UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Commission file number 1-04851
 
THE SHERWIN-WILLIAMS COMPANY
(Exact name of registrant as specified in its charter)
OHIO
  
34-0526850
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
101 West Prospect Avenue, Cleveland, Ohio
  
44115-1075
(Address of principal executive offices)
  
(Zip Code)
(216) 566-2000
Registrant’s telephone number, including area code
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
  
Name of each exchange on which registered
Common Stock, Par Value $1.00
  
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   x         No   o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.        Yes   o         No   x
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes   x         No   o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).        Yes   x         No   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.         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
 
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes   o         No   x
At January 31, 2018 , 93,993,791  shares of common stock were outstanding, net of treasury shares. The aggregate market value of common stock held by non-affiliates of the Registrant at June 30, 2017 was $32,731,587,330 (computed by reference to the price at which the common stock was last sold on such date).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Annual Report to Shareholders for the fiscal year ended December 31, 2017 (“ 2017 Annual Report”) are incorporated by reference into Parts I, II and IV of this report.
Portions of our Proxy Statement for the 2018 Annual Meeting of Shareholders (“Proxy Statement”) to be filed with the Securities and Exchange Commission within 120 days of our fiscal year ended December 31, 2017 are incorporated by reference into Part III of this report.



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




PART I
ITEM  1.    BUSINESS
Introduction
The Sherwin-Williams Company, founded in 1866 and incorporated in Ohio in 1884, is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region, Europe, Asia and Australia. Our principal executive offices are located at 101 West Prospect Avenue, Cleveland, Ohio 44115-1075, telephone (216) 566-2000. As used in this report, the terms “Sherwin-Williams,” “Company,” “we” and “our” mean The Sherwin-Williams Company and its consolidated subsidiaries unless the context indicates otherwise.
Available Information
We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. You may access these documents on the “Investor Relations” page of our website at www.sherwin.com.
We also make available free of charge on our website our Corporate Governance Guidelines, our Director Independence Standards, our Code of Conduct and the charters of our Audit Committee, our Compensation and Management Development Committee and our Nominating and Corporate Governance Committee. You may access these documents in the “Corporate Governance” section on the “Investor Relations” page of our website at www.sherwin.com.
Basis of Reportable Segments
The Company reports its segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources in accordance with the Segment Reporting Topic of the Accounting Standards Codification (ASC). Upon completion of the Valspar acquisition in the second quarter of 2017 , the Company made important changes to its organizational and reporting structure that resulted in establishing three reportable operating segments: The Americas Group, Consumer Brands Group and Performance Coatings Group (individually, a "Reportable Segment" and collectively, the “Reportable Segments”). Prior period reporting has been adjusted to reflect the updated reportable segments. Factors considered in determining the three Reportable Segments of the Company include the nature of business activities, the management structure directly accountable to the Company’s chief operating decision maker (CODM) for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors. The Company reports all other business activities and immaterial operating segments that are not reportable in the Administrative segment. For more information about the Reportable Segments, see pages 8 through 15 of our 2017 Annual Report, which is incorporated herein by reference.
The Company’s CODM has been identified as the Chief Executive Officer because he has final authority over performance assessment and resource allocation decisions. Because of the diverse operations of the Company, the CODM regularly receives discrete financial information about each Reportable Segment as well as a significant amount of additional financial information about certain divisions, business units or subsidiaries of the Company. The CODM uses all such financial information for performance assessment and resource allocation decisions. The CODM evaluates the performance of and allocates resources to the Reportable Segments based on profit or loss before income taxes and cash generated from operations. The accounting policies of the Reportable Segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements on pages  46 through 50 of our 2017 Annual Report, which is incorporated herein by reference.
The Americas Group
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 consisted of 4,620 company-operated specialty paint stores in the United States, Canada, Latin America and the Caribbean region at December 31, 2017 . Each store in this segment is engaged in servicing the needs of architectural and industrial paint contractors and do-it-yourself homeowners. The Americas Group company-owned stores market and sell Sherwin-Williams ® and other controlled brand architectural paint and coatings, protective and marine products, OEM product finishes and related products. The majority of these products are produced by manufacturing facilities in the Consumer Brands Group. In addition, each store sells select purchased associated products. In addition to our stores in the Latin America region, The Americas Group meets regional customer demands through developing, licensing, manufacturing, distributing and selling a variety of architectural paints, coatings and related products in North and South America. The loss of any single customer would not have a material adverse effect on he business of this segment. At December 31, 2017 , The Americas Group consisted of operations from subsidiaries in 9 foreign countries. During 2017 , this segment opened 101 net new stores, consisting of 114 new stores opened ( 76 in the

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United States, 15 in Canada, 1 in Curacao, 14 in South America and 8 in Mexico) and 13 stores closed ( 4 in the United States, 1 in Canada, 6 in South America and 2 in Mexico). In 2016 and 2015 , this segment opened 142 and 98 net new stores, respectively. A map on the cover flap of our 2017 Annual Report, which is incorporated herein by reference, shows the number of paint stores and their geographic location. The CODM uses discrete financial information about The Americas Group, supplemented with information by geographic region, product type and customer type, to assess performance of and allocate resources to The Americas Group as a whole. In accordance with ASC 280-10-50-9, The Americas Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment.
Consumer Brands Group
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 Approximately 59.47% of the total sales of the Consumer Brands Group in 2017 were intersegment transfers of products primarily sold through The Americas Group. At December 31, 2017 , the Consumer Brands Group consisted of operations in the United States and subsidiaries in 6 foreign countries . Sales and marketing of certain controlled brand and private labeled products is performed by a direct sales staff. The products distributed through third-party customers are intended for resale to the ultimate end-user of the product. The Consumer Brands Group had sales to certain customers that, individually, may be a significant portion of the sales of the segment. However, the loss of any single customer would not have a material adverse effect on the overall profitability of the segment. This segment incurred most of the Company’s capital expenditures related to ongoing environmental compliance measures at sites currently in operation. The CODM uses discrete financial information about the Consumer Brands Group, supplemented with information by product type and customer type, to assess performance of and allocate resources to the Consumer Brands Group as a whole. In accordance with ASC 280-10-50-9, the Consumer Brands Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment.
Performance Coatings Group
The Performance Coatings Group 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. This segment licenses certain technology and trade names worldwide. Sherwin-Williams ® and other controlled brand products are distributed through The Americas Group and this segment’s 290 company-operated branches and by a direct sales staff and outside sales representatives to retailers, dealers, jobbers, licensees and other third-party distributors. The Performance Coatings Group had sales to certain customers that, individually, may be a significant portion of the sales of the segment. However, the loss of any single customer would not have a material adverse effect on the overall profitability of the segment. During 2017 , this segment opened 4 new branches and closed 2 branches for a net increase of 2 branches. At December 31, 2017 , the Performance Coatings Group consisted of operations in the United States and subsidiaries in 44 foreign countries. The CODM uses discrete financial information about the Performance Coatings Group, supplemented with information about geographic divisions, business units and subsidiaries, to assess performance of and allocate resources to the Performance Coatings Group as a whole. In accordance with ASC 280-10-50-9, the Performance Coatings Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment. A map on the cover flap of our 2017 Annual Report, which is incorporated herein by reference, shows the number of branches and their geographic locations.
Administrative Segment
The Administrative segment includes the administrative expenses of the Company’s corporate headquarters site. Also included in the Administrative segment is interest expense, interest and investment income, certain expenses related to closed facilities and environmental-related matters, and other expenses which are not directly associated with the Reportable Segments. The Administrative segment does not include any significant foreign operations. Also included in the Administrative segment is a real estate management unit that is responsible for the ownership, management, and leasing of non-retail

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properties held primarily for use by the Company, including the Company’s headquarters site, and disposal of idle facilities. Sales of this segment represents external leasing revenue of excess headquarters space or leasing of facilities no longer used by the Company in its primary businesses. Material gains and losses from the sale of property are infrequent and not a significant operating factor in determining the performance of the Administrative segment.
Segment Financial Information
For financial information regarding our Reportable Segments, including net external sales, segment profit, identifiable assets and other information by Reportable Segment, see Note 18 of the Notes to Consolidated Financial Statements on pages  74 through 77 of our 2017 Annual Report, which is incorporated herein by reference.
Domestic and Foreign Operations
Financial and other information regarding domestic and foreign operations is set forth in Note 18 of the Notes to Consolidated Financial Statements on page  76 of our 2017 Annual Report, which is incorporated herein by reference.
Additional information regarding risks attendant to foreign operations is set forth on page  29 of our 2017 Annual Report under the caption “Market Risk” of “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” which is incorporated herein by reference.
Business Developments
For additional information regarding our business and business developments, see pages  8 through 15 of our 2017 Annual Report and the “Letter to Shareholders” on pages  2 through  6 of our 2017 Annual Report, which is incorporated herein by reference.
Raw Materials and Products Purchased for Resale
We believe we generally have adequate sources of raw materials and fuel supplies used in our business. There are sufficient suppliers of each product purchased for resale that none of the Reportable Segments anticipate any significant sourcing problems during 2018 . See Item 1A Risk Factors for more information regarding cost and sourcing of raw materials.
Seasonality
The majority of the sales for the Reportable Segments traditionally occur during the second and third quarters. There is no significant seasonality in sales for the Administrative segment.
Working Capital
In order to meet increased demand during the second and third quarters, the Company usually builds its inventories during the first quarter. Working capital items (inventories and accounts receivable) are generally financed through short-term borrowings, which include the use of lines of credit and the issuance of commercial paper. For a description of the Company’s liquidity and capital resources, see pages  24 through  29 of our 2017 Annual Report under the caption “Financial Condition, Liquidity and Cash Flow” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated herein by reference.
Trademarks and Trade Names
Customer recognition of our trademarks and trade names collectively contribute significantly to our sales. The major trademarks and trade names used by each of the Reportable Segments are set forth below.
The Americas Group:     Sherwin-Williams®, A-100®, Cashmere®, Colorgin®, Condor®, Duracraft®, Duration Home®, Duration®, Emerald®, Harmony®, HGTV Home® by Sherwin- Williams, Kem Pro®, Kem Tone®, Krylon®, Loxon®, Marson®, Martin Senour®, Metalatex®, Minwax®, Novacor®, Paint Shield®, PrepRite®, ProClassic®, ProCraft ®, ProConstructor®, ProIndustrial™, ProMar®, ProPark®, Solo®, Sumaré®, SuperDeck®, SuperPaint®, Ultra Proteccion®, Woodscapes®
Consumer Brands Group:     Accurate Dispersions™, Altax™, Bestt Liebco®, Cabot®, Conco®, Duckback®, Dupli-Color®, DuraSeal®, Dutch Boy®, Geocel®, Granosite®, H&C®, HGTV HOME® by Sherwin-Williams, Huarun™, Kool Seal®, Krylon®, Martin Senour®, Mason’s Select®, Minwax®, Pratt & Lambert®, Purdy®, Ronseal™, Rubberset®, Snow Roof®, Solver®, Sprayon®, SuperDeck®, Thompson’s® WaterSeal®, Tri-Flow®, Uniflex®, Valspar®, VHT®, Wattyl®, White Lightning®
Performance Coatings Group:     Sherwin-Williams®, Acrolon®, AcromaPro®,Arti™, ATX™, AWX Performance Plus™, Baco®, Conely®, DeBeer®, DFL™, Dimension®, Duraspar™, Envirolastic®, Euronavy®, Excelo®, Fastline®, Finish 1™, Firetex®, Fluropon®, Genesis®, Heat-Flex®, House of Kolor®, Huarun™, Inchem®, Inver®, Kem Aqua®, Lanet™, Lazzuril®, Macropoxy®, Magnalux™, Martin Senour®, Matrix®, ML Campbell®, Oece™,

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PermaClad®, Planet Color®, Polane®, Powdura®, Prospray®, Sayerlack®, Sher-Wood®, Ultra-Cure®, Ultra™, USC®, ValPure® V70, Valspar®, Wattyl®
Patents
Although patents and licenses are not of material importance to our business as a whole or any segment, The Americas Group and the Performance Coatings Group derive a portion of their income from the licensing of technology, trademarks and trade names to foreign companies.
Backlog and Productive Capacity
Backlog orders are not significant in the business of any Reportable Segment since there is normally a short period of time between the placing of an order and shipment. We believe that sufficient productive capacity currently exists to fulfill our needs for paint, coatings and related products through 2018 .
Research and Development
For information regarding our costs of research and development included in technical expenditures, see Note 1 of the Notes to Consolidated Financial Statements on page  49 of our 2017 Annual Report, which is incorporated herein by reference.
Competition
We experience competition from many local, regional, national and international competitors of various sizes in the manufacture, distribution and sale of our paint, coatings and related products. We are a leading manufacturer and retailer of paint, coatings and related products to professional, industrial, commercial and retail customers, however, our competitive position varies for our different products and markets.
In The Americas Group, competitors include other paint and wallpaper stores, mass merchandisers, home centers, independent hardware stores, hardware chains and manufacturer-operated direct outlets. Product quality, product innovation, breadth of product line, technical expertise, service and price determine the competitive advantage for this segment.
In the Consumer Brands Group, domestic and foreign competitors include manufacturers and distributors of branded and private labeled paint and coatings products. Technology, product quality, product innovation, breadth of product line, technical expertise, distribution, service and price are the key competitive factors for this segment.
The Performance Coatings Group has numerous competitors in its domestic and foreign markets with broad product offerings and several others with niche products. Key competitive factors for this segment include technology, product quality, product innovation, breadth of product line, technical expertise, distribution, service and price.
The Administrative segment has many competitors consisting of other real estate owners, developers and managers in areas in which this segment owns property. The main competitive factors are the availability of property and price.
Employees
We employed 52,695  persons at December 31, 2017 .
Environmental Compliance
For additional information regarding environmental-related matters, see page  27 of our 2017 Annual Report under the caption “Environmental-Related Liabilities” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes  1 , 8 and 13 of the Notes to Consolidated Financial Statements on pages 48 , 62 through 63 and 69 through 70 , respectively, of our 2017 Annual Report, which is incorporated herein by reference.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in “Management's Discussion and Analysis of Financial Condition and Results of Operations,” “Letter to Shareholders” 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

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results to differ materially from such statements and from our historical results and experience. These risks, uncertainties and other factors include such things as:
general business conditions, strengths of retail and manufacturing economies and the growth in the coatings industry;
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;
changes in raw material and energy supplies and pricing;
changes in our relationships with customers and suppliers;
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;
our ability to attain cost savings from productivity initiatives;
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
adverse weather conditions and natural disasters.

