global economic conditions on the estimates and assumptions used by management was believed to be reasonable under the circumstances. Management used assumptions based on historical results, considering the current economic trends, and other assumptions to form the basis for determining appropriate carrying values of assets and liabilities that were not readily available from other sources. Actual results could differ from those estimates. Also, materially different amounts may result under materially different conditions, materially different economic trends or from using materially different assumptions. However, management believes that any materially different amounts resulting from materially different conditions or material changes in facts or circumstances are unlikely to significantly impact the current valuation of assets and liabilities that were not readily available from other sources.
A comprehensive discussion of the Company’s critical accounting policies and management estimates and significant accounting policies followed in the preparation of the financial statements is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1, on pages 44 through 48, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 . There have been no significant changes in critical accounting policies, management estimates or accounting policies followed since the year ended December 31, 2016 . See Note 6 for accounting policy information regarding warranties and deferred revenue related to furniture protection plans for the Acquisition.
FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW
Overview
On June 1, 2017, the Company completed the acquisition of Valspar for a total purchase price of $8.9 billion . On May 16, 2017, the Company issued $6.0 billion of senior notes (collectively the "New Notes") in a public offering. The net proceeds from the issuance of the New Notes were used to fund the Acquisition. In April 2016, the Company entered into a $7.3 billion bridge credit agreement (Bridge Loan) and a $2.0 billion term loan credit agreement (Term Loan) as committed financing for the Acquisition. On June 1, 2017, the Company terminated the agreement for the Bridge Loan and borrowed the full $2.0 billion on the Term Loan. The Company continues to maintain sufficient short-term borrowing capacity at reasonable rates, and the Company has sufficient cash on hand and total available borrowing capacity to fund its current operating needs.
The Acquisition significantly affected the Company’s financial condition, liquidity and cash flow. See Note 3 for a table detailing the Acquisition preliminary opening balance sheet. Net working capital decreased $156.6 million at June 30, 2017 compared to the end of the second quarter of 2016 due to a significant increase in current liabilities partially offset by a significant increase in current assets primarily due to the Acquisition. Cash and cash equivalents decreased $192.6 million while current portion of long-term debt increased $698.9 million resulting from 1.35% senior notes becoming due in 2017. In the first six months of 2017 , cash and cash equivalents decreased $679.7 million , accounts receivable increased $1.147 billion and inventories increased $786.6 million when normal seasonal trends typically require significant growth in these categories. Accounts payable increased $749.0 million and other accruals increased $320.0 million , primarily due to Acquisition cost accruals. Short-term borrowings increased $11.2 million . Accrued taxes increased $244.1 million and compensation and taxes withheld liabilities decreased $2.2 million both primarily due to timing of payments. Total debt at June 30, 2017 increased $9.534 billion to $11.504 billion from $1.971 billion at June 30, 2016 and increased as a percentage of total capitalization to 82.8 percent from 61.3 percent at the end of the second quarter last year. Total debt increased $9.552 billion from December 31, 2016 and increased as a percentage of total capitalization from 51.0 percent to 82.8 percent . At June 30, 2017 , the Company had remaining short-term borrowing ability of $1.820 billion . Net operating cash improved $76.2 million in the first six months of 2017 to a cash source of $586.1 million from a cash source of $510.0 million in 2016 . In the twelve month period from July 1, 2016 through June 30, 2017 , the Company generated net operating cash of $1.385 billion .
Net Working Capital, Debt and Other Long-Term Assets and Liabilities
Cash and cash equivalents decreased $679.7 million during the first six months of 2017 . Cash and cash equivalents on hand funded cash requirements for increased sales and normal seasonal increases in working capital, capital expenditures of $83.6 million , and payments of cash dividends of $158.9 million . At June 30, 2017 , the Company’s current ratio was 1.17 compared to 1.28 at December 31, 2016 and 1.33 a year ago.

23



Goodwill and intangible assets increased $11.799 billion from December 31, 2016 and increased $11.789 billion from June 30, 2016 . The net increase during the first six months of 2017 was primarily due to the Acquisition and capitalized software additions of $11.838 billion and $6.0 million , respectively, partially offset by amortization of $35.1 million and foreign currency translation of $9.9 million . The net increase over the twelve month period from June 30, 2016 was primarily due to the Acquisition and capitalized software additions of $11.839 billion and $27.3 million , respectively, partially offset by amortization of $49.4 million , goodwill impairment of $10.7 million and foreign currency translation of $17.5 million . Based on the preliminary purchase accounting, goodwill of $4.6 billion and $1.5 billion was recognized in the Performance Coatings Group and the Consumer Brands Group, respectively. See Note 4, on pages 49 and 50, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for more information concerning goodwill and intangible assets.
Deferred pension assets decreased $0.8 million during the first six months of 2017 and decreased $21.4 million from June 30, 2016 . The decrease in the last twelve months was due to increased pension benefit obligations, primarily due to changes in actuarial assumptions, and a decrease in the fair value of plan assets. See Note 6, on pages 54 through 59, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for more information concerning the Company’s benefit plan assets.
Other assets at June 30, 2017 increased $146.2 million in the first six months of 2017 and increased $96.5 million from a year ago primarily due to the reclass of current deferred tax assets to non-current due to the adoption of ASU No. 2015-17. See Note 2.
Net property, plant and equipment increased $794.0 million in the first six months of 2017 and increased $817.7 million in the twelve months since June 30, 2016 . The increase in the first six months was primarily due to acquired property plant and equipment of $824.8 million , capital expenditures of $83.6 million and changes in currency translation rates of $18.1 million , partially offset by depreciation expense of $95.0 million and sale or disposition of fixed assets of $37.6 million . Since June 30, 2016 , acquired property plant and equipment of $824.8 million , capital expenditures of $208.6 million and changes in currency translation rates of $8.5 million were partially offset by depreciation expense of $180.3 million and sale or disposition of fixed assets of $43.7 million . Capital expenditures during the first six months of 2017 primarily represented expenditures associated with improvements and normal equipment replacement in manufacturing and distribution facilities in the Consumer Brands Group, normal equipment replacement in The Americas and Performance Coatings Groups, and information systems hardware in the Administrative Segment.
On June 2, 2017 the Company closed its previously announced exchange offers and consent solicitations (collectively, the "Exchange Offer") for the outstanding senior notes of Valspar. Pursuant to the Exchange Offer, the Company issued an aggregate principal amount of approximately $1.478 billion (collectively the "Exchange Notes"). On May 16, 2017, the Company issued $6.0 billion of senior notes (collectively the "New Notes") in a public offering. The net proceeds from the issuance of the New Notes were used to fund the Acquisition. As previously disclosed, the interest rate locks entered into in 2016 settled in March 2017 resulting in a pretax gain of $87.6 million recognized in Cumulative other comprehensive loss. This gain is being amortized from Cumulative other comprehensive loss to a reduction of interest expense over the terms of the New Notes. For the three months ended June 30, 2017 , the amortization of the unrealized gain reduced interest expense by $1.0 million . The Company expects to amortize unrealized gains of $8.3 million from Cumulative other comprehensive loss to Interest expense during the next twelve months. In April 2016, the Company entered into agreements for a $7.3 billion Bridge Loan and a $2.0 billion Term Loan as committed financing for the Acquisition. On June 1, 2017, the Company terminated the agreement for the Bridge Loan and borrowed the full $2.0 billion on the Term Loan.
In May 2016 and subsequently amended in 2017, the Company entered into a five-year $500.0 million credit agreement. The credit agreement will be used for general corporate purposes. There were no borrowings outstanding under this credit agreement at June 30, 2017 . See Note 7, on pages 60 and 61, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for more information concerning the Company’s debt.
At June 30, 2017 , there were no borrowings outstanding under the commercial paper program, and short-term borrowings under the Company's global five-year $1.350 billion credit agreement were $30.2 million with a weighted average interest rate of 1.4 percent . Short-term borrowings under various other foreign programs were $21.7 million with a weighted average interest rate of 9.7 percent . The Company had unused capacity of $1.320 billion at June 30, 2017 under the credit agreement.
Long-term liabilities for postretirement benefits other than pensions did not change significantly from December 31, 2016 and June 30, 2016 . See Note 6, on pages 54 through 59, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for more information concerning the Company’s benefit plan obligations.
Deferred income taxes at June 30, 2017 increased $2.394 billion in the first six months of 2017 and increased $2.336 billion from a year ago primarily due to increased deferred tax liabilities as a result of the Acquisition.