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.
ITEM 1A.    RISK FACTORS
The risks described below and in other documents that we file from time to time with the Securities and Exchange Commission could materially and adversely affect our business, results of operations, cash flow, liquidity or financial condition.
Adverse changes in general business and economic conditions in the United States and worldwide may adversely affect our results of operations, cash flow, liquidity or financial condition.
Our business is sensitive to global and regional business and economic conditions. Adverse changes in such conditions in the United States and worldwide may reduce the demand for some of our products and impair the ability of those with whom we do business to satisfy their obligations to us, each of which could adversely affect our results of operations, cash flow, liquidity or financial condition. Higher inflation rates, interest rates, tax rates and unemployment rates, higher labor and healthcare costs, recessions, changing governmental policies, laws and regulations, and other economic factors could also adversely affect demand for some of our products and our results of operations, cash flow, liquidity or financial condition and that of our customers, vendors, and suppliers.
A weakening or reversal of the general economic recovery in the United States and other countries and regions in which we do business, or the continuation or worsening of economic downturns in other countries and regions, may adversely affect our results of operations, cash flow, liquidity or financial condition.
Global economic uncertainty continues to exist. A weakening or reversal of the general economic recovery in the United States and other countries and regions in which we do business, or the continuation or worsening of economic downturns in other countries and regions, may adversely impact our net sales, the collection of accounts receivable, funding for working capital needs, expected cash flow generation from current and acquired businesses, and our investments, which may adversely impact our results of operations, cash flow, liquidity or financial condition.
We finance a portion of our sales through trade credit. Credit markets remain tight, and some customers who require financing for their businesses have not been able to obtain necessary financing. A continuation or worsening of these conditions

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could limit our ability to collect our accounts receivable, which could adversely affect our results of operations, cash flow, liquidity or financial condition.
We generally fund a portion of our seasonal working capital needs and obtain funding for other general corporate purposes through short-term borrowings backed by our revolving credit facility and other financing facilities. If any of the banks in these credit and financing facilities are unable to perform on their commitments, which could adversely affect our ability to fund seasonal working capital needs and obtain funding for other general corporate purposes, our cash flow, liquidity or financial condition could be adversely impacted.
Although we currently have available credit facilities to fund our current operating needs, we cannot be certain that we will be able to replace our existing credit facilities or refinance our existing or future debt when necessary. Our cost of borrowing and ability to access the capital markets are affected not only by market conditions, but also by our debt and credit ratings assigned by the major credit rating agencies. Downgrades in these ratings will increase our cost of borrowing and could have an adverse effect on our access to the capital markets, including our access to the commercial paper market. An inability to access the capital markets could have a material adverse effect on our results of operations, cash flow, liquidity or financial condition.
We have goodwill and intangible assets recorded on our balance sheet. We periodically evaluate the recoverability of the carrying value of our goodwill and intangible assets whenever events or changes in circumstances indicate that such value may not be recoverable. An impairment assessment involves judgment as to assumptions regarding future sales and cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions and may result in changes in our estimates of future sales and cash flows that may result in us incurring substantial impairment charges, which would adversely affect our results of operations or financial condition.
We hold investments in equity and debt securities in some of our defined benefit pension plans. A decrease in the value of plan assets resulting from a general financial downturn may cause a negative pension plan investment performance, which may adversely affect our results of operations, cash flow, liquidity or financial condition.
Protracted duration of economic downturns in cyclical segments of the economy may depress the demand for some of our products and adversely affect our sales, earnings, cash flow or financial condition.
Portions of our business involve the sale of paint, coatings and related products to segments of the economy that are cyclical in nature, particularly segments relating to construction, housing, manufacturing and oil production, refining, storage and transportation. Our sales to these segments are affected by the levels of discretionary consumer and business spending in these segments. During economic downturns in these segments, the levels of consumer and business discretionary spending may decrease, and the recovery of these segments may lag behind the recovery of the overall economy. This decrease in spending will likely reduce the demand for some of our products and may adversely affect our sales, earnings, cash flow or financial condition.
In recent months, interest rates, including mortgage rates, have risen and are expected to continue to rise in 2018 . Although interest rates remain low by historical standards, this increase may adversely affect the demand for new residential homes, existing home turnover, and new non-residential construction. Challenging market conditions are expected to continue for the foreseeable future and may worsen. A worsening in these segments will reduce the demand for some of our products and may adversely impact sales, earnings and cash flow.
In the U.S. construction and housing segments, the recent demand for new construction has caused contractors to experience a shortage of skilled workers, resulting in project backlogs and an adverse effect on the rate of growth of demand for our products. While we expect to see higher demand for our products as project backlogs are reduced in the future, this labor shortage may adversely impact our sales, earnings, cash flow or financial condition.
Increases in the cost of raw materials and energy may adversely affect our earnings or cash flow.
We purchase raw materials (including titanium dioxide and petrochemical feedstock sources, such as propylene and ethylene) and energy for use in the manufacturing, distribution and sale of our products. Factors such as adverse weather conditions, including hurricanes, and other disasters can disrupt raw material and fuel supplies and increase our costs. Although raw materials and energy supplies (including oil and natural gas) are generally available from various sources in sufficient quantities, unexpected shortages and increases in the cost of raw materials and energy, or any deterioration in our relationships with or the financial viability of our suppliers, may have an adverse effect on our earnings or cash flow in the event we are unable to offset higher costs in a timely manner by sufficiently decreasing our operating costs or raising the prices of our products. Recently, some raw material and energy prices have increased, particularly titanium dioxide and petrochemical feedstock sources, such as propylene and ethylene. The cost of raw materials and energy has in the past experienced, and likely will in the future continue to experience, periods of volatility.

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Although we have an extensive customer base, the loss of any of our largest customers could adversely affect our sales, earnings or cash flow.
We have a large and varied customer base due to our extensive distribution network. During 2017 , no individual customer accounted for sales totaling more than ten percent of our sales. However, we have some customers that, individually, purchase a large amount of products from us. Although our broad distribution channels help to minimize the impact of the loss of any one customer, the loss of any of these large customers could have an adverse effect on our sales, earnings or cash flow.
Increased competition may reduce our sales, earnings or cash flow performance.
We face substantial competition from many international, national, regional and local competitors of various sizes in the manufacture, distribution and sale of our paint, coatings and related products. Some of our competitors are larger than us and have greater financial resources to compete. Other competitors are smaller and may be able to offer more specialized products. Technology, product quality, product innovation, breadth of product line, technical expertise, distribution, service and price are the key competitive factors for our business. Competition in any of these areas may reduce our sales and adversely affect our earnings or cash flow by resulting in decreased sales volumes, reduced prices and increased costs of manufacturing, distributing and selling our products.
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 all 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 December 31, 2017 , we had total debt of approximately $10.5 billion , which is an increase of $8.6 billion since December 31, 2016 , 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;

7


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

Additionally, any failure to comply with covenants in the instruments governing our debt could result in an event of default which, if not cured or waived, would have a material adverse effect on us.

A significant portion of our operations are conducted through our subsidiaries. As a result, our ability to generate sufficient cash flow for our needs is dependent to some extent on the earnings of our subsidiaries and the payment of those earnings to us in the form of dividends, loans or advances and through repayment of loans or advances from us. Our subsidiaries are separate and distinct legal entities. Our subsidiaries have no obligation to pay any amounts due on our debt or to provide us with funds to meet our cash flow needs, whether in the form of dividends, distributions, loans or other payments. In addition, any payment of dividends, loans or advances by our subsidiaries could be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries’ earnings and business considerations. Our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors. In addition, even if we are a creditor of any of our subsidiaries, our rights as a creditor would be subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us. Finally, changes in the laws of foreign jurisdictions in which we operate may adversely affect the ability of some of our foreign subsidiaries to repatriate funds to us.
Our results of operations, cash flow or financial condition may be negatively impacted if we do not successfully integrate future acquisitions into our existing operations and if the performance of the businesses we acquire do not meet our expectations.
We have historically made strategic acquisitions of businesses in the paint and coatings industry and will likely acquire additional businesses in the future as part of our long-term growth strategy. The success of future acquisitions depends in large part on our ability to integrate the operations and personnel of the acquired companies and manage challenges that may arise as a result of the acquisitions, particularly when the acquired businesses operate in new or foreign markets. In the event that we do not successfully integrate such future acquisitions into our existing operations so as to realize the expected return on our investment, our results of operations, cash flow or financial condition could be adversely affected.
Risks and uncertainties associated with our expansion into and our operations in Asia, Europe, South America and other foreign markets could adversely affect our results of operations, cash flow, liquidity or financial condition.
Net external sales of our consolidated foreign subsidiaries totaled approximately 19.8% , 14.5% and 15.8% of our total consolidated net sales in 2017 , 2016 and 2015 , respectively. Sales outside of the United States make up a significant part of our current business and future strategic plans. Our results of operations, cash flow, liquidity or financial condition could be adversely affected by a variety of international factors, including general economic conditions, inflation rates, recessions, foreign currency exchange rates, foreign currency exchange controls, interest rates, foreign investment and repatriation restrictions, legal and regulatory constraints, civil unrest, difficulties in staffing and managing foreign operations and other external economic and political factors. Our inability to successfully manage the risks and uncertainties relating to these factors could adversely affect our results of operations, cash flow, liquidity or financial condition.
In many foreign countries, it is acceptable to engage in certain business practices that we are prohibited from engaging in because of regulations that are applicable to us, such as the Foreign Corrupt Practices Act and the UK Bribery Act. Although we have internal control policies and procedures designed to ensure compliance with these regulations, there can be no assurance that our policies and procedures will prevent a violation of these regulations. Any violation could cause an adverse effect on our results of operations, cash flow or financial condition.
Fluctuations in foreign currency exchange rates could adversely affect our results of operations, cash flow, liquidity or financial condition.
Because of our international operations, we are exposed to risk associated with interest rates and value changes in foreign currencies, which may adversely affect our business. Historically, our reported net sales, earnings, cash flow and financial condition have been subjected to fluctuations in foreign exchange rates. Our primary exchange rate exposure is with the Euro, the Chinese yuan, the Brazilian real, the Canadian dollar, the British pound, the Mexican peso and the Australian dollar, each against the U.S. dollar. While we actively manage the exposure of our foreign currency risk as part of our overall financial risk management policy, we believe we may experience losses from foreign currency exchange rate fluctuations, and such losses could adversely affect our sales, earnings, cash flow, liquidity or financial condition.