24



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 the first six months of 2017 . 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 9 for further information on environmental-related long-term liabilities.
Contractual Obligations, Commercial Commitments and Warranties
Short-term borrowings increased $11.2 million to $51.9 million at June 30, 2017 from $40.7 million at December 31, 2016 . Total long-term debt increased $9.541 billion to $11.452 billion at June 30, 2017 from $1.912 billion at December 31, 2016 , and increased $9.541 billion from $1.911 billion at June 30, 2016 .
On June 1, 2017, the Company completed the Acquisition. As of December 31, 2016, Valspar had marketing commitments and operating leases of $199.3 million and $128.6 million, respectively. There have been no other significant changes to the Company’s contractual obligations and commercial commitments in the second quarter of 2017 as summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .
Changes to the Company’s accrual for product warranty claims in the first six months of 2017 are disclosed in Note 6.
Litigation
See Note 10 for information concerning litigation.
Shareholders’ Equity
Shareholders’ equity increased $512.8 million to $2.391 billion at June 30, 2017 from $1.878 billion at December 31, 2016 and increased $1.145 billion from $1.247 billion at June 30, 2016 . The increase in Shareholders’ equity for the first six months of 2017 resulted primarily from net income of $558.3 million , an increase in Other capital of $118.2 million resulting primarily from stock option exercises, and a decrease in Cumulative other comprehensive loss of $21.1 million , partially offset by cash dividends paid on common stock of $158.9 million . Since June 30, 2016 , net income of $1.148 billion , an increase in Other capital of $194.2 million , and a decrease in Cumulative other comprehensive loss of $142.9 million more than offset cash dividends paid on common stock of $315.3 million in twelve months. During the first six months of 2017 and fiscal year 2016, the Company did not purchase any shares of its common stock for treasury purposes through open market purchases. The Company acquires its common stock for general corporate purposes, and depending on its cash position and market conditions, it may acquire additional shares in the future. The Company had remaining authorization at June 30, 2017 to purchase 11.65 million shares of its common stock. In February 2017, the Board of Directors increased the quarterly cash dividend from $.84 per common share to $.85 per common share. This quarterly dividend will 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.
Cash Flow
Net operating cash improved $76.2 million in the first six months of 2017 to a cash source of $586.1 million from a cash source of $510.0 million in 2016 primarily due to cash generated from increased net income from continuing operations and cash received of $87.6 million for the settlement of the interest rate lock agreements. Net investing cash usage increased $8.715 billion in the first six months of 2017 to a usage of $8.864 billion from a usage of $149.0 million in 2016 primarily due to the completion of the Acquisition. Net financing cash sources increased $7.775 billion to a source of $7.604 billion in the first six months of 2017 from a usage of $170.9 million in 2016 primarily due to proceeds from long-term debt (see Note 16). In the twelve month period from July 1, 2016 through June 30, 2017 , the Company generated net operating cash of $1.385 billion , used $9.019 billion in investing activities and generated $7.467 billion in financing activities.

25



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 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.
Financial Covenant
Certain borrowings contain a consolidated leverage covenant. The covenant states that upon close of the Acquisition, the Company’s leverage ratio is not to exceed 5.25 to 1.00. The leverage ratio is defined as the ratio of total indebtedness (the sum of Short-term borrowings, Current portion of long-term debt and Long-term debt) at the reporting date to consolidated pro forma “Earnings Before Interest, Taxes, Depreciation, and Amortization” (EBITDA) for the combined companies for the twelve month period ended on the same date. Refer to the “Results of Operations” caption below for a reconciliation of EBITDA to Net income. At June 30, 2017 , the Company was in compliance with the covenant. The Company’s Notes, Debentures and revolving credit agreements 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 and 61, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for more information concerning the Company’s debt and related covenant.
RESULTS OF OPERATIONS
Shown below are net sales and income before taxes by segment for the second quarter :
(Thousands of dollars)
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
The Americas Group
$
2,437,655

 
$
2,241,566

 
8.7
 %
 
$
4,389,401

 
$
3,982,060

 
10.2
 %
Consumer Brands Group
536,441

 
462,473

 
16.0
 %
 
859,807

 
827,093

 
4.0
 %
Performance Coatings Group
761,094

 
514,198

 
48.0
 %
 
1,245,548

 
981,830

 
26.9
 %
Administrative
627

 
1,288

 
-51.3
 %
 
2,448

 
2,566

 
-4.6
 %
Total
$
3,735,817

 
$
3,219,525

 
16.0
 %
 
$
6,497,204

 
$
5,793,549

 
12.1
 %
 
(Thousands of dollars)
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Income Before Income Taxes:
 
 
 
 
 
 
 
 
 
 
 
The Americas Group
$
532,687

 
$
499,347

 
6.7
 %
 
$
837,911

 
$
751,953

 
11.4
 %
Consumer Brands Group
76,064

 
103,157

 
-26.3
 %
 
131,978

 
163,030

 
-19.0
 %
Performance Coatings Group
62,345

 
70,377

 
-11.4
 %
 
119,457

 
123,050

 
-2.9
 %
Administrative
(162,093
)
 
(133,667
)
 
-21.3
 %
 
(273,738
)
 
(282,454
)
 
3.1
 %
Total
$
509,003

 
$
539,214

 
-5.6
 %
 
$
815,608

 
$
755,579

 
7.9
 %
Consolidated net sales increased in the second quarter and first six months of 2017 due primarily to the addition of Valspar sales for the month of June and higher paint sales volume in The Americas Group and Performance Coatings Group. The previously announced change in revenue classification increased consolidated net sales 2.2 percent in both the quarter and six months . This prospective change primarily impacts The Americas and Performance Coatings Groups. This change had no impact on operating profit, but reduced the operating margins of the affected Groups. Currency translation rate changes did not have a material impact on consolidated net sales in the quarter and six months .
Net sales of all consolidated foreign subsidiaries were up 32.7 percent to $603.3 million in the quarter and up 19.5 percent to $1.022 billion in the first six months versus $454.5 million and $855.2 million in the same periods last year. The increase in net sales for all consolidated foreign subsidiaries in the quarter and six months was due primarily to the addition of Valspar sales for the month of June. Net sales of all operations other than consolidated foreign subsidiaries were up 13.3 percent to $3.132

26



billion in the quarter and up 10.9 percent to $5.475 billion in the first six months as compared to $2.765 billion and $4.938 billion in the same periods last year.
Net sales in The Americas Group increased in the second quarter and first six months due primarily to higher architectural paint sales volume, the impact of the change in revenue classification and selling price increases. Net sales from stores open for more than twelve calendar months in the U.S. and Canada, excluding the change in revenue classification, increased 4.9 percent in the quarter and increased 6.0 percent in the first six months compared to last year’s comparable periods. Sales of non-paint products, excluding the change in revenue classification, increased by 11.0 percent over last year's second quarter and increased by 9.5 percent over last year's first six months . A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold. Net sales of the Consumer Brands Group increased in the second quarter and first six months primarily due to the inclusion of Valspar sales for the month of June, partially offset by lower volume sales to most of the Group’s retail and commercial customers. Valspar sales increased the Consumer Brands Group's Net sales by 27.9% and 15.6% in the quarter and six months , respectively. Net sales in the Performance Coatings Group stated in U.S. dollars increased in the second quarter and first six months due primarily to one month of Valspar sales and higher paint sales volume and selling price increases. 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, were essentially flat in the second quarter and first six months .
Consolidated gross profit increased $101.2 million in the second quarter and increased $182.6 million in the first six months of 2017 compared to the same periods in 2016 primarily due to one month of Valspar sales and increased paint sales volume partially offset by inventory step-up amortization related to the Acquisition and higher raw material costs. Consolidated gross profit as a percent of consolidated net sales decreased in the second quarter of 2017 to 46.5 percent compared to 2016 at 50.8 percent and decreased in the first six months to 47.4 percent from 50.0 percent due primarily to inventory step-up amortization related to the Acquisition, the impact of the change in revenue classification and higher raw material costs partially offset by increased paint volume.
The Americas Group’s gross profit was higher than last year by $61.3 million in the second quarter and was higher than last year by $148.7 million in the first six months due to higher paint sales volume. The Americas Group’s gross profit margins decreased in the quarter and first six months , primarily due to the impact of the change in revenue classification and increased raw material costs only partially offset by increased paint sales volume. The Consumer Brands Group’s gross profit decreased by $7.7 million in the quarter and decreased by $18.2 million in the first six months compared to the same periods last year primarily due to inventory step-up amortization related to the Acquisition, increased raw material costs, and lower volume sales to most of the Group’s retail and commercial customers partially offset by the inclusion of Valspar sales for the month of June. The Consumer Brands Group’s gross profit margins were down as a percent of sales in the quarter and first six months compared to the same periods last year for those same reasons. The Performance Coatings Group’s gross profit increased $45.8 million in the second quarter and increased $52.8 million in the first six months compared to the same periods last year, when stated in U.S. dollars, primarily due to the inclusion of Valspar sales for the month of June, selling price increases and higher sales volume partially offset by inventory step-up amortization related to the Acquisition and higher raw material costs. The Performance Coatings Group’s gross profit margins were down as a percent of sales in the quarter and first six months compared to the same periods last year primarily due to Acquisition-related purchase accounting adjustments to inventory and higher raw material costs partially offset by price increases. The Administrative segment’s gross profit increased by $1.8 million in the second quarter and decreased by $0.7 million compared to the same periods last year.
Selling, general and administrative expenses (SG&A) increased $97.0 million in the second quarter and increased $110.5 million in the first six months of 2017 versus last year due primarily to the inclusion of Valspar for the month of June, increased expenses to support higher sales levels and net new store openings. In the second quarter of 2017 , expenses associated with the Acquisition were 95.8 million compared to $4.5 million in 2016 . As a percent of sales, consolidated SG&A decreased to 30.7 percent in the quarter and decreased to 33.2 percent in the first six months of 2017 from 32.6 percent in the second quarter and 35.3 percent in the first six months of 2016 primarily due to the impact from Valspar operations in June which helped reduce these ratios.
The Americas Group’s SG&A increased $29.3 million in the second quarter and increased $66.3 million in the first six months due primarily to net new store openings and general comparable store expenses to support higher sales levels. The Consumer Brands Group’s SG&A increased $15.3 million in the quarter and increased $9.2 million in the first six months compared to the same periods last year primarily due to the impact from Valspar operations in June partially offset by good expense control. The Performance Coatings Group’s SG&A increased $34.7 million in the quarter and increased $38.1 million in the first six months primarily due to the impact from Valspar operations in June. The Administrative segment’s SG&A increased $17.7 million in the second quarter and decreased $3.2 million in the first six months primarily due to increased costs associated with the Acquisition in the quarter.
Amortization expense increased $23.3 million in the second quarter and increased $23.7 million in the first six months of 2017 versus 2016 primarily due to amortization of Acquisition-related purchase accounting intangibles adjustment.

27



Interest expense increased $15.9 million in the second quarter and increased $15.8 million in the first six months of 2017 versus 2016 due to the Acquisition-related debt incurred.
Other general expense—net decreased $1.0 million in the second quarter and decreased $18.2 million in the first six months primarily due to decreased provisions for environmental expenses in the Administrative segment.
Other expense (income) —net improved $1.7 million in the second quarter and improved $6.3 million in the first six months as compared to 2016 primarily due to favorable foreign currency transaction related gains in both the Performance Coatings and The Americas Groups in 2017.
Consolidated income from continuing operations before income taxes decreased $30.2 million in the second quarter , primarily due to Acquisition-related costs, inventory purchase accounting adjustment amortization and increased amortization of intangibles partially offset higher segment profits in The Americas Group. Consolidated income from continuing operations before income taxes increased $60.0 million in the first six months primarily due to higher segment profits in The Americas Group partially offset by Acquisition-related costs, inventory purchase accounting adjustment amortization and increased amortization of intangibles.
The effective tax rate for income from continuing operations for the second quarter and first six months of 2017 was 29.1 percent and 26.5 percent compared to 29.9 percent and 28.1 percent in 2016 . The decrease in the effective tax rate for the second quarter and six months of 2017 compared to 2016 was primarily due to the impact of the Acquisition. Excluding the impact of the Acquisition, the effective income tax rate was 28.2 percent and 30.3 percent for the second quarter of 2017 and 2016 , respectively, and 26.2 percent and 29.0 percent for the first six months of 2017 and 2016 , respectively.
Diluted net income per common share in the quarter decreased to $3.36 per share from $3.99 per share in 2016 . Diluted net income per common share in six months increased to $5.90 per share from $5.76 per share in 2016 . Diluted net income per common share from continuing operations (excluding the $.44 per share charge related to the divestiture) in the quarter and six months was $3.80 and $6.34 per share, respectively. Second quarter and six months 2017 diluted net income per common share include a $.72 and $.80 per share charge, respectively, from Acquisition-related costs, inventory purchase accounting adjustments and increased amortization of intangibles. Second quarter and six months 2016 diluted net income per common share included a $.16 and $.40 per share charge from Acquisition costs, respectively. Currency translation rate changes did not have a significant impact on diluted net income per common share in the quarter and six months .
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 “Earnings Before Interest, Taxes, Depreciation and Amortization” (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 cash flows from operating activities as an indicator of operating performance or as a measure of liquidity. The reader should refer to the determination of net income and cash flows from operating activities in accordance with U.S. generally accepted accounting principles disclosed in the Statements of Consolidated Income and Comprehensive Income and Statements of Consolidated Cash Flows. EBITDA as used by management is calculated as follows:
(Thousands of dollars)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net income from continuing operations
$
360,651

 
$
378,064

 
$
599,803

 
$
542,940

Interest expense
56,729

 
40,878

 
82,424

 
66,610

Income taxes
148,352

 
161,150

 
215,805

 
212,639

Depreciation
50,370

 
43,829

 
94,965

 
86,724

Amortization
28,918

 
5,584

 
35,088

 
11,366

EBITDA from continuing operations
645,020

 
629,505

 
1,028,085

 
920,279

Valspar EBITDA *
(9,494
)
 
(4,479
)
 
(16,952
)
 
(35,623
)
EBITDA from continuing operations without Valspar
$
654,514

 
$
633,984

 
$
1,045,037

 
$
955,902

 
 
 
 
 
 
 
 
* Valspar EBITDA for 2017 includes June 2017 Valspar operations, purchase accounting items and acquisition costs. Valspar EBITDA for 2016 includes acquisition costs only.

28




CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report constitute “forward-looking statements” within the meaning of the federal securities laws. 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 "believe," "expect," "may," "will," "should," "project," "could," "plan," "goal," "potential," "seek," "intend" or "anticipate" or the negative thereof or comparable terminology.
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 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;
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 anticipated cost synergies resulting from the acquisition of Valspar and the timing thereof ;
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, except as otherwise required by law.


29



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 enters into option and forward currency exchange contracts and commodity swaps to hedge against value changes in foreign currency and commodities. The Company believes it may experience continuing losses from foreign currency translation and commodity price fluctuations. However, the Company does not expect currency translation, transaction, commodity price fluctuations or hedging contract losses to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. There were no material changes in the Company’s exposure to market risk since the disclosure included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .

30



Item 4. 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. We acquired The Valspar Corporation, or Valspar, on June 1, 2017 and have not yet included Valspar in our assessment of the effectiveness of our internal control over financial reporting. Accordingly, pursuant to the Securities and Exchange Commission's general guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment in the year of acquisition, the scope of our assessment of the effectiveness of disclosure controls and procedures does not include internal control over financial reporting related to Valspar. For the second quarter 2017 , Valspar accounted for $381.0 million of our total net sales and as of June 30, 2017 had total assets of $14.2 billion .

Except as described in the preceding paragraph, 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.

31



PART II. OTHER INFORMATION
Item 1. Legal Proceedings .
For information with respect to certain environmental-related matters and legal proceedings, see the information included under the captions entitled “Environmental-Related Liabilities” and “Litigation” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 8 and 9 of the “Notes to Condensed Consolidated Financial Statements,” which is incorporated herein by reference.

32



Item 1A.     Risk Factors
A discussion of our risk factors can be found in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. The information below includes additional risks relating to our acquisition of The Valspar Corporation, or Valspar, which was consummated on June 1, 2017. 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.
We may not realize the growth opportunities and cost synergies that are anticipated from the acquisition of Valspar.
The benefits that are expected to result from the acquisition of Valspar will depend, in part, on our ability to realize the anticipated growth opportunities and cost synergies as a result of the acquisition. Our success in realizing these growth opportunities and cost synergies, and the timing of this realization, depends 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 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 acquisition may be offset by costs incurred to, or delays in, integrating the businesses.
We incurred a substantial amount of debt to complete the 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 June 30, 2017, we had total debt of approximately  $11.5 billion ,which is an increase of $9.6 billion since March 31, 2017, including indebtedness incurred to complete the acquisition of Valspar. We have the ability under our existing credit facilities to incur substantial additional indebtedness in the future. 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 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;
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.

33



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.


34



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

A summary of the repurchase activity for the Company’s second quarter is as follows:  
Period
Total
Number of
Shares
Purchased
 
Average
Price
Paid Per
Share
 
Number of
Shares
Purchased as
Part of a
Publicly
Announced
Plan
 
Number of
Shares That
May Yet Be
Purchased
Under the
Plan
April 1 - April 30
 
 
 
 
 
 
 
 
 
Share repurchase program (1)
 
 
 
 
 
 
 
11,650,000

 
Employee transactions (2)
 
926

 
$
323.63

 
 
 
N/A

 
 
 
 
 
 
 
 
 
 
May 1 - May 31
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 1 - June 30
 
 
 
 
 
 
 
 
 
Employee transactions (2)
 
9,014

 
335.86

 
 
 
N/A

Total
 
 
 
 
 
 
 
 
 
 
Share repurchase program  (1)
 
 
 
 
 
 
 
11,650,000

 
Employee transactions  (2)
 
9,940

 
$
334.72

 
 
 
NA

 
(1)  
All shares were 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 June 30, 2017 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.





35



Item 5. Other Information .
During the six months ended June 30, 2017 , the Audit Committee of the Board of Directors of the Company approved permitted non-audit services to be performed by Ernst & Young LLP, the Company’s independent registered public accounting firm. These non-audit services were approved within categories related to domestic advisory tax and tax compliance services and international tax compliance.

36



Item 6. Exhibits.
 
 
4.1
Amendment No. 7 to the Credit Agreement, dated as of May 8, 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 May 8, 2017, and incorporated herein by reference.
 
 
4.2
Amendment No. 8 to the Credit Agreement, dated as of May 11, 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 May 11, 2017, and incorporated herein by reference.
 
 
4.3
Third Supplemental Indenture, dated May 16, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 16, 2017, and incorporated herein by reference.
 
 
4.4
Fourth Supplemental Indenture, dated May 16, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated May 16, 2017, and incorporated herein by reference.
 
 
4.5
Fifth Supplemental Indenture, dated May 16, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K dated May 16, 2017, and incorporated herein by reference.
 
 
4.6
Sixth Supplemental Indenture, dated May 16, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K dated May 16, 2017, and incorporated herein by reference.
 
 
4.7
Seventh Supplemental Indenture, dated May 16, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.5 to the Company’s Current Report on Form 8-K dated May 16, 2017, and incorporated herein by reference.
 
 
4.8
Eighth Supplemental Indenture, dated June 2, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 5, 2017, and incorporated herein by reference.
 
 
4.9
Ninth Supplemental Indenture, dated June 2, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated June 5, 2017, and incorporated herein by reference.
 
 
4.10
Tenth Supplemental Indenture, dated June 2, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K dated June 5, 2017, and incorporated herein by reference.
 
 
4.11
Eleventh Supplemental Indenture, dated June 2, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K dated June 5, 2017, and incorporated herein by reference.
 
 
4.12
Twelfth Supplemental Indenture, dated June 2, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.5 to the Company’s Current Report on Form 8-K dated June 5, 2017, and incorporated herein by reference.
 
 
10.1
Registration Rights Agreement, dated June 2, 2017, by and among the Company, as issuer, and each of Citigroup Global Markets Inc. and Wells Fargo Securities, LLC, as dealer managers, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated June 5, 2017, and incorporated herein by reference.
 
 
10.2*
Retention Agreement, dated June 12, 2017, between the Company and Catherine M. Kilbane (filed herewith).
 
 
10.3*
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 (filed herewith).
 
 
31(a)
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (filed herewith).
 
 
31(b)
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith).
 
 
32(a)
Section 1350 Certification of Chief Executive Officer (furnished herewith).
 
 
32(b)
Section 1350 Certification of Chief Financial Officer (furnished herewith).
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 

37



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
* Management contract or compensatory plan or arrangement.

38



Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.  
 