8


We are subject to a wide variety of complex domestic and foreign laws, rules and regulations, for which compliance could adversely affect our results of operations, cash flow or financial condition.
We are subject to a wide variety of complex domestic and foreign laws, rules and regulations, and legal compliance risks, including securities laws, tax laws, employment and pension-related laws, competition laws, U.S. and foreign export and trading laws, data privacy and security laws, and laws governing improper business practices. We are affected by new laws and regulations, and changes to existing laws and regulations, including interpretations by courts and regulators. From time to time, our Company, our operations and the industries in which we operate are being reviewed or investigated by regulators, which could lead to enforcement actions or the assertion of private litigation claims and damages.
Although we believe that we have adopted appropriate risk management and compliance programs to mitigate these risks, the global and diverse nature of our operations means that compliance risks will continue to exist. Investigations, examinations and other proceedings, the nature and outcome of which cannot be predicted, will likely arise from time to time. These investigations, examinations and other proceedings could subject us to significant liability and require us to take significant accruals or pay significant settlements, fines and penalties, which could have a material adverse effect on our results of operations, cash flow or financial condition.
We are subject to tax laws and regulations in the United States and multiple foreign jurisdictions. We are affected by changes in tax laws and regulations, as well as changes in related interpretations and other tax guidance. In the ordinary course of our business, we are subject to examinations and investigations by various tax authorities. In addition to existing examinations and investigations, there could be additional examinations and investigations in the future, and existing examinations and investigations could be expanded.
On December 22, 2017, U.S. tax reform legislation known as the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act makes substantial changes to U.S. tax law, including a reduction in the corporate tax rate, a limitation on deductibility of interest expense, a limitation on the use of net operating losses to offset future taxable income, the allowance of immediate expensing of capital expenditures, deemed repatriation of foreign earnings and significant changes to the taxation of foreign earnings going forward. The Tax Act contains numerous, complex provisions impacting U.S. multinational companies, and we continue to review and assess the legislative language and its potential impact on us. The full extent of the impact remains uncertain at this time, and our current interpretations of, and assumptions regarding, the Tax Act are subject to additional regulatory or administrative developments, including any regulations or other guidance promulgated by the U.S. Internal Revenue Service. As a result, the Tax Act, including any regulations or other guidance promulgated by the U.S. Internal Revenue Service, and other tax laws could have significant effects on us, some of which may be adverse and could materially and adversely impact our financial condition, results of operations and cash flows.
For non-income tax risks, we estimate material loss contingencies and accrue for such loss contingencies as required by U.S. generally accepted accounting principles based on our assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and circumstances known to us at a particular point in time. Subsequent developments may affect our assessment and estimates of the loss contingency. In the event the loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material adverse effect on our results of operations or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and cannot be reasonably estimated, any potential liability ultimately determined to be attributable to us may result in a material adverse effect on our results of operations, cash flow or financial condition for the annual or interim period during which such liability is accrued or paid. For income tax risks, we recognize tax benefits based on our assessment that a tax benefit has a greater than 50% likelihood of being sustained upon ultimate settlement with the applicable taxing authority that has full knowledge of all relevant facts. For those income tax positions where we assess that there is not a greater than 50% likelihood that such tax benefits will be sustained, we do not recognize a tax benefit in our financial statements. Subsequent events may cause us to change our assessment of the likelihood of sustaining a previously-recognized benefit which could result in a material adverse effect on our results of operations, cash flow or financial position for the annual or interim period during which such liability is accrued or paid.
We discuss risks and uncertainties with regard to taxes in more detail in Note 14 of the Notes to Consolidated Financial Statements on pages 70 through 72 of our 2017 Annual Report.

Adverse weather conditions and natural disasters may temporarily reduce the demand for some of our products and could have a negative effect on our sales, earnings or cash flow.
Our business is seasonal in nature, with the second and third quarters typically generating a higher proportion of sales and earnings than other quarters. From time to time, adverse weather conditions and natural disasters have had an adverse effect on our sales of paint, coatings and related products. For example, during 2017 the impact of Hurricanes Harvey, Irma and Maria on our operations in Texas, Florida, the Caribbean and neighboring areas, as well as two earthquakes in Mexico, resulted in a

9


temporary shutdown of our company-operated paint stores, manufacturing facilities and distribution centers in the affected regions, resulting in reduced revenues. In addition, unusually cold and rainy weather could have an adverse effect on sales of our exterior paint products. An adverse effect on sales may cause a reduction in our earnings or cash flow.
Inability to protect or enforce our material trademarks and other intellectual property rights could have an adverse effect on our business.
We have numerous patents, trade secrets, trademarks, trade names and know-how that are valuable to our business. Despite our efforts to protect such intellectual property and other proprietary information from unauthorized use or disclosure, third parties may attempt to disclose, obtain or use our trademarks or such other intellectual property and information without our authorization. Although we rely on the patent, trademark, trade secret and copyright laws of the United States and other countries to protect our intellectual property rights, the laws of some countries may not protect such rights to the same extent as the laws of the United States. Unauthorized use of our intellectual property by third parties, the failure of foreign countries to have laws to protect our intellectual property rights, or an inability to effectively enforce such rights in foreign countries could have an adverse effect on our business.
Unauthorized disclosure of sensitive or confidential customer, employee, supplier or Company information, whether through a breach of our computer systems, including cyber attacks, or otherwise, could severely harm our business.
As part of our business, we collect, process, and retain sensitive and confidential personal information about our customers, employees and suppliers. Despite the security measures we have in place, our facilities and systems, and those of the retailers, dealers, licensees and other third party suppliers and vendors with which we do business, may be vulnerable to security breaches, cyber attacks, acts of vandalism or misconduct, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer, employee, supplier or Company information, whether by us or by the retailers, dealers, licensees and other third party suppliers and vendors with which we do business, could result in losses, severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and have a material adverse effect on our business, results of operations and financial condition. As cyber security threats evolve in sophistication and become more prevalent in numerous industries worldwide, we continue to increase our sensitivity and attention to these threats and seek additional investments and resources to address these threats and enhance the security of our facilities and systems. The regulatory environment related to information security, data collection and privacy is increasingly rigorous and complex, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs.
We are required to comply with numerous complex and increasingly stringent domestic and foreign health, safety and environmental laws and regulations, the cost of which is likely to increase and may adversely affect our results of operations, cash flow or financial condition.
Our operations are subject to various domestic and foreign health, safety and environmental laws and regulations. These laws and regulations not only govern our current operations and products, but also impose potential liability on us for our past operations. We expect health, safety and environmental laws and regulations to impose increasingly stringent requirements upon our industry and us in the future. Our costs to comply with these laws and regulations may increase as these requirements become more stringent in the future, and these increased costs may adversely affect our results of operations, cash flow or financial condition.
We are involved with environmental investigation and remediation activities at some of our currently and formerly owned sites, as well as a number of third-party sites, for which our ultimate liability may exceed the current amount we have accrued.
We are involved with environmental investigation and remediation activities at some of our currently and formerly owned sites and a number of third-party sites. We accrue for estimated costs of investigation and remediation activities at these sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs are based on currently available facts regarding each site. We continuously assess our potential liability for investigation and remediation activities and adjust our environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated. Due to the uncertainties surrounding environmental investigation and remediation activities, our liability may result in costs that are significantly higher than currently accrued and may have an adverse effect on our earnings. We discuss these risks and uncertainties in more detail on page 23 of our 2017 Annual Report under the caption “Environmental Matters,” page 27 of our 2017 Annual Report under the caption “Environmental-Related Liabilities” and in Note 8 of the Notes to Consolidated Financial Statements on pages 62 through 63 of our 2017 Annual Report.

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The nature, cost, quantity and outcome of pending and future litigation, such as litigation arising from the historical manufacture and sale of lead pigments and lead-based paint, could have a material adverse effect on our results of operations, cash flow, liquidity and financial condition.
In the course of our business, we are subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to us. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, we accrue for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event that a loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material impact on our results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and the amount of any such loss cannot be reasonably estimated, any potential liability ultimately determined to be attributable to us may result in a material impact on our results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. In those cases where no accrual is recorded or exposure to loss exists in excess of the amount accrued, the Contingencies Topic of the ASC requires disclosure of the contingency when there is a reasonable possibility that a loss or additional loss may have been incurred.
Our past operations included the manufacture and sale of lead pigments and lead-based paints. Along with other companies, we are and have been a defendant in a number of legal proceedings, including individual personal injury actions, purported class actions and actions brought by various counties, cities, school districts and other government-related entities, arising from the manufacture and sale of lead pigments and lead-based paints. The plaintiffs' claims have been based upon various legal theories, including negligence, strict liability, breach of warranty, negligent misrepresentations and omissions, fraudulent misrepresentations and omissions, concert of action, civil conspiracy, violations of unfair trade practice and consumer protection laws, enterprise liability, market share liability, public nuisance, unjust enrichment and other theories. The plaintiffs seek various damages and relief, including personal injury and property damage, costs relating to the detection and abatement of lead-based paint from buildings, costs associated with a public education campaign, medical monitoring costs and others. We have also been a defendant in legal proceedings arising from the manufacture and sale of non-lead-based paints that seek recovery based upon various legal theories, including the failure to adequately warn of potential exposure to lead during surface preparation when using non-lead-based paint on surfaces previously painted with lead-based paint. We believe that the litigation brought to date is without merit or subject to meritorious defenses and are vigorously defending such litigation. We have not settled any material lead pigment or lead-based paint litigation. We expect that additional lead pigment and lead-based paint litigation may be filed against us in the future asserting similar or different legal theories and seeking similar or different types of damages and relief.
Notwithstanding our views on the merits, litigation is inherently subject to many uncertainties, and we ultimately may not prevail. Adverse court rulings, such as the court's decision in the Santa Clara County, California proceeding, the jury verdict against us and other defendants in the State of Rhode Island action and the Wisconsin State Supreme Court’s determination that Wisconsin’s risk contribution theory may apply in the lead pigment litigation, or determinations of liability, among other factors, could affect the lead pigment and lead-based paint litigation against us and encourage an increase in the number and nature of future claims and proceedings. In addition, from time to time, various legislation and administrative regulations have been enacted, promulgated or proposed to impose obligations on present and former manufacturers of lead pigments and lead-based paints respecting asserted health concerns associated with such products or to overturn the effect of court decisions in which we and other manufacturers have been successful.
Due to the uncertainties involved, management is unable to predict the outcome of the lead pigment and lead-based paint litigation, the number or nature of possible future claims and proceedings, or the effect that any legislation and/or administrative regulations may have on the litigation or against us. In addition, management cannot reasonably determine the scope or amount of the potential costs and liabilities related to such litigation, or resulting from any such legislation and regulations. We have not accrued any amounts for such litigation. With respect to such litigation, including the public nuisance litigation, the Company does not believe that it is probable that a loss has occurred, and it is not possible to estimate the range of potential losses as there is no prior history of a loss of this nature and there is no substantive information upon which an estimate could be based. In addition, any potential liability that may result from any changes to legislation and regulations cannot reasonably be estimated. In the event any significant liability is determined to be attributable to us relating to such litigation, the recording of the liability may result in a material impact on net income for the annual or interim period during which such liability is accrued. Additionally, due to the uncertainties associated with the amount of any such liability and/or the nature of any other remedy which may be imposed in such litigation, any potential liability determined to be attributable to us arising out of such litigation may have a material adverse effect on our results of operations, cash flow, liquidity or financial

11


condition. An estimate of the potential impact on our results of operations, cash flow, liquidity or financial condition cannot be made due to the aforementioned uncertainties.
A trial commenced in the Santa Clara County, California proceeding on July 15, 2013 and ended on August 22, 2013. The court entered final judgment on January 27, 2014, finding in favor of the plaintiffs and against the Company and two other defendants (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 a new trial and a motion to vacate the judgment. The court denied these motions on March 24, 2014. On March 28, 2014, the Company filed a notice of appeal to the Sixth District Court of Appeal for the State of California. The filing of the notice of appeal effects an automatic stay of the judgment without the requirement to post a bond. Oral argument before the Sixth District Court of Appeal was held on August 24, 2017. On November 14, 2017, the Sixth District Court of Appeal entered its decision, which affirmed the trial court’s judgment of liability with respect to residences built before 1951 and reversed and vacated the trial court’s judgment with respect to residences built after 1950. The Sixth District Court of Appeal directed the trial court to: (i) recalculate the amount of the abatement fund to limit the fund to the amount necessary to cover the cost of inspecting and remediating pre-1951 residences; and (ii) hold an evidentiary hearing to appoint a suitable receiver. On November 29, 2017, the Company and the two other defendants filed separate Petitions for Rehearing, which the Sixth District Court of Appeal denied on December 6, 2017. The Sixth District Court of Appeal’s decision became final on December 14, 2017. On December 22, 2017, the Company and the two other defendants submitted separate Petitions for Review to the California Supreme Court. On February 14, 2018, the California Supreme Court issued an order denying the Petitions for Review. The Company believes that the judgment conflicts with established principles of law and is unsupported by the evidence. The Company intends to file a Petition for Writ of Certiorari with the Supreme Court of the United States seeking discretionary review. The Company also intends to file a motion to stay the Santa Clara County, California proceeding while the Petition for Writ of Certiorari is pending.
Although the Company believes it is probable that a loss has occurred, the Company has concluded that it is not possible to reasonably estimate the range of potential loss due to the numerous possible outcomes and uncertainties, including, but not limited to, (i) the final amount of the abatement fund necessary to cover the cost of inspecting and remediating pre-1951 residences, as recalculated by the trial court, and (ii) the portion of the abatement fund for which the Company, the two other defendants and others are determined to be responsible. If the Company concludes that it is possible to reasonably estimate the range of potential loss once more definitive information becomes available, the Company will recognize the loss and disclose such information. Because of joint and several liability, it is possible the Company could ultimately be liable for the total amount of the abatement fund. In the event any significant liability is determined to be attributable to the Company relating to such litigation, the recording of any 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 liability is accrued.
We discuss the risks and uncertainties related to litigation, including the lead pigment and lead-based paint litigation, in more detail in Note 9 of the Notes to Consolidated Financial Statements on pages  63 through 66 of our 2017 Annual Report.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.

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ITEM 2.    PROPERTIES
We own our world headquarters located in Cleveland, Ohio, which includes the world headquarters for The Americas Group, Consumer Brands Group and Performance Coatings Group. Our principal manufacturing and distribution facilities are located as set forth below. We believe our manufacturing and distribution facilities are well-maintained and are suitable and adequate, and have sufficient productive capacity, to meet our current needs.
 
 
 
 
 
 
 
 
 
Manufacturing
 
Distribution
 
 
Leased
Owned
Total
 
Leased
Owned
Total
Consumer Brands Group
 
 
 
 
 
 
 
 
Asia
 
1
6
7
 
1
3
4
Australia
 
 
3
3
 
 
3
3
Canada
 
 
3
3
 
 
 

Europe
 
1
3
4
 
2
3
5
Jamaica
 
 
1
1
 
 
1
1
Latin America
 
3
6
9
 
4
5
9
United States
 
4
27
31
 
6
3
9
Total
 
9
49
58
 
13
18
31
 
 
 
 
 
 
 
 
 
Performance Coatings Group
 
 
 
 
 
 
 
 
Africa
 
 
1
1
 
 
1
1
Asia
 
2
4
6
 
2
4
6
Canada
 
 
1
1
 
 
 

Europe
 
4
21
25
 
5
13
18
Latin America
 
 
5
5
 
1
7
8
United States
 
1
10
11
 
1
10
11
Total
 
7
42
49
 
9
35
44
 
 
 
 
 
 
 
 
 

The operations of The Americas Group included one manufacturing and distribution facility in Uruguay and 4,620 company-operated specialty paint stores, of which 218 were owned, in the United States, Canada, Puerto Rico, Virgin Islands, Grenada, Trinidad and Tobago, St. Maarten, Jamaica, Curacao, Aruba, St. Lucia, Uruguay, Brazil, Chile, Peru, Mexico, Ecuador and Barbados at December 31, 2017 . These paint stores are divided into six separate operating divisions that are responsible for the sale of predominantly architectural, protective and marine and related products through the paint stores located within their geographical region. At the end of 2017 :
the Mid Western Division operated 1,088 paint stores primarily located in the midwestern and upper west coast states;
the Eastern Division operated 856 paint stores along the upper east coast and New England states;
the Canada Division operated 227 paint stores throughout Canada;
the Southeastern Division operated 1,095 paint stores principally covering the lower east and gulf coast states, Puerto Rico, Virgin Islands, Grenada, Trinidad and Tobago, St. Maarten, Jamaica, Curacao, Aruba, St. Lucia and Barbados;
the South Western Division operated 1,001  paint stores in the central plains and the lower west coast states; and
the Latin America Division operated 353 paint stores in Uruguay, Brazil, Chile, Peru, Mexico and Ecuador.
During 2017 , The Americas Group opened 101 net new stores, consisting of 114 new stores opened ( 76 in the United States, 15 in Canada, 1 in Curacao, 14 in South America and 8 in Mexico) and 13 stores closed ( 4 in the United States, 1 in Canada, 6 in South America and 2 in Mexico).
The Performance Coatings Group operated 229 branches in the United States, of which 8 were owned, at December 31, 2017 . The Performance Coatings Group also operated 61 branches internationally, of which 6 were owned, at December 31,

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2017 , consisting of branches in Canada (26), Europe (16), Chile (11), Mexico (4), Peru (1) and Vietnam (3). During 2017 , this segment opened 4 new branches and closed 2 branches for a net increase of 2 branches.
All real property within the Administrative segment is owned by us. For additional information regarding real property within the Administrative segment, see the information set forth in Item 1 of this report, which is incorporated herein by reference.
For additional information regarding real property leases, see Note 17 of the Notes to Consolidated Financial Statements on page  74 of our 2017 Annual Report, which is incorporated herein by reference.
ITEM 3.    LEGAL PROCEEDINGS
For information regarding environmental-related matters and other legal proceedings, see pages  27 and 29 of our 2017 Annual Report under the captions “Environmental-Related Liabilities” and “Litigation” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes  1 , 8 , 9 and 13 of the Notes to Consolidated Financial Statements on pages  48 , 62 through 63 , 63 through 66 and 69 through 70 , respectively, of our 2017 Annual Report, which is incorporated herein by reference.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is the name, age and present position of each of our executive officers at February 14, 2018 , as well as all prior positions held by each during the last five years and the date when each was first elected or appointed as an executive officer. Executive officers are generally elected annually by the Board of Directors and hold office until their successors are elected and qualified or until their earlier death, resignation or removal.
 
Name
Age
Present Position
Date When
First Elected
or Appointed
John G. Morikis
54
Chairman, President and Chief Executive Officer, Director
1999
Allen J. Mistysyn
49
Senior Vice President - Finance and Chief Financial Officer
2010
Jane M. Cronin
50
Senior Vice President - Corporate Controller
2016
Mary L. Garceau
45
Senior Vice President, General Counsel and Secretary
2017
Thomas P. Gilligan
57
Senior Vice President - Human Resources
2016
Sean P. Hennessy
60
Senior Vice President - Corporate Planning, Development and Administration
2001
Robert J. Wells
60
Senior Vice President - Corporate Communications and Public Affairs
2006
Joel D. Baxter
57
President & General Manager, Global Supply Chain Division, Consumer Brands Group
2016
Aaron M. Erter
44
President, Consumer Brands Group
2017
Peter J. Ippolito
53
President, The Americas Group
2018
David B. Sewell
49
President, Performance Coatings Group
2014

Mr. Morikis has served as Chairman since January 2017 and President and Chief Executive Officer since January 2016. Mr. Morikis served as President and Chief Operating Officer from October 2006 to January 2016. Mr. Morikis has served as a Director since October 2015 and has been employed with the Company since December 1984.
Mr. Mistysyn has served as Senior Vice President - Finance and Chief Financial Officer since January 2017. Mr. Mistysyn served as Senior Vice President - Finance from October 2016 to January 2017, Senior Vice President - Corporate Controller from October 2014 to October 2016, and Vice President - Corporate Controller from May 2010 to October 2014. Mr. Mistysyn has been employed with the Company since June 1990.
Ms. Cronin has served as Senior Vice President - Corporate Controller since October 2016. Ms. Cronin served as Vice President - Corporate Audit and Loss Prevention from September 2013 to October 2016 and Vice President - Controller, Diversified Brands Division, Consumer Group from July 2005 to September 2013. Ms. Cronin has been employed with the Company since September 1989.

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Ms. Garceau has served as Senior Vice President, General Counsel and Secretary since August 2017. Ms. Garceau served as Vice President, Deputy General Counsel and Assistant Secretary from June 2017 to August 2017, Associate General Counsel and Assistant Secretary from April 2017 to June 2017, and Associate General Counsel from February 2014 to April 2017. Prior to joining the Company, Ms. Garceau was General Counsel of Thirty-One Gifts LLC from August 2011 to February 2014. Ms. Garceau has been employed with the Company since February 2014.
Mr. Gilligan has served as Senior Vice President - Human Resources since January 2016. Mr. Gilligan served as Senior Vice President, Human Resources, The Americas Group from August 2014 to January 2016 and Senior Vice President, Human Resources, Paint Stores Group from July 2000 to August 2014. Mr. Gilligan has been employed with the Company since October 1983.
Mr. Hennessy has served as Senior Vice President - Corporate Planning, Development and Administration since January 2017. Mr. Hennessy served as Senior Vice President - Finance and Chief Financial Officer from August 2001 to January 2017. Mr. Hennessy has been employed with the Company since September 1984.
Mr. Wells has served as Senior Vice President - Corporate Communications and Public Affairs since February 2009. Mr. Wells has been employed with the Company since May 1998.
Mr. Baxter has served as President & General Manager, Global Supply Chain Division, Consumer Brands Group (f/k/a Consumer Group) since September 2008. Mr. Baxter has been employed with the Company since September 1990.
Mr. Erter has served as President, Consumer Brands Group since August 2017. Mr. Erter served as President & General Manager, Consumer Division, Consumer Brands Group from June 2017 to August 2017. Prior to joining the Company in connection with the acquisition of The Valspar Corporation, Mr. Erter served as Senior Vice President of Valspar from December 2015 to June 2017 and Vice President and General Manager, North America of Valspar from November 2011 to December 2015. Mr. Erter has been employed with the Company since June 2017.
Mr. Ippolito has served as President, The Americas Group since January 2018. Mr. Ippolito served as President & General Manager, Mid Western Division, The Americas Group from November 2010 to January 2018. Mr. Ippolito has been employed with the Company since May 1986.
Mr. Sewell has served as President, Performance Coatings Group (f/k/a Global Finishes Group) since August 2014. Mr. Sewell served as President & General Manager, Product Finishes Division, Global Finishes Group from July 2012 to August 2014. Mr. Sewell has been employed with the Company since February 2007.



15


PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange and traded under the symbol SHW. The number of shareholders of record at January 31, 2018 was 6,470 .
Information regarding market prices and dividend information with respect to our common stock is set forth on page  79 of our 2017 Annual Report, which is incorporated herein by reference. The performance graph set forth on page  16 of our 2017 Annual Report is incorporated herein by reference. The information with respect to securities authorized for issuance under the Company’s equity compensation plans is set forth under the caption “Equity Compensation Plan Information” in our Proxy Statement, which is incorporated herein by reference.
Issuer Purchases of Equity Securities
The following table sets forth a summary of the Company’s purchases of common stock during the fourth quarter of 2017 .  
Period
 
Total
Number of
Shares
Purchased
 
Average Price
Paid per
Share
 
Total Number
of Shares
Purchased as
Part of a
Publicly
Announced Plan
 
Maximum Number
of Shares
that May
Yet Be
Purchased Under
the Plan
 
 
 
 
 
 
 
 
 
October 1 – October 31
 
 
 
 
 
 
 
 
Share repurchase program (1)
 
 
 
 
 
 
 
11,650,000

Employee transactions (2)
 
752

 
$378.20
 
 
 
N/A

 
 
 
 
 
 
 
 
 
November 1 – November 30
 
 
 
 
 
 
 
 
Employee transactions (2)
 
1,043

 
389.63

 
 
 
N/A

 
 
 
 
 
 
 
 
 
December 1 – December 31
 
 
 
 
 
 
 
 
Employee transactions (2)
 
10,859

 
404.54

 
 
 
N/A

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

Employee transactions (2)
 
12,654

 
$401.75
 
 
 
N/A

 
 
 
 
 
 
 
 
 
(1)  
All shares are purchased through the Company’s publicly announced share repurchase program. There is no expiration date specified for the program. The Company had remaining authorization at December 31, 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.

16



ITEM 6. SELECTED FINANCIAL DATA
(millions of dollars, except per common share data)
 
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
Operations
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
14,984

 
$
11,856

 
$
11,339

 
$
11,130

 
$
10,186

 
Net income
 
1,814

 
1,133

 
1,054

 
866

 
753

 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Position
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
19,958

 
$
6,753

 
$
5,779

 
$
5,699

 
$
6,383

 
Long-term debt
 
9,886

 
1,211

 
1,907

 
1,116

 
1,122

 
Ratio of earnings to fixed charges  (1)
 
4.7x

 
6.5x

 
9.1x

 
7.7x

 
7.4x

 
 
 
 
 
 
 
 
 
 
 
 
 
Per Common Share Data
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations — basic  (2)
 
$
19.52

 
$
12.33

 
$
11.43

 
$
9.00

 
$
7.46

 
Net income from continuing operations — diluted (2)
 
19.11

 
11.99

 
11.15

 
8.77

 
7.25

 
Cash dividends
 
3.40

 
3.36

 
2.68

 
2.20

 
2.00

 
(1)  
For purposes of calculating the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges. Fixed charges consist of interest expense, net, including amortization of discount and financing costs and the portion of operating rental expense which management believes is representative of the interest component of rent expense. The following schedule includes the figures used to calculate the ratios:
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
Income before income taxes
 
$
1,528

 
$
1,595

 
$
1,549

 
$
1,258

 
$
1,086

 
Fixed charges:
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
263

 
154

 
62

 
64

 
63

 
Interest component of rent expense
 
153

 
138

 
130

 
125

 
108

 
Total fixed charges
 
416

 
292

 
192

 
189

 
171

 
Earnings
 
$
1,944

 
$
1,887

 
$
1,741

 
$
1,447

 
$
1,257

 

(2)  
Presented under the treasury stock method.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is set forth on pages  19 through 34 of our 2017 Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated herein by reference.
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk associated with interest rates, foreign currency and commodity fluctuations. We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use derivative instruments for speculative or trading purposes. The Company entered into foreign currency option and forward currency exchange contracts during 2017 to hedge against value changes in foreign currency. There were no material contracts outstanding at December 31, 2017 . Foreign currency option and forward contracts are described in Note 13 of the Notes to Consolidated Financial Statements on page  70 of our 2017 Annual Report. We believe we may experience continuing losses from foreign currency fluctuations. However, we do not expect currency translation, transaction or hedging contract losses to have a material adverse effect on our financial condition, results of operations or cash flows.The interest rate lock agreements entered into in 2016 were settled during 2017. See Note 7 of the Notes to Consolidated Financial Statements on pages  61 through 62 of our 2017 Annual Report.