 
THE SHERWIN-WILLIAMS COMPANY
 
 
 
July 26, 2017
By:
/s/ Jane M. Cronin
 
Jane M. Cronin
 
 
Senior Vice President,
 
 
Corporate Controller and Assistant Secretary

 
 
 
July 26, 2017
By:
/s/ Allen J. Mistysyn
 
Allen J. Mistysyn
 
 
Senior Vice President,
 
 
Finance and Chief Financial Officer

39



INDEX TO EXHIBITS
 
Exhibit No.
Exhibit Description
Amendment No. 7 to the Credit Agreement, dated as of May 8, 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 May 8, 2017, and incorporated herein by reference.
 
 
Amendment No. 8 to the Credit Agreement, dated as of May 11, 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 May 11, 2017, and incorporated herein by reference.
 
 
Third Supplemental Indenture, dated May 16, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 16, 2017, and incorporated herein by reference.
 
 
Fourth Supplemental Indenture, dated May 16, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated May 16, 2017, and incorporated herein by reference.
 
 
Fifth Supplemental Indenture, dated May 16, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K dated May 16, 2017, and incorporated herein by reference.
 
 
Sixth Supplemental Indenture, dated May 16, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K dated May 16, 2017, and incorporated herein by reference.
 
 
Seventh Supplemental Indenture, dated May 16, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.5 to the Company’s Current Report on Form 8-K dated May 16, 2017, and incorporated herein by reference.
 
 
Eighth Supplemental Indenture, dated June 2, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 5, 2017, and incorporated herein by reference.
 
 
Ninth Supplemental Indenture, dated June 2, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated June 5, 2017, and incorporated herein by reference.
 
 
Tenth Supplemental Indenture, dated June 2, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K dated June 5, 2017, and incorporated herein by reference.
 
 
Eleventh Supplemental Indenture, dated June 2, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K dated June 5, 2017, and incorporated herein by reference.
 
 
Twelfth Supplemental Indenture, dated June 2, 2017, by and between the Company and Wells Fargo Bank, National Association, as trustee, filed as Exhibit 4.5 to the Company’s Current Report on Form 8-K dated June 5, 2017, and incorporated herein by reference.
 
 
Registration Rights Agreement, dated June 2, 2017, by and among the Company, as issuer, and each of Citigroup Global Markets Inc. and Wells Fargo Securities, LLC, as dealer managers, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated June 5, 2017, and incorporated herein by reference.
 
 
Retention Agreement, dated June 12, 2017, between the Company and Catherine M. Kilbane (filed herewith).
 
 
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 (filed herewith).
 
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (filed herewith).
 
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith).
 
 
Section 1350 Certification of Chief Executive Officer (furnished herewith).
 
 
Section 1350 Certification of Chief Financial Officer (furnished herewith).
 
 
101.INS
XBRL Instance Document
 
 

40



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
* Management contract or compensatory plan or arrangement.

41


EXHIBIT 10.2

RETENTION AGREEMENT

This RETENTION AGREEMENT (“Agreement”) is being signed as of the 12th day of June, 2017 (the “Signing Date”) to cover a new employment relationship which will be effective as of the 1 st day of August, 2017 (the “Effective Date”) by and between Catherine M. Kilbane (“Employee”) and The Sherwin-Williams Company, an Ohio corporation (“Employer”).

WHEREAS , Employee has worked for Employer in an at-will relationship as its Senior Vice President, General Counsel and Secretary, and the parties now desire to memorialize an updated employment relationship pursuant to this Agreement; and

WHEREAS , Employer desires to employ Employee for the term of this Agreement under the terms and conditions as set forth herein and Employee desires to accept such Employment.

NOW, THEREFORE , in consideration of the terms, conditions, premises and the mutual covenants herein set forth, the parties hereby agree as follows:

1.      POSITION . On the Effective Date, Employer shall employ Employee in the position of “Senior Vice President - Legal Integration”, reporting to Employer’s Chief Executive Officer (the “CEO”), and Employee does hereby accept such employment. On and after the Effective Date, Employer and Employee hereby acknowledge that the position of Senior Vice President - Legal Integration shall not constitute an “officer” or “executive officer” position within the meaning of Rule 16a-1(f) or Rule 3b-7, respectively, of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Employer and Employee agree that, effective as of 11:59 pm on the day before the Effective Date, Employee shall hereby resign as General Counsel and Corporate Secretary of Employer and from any and all officer and/or director positions of Employer and any such positions with Employer’s direct or indirect subsidiaries, and Employer hereby accepts such resignations on behalf of itself and its subsidiaries.

Employee shall have such responsibilities mutually and reasonably agreed upon by the parties during the Term and shall utilize her energy, experience and talents in furtherance of those responsibilities, as applicable. From the Signing Date and during the Term, Employee will not engage in any other activities, whether as a consultant, employee, director, officer or otherwise, for any direct or indirect remuneration for a Competitor (as hereafter defined) without the written approval of the CEO; provided, however, that it shall not be a violation of this Agreement, and Employee will not need the approval of the CEO, for Employee to manage her personal investments or to engage in, or serve, such civic, community, charitable, educational, or religious organizations or to serve in any capacity, including as a director, employee, consultant or otherwise, for any company that is not a Competitor (including, but not limited to, her existing service as a Board member and lead independent director of The Andersons Inc. and/or the boards of directors of its subsidiaries). As used in this Agreement, the term “Competitor” refers to any company, including its subsidiaries, listed on Exhibit A attached hereto.


1



2.      TERM . The term of employment under this Agreement shall commence on the Effective Date, August 1, 2017, and shall terminate on November 30, 2018, subject to earlier termination only pursuant to Section 12 (the “Term”).

3.      BASE COMPENSATION . During the Term, subject to Section 12, Employee shall receive as compensation for her services, a base salary, payable in equal installments in accordance with Employer payroll procedures, in an aggregate amount of Seven Hundred Forty-Eight Thousand Five Hundred Fifty Seven and 00/100 ($748,557.00) for the entire Term.

4.      BENEFITS .

(a)      Subject to Section 12 and except as set forth in Section 4(b) hereof, during the Term, Employee shall be eligible to participate in any employee benefits program (including welfare and/or retirement benefits) in which Employee currently participates as of the Effective Date that is offered to similarly situated full-time salaried employees of Employer pursuant to the same terms and conditions offered to such other employees, subject to and in accordance with the terms and conditions of the applicable plan documents and all applicable laws and regulations, provided however, that, except as otherwise provided herein, Employee’s position shall not be considered a Sherwin-Williams’ Section 162(m) or Management Incentive Plan (SWMIP) position, but shall be considered a “Participating Position” solely for purposes of any of Employee’s outstanding equity incentive awards under the 2006 Equity and Performance Incentive Plan, as amended and restated (the “Equity Plan”).

(b)      Notwithstanding the foregoing, as of the Effective Date, Employee hereby expressly waives: (i) participation in Employer’s short-term and long-term disability plans; (ii) any rights to receive stock option and/or restricted stock unit grants or other types of equity grants at the October 2017, February 2018, and/or October 2018 Board or Board committee meetings (or such other meetings at which such awards or other equity awards are made); and (iii) the continued right to participate as an active participant in Employer’s Deferred Compensation Savings and Pension Equalization Plan on and after the Effective Date (but retains all rights under such plan with respect to benefits earned prior to the Effective Date). The parties acknowledge that they have exchanged a Transaction Compensation Statement which sets forth an illustrative example of the cash and equity compensation to be provided by Employer to Employee, subject to the overriding terms and conditions of this Agreement and the other plans and agreements to which such compensation is subject.

(c)      If Employee remains employed with Employer through the 2017 calendar year, Employee shall be eligible for her 2017 incentive bonus at such time as such bonuses are awarded and paid in early 2018, with the actual amount of entitlement to be determined based upon actual results. Such bonus shall be determined as if Employee had remained in her prior Section 162(m) or SWMIP, as applicable, position for the entire 2017 calendar year. In addition, unless Employee’s employment is terminated during the Term as provided in Section 12 hereof, subject to the timely execution and non-revocation of the Release pursuant to Section 4(e), Employer shall pay Employee an incentive bonus for 2018 as soon as practicable following the expiration of the Term in an amount

2



equal to Three Hundred Twenty-Seven Thousand Four Hundred Ninety-Four and 00/100 ($327,494) (the “2018 Bonus”).

(d)      While Employee remains employed with the Employer, all outstanding unvested stock options and outstanding unvested restricted stock units held by Employee shall continue to vest throughout the Term.

(e)      Employee agrees to execute, deliver and not revoke, within 60 days following Employee’s termination of employment under Section 12(a) or (b) hereof during the Term, or following her cessation of employment at the end of the Term, a General Release in the form attached hereto as Exhibit B (the “Release”) and Employer agrees to execute and deliver the Release promptly thereafter. To the extent that (i) such termination of employment occurs within 60 days of the end of any calendar year, and (ii) any of the benefits that are payable on or after Employee’s termination of employment constitute “nonqualified deferred compensation” for purposes of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations and guidance promulgated thereunder (collectively, “Code Section 409A”), any payment of any amount or provision of any benefit otherwise scheduled to occur prior to the 60 th day following the date of Employee's termination of employment shall not be made prior to the first day of the following calendar year, after which any remaining benefits shall thereafter be provided to Employee according to the applicable terms.

5.      VACATION PAY . Employer shall pay Employee her 2017 earned but unused vacation, if any, in a lump sum as soon as practicable following the end of the 2017 calendar year.