17


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is set forth on pages  38 through 77 of our 2017 Annual Report under the captions “Report of Management on the Consolidated Financial Statements,” “Report of the Independent Registered Public Accounting Firm on the Consolidated Financial Statements,” “Statements of Consolidated Income and Comprehensive Income,” “Consolidated Balance Sheets,” “Statements of Consolidated Cash Flows,” “Statements of Consolidated Shareholders’ Equity,” and “Notes to Consolidated Financial Statements,” which is incorporated herein by reference. Unaudited quarterly data is set forth in Note 16 of the Notes to Consolidated Financial Statements on page  74 of our 2017 Annual Report, which is incorporated herein by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.    CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chairman, President and Chief Executive Officer and our Senior Vice President – Finance and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, our Chairman, President and Chief Executive Officer and our Senior Vice President – Finance and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and accumulated and communicated to our management, including our Chairman, President and Chief Executive Officer and our Senior Vice President – Finance and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
The “Report of Management on Internal Control over Financial Reporting” is set forth on page  36 of our 2017 Annual Report, which is incorporated herein by reference.
The “Report of the Independent Registered Public Accounting Firm on Internal Control over Financial Reporting” is set forth on page  37 of our 2017 Annual Report, which is incorporated herein by reference.
There were no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.    OTHER INFORMATION
None.

18


PART III
ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The information regarding our directors is set forth under the captions “Proposal 1 – Election of Directors” and “Experiences, Qualifications, Attributes and Skills of Director Nominees” in our Proxy Statement, which is incorporated herein by reference.
There were no material changes to the procedures by which security holders may recommend nominees to our Board of Directors during 2017 . Please refer to the information set forth under the caption “Board Meetings and Committees” in our Proxy Statement, which is incorporated herein by reference.
Executive Officers
The information regarding our executive officers is set forth under the caption “Executive Officers of the Registrant” in Part I of this report, which is incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
The information regarding compliance with Section 16 of the Securities Exchange Act of 1934 is set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement, which is incorporated herein by reference.
Audit Committee
The information regarding the Audit Committee of our Board of Directors and the information regarding audit committee financial experts are set forth under the caption “Board Meetings and Committees” in our Proxy Statement, which is incorporated herein by reference.
Code of Ethics
We have adopted a Code of Conduct, which applies to all directors, officers and employees of Sherwin-Williams and our subsidiaries wherever located. Our Code of Conduct contains the general guidelines and principles for conducting Sherwin-Williams' business consistent with the highest standards of business ethics. Under our Code of Ethics for Senior Financial Management, our chief executive officer, chief financial officer and senior financial management are responsible for creating and maintaining a culture of high ethical standards and of commitment to compliance throughout our company to ensure the fair and timely reporting of Sherwin-Williams' financial results and condition. Senior financial management includes the controller, the treasurer, the principal financial/accounting personnel in our operating groups and divisions, and all other financial/accounting personnel within our corporate departments and operating groups and divisions with staff supervision responsibilities. Please refer to the information set forth under the caption “Corporate Governance – Code of Conduct” in our Proxy Statement, which is incorporated herein by reference. Our Code of Conduct and Code of Ethics for Senior Financial Management are available in the “Corporate Governance” section on the “Investor Relations” page of our website at www.sherwin.com.
We intend to disclose on our website any amendment to, or waiver from, a provision of our Code of Conduct or Code of Ethics for Senior Financial Management that applies to our directors and executive officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, or any persons performing similar functions, and that is required to be publicly disclosed pursuant to the rules of the Securities and Exchange Commission.
ITEM 11.    EXECUTIVE COMPENSATION
The information required by this item is set forth under the captions “Compensation Committee Report,” “Compensation Risk Assessment,” “ 2017 Director Compensation Table” and “Director Compensation Program” in our Proxy Statement, and under the Executive Compensation section of our Proxy Statement commencing with the information under the caption “Compensation Discussion and Analysis (CD&A)” and continuing through the information under the caption “2017 CEO Pay Ratio,” which is incorporated herein by reference.

19


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

20


PART IV
ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
Financial Statements
The following consolidated financial statements of the Company included in our 2017 Annual Report are incorporated by reference in Item 8.
(i)
Report of Management on the Consolidated Financial Statements (page  38 of our 2017 Annual Report);
(ii)
Report of the Independent Registered Public Accounting Firm on the Consolidated Financial Statements (page  39 of our 2017 Annual Report);
(iii)
Statements of Consolidated Income and Comprehensive Income for the years ended December 31, 2017 , 2016 and 2015 (page  40 and 41 of our 2017 Annual Report);
(iv)
Consolidated Balance Sheets at December 31, 2017 , 2016 and 2015 (page  42 of our 2017 Annual Report);
(v)
Statements of Consolidated Cash Flows for the years ended December 31, 2017 , 2016 and 2015 (page  43 of our 2017 Annual Report);
(vi)
Statements of Consolidated Shareholders’ Equity for the years ended December 31, 2017 , 2016 and 2015 (page  44 of our 2017 Annual Report); and
(vii)
Notes to Consolidated Financial Statements for the years ended December 31, 2017 , 2016 and 2015 (pages  46 through  77 of our 2017 Annual Report).
(2) Financial Statement Schedule
Schedule II — Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2017 , 2016 and 2015 is set forth below. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
Valuation and Qualifying Accounts and Reserves
(Schedule II)
Changes in the allowance for doubtful accounts were as follows:  
(thousands of dollars)
2017
 
2016
 
2015
Beginning balance
$
40,450

 
$
49,420

 
$
53,770

Bad debt expense
42,716

 
29,869

 
30,393

Uncollectible accounts written off, net of recoveries
(30,169
)
 
(38,839
)
 
(34,743
)
Ending balance
$
52,997

 
$
40,450

 
$
49,420


(3) Exhibits
2.
*(a)

 
 
 
3.
(a)

 
 
 
 
(b)

 
 
 
4.
(a)

 
 
 
 
(b)




21




 
(c)

 
 
 
 
(d)

 
 
 
 
(e)

 
 
 
 
(f)

 
 
 
 
(g)


 
 
 
 
(h)

 
 
 
 
(i)

 
 
 
 
(j)

 
 
 
 
(k)

 
 
 
 
(l)

 
 
 
 
(m)
 
 
 
 
(n)
 
 
 
 
(o)
 
 
 
 
(p)
 
 
 
 
(q)
 
 
 
 
(r)
 
 
 

22


 
(s)
 
 
 
 
(t)
 
 
 
 
(u)
 
 
 
 
(v)
 
 
 
 
(w)
 
 
 
 
(x)
 
 
 
 
(y)

 
 
 
 
(z)
 
 
 
 
(aa)
 
 
 
 
(bb)
 
 
 
 
(cc)
 
 
 
 
(dd)
 
 
 
 
(ee)
 
 
 
 
(ff)
 
 
 
 
(gg)
 
 
 

23


 
(hh)
 
 
 
 
(ii)
 
 
 
10.
**(a)
 
 
 
 
**(b)
 
 
 
 
**(c)
 
 
 
 
**(d)
 
 
 
 
**(e)
 
 
 
 
**(f)
 
 
 
 
**(g)
The Sherwin-Williams Company Executive Disability Income Plan filed as Exhibit 10(g) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (SEC File Number 001-04851), and incorporated herein by reference.


 
 
 
 
**(h)
 
 
 
 
**(i)
 
 
 
 
**(j)
 
 
 
 
**(k)
 
 
 
 
**(l)
 
 
 
 
**(m)
 
 
 
 
**(n)
 
 
 
 
**(o)
 
 
 
 
**(p)
 
 
 
 
**(q)
 
 
 

24


 
**(r)
 
 
 
 
**(s)
 
 
 
 
**(t)
 
 
 
 
**(u)
 
 
 
 
**(v)
 
 
 
 
**(w)
 
 
 
 
**(x)
 
 
 
 
**(y)
 
 
 
13.
 
 
 
 
21.
 
 
 
 
23.
 
 
 
 
24.
(a)
 
 
 
 
(b)
 
 
 
31.
(a)
 
 
 
 
(b)
 
 
 
32.
(a)
 
 
 
 
(b)
 
 
 
101.INS
XBRL Instance Document
 
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document

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





ITEM 16. FORM 10-K SUMMARY
None.

25


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 23, 2018 .
 
THE SHERWIN-WILLIAMS COMPANY
 
 
By:
/ S /
MARY L. GARCEAU
 
 
Mary L. Garceau, Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 23, 2018 .
* JOHN G. MORIKIS
 
Chairman, President and Chief Executive Officer, Director
(Principal Executive Officer)
    John G. Morikis
 
* ALLEN J. MISTYSYN
 
Senior Vice President – Finance and Chief Financial Officer (Principal Financial Officer)
    Allen J. Mistysyn
 
* JANE M. CRONIN
 
Senior Vice President – Corporate Controller
(Principal Accounting Officer)
    Jane M. Cronin
 
* ARTHUR F. ANTON
 
Director
    Arthur F. Anton
 
 
* DAVID F. HODNIK
 
Director
    David F. Hodnik
 
 
* RICHARD J. KRAMER
 
Director
    Richard J. Kramer
 
* SUSAN J. KROPF
 
Director
    Susan J. Kropf
 
 
* CHRISTINE A. POON
 
Director
    Christine A. Poon
 
* JOHN M. STROPKI
 
Director
    John M. Stropki
 
* MICHAEL H. THAMAN
 
Director
    Michael H. Thaman
 
* MATTHEW THORNTON III
 
Director
    Matthew Thornton III
 
* STEVEN H. WUNNING
 
Director
    Steven H. Wunning
 

*
The undersigned, by signing her name hereto, does sign this report on behalf of the designated officers and directors of the Company pursuant to powers of attorney executed on behalf of each such officer and director and filed as an exhibit to this report.
By:
/ S /
MARY L. GARCEAU

  
February 23, 2018
 
 
Mary L. Garceau, Attorney-in-fact
  
 

26


EXHIBIT 10(b)

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
Peter J. Ippolito
Robert J. Wells


Form C of Severance Pay Agreement

Jane M. Cronin
Mary L. Garceau
Thomas P. Gilligan
Allen J. Mistysyn
David B. Sewell





EXHIBIT 10(k)
THE SHERWIN-WILLIAMS COMPANY
2006 Equity and Performance Incentive Plan
(Amended and Restated as of April 19, 2017)
1.
Purpose. The purpose of this 2006 Equity and Performance Incentive Plan (Amended and Restated as of April 19, 2017) is to attract and retain officers and other employees of The Sherwin-Williams Company and its Subsidiaries, to help align the economic interests between such persons and the shareholders of the Company, and to provide to such persons incentives and rewards for performance.

2.
Definitions. As used in this Plan, and except as otherwise provided in an Evidence of Award:

(a)
“Appreciation Right” means a right granted pursuant to Section 5, and includes both Free-Standing Appreciation Rights and Tandem Appreciation Rights.

(b)
“Assumed” has the meaning provided in Section 12.

(c)
“Base Pay” has the meaning provided in Section 12.

(d)
“Base Price” means the price to be used as the basis for determining the Spread upon the exercise of a Free-Standing Appreciation Right or a Tandem Appreciation Right.

(e)
“Board” means the Board of Directors of the Company and, to the extent of any delegation by the Board to a committee (or subcommittee thereof) pursuant to Section 10, such committee (or subcommittee). In addition, to the extent deemed necessary or appropriate by the Board, such committee shall be comprised of not less than two individuals who are (i) “non-employee directors” within the meaning of Section 16 of the Exchange Act, and (ii) for remuneration that is payable under the Plan pursuant to a written binding contract in effect on November 2, 2017, “outside directors” within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder (“Section 162(m)”).

(f)
“Cause” has the meaning provided in Section 12.

(g)
“Change of Control” has the meaning provided in Section 12.

(h)
“Code” means the Internal Revenue Code of 1986, as amended from time to time.

(i)
“Common Stock” means Common Stock, par value $1.00 per share, of the Company or any security into which such shares of Common Stock may be changed by reason of any transaction or event of the type referred to in Section 11.

(j)
“Company” means The Sherwin-Williams Company, an Ohio corporation, and its successors.