6.      CONFIDENTIAL INFORMATION .

(a)      Except as otherwise provided herein or Section 20 hereof, from the Signing Date, during the Term and thereafter, Employee agrees that, in addition to any other limitations to which she is already subject, regardless of the circumstances of the termination of employment with Employer, she will not communicate to any person, firm, or corporation any non-public, confidential knowledge, information or data including, without limitation, such information relating to acquisitions, divestitures, mergers, restructurings, business information, strategic plans, customer lists, prices, trade secrets or advertising, in any such case, which she has or might from time to time acquire as a result of her employment with Employer with respect to the business of the Employer and/or any of its affiliates or subsidiaries (“Confidential Information”), unless and to the extent that such information becomes generally known to the general public other than as a result of Employee’s acts or omissions (in which case, such information shall no longer be “Confidential Information”). Notwithstanding anything contained herein to the contrary, this Agreement shall not prohibit disclosure of Confidential Information if (i) it is required by law or regulation or by a court of competent jurisdiction or other applicable legal or administrative process or (ii) it is in connection with any Legal Action (as defined in Section 8 hereof) requiring Employee’s testimony, deposition, certifications or similar involvement, including without limitation, any such Legal Action in which Employee’s legal rights and obligations as an employee, officer or director of Employer or its subsidiaries or affiliates, under this Agreement are at issue; provided, however, that Employee shall, to the extent reasonably practicable and lawful in any such event, give prior notice to the Employer

3



of Employee’s intent to disclose Confidential Information so as to allow the Employer an opportunity to obtain such protective orders or similar relief with respect thereto as may reasonably be deemed appropriate by Employer.

(b)      All Confidential Information, Employer’s and its affiliates’ and subsidiaries’ intellectual property, files, records, correspondence, memoranda, notes or other documents (including, without limitation, those in computer-readable form) or property relating or belonging to Employer and its subsidiaries and affiliates, whether prepared by Employee or otherwise coming into her possession or control in the course of the performance of her services under this Agreement, shall be the exclusive property of Employer and those assets in physical form known to Employee shall be delivered to Employer, and not retained by Employee (including, without limitation, any copies thereof), promptly upon request by Employer and, in any event, promptly upon termination of the Term.

(c)      Employee acknowledges and agrees that she has no expectation of privacy with respect to Employer’s telecommunications, networking or information processing systems (including, without limitation, stored computer files, email messages and voice messages), and that Employee’s activity and any files or messages on or using any of those systems may be monitored at any time without notice.

7.      MUTUAL NONDISPARAGEMENT . From the Signing Date, during the Term and thereafter, Employee shall not, directly or indirectly, take any action, or encourage others to take any action, to disparage or criticize Employer and/or its subsidiaries and affiliates or their respective employees, officers, directors, products or services. Employer shall instruct its directors and officers (who are “officers” of the Employer as defined in Rule 16a-1(f) of the Exchange Act and determined to be such “officers” by the Board, (the “Section 16 Officers”)) not to, directly or indirectly, from the Signing Date, during the Term and thereafter, take any action, or encourage others to take any action, to disparage or criticize Employee; and Employer shall be fully responsible for any violation or breach thereof by any such director or officer. Nothing contained in this Section 7 shall preclude Employee or Employer (or its directors or Section 16 Officers) from enforcing their respective rights under this Agreement or truthfully testifying in any Legal Action or a governmental inquiry, or from exercising protected rights to the extent such rights cannot be waived by this Agreement.

8.      LITIGATION ASSISTANCE; INDEMNITY; REIMBURSEMENT .

(a)      To the extent that Employer, in its reasonable judgment, determines that Employee possesses information relevant to any action, suit or proceeding, whether civil, criminal, administrative or investigative, or any litigation, potential litigation, investigations by government agencies, potential investigations by government agencies or internal investigations conducted by Employer (collectively, “Legal Actions”) or, contract negotiations or matters arising therefrom, or otherwise, which relates to activities that occurred during her employment with Employer, whether pursuant to this Agreement or otherwise, or thereafter and about which she has or may have knowledge (a “Proceeding”), Employee agrees to make herself reasonably available at Employer’s request to provide information and assistance, including, but not limited to, interviews, deposition testimony, pretrial preparation and trial testimony, to respond to requests for information from

4



Employer’s counsel, government authorities and otherwise; provided that Employer shall make reasonable efforts to minimize disruption of Employee’s other activities, and provided further that Employer shall reimburse Employee for reasonable expenses incurred in connection with such cooperation. If such assistance is requested after the Term, Employer shall also compensate Employee at an hourly rate based on Employee’s 2017 base salary compensation level. In connection therewith and regardless of whether Employer has counsel, as a condition to her participation therein, Employee shall have the right to be represented in any such Proceeding by counsel of her choosing and at Employer’s reasonable cost and expense and subject to Employer’s receipt of such appropriate documentation thereof as Employer may reasonably require (which shall not include any information reasonably considered to be confidential or privileged by Employee or her counsel). Nothing in this Agreement is to be construed as prohibiting Employee from providing any truthful information or testimony in any Legal Action, or to a state or federal agency or a court, when requested or required to do so by such agency or court.

(b)      Employee will be entitled to indemnification to the maximum extent provided by Employer’s Articles of Incorporation, Code of Regulations, any directors’ and officers’ insurance policies maintained by Employer, or under any other relevant existing contract or agreement applicable to Employee.

(c) Employer shall reimburse Employee for all reasonable attorneys’ and advisors’ fees and expenses, incurred in connection with the negotiation, documentation and execution of this Agreement (and related review of disclosure relating to the same; provided that any such payment shall be subject to Employer’s receipt of appropriate documentation thereof as Employer may reasonably require (which shall not include any information reasonably considered to be confidential or privileged by Employee or her counsel), and, if such documentation is timely received, such payments shall be made in accordance with the Employer’s timing processes for paying attorney’s fees, but in no event later than March 15 of the calendar year immediately following the date such costs and expenses were incurred.

9.      SUCCESSORS AND BINDING AGREEMENT .

(a)      Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of Employer, to assume and agree to perform this Agreement in the same manner and to the same extent Employer would be required to perform if such succession had not taken place. This Agreement will be binding upon and inure to the benefit of Employer and any such successor to Employer, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of Employer whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the “Employer” for the purposes of this Agreement). Notwithstanding the foregoing, to the extent the obligations of the Employer are transferred to a successor that is owned or controlled by the Employer as part of an internal reorganization or restructuring, Employer hereby agrees to guarantee such successor’s obligations to Employee if and to the extent owed under the terms of this Agreement.


5



(b)      This Agreement will inure to the benefit of and be enforceable by Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees.

(c)      This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 9(a) and 9(b).

10.      ENTIRETY . This Agreement, together with attachments hereto and agreements referenced herein, embodies the entire understanding and agreement between the parties relative to the subject matter hereof.

11.      CONTROLLING LAW; VENUE; JURISDICTION .

(a)      The interpretation and performance of this Agreement shall be governed by the laws of the State of Ohio, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Ohio or any other jurisdiction) that would cause the application of the law of any jurisdiction other than the State of Ohio. The parties hereto acknowledge and agree that this Agreement was executed and delivered in the State of Ohio.

(b)      Each party to this Agreement hereby consents to the exclusive jurisdiction of the courts of the County of Cuyahoga and the United States District Court for the Northern District of Ohio, as well as to the jurisdiction of all courts to which an appeal may be taken from such courts, for the purpose of any suit, action or other proceeding arising out of any obligation hereunder or with respect to the transactions contemplated hereby, and expressly waives any and all objections such party may have as to venue in any such courts.

12.      TERMINATION . Employee’s employment hereunder may only be terminated prior to the end of the Term only pursuant to subsections (a), (b) or (c) below:

(a)      Employer hereby specifically reserves the right to terminate Employee’s employment prior to the conclusion of the Term and the compensation and benefits due in the future under Sections 3, 4 and 5 immediately in the event Employee’s actions from the Signing Date through the end of the Term hereof have an “Adverse Effect” on the business or operations of the Employer. As used herein, the phrase “Adverse Effect” shall mean (i)(A) any theft in office from the Employer or its affiliates by Employee and/or (B) any felony conviction of Employee, that in either such instance, causes either material injury to the reputation of, or material financial harm to, Employer and/or its affiliates, or (ii) any material breach of Sections 1, 4(e), 8(a),13(a), or 17 of this Agreement by Employee. Notwithstanding the foregoing, in order for Employee’s employment to be terminated by Employer due to “Adverse Effect,” the Employee must fail to correct the event, to the extent it may be corrected, within 20 days following written notice by Employer to Employee of the event constituting “Adverse Effect”, which notice shall include a specific description of the Adverse Effect .


6



(b)      Employee may terminate her employment and the compensation and benefits due in the future under Sections 3, 4 and 5 prior to the conclusion of the Term at any time upon reasonable written notice to the Employer.

(c)      Employee’s employment may be terminated prior to the end of the Term due to death or becoming “disabled,” as defined in the form of restricted stock unit agreement under the Employer’s equity plan filed as Exhibit 10(aa) to the Annual Report on Form 10-K for the fiscal year ended December 31, 2016. In either such event, Employer shall continue to pay Employee (or Employee’s estate) the base compensation set forth in Section 3 hereof that would have been paid to Employee throughout the remainder of the Term had she continued to perform services to Employer, the 2018 Bonus, at the time such 2018 Bonus otherwise would be payable to Employee hereunder, and make such other payments and benefits as provided by the terms and conditions of other applicable plans and agreements for which compensation described in Sections 4 and 5 is subject.

(d)      Notwithstanding anything in this Agreement to the contrary, upon termination of this Agreement in accordance with Section 12 (a), (b) or (c), Employee shall not be entitled to any severance pay or similar benefit or payment to which Employee may otherwise be entitled, if any, or to any pro-rata vacation pay to which Employee may otherwise be entitled, if any. Upon termination of this Agreement during the Term in accordance with Sections 12(a) or (b), Employer’s obligations under Sections 3, 4 and 5 shall immediately cease except as otherwise provided by the terms of the Employer’s plans and arrangements to which such compensation may be subject.

(e)      Upon expiration or other termination of this Agreement, the respective rights and obligations of the parties shall survive said expiration or termination to the extent necessary to carry out the intentions of the parties under this Agreement.

(f)      In the event that, contrary to the provisions of this Agreement, Employer terminates Employee during the Term for a reason other than an “Adverse Effect”, Employee or Employee’s estate shall be entitled to all remedies provided by law or equity for Employer’s breach of this contract, and, without limitation, shall be entitled to bring an action to recover the full value of compensation, equity and benefits payable under Sections 3, 4 and 5 and any plans or program referred to therein pursuant to the terms thereof as if she had remained employed with Employer for the Term.

13.      MUTUAL RELEASE .

(a)      IN CONSIDERATION OF THE COMPENSATION AND OTHER BENEFITS PROVIDED HEREUNDER, AND EFFECTIVE AS OF THE EFFECTIVE DATE, EMPLOYEE, ON BEHALF OF HERSELF, HER HEIRS, AGENTS, SUCCESSORS, ASSIGNS AND REPRESENTATIVES, HEREBY WAIVES, RELEASES AND DISCHARGES EMPLOYER AND ITS CURRENT OR FORMER SUBSIDIARIES, THEIR DIRECTORS, OFFICERS, EMPLOYEES, TRUSTEES, PLAN ADMINISTRATORS, AGENTS, REPRESENTATIVES, SUCCESSORS AND ASSIGNS WITH RESPECT TO ANY AND ALL CAUSES OF ACTION, CLAIMS, LIABILITIES AND DEMANDS OF ANY NATURE, WHETHER KNOWN OR UNKNOWN, RESULTING FROM OR BASED UPON, DIRECTLY OR INDIRECTLY, EMPLOYEE’S EMPLOYMENT

7



RELATIONSHIP WITH THE ABOVE DESCRIBED PARTIES INCLUDING, BUT NOT LIMITED TO, ANY ACTIONS, CLAIMS, LIABILITIES OR DEMANDS CONCERNING, BASED UPON OR ARISING UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT, THE AMERICANS WITH DISABILITIES ACT, THE CIVIL RIGHTS ACT OF 1991, THE EMPLOYEE RETIREMENT INCOME SECURITY ACT, THE EQUAL PAY ACT, THE GENETIC INFORMATION NON-DISCRIMINATION ACT, THE FAMILY AND MEDICAL LEAVE ACT, SECTION 1981 OF U.S.C, TITLE VII OF THE CIVIL RIGHTS ACT, OHIO FAIR EMPLOYMENT PRACTICES LAW/CIVIL RIGHTS ACT, OHIO EQUAL PAY ACT, OHIO WHISTLEBLOWER LAW, OHIO PREGNANCY DISCRIMINATION/MATERNITY LEAVE ACT, OHIO WAGE PAYMENT ANTI-RETALIATION LAW, OHIO MINIMUM WAGE/FAIR STANDARDS LAW, OHIO MISCELLANEOUS LABOR PROVISIONS, OHIO WORKERS’ COMPENSATION ANTI-RETALIATION STATUTE,  OHIO CONSTITUTION ART. II, §34 & 34A , AS WELL AS ANY CLAIMS FOR ALLEGED WRONGFUL DISCHARGE, DISCRIMINATION OR HARASSMENT, BREACH OF AN EXPRESS OR IMPLIED CONTRACT, BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING, DEFAMATION, INTENTIONAL OR NEGLIGENT INFLICTION OF EMOTIONAL DISTRESS, PROMISSORY ESTOPPEL, WHISTLEBLOWER RETALIATION, OTHER PERSONAL INJURY, FRAUD OR MISREPRESENTATION, INVASION OF PRIVACY, NEGLIGENCE, RETALIATION, VIOLATION OF PUBLIC POLICY OR ANY OTHER CLAIMS UNDER ANY FEDERAL, STATE OR LOCAL COMMON LAW, STATUTORY, OR REGULATORY PROVISION, NOW OR HEREAFTER RECOGNIZED, AND ANY CLAIMS FOR ATTORNEYS’ FEES AND COSTS.  EMPLOYEE IS NOT WAIVING ANY CLAIMS UNDER THIS AGREEMENT, CLAIMS FOR UNEMPLOYMENT OR WORKERS’ COMPENSATION BENEFITS, ANY RIGHTS TO BENEFITS UNDER ANY EMPLOYEE BENEFIT PLANS, AGREEMENTS, OR OTHER PROGRAMS TO WHICH SHE IS OTHERWISE ENTITLED, INCLUDING, WITHOUT LIMITATION, ANY BENEFITS UNDER THE EMPLOYER’S 401(K), MEDICAL OR OTHER WELFARE PLANS (EXCEPT FOR ANY RIGHTS TO SEVERANCE AND ANY RIGHTS EXPRESSLY WAIVED UNDER SECTION 4(b) HEREOF), CLAIMS ARISING AFTER THE DATE ON WHICH EMPLOYEE SIGNS THIS AGREEMENT, OR CLAIMS THAT ARE NOT OTHERWISE WAIVABLE UNDER APPLICABLE LAW OR REGULATION. NOTWITHSTANDING THE FOREGOING, THIS RELEASE SHALL BE NULL AND VOID IF EMPLOYER FAILS TO TIMELY MAKE ANY MATERIAL PAYMENT OR PROVIDE ANY MATERIAL BENEFIT TO EMPLOYEE CALLED FOR UNDER THIS AGREEMENT; PROVIDED, HOWEVER, THAT, IN ORDER FOR THIS RELEASE TO BE CONSIDERED NULL AND VOID DUE TO ANY SUCH FAILURE, EMPLOYER MUST FAIL TO MAKE THE MATERIAL PAYMENT OR PROVIDE THE MATERIAL BENEFIT, AS APPLICABLE, WITHIN 20 DAYS FOLLOWING WRITTEN NOTICE BY EMPLOYEE TO EMPLOYER OF EMPLOYER’S FAILURE TO MAKE SUCH PAYMENT OR PROVIDE SUCH BENEFIT.

(b)      EXCEPT FOR CLAIMS THAT ARE NOT OTHERWISE WAIVABLE UNDER APPLICABLE LAW OR REGULATION, AND EFFECTIVE AS OF THE EFFECTIVE DATE, EMPLOYER, ON BEHALF OF ITSELF AND ITS CURRENT AND FORMER SUBSIDIARIES, HEREBY WAIVES, RELEASES AND DISCHARGES EMPLOYEE AND HER SUCCESSORS AND ASSIGNS AND HEIRS AND BENEFICIARIES (“EMPLOYEE RELEASEES”) WITH

8



RESPECT TO ANY AND ALL CAUSES OF ACTION, CLAIMS, LIABILITIES AND DEMANDS OF ANY NATURE, WHETHER KNOWN OR UNKNOWN (EXCEPT AS EXCLUDED BELOW), RESULTING FROM OR BASED UPON, DIRECTLY OR INDIRECTLY, EMPLOYEE’S EMPLOYMENT RELATIONSHIP OR HER ROLE AS A DIRECTOR, OFFICER, MANAGER OR OTHERWISE WITH RESPECT TO THE EMPLOYER OR ANY OF ITS CURRENT OR FORMER SUBSIDIARIES OR AFFILIATES; PROVIDED, HOWEVER, THAT THIS RELEASE SHALL NOT INCLUDE ANY CLAIMS OR CAUSES OF ACTION BASED UPON OR ATTRIBUTABLE TO EMPLOYEE’S COMMISSION OF ANY FRAUDULENT ACT, NOT KNOWN TO EMPLOYER AS OF THE DATE IT EXECUTED THIS AGREEMENT. NOTWITHSTANDING THE FOREGOING, THE RELEASE CONTAINED IN THIS SECTION 13(B) SHALL BE NULL AND VOID IF EMPLOYEE BREACHES ANY MATERIAL PROVISION OF THIS AGREEMENT; PROVIDED, HOWEVER, THAT, IN ORDER FOR THIS RELEASE TO BE CONSIDERED NULL AND VOID DUE TO ANY SUCH BREACH, THE EMPLOYEE MUST FAIL TO CORRECT THE BREACH, TO THE EXTENT IT MAY BE CORRECTED, WITHIN 20 DAYS FOLLOWING WRITTEN NOTICE BY EMPLOYER TO EMPLOYEE OF THE EVENT CONSTITUTING EMPLOYEE’S BREACH.

14.      RIGHT TO ATTORNEY; OPPORTUNITY TO REVIEW . EMPLOYEE HEREBY ACKNOWLEDGES AND REPRESENTS THAT EMPLOYEE HAS CONSULTED WITH INDEPENDENT LEGAL COUNSEL REGARDING EMPLOYEE’s RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT AND THE TERMS OF THE RELEASE ATTACHED AS EXHIBIT B , TO THE EXTENT DETERMINED NECESSARY OR APPROPRIATE BY EMPLOYEE, AND THAT EMPLOYEE FULLY UNDERSTANDS THE TERMS AND CONDITIONS CONTAINED HEREIN AND THEREIN. In particular, Employee represents and agrees that: (i) she has had a period of not less than 21 days within which to review and consider this Agreement and has used as much of this 21 day period as she desired prior to executing the same; and (ii) she is voluntarily entering into this Agreement.

15.      ENFORCEABILITY . This Agreement may be revoked by Employee during the seven (7) day period immediately following the date she executes this Agreement. This Agreement shall not become effective or enforceable until the seven-day revocation period has expired.

16.      MUTUAL NONDISCLOSURE . Employee and Employer agree that all events in connection with, and leading to, the execution of this Agreement, as well as the terms and provisions of this Agreement, are to remain confidential and shall not be discussed or disclosed to anyone other than applicable advisors and representatives of each party (including Employee’s spouse) or as otherwise required by law or regulation, including U.S. federal securities laws and/or rules and regulations adopted by the Securities and Exchange Commission (the “SEC”), or provided herein. Employee and Employer have agreed on the form of the Current Report on Form 8-K disclosure and the internal statement regarding Employee’s transition of employment and this Agreement, and both parties agree that any other discussion or public statements will be consistent with those two documents. Any further disclosure of this Agreement that is required by applicable law or regulation, including any disclosures that Employer may be required to make under applicable securities laws or stock exchange rules and regulations shall be subject to prior review and comment

9



by the other party hereto; provided that any disclosures by Employee in connection with the preparation and filing of her tax returns shall not be subject to prior review or approval of Employer.