(k)
“Covered Employee” means a Participant who is, or is determined by the Board to be likely to become, a “covered employee” within the meaning of Section 162(m) (or any successor provision).

(l)
“Date of Grant” means the date specified by the Board on which a grant of Option Rights, Appreciation Rights, Performance Shares, Performance Units or Other Awards, or a grant or sale of Restricted Stock, Restricted Stock Units or Other Awards, will become effective (which date will not be earlier than the date on which the Board takes action with respect thereto).

(m)
“Director” means a member of the Board of Directors of the Company.

(n)
“Effective Date” means April 19, 2017.

(o)
“Employee Benefits” has the meaning provided in Section 12.






(p)
“Evidence of Award” means an agreement, certificate, resolution or other type or form of writing or other evidence approved by the Board that sets forth the terms and conditions of Option Rights, Appreciation Rights, Performance Shares, Performance Units or Other Awards granted, or a grant or sale of Restricted Stock, Restricted Stock Units or Other Awards. An Evidence of Award may be in an electronic medium, may be limited to notation on the books and records of the Company and, unless otherwise determined by the Board, need not be signed by a representative of the Company or a Participant.

(q)
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, as such law, rules and regulations may be amended from time to time.

(r)
“Free-Standing Appreciation Right” means an Appreciation Right granted pursuant to Section 5 that is not granted in tandem with an Option Right.

(s)
“Good Reason” has the meaning provided in Section 12.

(t)
“Incentive Pay” has the meaning provided in Section 12.

(u)
“Incentive Stock Options” means Option Rights that are intended to qualify as “incentive stock options” under Section 422 of the Code or any successor provision.

(v)
“Management Objectives” means the measurable performance objective or objectives established pursuant to this Plan for Participants who have received grants of Performance Shares or Performance Units, Option Rights, Appreciation Rights, Restricted Stock, Restricted Stock Units, Other Awards or dividend equivalents pursuant to this Plan. Management Objectives may be described in terms of Company-wide objectives or objectives that are related to the performance of the individual Participant or of the Subsidiary, division, department, or function within the Company or Subsidiary in which the Participant is employed. The Management Objectives may be made relative to the performance of one or more other companies or subsidiaries, divisions, departments, regions or functions within such other companies, and may be made relative to an index or one or more of the performance criteria themselves. The Board may grant awards subject to Management Objectives that are either Qualified Performance-Based Awards or are not Qualified Performance-Based Awards. The Management Objectives will be based on one or more, or a combination, of the following criteria: appreciation in value of shares; shareholder return (including, without limitation, total shareholder return and absolute shareholder return); earnings per share; book value per share; operating income; net income; earnings (including, without limitation, pretax earnings, retained earnings, earnings before interest and taxes, and earnings before interest, taxes, depreciation and amortization); pro forma net income; return on equity; return on assets (including, without limitation, designated assets); return on net assets employed; return on capital; return on sales; sales; sales per dollar of assets; sales per employee; economic value added; revenues; expenses; cash flow (including, without limitation, operating cash flow and free cash flow); cash flow return on investment; operating profit margin or net profit margin; cost of capital; cost reductions; debt reduction; debt leverage; total debt to capitalization; facilities open; gallon growth; interest coverage; inventory management; productivity improvement; profit after tax; reduction of fixed costs; working capital; enterprise value; asset management; environmental, health and/or safety goals; regulatory achievements; recruiting or maintaining personnel; customer growth; research and development achievements; strategic sustainability metrics; accomplishment of, or goals related to, mergers, acquisitions, dispositions public offerings, or similar business transactions; achievement of business or operational goals such as market share, business development and/or customer objectives; manufacturing achievements; joint venture or other similar arrangements; any of the above criteria as compared to the performance of a published or a special index deemed applicable by the Board, including, but not limited to, the Standard & Poor’s 500 Stock Index; or any other objective goals established by the Board. Where more specific metrics are listed within the categories herein, they are intended to be illustrative and are not to be construed as limitations on the more generic metrics.

The Board may specify that the Management Objectives may include adjustments to include or exclude the effects of certain events, including any of the following events: the impairment of tangible or intangible assets; asset write-downs; litigation or claim judgments or settlements; acquisitions or divestitures; gains or losses on the sale of assets; severance, contract termination and other costs relating to certain business activities; gains or losses from the disposition of businesses or assets or from the early extinguishment of debt; foreign exchange gains and/or losses; changes in tax law, accounting principles, accounting estimates or other such laws or provisions affecting reported results; changes in regulations that directly impact the





business; the effect of any statements issued by the Financial Accounting Standards Board or its committees; business combinations, reorganizations and/or restructuring programs, including, but not limited to reductions in force and early retirement incentives; currency fluctuations; any unusual, infrequent or non-recurring items, including, but not limited to, such items described in management’s discussion and analysis of financial condition and results of operations or the financial statements and/or notes thereto appearing in the Company’s annual report for the applicable period; and expenses related to goodwill and other intangible assets, stock offerings, stock repurchases and loan loss provisions. In addition, if the Board determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which it conducts its business, or other events or circumstances render the Management Objectives unsuitable, the Board may in its discretion modify such Management Objectives or the related level or levels of achievement, in whole or in part, as the Board deems appropriate and equitable, except in the case of a Qualified Performance-Based Award (other than in connection with a Change of Control) where such action would result in the loss of the otherwise available exemption of the award under Section 162(m), except as otherwise permitted under Section 18.
(w)
“Market Value Per Share” means, as of any particular date, the average of the highest and lowest reported sales prices of the Common Stock during normal trading hours on the New York Stock Exchange Composite Tape or, if not listed on such exchange, on any other principal securities exchange on which the Common Stock is listed. If there is no regular public trading market for such Common Stock, the Market Value Per Share of the Common Stock shall be determined by the Board. The Board is authorized to adopt another fair market value pricing method, provided such method is stated in the Evidence of Award, and is in compliance with the fair market value pricing rules set forth in Section 409A of the Code and the regulations promulgated thereunder (“Section 409A”). Notwithstanding any other provision of this Section 2(w) or any other provision of this Plan, the “Market Value Per Share” will be such price per share of Common Stock, rounded to two decimal points (provided, however, that such rounding is in compliance with the fair market value pricing rules set forth in Section 409A), as shall be provided to the Company by the Company’s third-party equity plan administrator, as applicable.

(x)
“Optionee” means the optionee named in an Evidence of Award evidencing an outstanding Option Right.

(y)
“Option Price” means the purchase price payable upon exercise of an Option Right.

(z)
“Option Right” means the right to purchase shares of Common Stock upon exercise of an option granted pursuant to Section 4.

(aa)
“Other Award” means an award granted pursuant to Section 9.

(ab)
“Participant” means a person who is selected by the Board to receive benefits under this Plan and who is at the time an officer or other employee of the Company or any one or more of its Subsidiaries, or who has agreed to commence serving in any of such capacities within 90 days of the Date of Grant. The term “Participant” shall also include any person who provides services to the Company or a Subsidiary that are substantially equivalent to those typically provided by an employee.

(ac)
“Performance Period” means, in respect of a Performance Share or Performance Unit, a period of time established pursuant to Section 8 within which the Management Objectives relating to such Performance Share or Performance Unit are to be achieved.

(ad)
“Performance Share” means a bookkeeping entry that records the equivalent of one share of Common Stock awarded pursuant to Section 8.

(ae)
“Performance Unit” means a bookkeeping entry awarded pursuant to Section 8 that records a unit equivalent to $1.00 or such other value as determined by the Board.

(af)
“Plan” means The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan, as may be amended or amended and restated from time to time.

(ag)
“Post-CIC Period” has the meaning provided in Section 12.






(ah)
“Qualified Performance-Based Award” means any award of Performance Shares, Performance Units, Restricted Stock, Restricted Stock Units or Other Awards, or portion of such award, to a Covered Employee that is intended to satisfy the requirements for “qualified performance-based compensation” under Section 162(m).

(ai)
“Restricted Stock” means shares of Common Stock granted or sold pursuant to Section 6 as to which neither the substantial risk of forfeiture nor the prohibition on transfer has expired.

(aj)
“Restriction Period” means the period of time during which Restricted Stock Units are subject to restrictions, as provided in Section 7.

(ak)
“Restricted Stock Unit” means an award made pursuant to Section 7 of the right to receive shares of Common Stock or cash at the end of a specified period.

(al)
“Spread” means the excess of the Market Value Per Share on the date when an Appreciation Right is exercised over the Option Price or Base Price provided for in the related Option Right or Free-Standing Appreciation Right, respectively.

(am)
“Subsidiary” means a corporation, company or other entity (i) at least 50 percent of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, or (ii) which does not have outstanding shares or securities (as may be the case in a partnership, joint venture or unincorporated association), but at least 50 percent of whose ownership interest representing the right generally to make decisions for such other entity is, now or hereafter, owned or controlled, directly or indirectly, by the Company except that for purposes of determining whether any person may be a Participant for purposes of any grant of Incentive Stock Options, “Subsidiary” means any corporation in which at the time the Company owns or controls, directly or indirectly, at least 50 percent of the total combined voting power represented by all classes of stock issued by such corporation.

(an)
“Tandem Appreciation Right” means an Appreciation Right granted pursuant to Section 5 that is granted in tandem with an Option Right.

(ao)
“10% Shareholder” means an employee of the Company or its Subsidiary who, as of the date on which an Incentive Stock Option is granted to such employee, owns more than ten percent (10%) of the total combined voting power of all classes of shares of Common Stock then issued by the Company or any of its Subsidiaries.

3.
Shares Subject to this Plan .

(a)
Maximum Shares Available Under Plan .

(i)
Subject to adjustment as provided in Section 11, the number of shares of Common Stock that may be issued or transferred (A) upon the exercise of Option Rights or Appreciation Rights; (B) as Restricted Stock and released from substantial risks of forfeiture thereof; (C) in payment of Restricted Stock Units; (D) in payment of Performance Shares or Performance Units that have been earned; (E) as Other Awards or in payment of Other Awards, or (F) in payment of dividend equivalents paid with respect to awards made under this Plan will not exceed in the aggregate 23,700,000 shares of Common Stock (representing 19,200,000 previously authorized shares, plus 4,500,000 newly authorized shares as of the Effective Date), plus any shares of Common Stock relating to awards that expire or are forfeited or are cancelled under this Plan. Such shares may be shares of original issuance or treasury shares or a combination of the foregoing.

(ii)
Each share of Common Stock issued or transferred pursuant to an award of Option Rights or Appreciation Rights will reduce the aggregate plan limit described above in Section 3(a)(i) by one share of Common Stock. Each share of Common Stock issued or transferred (and in the case of Restricted Shares, released from all substantial risk of forfeiture) pursuant to an award other than Option Rights or Appreciation Rights shall reduce the aggregate plan limit described above in Section 3(a)(i) by (A) two (2) shares of Common Stock if issued or transferred pursuant to an award granted prior to April 19, 2017 and (B) three (3) shares of Common Stock if issued or transferred pursuant to an award granted on or after April 19, 2017; provided, however, that any award (or any





portion) designated to be settled, or that is paid, in cash will not be counted against, or have any effect upon, the number of shares of Common Stock available for issuance under this Plan. Any shares of Common Stock that again become available for issuance pursuant to this Section 3 shall be added back to the aggregate plan limit in the same manner such shares were originally deducted from the aggregate plan limit pursuant to this Section 3(a)(ii).

(iii)
Shares of Common Stock covered by an award granted under this Plan shall not be counted as used unless and until they are actually issued and delivered to a Participant and, therefore, the total number of shares available under this Plan as of a given date shall not be reduced by any shares relating to prior awards that have expired or have been forfeited or cancelled; provided, however, that shares of Common Stock: (A) tendered or otherwise used in payment of the Option Price of an Option Right or the Base Price of an Appreciation Right, as applicable; (B) not issued upon the settlement of Appreciation Rights; (C) tendered to or withheld by the Company to satisfy applicable tax withholding obligations; or (D) repurchased by the Company using proceeds from Option Right exercises, shall be considered issued or transferred, and shall not become available again for issuance, under this Plan. If, under this Plan, a Participant has elected to give up the right to receive compensation in exchange for shares of Common Stock based on fair market value, such shares of Common Stock shall not count against the aggregate plan limit described above. Shares of Common Stock issued under Awards granted in assumption, substitution or exchange for previously granted awards of a company acquired by the Company or its Subsidiaries shall not reduce the shares of Common Stock available under this Plan, and available shares under a shareholder approved plan of an acquired company (as appropriately adjusted to reflect the transaction) may be used for awards under this Plan and shall not reduce this Plan’s share reserve (unless otherwise required by any applicable stock exchange listing requirements).

(b)
Incentive Stock Option Limit. Notwithstanding anything in this Section 3, or elsewhere in this Plan, to the contrary and subject to adjustment pursuant to Section 11, the aggregate number of shares of Common Stock actually issued or transferred by the Company upon the exercise of Incentive Stock Options shall not exceed 23,700,000.