17.      INSIDER TRADING POLICY . Employee hereby acknowledges her obligations and responsibilities under the Employer’s Insider Trading Policy and agrees to abide by such policy to the extent applicable to her during the Term and thereafter.

18.      WITHHOLDING TAXES . All amounts payable hereunder shall be subject to the withholding of all applicable taxes and deductions required by any applicable law or regulation.

19.      SECTION 409A .

(a)      The intent of the parties is that payments and benefits under this Agreement comply with, or be exempt from, Code Section 409A, and Employer shall have complete discretion to interpret and construe this Agreement and any associated documents in any manner that establishes an exemption from (or compliance with) the requirements of Code Section 409A (but not to eliminate or reduce the benefits payable).  If for any reason, such as imprecision in drafting, any provision of this Agreement (or of any award of compensation, including, without limitation, equity compensation or benefits) does not accurately reflect its intended establishment of an exemption from (or compliance with) Code Section 409A, as demonstrated by consistent interpretations or other evidence of intent, such provision shall be considered ambiguous as to its exemption from (or compliance with) Code Section 409A and shall be interpreted by Employer in a manner consistent with such intent, as determined in the discretion of Employer.

(b)      A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits that are considered nonqualified deferred compensation under Code Section 409A upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Code Section 409A, and, for purposes of any such provision of this Agreement, references to a “termination,” “termination of employment” or like terms shall mean such a separation from service. The determination of whether and when a separation from service has occurred for purposes of this Agreement shall be made in accordance with the presumptions set forth in Section 1.409A-1(h) of the treasury regulations. This section shall not be construed, however, to eliminate or reduce any benefits otherwise payable under this Agreement.

(c)      Any provision of this Agreement to the contrary notwithstanding, if at the time of Employee’s separation from service, Employer determines that Employee is a “specified employee,” within the meaning of Code Section 409A, then to the extent any payment or benefit that Employee becomes entitled to under this Agreement on account of such separation from service would be considered nonqualified deferred compensation under Code Section 409A, such payment or benefit shall be paid or provided at the date which is the earlier of (i) six (6) months and one day after such separation from service, and (ii) the date of Employee’s death (the “Delay Period”). Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section 19(c) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or provided to Employee in a lump-sum, and any remaining payments and

10



benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

(d)      Any reimbursements provided under this Agreement that constitute deferred compensation within the meaning of Code Section 409A shall be made or provided in accordance with the requirements of Code Section 409A, including, without limitation, that (i) in no event shall any fees, expenses or other amounts eligible to be reimbursed by Employer under this Agreement be paid later than the last day of the calendar year next following the calendar year in which the applicable fees, expenses or other amounts were incurred; (ii) the amount of expenses eligible for reimbursement in any given calendar year shall not affect the expenses that Employer is obligated to reimburse in any other calendar year, provided that the foregoing clause (ii) shall not be violated with regard to expenses reimbursed under any arrangement covered by Code Section 105(b) solely because such expenses are subject to a limit related to the period the arrangement is in effect; (iii) Employee’s right to have Employer pay or provide such reimbursements may not be liquidated or exchanged for any other benefit; and (iv) in no event shall Employer’s obligations to make such reimbursements apply later than Employee’s remaining lifetime (or if longer, through the sixth (6th) anniversary of the commencement date).

(e)      For purposes of Code Section 409A, Employee’s right to receive any installment payments shall be treated as a right to receive a series of separate and distinct payments.  Whenever a payment under this Agreement specifies a payment period with reference to a number of days (for example, “payment shall be made within thirty (30) days following the date of termination”), the actual date of payment within the specified period shall be within the sole discretion of Employer. In no event may Employee, directly or indirectly, designate the calendar year of any payment to be made under this Agreement, to the extent such payment is subject to Code Section 409A.

(f)      Employer makes no representation or warranty and shall have no liability to Employee if any provisions of this Agreement are determined to constitute deferred compensation subject to Code Section 409A but do not satisfy an exemption from, or the conditions of, Code Section 409A in form; provided, however, that Employer shall indemnify and fully gross-up and reimburse Employee (including for purposes of this subsection, any heirs or beneficiaries) for the amount and acceleration of any taxes, penalties, or interest to which Employee  may become subject pursuant to Code Section 409A with respect to any benefits, compensation or other amounts paid or payable under this Agreement, including this paragraph, or under any other arrangements referenced hereunder, that result from the failure of Employer to comply with Code Section 409A in operation (e.g., due to the failure of Employer to timely make payments that are otherwise required pursuant to the terms of this Agreement or such arrangements).  Employer shall provide such indemnification and gross-up as soon as practicable after the time Employee becomes subject to such taxes, penalties, or interest (and, in any event, no later than March 15 of the calendar year which follows the calendar year in which Employee becomes subject thereto).

20.      REPORTS TO GOVERNMENT ENTITIES . Nothing in this Agreement, including the release clauses, restricts or prohibits Employee from initiating communications directly with, responding to any inquiries from, providing testimony before, providing confidential information to, reporting possible violations of law or regulation to, or from filing a claim or assisting with an

11



investigation directly with a self-regulatory authority or a government agency or entity, including the U.S. Equal Employment Opportunity Commission, the Department of Labor, the National Labor Relations Board, the Department of Justice, the SEC, the Congress, and any agency Inspector General (collectively, the “Regulators”), or from making other disclosures that are protected under the whistleblower provisions of state or federal law or regulation. However, to the maximum extent permitted by law, Employee is waiving her right to receive any individual monetary relief from Employer or any others covered by the release of claims resulting from such claims or conduct, regardless of whether Employee or another party has filed them, and in the event Employee obtains such monetary relief from the Employer or any others covered by the release of claims, Employer will be entitled to an offset for the payments made pursuant to this Agreement. This Agreement does not limit Employee’s right to receive an award from any Regulator that provides awards for providing information relating to a potential violation of law. Employee does not need the prior authorization of Employer to engage in conduct protected by this paragraph, and Employee does not need to notify Employer that Employee has engaged in such conduct.

Please take notice that federal law provides criminal and civil immunity to federal and state claims for trade secret misappropriation to individuals who disclose a trade secret to their attorney, a court, or a government official in certain, confidential circumstances that are set forth at 18 U.S.C. §§ 1833(b)(1) and 1833(b)(2), related to the reporting or investigation of a suspected violation of the law, or in connection with a lawsuit for retaliation for reporting a suspected violation of the law.

21.      REMOVAL OF EMPLOYEE AS SIGNATORY . On or before the Effective Date, Employer agrees to take all appropriate measures to remove Employee as a signatory on all foreign bank accounts. On or before December 31, 2018, or as soon as practicable prior to such date, Employer agrees to deliver to Employee Form FinCEN 114 (formerly 90.22 FBAR) with regard to calendar year 2017.



12



IN WITNESS WHEREOF, the parties hereto have executed this Agreement (in the case of Employer, by its duly authorized officer) as of the dates indicated below.

THE SHERWIN-WILLIAMS COMPANY
 
EMPLOYEE
 
 
 
 
 
 
 
 
BY:
/s/ Thomas P. Gilligan
 
/s/ Catherine M. Kilbane
 
       Thomas P. Gilligan
 
Catherine M. Kilbane
 
 
 
 
Title:      Senior Vice President - Human Resources
 
 
 
 
DATE: June 12, 2017
 
DATE: June 12, 2017
 
 
 
 

13



EXHIBIT A
PPG Industries, Inc., RPM International Inc., Akzo Nobel N.V., Benjamin Moore & Co., The Home Depot, Inc., Lowes Companies, Inc., Menard, Inc., The Jotun Group, Hempel A/S, Tnemec Company Inc., Dunn-Edwards Corporation, Masco Corporation, BASF SE, or Axalta Coating Systems LLC.



14



EXHIBIT B
GENERAL RELEASE

This General Release (this “Release”) is made as of this ___ day of ____________, 2018, by and between The Sherwin-Williams Company, an Ohio corporation (“Employer”), and Catherine M. Kilbane (“Employee”).
WHEREAS, Employee’s employment with Employer has terminated as of ___________ __, 2018;
WHEREAS, pursuant to the Retention Agreement between Employee and Employer effective August 1, 2017 (the “Retention Agreement”), Employer has agreed to make certain payments to Employee and to provide her with certain benefits, subject to the execution of the Retention Agreement and this Release;
WHEREAS, Employee and Employer enter into this Release intending to waive, settle and release all liability for and recovery from (i) claims Employee has ever had, now has, or might have against Employer and certain other parties, and (ii) claims Employer has ever had, now has, or might have against Employee and certain other parties, in each case, as set forth in this Release as of the effective date of this Release; and
NOW THEREFORE, in consideration of these premises and the mutual promises contained herein, and intending to be legally bound hereby, the parties agree as follows:
1. Consideration . Employee acknowledges that: (i) the payments and benefits set forth in the Retention Agreement constitute full settlement of all her rights under the Retention Agreement, (ii) she has no entitlement to any other separation pay or separation benefits from Employer and its subsidiaries and affiliates, and (iii) except as otherwise provided in this Release or referenced in the Retention Agreement or the other compensation, compensatory plans or benefits to which she is entitled, Employer and its affiliates and subsidiaries do not and will not have any other liability or obligation to her. Notwithstanding the foregoing, this release shall be null and void if Employer fails to timely make any material payment or provide any material benefit to Employee called for under this agreement; provided, however, that, in order for this release to be considered null and void due to any such failure, Employer must fail to make the material payment or provide the material benefit, as applicable, within 20 days following written notice by Employee to Employer of Employer’s failure to make such payment or provide such benefit.
2. Claims .
(a)      Employee, for and in consideration of the commitments of Employer as set forth in Section 4 of the Retention Agreement, and intending to be legally bound, does hereby REMISE, RELEASE AND FOREVER DISCHARGE Employer, its affiliates, predecessors, subsidiaries and parents, and their present or former officers, directors, employees, trustees, plan administrators, agents, representatives, successors and assigns, with respect to any and all causes of action, claims, liabilities and demands whatsoever in law or in equity, which Employee ever had, now has, or

15



hereafter may have, of any nature, whether known or unknown, or which Employee’s heirs, executors, or administrators may have, by reason of any matter, cause or thing whatsoever, from any time prior to the date of this Release, and particularly, but without limitation of the foregoing general terms, any claims arising from or relating in any way to Employee’s employment relationship with Employer, the terms and conditions of that employment relationship, and the termination of that employment relationship, including, but not limited to, any claims resulting from or based upon or arising under the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Civil Rights Act of 1991, the Employee Retirement Income Security Act, the Equal Pay Act, the Genetic Information Non-Discrimination Act, the Family and Medical Leave Act, Section 1981 of the U.S.C., Title VII of the Civil Rights Act, Ohio Fair Employment Practices Law/Civil Rights Act, Ohio Equal Pay Act, Ohio Whistleblower Law, Ohio Pregnancy Discrimination/Maternity Leave Act, Ohio Wage Payment Anti-Retaliation Law, Ohio Minimum Wage/Fair Standards Law, Ohio Miscellaneous Labor Provisions, Ohio Workers’ Compensation Anti- Retaliation Law, Ohio Minimum Wage/Fair Standards Law, Ohio Miscellaneous Labor Provisions, Ohio Workers’ Compensation Anti-Retaliation Statute, Ohio Constitution Art. II, §34 & 34a, as well as any claims for alleged wrongful discharge, discrimination or harassment, breach of an express or implied contract, breach of the implied covenant of good faith and fair dealing, defamation, intentional or negligent infliction of emotional distress, promissory estoppel, whistleblower retaliation, other personal injury, fraud or misrepresentation, invasion of privacy, negligence, retaliation, violation of public policy and any other claims under any federal, state or local common law, statutory, or regulatory provision, now or hereafter recognized, and any claims for attorneys’ fees and costs. Employee is not waiving any claims under the Retention Agreement, claims for unemployment or workers’ compensation benefits, claims or rights to benefits under any employee benefit plans, agreements or other programs to which she is otherwise entitled, including without limitation any benefits under the Employer’s 401(k), medical or other welfare plans (except for any rights to severance and any rights expressly waived under Section 4(b) of the Retention Agreement), claims arising after the date on which Employee signs this Release, or claims that are not otherwise waivable under applicable law or regulation. 
(b)      Except for claims that are not otherwise waivable under applicable law or regulation, Employer, on behalf of itself and its current and former subsidiaries, hereby waives, releases and discharges Employee and her successors and assigns and heirs and beneficiaries (“Employee Releasees”) with respect to any and all causes of action, claims, liabilities and demands of any nature, whether known or unknown (except as excluded below), resulting from or based upon, directly or indirectly, Employee’s employment relationship or her role as a director, officer, manager or otherwise with respect to the Employer or any of its current or former subsidiaries or affiliates; provided, however, that this Release shall not include any claims or causes of action based upon or attributable to Employee’s commission of any fraudulent act, not known to Employer as of the date it executed this Release. Notwithstanding the foregoing, the release contained in this Section 2(b) shall be null and void if Employee breaches any material provision of the Retention Agreement; provided, however, that in order for this release to be considered null and void due to any such breach, the Employee must fail to correct the breach, to the extent it may be corrected, within 20 days following written notice by Employer to Employee of the event constituting Employee’s breach.
(c)      To the fullest extent permitted by law, and subject to the provisions of Section 4 of the Retention Agreement, Employee represents and affirms that Employee has not filed or caused to

16



be filed on Employee’s behalf any charge, complaint or claim for relief against Employer or any Employer Releasee and, to the best of Employee’s knowledge and belief, no outstanding charges, complaints or claims for relief have been filed or asserted against Employer or any Employer Releasee on Employee’s behalf. Nothing herein shall prevent Employee from testifying in any cause of action when required to do so by process of law. Employee shall promptly inform Employer if called upon to testify on matters relating to Employer so as to allow the Employer an opportunity to obtain such protective orders or similar relief with respect thereto as may be deemed appropriate by Employer.
(d)      To the fullest extent permitted by law, Employer represents and affirms that Employer has not filed or caused to be filed on Employer's behalf any charge, complaint or claim for relief against Employee or any Employee Releasee and, to the best of Employer's knowledge and belief, no outstanding charges, complaints or claims for relief have been filed or asserted against Employee or any Employee Releasee on Employer's behalf. Nothing herein shall prevent Employer from testifying in any cause of action when required to do so by process of law. Employer shall promptly inform Employee if called upon to testify on matters relating to Employee.
(e)      Employee does not waive any right to file a charge with the Equal Employment Opportunity Commission (“EEOC”) or participate in an investigation or proceeding conducted by the EEOC, but explicitly waives any right to file a personal lawsuit or receive monetary damages that the EEOC might recover if said charge results in an EEOC lawsuit against Employer or Employer Releasees.
(f)      Employee does not waive the right to challenge the validity of this Release as a release of claims arising under the federal Age Discrimination in Employment Act.
(g)      Employee does not waive rights or claims that may arise after the date this Release is executed.
3. Rescission Right . Employee expressly acknowledges and recites that (i) she has read the terms of this Release, and that she understands its terms and effects, including the fact that Employee has agreed to RELEASE AND FOREVER DISCHARGE Employer and the Employer Releasees from any legal action arising out of Employee’s employment relationship with Employer and the termination of that employment relationship as and to the extent specified therein; (ii) she has signed this Release voluntarily and knowingly in exchange for the consideration described in the Retention Agreement, which Employee acknowledges is adequate and satisfactory to her and which she acknowledges provides benefits in addition to any other benefits to which Employee is otherwise entitled; (iii) Employer advises Employee (in writing) to consult with an attorney before signing this Release; (iv) she does not waive rights or claims that may arise after the date this Release is executed; (v) Employer has provided her with a period of twenty-one (21) days within which to consider this Release, and that Employee has signed on the date indicated below after concluding that this Release is satisfactory to her; and (vi) this Release may be revoked by her within seven (7) days after execution, and it shall not become effective until the expiration of such seven (7) day revocation period. In the event of a timely revocation by Employee, this Release and the Retention Agreement will be deemed null and void and Employer will have no obligations hereunder.

17



4. No Admission of Liability . Employee agrees and acknowledges that the agreement by Employer described in this Release and in the Retention Agreement, and the settlement and termination of any asserted or unasserted claims against the Employer Releasees, are not and shall not be construed to be an admission of any violation of any federal, state or local statute or regulation, or of any duty owed by any of the Employer Releasees to Employee.
5. Reports to Government Entities . Nothing in the Retention Agreement or this Release, including the release clauses, restricts or prohibits Employee from initiating communications directly with, responding to any inquiries from, providing testimony before, providing confidential information to, reporting possible violations of law or regulation to, or from filing a claim or assisting with an investigation directly with a self-regulatory authority or a government agency or entity, including the U.S. Equal Employment Opportunity Commission, the Department of Labor, the National Labor Relations Board, the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General (collectively, the “Regulators”), or from making other disclosures that are protected under the whistleblower provisions of state or federal law or regulation. However, to the maximum extent permitted by law, Employee is waiving her right to receive any individual monetary relief from Employer or any others covered by the release of claims resulting from such claims or conduct, regardless of whether Employee or another party has filed them, and in the event Employee obtains such monetary relief from Employer or any others covered by the release of claims, Employer will be entitled to an offset for the payments made pursuant to the Retention Agreement and this Release. The Retention Agreement and this Release do not limit Employee’s right to receive an award from any Regulator that provides awards for providing information relating to a potential violation of law. Employee does not need the prior authorization of Employer to engage in conduct protected by this paragraph, and Employee does not need to notify Employer that Employee has engaged in such conduct. Please take notice that federal law provides criminal and civil immunity to federal and state claims for trade secret misappropriation to individuals who disclose a trade secret to their attorney, a court, or a government official in certain, confidential circumstances that are set forth at 18 U.S.C. §§ 1833(b)(1) and 1833(b)(2), related to the reporting or investigation of a suspected violation of the law, or in connection with a lawsuit for retaliation for reporting a suspected violation of the law.
IN WITNESS WHEREOF , and intending to be legally bound hereby, the parties have executed the foregoing Release (in the case of Employer, by its duly authorized officer) this ______ day of __________, 2018.
 
 
 
 
 
 
 
 
Witness:
 
 
Catherine M. Kilbane
 
 
 
 
 
 
 
 
 
 
 
 
 
 
THE SHERWIN-WILLIAMS COMPANY
 
 
 
 
 
 
 
 
By:
 
 
Witness:
 
Name:
 
 
 
 
Title:
 
 
 
 

18


EXHIBIT 10.3


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
Cheri M. Phyfer
Robert J. Wells


Form C of Severance Pay Agreement

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


1


EXHIBIT 31(a)
CERTIFICATION

I, John G. Morikis, certify that:


1.
I have reviewed this quarterly report on Form 10-Q 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:
July 26, 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 quarterly report on Form 10-Q 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:
July 26, 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 Quarterly Report on Form 10-Q of The Sherwin-Williams Company (the "Company") for the period ended June 30, 2017 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:
July 26, 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 Quarterly Report on Form 10-Q of The Sherwin-Williams Company (the "Company") for the period ended June 30, 2017 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:
July 26, 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.