(c)
Individual Participant Limits . Notwithstanding anything in this Section 3, or elsewhere in this Plan, to the contrary and subject to adjustment pursuant to Section 11:
(i)
No Participant shall be granted Option Rights or Appreciation Rights, in the aggregate, in excess of 500,000 shares of Common Stock during any calendar year under this Plan.
(ii)
No Participant shall be granted Qualified Performance-Based Awards of (A) Restricted Stock, (B) Restricted Stock Units, (C) Performance Shares or (D) in the form of Other Awards payable in Common Stock, in the aggregate, in excess of 200,000 shares of Common Stock (measured based upon a maximum award level on each Date of Grant) during any calendar year under this Plan.
(iii)
No Participant shall be granted Qualified Performance-Based Awards of Performance Units having an aggregate value in excess of $7,500,000 (measured based upon a maximum award level determined on each Date of Grant) during any calendar year under this Plan.
(iv)
No Participant shall be granted Qualified Performance-Based Awards in the form of Other Awards payable in cash under Section 9(b) having an aggregate value in excess of $7,500,000 (measured based upon a maximum award level determined on each Date of Grant) during any calendar year under this Plan.

(d)
Exclusion from Certain Restrictions . Notwithstanding anything in this Plan to the contrary, up to 5% of the maximum number of shares of Common Stock provided for in Section 3(a)(i) above may be used for awards granted under Sections 6 through 9 that do not comply with the three-year requirements set forth in Sections 6(c), 7(c) and 9(d) and the one-year requirements of Sections 4(e), 5(b), 6(e), 7(a), 8(b) and 9(d).

4.
Option Rights. The Board may, from time to time and upon such terms and conditions as it may determine, authorize the granting to Participants of options to purchase shares of Common Stock. Each such grant will be subject to all of the following provisions:

(a)
Each grant will specify the number of shares of Common Stock to which it pertains subject to the limitations set forth in Section 3.






(b)
Each grant will specify an Option Price per share, which may not be less than the Market Value Per Share on the Date of Grant (or less than 110% of the Market Value Per Share in the case of an Incentive Stock Option granted to a 10% Shareholder).

(c)
Each grant will specify whether the Option Price will be payable (i) in cash or by check acceptable to the Company or by wire transfer of immediately available funds, (ii) by the actual or constructive transfer to the Company of shares of Common Stock owned by the Optionee having a value at the time of exercise equal to the total Option Price, (iii) by a combination of such methods of payment, or (iv) by such other methods as may be approved by the Board.
(d)
Successive grants may be made to the same Participant whether or not any Option Rights previously granted to such Participant remain unexercised; provided, however, that no Option Rights will be granted with automatic reload features.

(e)
Each grant will specify the period or periods of continuous service by the Optionee with the Company or any Subsidiary that is necessary before the Option Rights or installments thereof will become vested and exercisable. A grant of Option Rights may provide for the earlier vesting and exercise of such Option Rights in the event of death or disability of the Participant or a Change of Control and shall have an initial vesting schedule of no less than one year.

(f)
Any grant of Option Rights may specify Management Objectives that must be achieved as a condition to the exercise of such rights. The grant of such Option Rights will specify that, before the exercise of such rights, the Board must determine that the Management Objectives have been satisfied.

(g)
Option Rights may be (i) options, including, without limitation, Incentive Stock Options that are intended to qualify under particular provisions of the Code, (ii) options that are not intended so to qualify, or (iii) combinations of the foregoing. Incentive Stock Options may only be granted to Participants who meet the definition of “employees” under Section 3401(c) of the Code. The terms of any Incentive Stock Option shall be subject in all respects to the provisions of Section 422 of the Code, or any successor provision thereto, and any regulations promulgated thereunder.

(h)
The exercise of an Option Right will result in the cancellation on a share- for-share basis of any Tandem Appreciation Right authorized under Section 5.

(i)
No Option Right will be exercisable more than 10 years from the Date of Grant (or five years in the case of an Incentive Stock Option granted to a 10% Shareholder).

(j)
Each grant of Option Rights will be evidenced by an Evidence of Award. Each Evidence of Award shall be subject to this Plan and shall contain such terms and provisions, consistent with this Plan, as the Board may approve. Until the shares of Common Stock relating to Option Rights have been issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the shares of Common Stock relating to the Option Rights, notwithstanding the exercise of the Option Rights.

5.
Appreciation Rights .

(a)
The Board may also, from time to time and upon such terms and conditions as it may determine, authorize the granting (i) to any Optionee, of Tandem Appreciation Rights in respect of Option Rights granted hereunder, and (ii) to any Participant, of Free-Standing Appreciation Rights. A Tandem Appreciation Right will be a right of the Optionee, exercisable by surrender of the related Option Right, to receive from the Company an amount determined by the Board, which will be expressed as a percentage of the Spread (not exceeding 100%) at the time of exercise. Tandem Appreciation Rights may be granted at any time prior to the exercise or termination of the related Option Rights; provided, however, that a Tandem Appreciation Right awarded in relation to an Incentive Stock Option must be granted concurrently with such Incentive Stock Option. A Free-Standing Appreciation Right will be a right of the Participant to receive from the Company an amount determined by the Board, which will be expressed as a percentage of the Spread (not exceeding 100%) at the time of exercise.

(b)
Each grant of Appreciation Rights will be subject to all of the following provisions:





(i)
Any grant may specify that the amount payable on exercise of an Appreciation Right may be paid in cash, in shares of Common Stock or in any combination thereof and may either grant to the Participant or retain in the Board the right to elect among those alternatives.

(ii)
Any grant may specify that the amount payable on exercise of an Appreciation Right may not exceed a maximum specified by the Board at the Date of Grant.

(iii)
Any grant may specify waiting periods before exercise and permissible exercise dates or periods.

(iv)
Any grant may specify that such Appreciation Right may be vested and exercised earlier in the event of death or disability of the Participant or a Change of Control and shall have an initial vesting schedule of no less than one year.

(v)
Any grant of Appreciation Rights may specify Management Objectives that must be achieved as a condition of the vesting and exercise of such Appreciation Rights. The grant of such Appreciation Rights will specify that, before the exercise of such Appreciation Rights, the Board must determine that the Management Objectives have been satisfied.

(vi)
Each grant of Appreciation Rights will be evidenced by an Evidence of Award, which Evidence of Award will describe such Appreciation Rights, identify the related Option Rights (if applicable), and contain such other terms and provisions, consistent with this Plan, as the Board may approve. Until the shares of Common Stock relating to Appreciation Rights have been issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the shares of Common Stock relating to the Appreciation Rights, notwithstanding the exercise of the Appreciation Rights.

(c)
Any grant of Tandem Appreciation Rights will provide that such Tandem Appreciation Rights may be exercised only at a time when the related Option Right is also exercisable and at a time when the Spread is positive, and by surrender of the related Option Right for cancellation. Successive grants of Tandem Appreciation Rights may be made to the same Participant regardless of whether any Tandem Appreciation Rights previously granted to the Participant remain unexercised.

(d)
Regarding Free-Standing Appreciation Rights only:

(i)
Each grant will specify in respect of each Free-Standing Appreciation Right a Base Price, which may not be less than the Market Value Per Share on the Date of Grant;

(ii)
Successive grants may be made to the same Participant regardless of whether any Free-Standing Appreciation Rights previously granted to the Participant remain unexercised; provided, however, that no Free-Standing Appreciation Rights will be granted with automatic reload features; and

(iii)
No Free-Standing Appreciation Right may be exercised more than 10 years from the Date of Grant.

6.
Restricted Stock. The Board may also, from time to time and upon such terms and conditions as it may determine, authorize the grant or sale of Restricted Stock to Participants. Each such grant or sale will be subject to all of the following provisions:

(a)
Each such grant or sale will constitute an immediate transfer of the ownership of shares of Common Stock to the Participant, entitling such Participant to voting, dividend and other ownership rights, but subject to the substantial risk of forfeiture and restrictions on transfer hereinafter referred to.

(b)
Each such grant or sale may be made without additional consideration or in consideration of a payment by such Participant that is less than the Market Value Per Share at the Date of Grant.

(c)
If the elimination of restrictions is based only on the passage of time rather than the achievement of Management Objectives, the period of time will be no shorter than three years, except that the restrictions may be removed no sooner than ratably on an annual basis (but not earlier than the first anniversary of the Date of Grant) during the three-year period as determined by the Board at the Date of Grant.






(d)
Each such grant or sale will provide that during or after the period for which such substantial risk of forfeiture is to continue, the transferability of the Restricted Stock will be prohibited or restricted in the manner and to the extent prescribed by the Board at the Date of Grant (which restrictions may include, without limitation, rights of repurchase or first refusal in the Company or provisions subjecting the Restricted Stock to a continuing substantial risk of forfeiture in the hands of any transferee).

(e)
Any grant of Restricted Stock may specify Management Objectives that, if achieved, will result in termination or early termination of the restrictions applicable to such Restricted Stock; provided, however, that restrictions relating to Restricted Stock that vests upon the achievement of Management Objectives may not terminate sooner than one year. Each grant may specify in respect of such Management Objectives a minimum acceptable level of achievement and may set forth a formula for determining the number of shares of Restricted Stock on which restrictions will terminate if performance is at or above the minimum level, but falls short of full achievement of the specified Management Objectives. The grant of Restricted Stock will specify that, before the termination or early termination of the restrictions applicable to such Restricted Stock, the Board must determine that the Management Objectives have been satisfied.

(f)
Notwithstanding anything to the contrary contained in this Plan, subject to any applicable limitations contained in Section 18, any grant or sale of Restricted Stock may provide for the earlier lapse of the substantial risk of forfeiture for such Restricted Stock in the event of the death or disability of the Participant or a Change of Control.

(g)
Any such grant or sale of Restricted Stock requires that any or all dividends or other distributions paid thereon during the period of such restrictions be automatically deferred and reinvested in additional shares of Restricted Stock, which will be subject to the same restrictions as the underlying award; provided, further, that dividends or other distributions on Restricted Stock subject to restrictions that lapse as a result of the achievement of Management Objectives shall not be paid unless and until achievement of the applicable Management Objectives.

(h)
Each grant or sale of Restricted Stock will be evidenced by an Evidence of Award and will contain such terms and provisions, consistent with this Plan, as the Board may approve. Unless otherwise directed by the Board, (i) all certificates representing shares of Restricted Stock will be held in custody by the Company until all restrictions thereon will have lapsed, together with a stock power or powers executed by the Participant in whose name such certificates are registered, endorsed in blank and covering such Shares, or (ii) all shares of Restricted Stock shall be held at the Company’s transfer agent in book entry form with appropriate restrictions relating to the transfer of such shares of Restricted Stock.

(i)
If a Participant makes an election pursuant to Section 83(b) of the Code with respect to a share of Restricted Stock, such Participant shall file, within 30 days following the Date of Grant, a copy of such election with the Company and with the Internal Revenue Service in accordance with the regulations under Section 83(b) of the Code. The Board may provide in an Evidence of Award that the Restricted Stock award is conditioned upon the Participant’s making or refraining from making an election with respect to such award under Section 83(b).

7.
Restricted Stock Units. The Board may also, from time to time and upon such terms and conditions as it may determine, authorize the granting or sale of Restricted Stock Units to Participants. Each such grant or sale will be subject to all of the following provisions:

(a)
Each such grant or sale will constitute the agreement by the Company to deliver shares of Common Stock or cash to the Participant in the future, but subject to the fulfillment of such conditions (which may include the achievement of Management Objectives) during the Restriction Period as the Board may specify. If a grant of Restricted Stock Units specifies that the Restriction Period will terminate upon the achievement of Management Objectives, such Restriction Period may not terminate sooner than one year. Each grant may specify in respect of such Management Objectives a minimum acceptable level of achievement and may set forth a formula for determining the number of Restricted Stock Units on which restrictions will terminate if performance is at or above the minimum level, but falls short of full achievement of the specified Management Objectives. The grant of such Restricted Stock Units will specify that, before the termination or early termination of the restrictions applicable to such Restricted Stock Units, the Board must determine that the Management Objectives have been satisfied.






(b)
Each such grant or sale may be made without additional consideration or in consideration of a payment by such Participant that is less than the Market Value Per Share at the Date of Grant.

(c)
If the Restriction Period lapses only by the passage of time rather than the achievement of Management Objectives, each such grant or sale will be subject to a Restriction Period of not less than three years, except that a grant or sale may provide that the Restriction Period shall expire not sooner than ratably on an annual basis (but not earlier than the first anniversary of the Date of Grant) during the three-year period as determined by the Board at the Date of Grant.

(d)
Notwithstanding anything to the contrary contained in this Plan, and subject to any applicable limitations contained in Section 18, any grant or sale of Restricted Stock Units may provide for the earlier lapse or other modification of the Restriction Period in the event of the death or disability of the Participant or a Change of Control.

(e)
During the Restriction Period, the Participant will have no right to transfer any rights under his or her award and will have no rights of ownership in the shares of Common Stock deliverable upon payment of the Restricted Stock Units and shall have no right to vote them, but the Board may at the Date of Grant, authorize the payment of dividend equivalents on such Restricted Stock Units, either in cash or in additional shares of Common Stock, which dividend equivalents will not be paid unless and until the applicable Restriction Period has lapsed or the Management Objectives have been achieved.

(f)
Each grant or sale will specify the time and manner of payment of Restricted Stock Units that have been earned. Any grant or sale may specify that the amount payable with respect thereto may be paid by the Company in cash, in shares of Common Stock or in any combination thereof and may either grant to the Participant or retain in the Board the right to elect among those alternatives.

(g)
Each grant or sale of Restricted Stock Units will be evidenced by an Evidence of Award and will contain such terms and provisions, consistent with this Plan, as the Board may approve.

8.
Performance Shares and Performance Units. The Board may also, from time to time and upon such terms and conditions as it may determine, authorize the granting of Performance Shares and Performance Units that will become payable to a Participant upon achievement of specified Management Objectives during the Performance Period. Each such grant will be subject to all of the following provisions:

(a)
Each grant will specify the number of Performance Shares or Performance Units to which it pertains, which number may be subject to adjustment to reflect changes in compensation or other factors; provided, however, that no such adjustment will be made in the case of a Qualified Performance-Based Award (other than in connection with the death or disability of the Participant or a Change of Control) where such action would result in the loss of the otherwise available exemption of the award under Section 162(m).

(b)
The Performance Period with respect to each Performance Share or Performance Unit will be such period of time (not less than one year) as will be determined by the Board at the time of grant which may, subject to any applicable limitations contained in Section 18, be subject to earlier lapse or other modification in the event of the death or disability of the Participant or a Change of Control.

(c)
Any grant of Performance Shares or Performance Units will specify Management Objectives which, if achieved, will result in payment or early payment of the award, and each grant may specify in respect of such specified Management Objectives a minimum acceptable level or levels of achievement and will set forth a formula for determining the number of Performance Shares or Performance Units that will be earned if performance is at or above the level(s), but falls short of full achievement of the specified Management Objectives. The grant of Performance Shares or Performance Units will specify that, before the Performance Shares or Performance Units will be earned and paid, the Board must determine that the Management Objectives have been satisfied.

(d)
Each grant will specify the time and manner of payment of Performance Shares or Performance Units that have been earned. Any grant may specify that the amount payable with respect thereto may be paid by the Company in cash, in shares of Common Stock or in any combination thereof and may either grant to the Participant or retain in the Board the right to elect among those alternatives.






(e)
Any grant of Performance Shares or Performance Units may specify that the amount payable with respect thereto may not exceed a maximum specified by the Board at the Date of Grant. Any grant of Performance Units may specify that the amount payable or the number of shares of Common Stock issued with respect thereto may not exceed maximums specified by the Board at the Date of Grant.

(f)
The Board may at the Date of Grant of Performance Shares or Performance Units, provide for the payment of dividend equivalents to the holder thereof, either in cash or in additional shares of Common Stock, on a deferred basis contingent upon the achievement of the applicable Management Objectives.

(g)
Each grant of Performance Shares or Performance Units will be evidenced by an Evidence of Award and will contain such other terms and provisions, consistent with this Plan, as the Board may approve.

9.
Other Awards .

(a)
The Board may, subject to limitations under applicable law, grant to any Participant such other awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, shares of Common Stock or factors that may influence the value of such shares, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into shares of Common Stock, purchase rights for shares of Common Stock, awards with value and payment contingent upon performance of the Company or specified Subsidiaries, affiliates or other business units thereof or any other factors designated by the Board, and awards valued by reference to the book value of shares of Common Stock or the value of securities of, or the performance of specified Subsidiaries or affiliates or other business units of the Company. The Board shall determine the terms and conditions of such awards. Shares of Common Stock delivered pursuant to an award in the nature of a purchase right granted under this Section 9 shall be purchased for such consideration, paid for at such time, by such methods, and in such forms, including, without limitation, cash, shares of Common Stock, other awards, notes or other property, as the Board shall determine.

(b)
Cash awards may also be granted pursuant to this Section 9.

(c)
The Board may grant shares of Common Stock as a bonus, or may grant other awards in lieu of obligations of the Company or a Subsidiary to pay cash or deliver other property under this Plan or under other plans or compensatory arrangements, subject to such terms as shall be determined by the Board.

(d)
If the earning or vesting of, or elimination of restrictions applicable to, Other Awards is based only on the passage of time rather than the achievement of Management Objectives, the period of time shall be no shorter than three years, except that the restrictions may be removed no sooner than ratably on an annual basis during the three-year period as determined by the Board at the Date of Grant. If the earning or vesting of, or elimination of restrictions applicable to, Other Awards is based on the achievement of Management Objectives, the earning, vesting or restriction period may not terminate sooner than after one year. Notwithstanding anything to the contrary contained in this Plan, subject to any applicable limitations contained in Section 18, any grant of Other Awards may provide for the earlier lapse of the substantial risk of forfeiture in the event of the death or disability of the Participant or a Change of Control.

(e)
The Board may at the Date of Grant of Other Awards provide for the payment of dividends or dividend equivalents, as applicable, to the holder thereof, either in cash or in additional shares of Common Stock, that will be paid contingent on the lapse of the substantial risk of forfeiture or other restrictions and/or achievement of the applicable Management Objectives.

10.
Administration .

(a)
This Plan will be administered by the Board, which may from time to time delegate all or any part of its authority under this Plan to the Compensation and Management Development Committee or any other committee of the Board (or a subcommittee thereof), as constituted from time to time. To the extent of any such delegation, references in this Plan to the Board will be deemed to be references to such committee or subcommittee. Notwithstanding the foregoing, or anything contained in this Plan to the contrary, as further described in Section 18, Qualified Performance-Based Awards shall be granted and administered, to the





extent necessary, by a committee that consists solely of two or more “outside directors” within the meaning of Section 162(m).

(b)
The interpretation and construction by the Board (or the delegatees) of any provision of this Plan or of any agreement, notification or document evidencing the grant of Option Rights, Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units or Other Awards and any determination by the Board (or the delegatees) pursuant to any provision of this Plan or of any such agreement, notification or document will be final, binding and conclusive upon all persons. The Board may adopt, amend and rescind such rules and regulations as it deems necessary, desirable or appropriate in administering this Plan, and the Board may act at a meeting, in a written action without a meeting or by having actions otherwise taken pursuant to a delegation of duties by the Board.

(c)
The Board, a committee and/or subcommittee, as applicable, may, from time to time, delegate to one or more officers of the Company the authority of the Board or such committee or subcommittee to grant and determine the terms and conditions of awards granted under this Plan to the extent in compliance with applicable law and regulations.

11.
Adjustments. The Board shall make or provide for such adjustments in the numbers and/or type of shares of Common Stock covered by outstanding Option Rights, Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units and, if applicable, in (a) the number and/or type of shares of Common Stock (or other securities or property) covered by outstanding Other Awards granted hereunder or which may be made the subject of awards under Section 3, or (b) the Option Price and Base Price provided in outstanding Option Rights and Appreciation Rights, or, if the Board deems it appropriate, making provision for a cash payment to the holder of an outstanding award, in each case, as the Board, in its sole discretion, shall determine is equitably required to prevent dilution or enlargement of the rights of Participants or Optionees that otherwise would result from (x) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (y) any merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights or warrants to purchase securities, or (z) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, in the event of any such transaction or event, the Board, in its discretion, shall provide in substitution for any or all outstanding awards under this Plan such alternative consideration (including cash), if any, as it shall determine to be equitable in the circumstances and may require in connection therewith the surrender of all awards so replaced in a manner that complies with Section 409A. In addition, for each Option Right or Appreciation Right with an Option Price or Base Price greater than the consideration offered in connection with any such transaction or event or change of control, the Company shall not be required to make any payment to the person holding such Option Right or Appreciation Right upon surrender of such Option Right or Appreciation Right, and may cancel such Option Right or Appreciation Right for no consideration. Such surrender shall take place as of the date of the transaction or event or change of control or such other date as the Board may specify. The Board shall also make or provide for such adjustments in the numbers of shares specified in Section 3 as the Board in its sole discretion shall determine is appropriate to reflect any transaction or event described in this Section 11; provided, however, that any such adjustment to the number specified in Section 3(b) will be made only if and to the extent that such adjustment would not cause any option intended to qualify as an Incentive Stock Option to fail to so qualify.

12.
Change of Control. Notwithstanding anything to the contrary in this Plan, the following provisions shall apply in connection with a Change of Control (as defined in Section 12(c)):

(a)
Awards Assumed by Successor

(i)
Upon the occurrence of a Change of Control, any awards made under this Plan that are Assumed (as defined in Section 12(a)(v)) by the entity effecting the Change of Control shall continue to vest and become exercisable in accordance with the terms of the original grant unless, during the three-year period commencing on the date of the Change of Control (“Post-CIC Period”):

(A)
the Participant is involuntarily terminated for reasons other than for Cause (as defined in Section 12(a)(iii)); or

(B)
the Participant terminates his or her employment for Good Reason (as defined in Section 12(a)(iv)).






(ii)
If a Participant’s employment is terminated as described in Section 12(a)(i), any outstanding Option Rights and Appreciation Rights shall become fully vested and exercisable, any restrictions that apply to awards made pursuant to this Plan shall lapse, and awards made pursuant to this Plan that are subject to Management Objectives shall immediately be earned or vest and shall become immediately payable in accordance with their terms as if 100% of the Management Objectives have been achieved, on the date of termination; provided, that any Participant who terminates his or her employment for Good Reason must:

(A)
provide the Company with a written notice of his or her intent to terminate employment for Good Reason within 60 days after the Participant becomes aware of the circumstances giving rise to Good Reason; and

(B)
allow the Company 30 days to remedy such circumstances to the extent curable.

(iii)
Solely for purposes of this Section 12(a), “Cause” shall mean that the Participant shall have:

(A)
been convicted of a criminal violation involving, in each case, fraud, embezzlement or theft in connection with Participant’s duties or in the course of Participant’s employment with the Company or any subsidiary;

(B)
committed intentional wrongful damage to property of the Company or any Subsidiary; or

(C)
committed intentional wrongful disclosure of secret processes or confidential information of the Company or any Subsidiary;

and any such act shall have been demonstrably and materially harmful to the Company. For purposes of this Plan, no act or failure to act on the part of Participant will be deemed “intentional” if it was due primarily to an error in judgment or negligence, but will be deemed “intentional” only if done or omitted to be done by Participant not in good faith and without reasonable belief that Participant’s action or omission was in the best interest of the Company.

(iv)
Solely for purposes of this Section 12(a), “Good Reason” shall mean the occurrence, during the Post-CIC Period, of any of the following events without the Participant’s written consent:

(A)
failure to elect or re-elect or otherwise to maintain Participant in the office or the position, or a substantially equivalent or better office or position, of or with the Company and/or a Subsidiary (or any successor thereto by operation of law or otherwise), as the case may be, which Participant held immediately prior to a Change of Control, or the removal of Participant as a Director of the Company and/or a Subsidiary (or any successor thereto) if Participant shall have been a Director of the Company and/or a Subsidiary immediately prior to the Change of Control;

(B)
failure of the Company to remedy any of the following within 10 calendar days after receipt by the Company of written notice thereof from Participant: (1) a significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company and any Subsidiary which Participant held immediately prior to the Change of Control, (2) a reduction in Participant’s Base Pay received from the Company and any Subsidiary, (3) a reduction in Participant’s Incentive Pay opportunity as compared with the Incentive Pay opportunity most recently paid prior to the Change of Control, or (4) the termination or denial of Participant’s rights to Employee Benefits or a reduction in the scope or value thereof;

(C)
the liquidation, dissolution, merger, consolidation or reorganization of the Company or the transfer of all or substantially all of its business and/or assets, unless the successor (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of its business and/or assets have been transferred (by operation of law or otherwise) assumed all duties and obligations of the Company hereunder; or

(D)
the Company requires Participant to have Participant’s principal location of work changed to any location that is in excess of 30 miles from the location thereof immediately prior to





the Change of Control, or requires Participant to travel away from Participant’s office in the course of discharging Participant’s responsibilities or duties hereunder at least 20% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than was required of Participant in any of the three full years immediately prior to the Change of Control.

(E)
Definitions. As used in this Section 12(a),

(1)
“Base Pay” means Participant’s annual base salary rate as in effect from time to time.

(2)
“Incentive Pay” means an annual bonus, incentive or other payment of compensation, in addition to Base Pay, made or to be made in regard to services rendered in any year pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company or a Subsidiary, or any successor thereto. “Incentive Pay” does not include any stock option, stock appreciation, stock purchase, restricted stock, private equity, long-term incentive or similar plan, program, arrangement or grant, whether or not provided under a plan, program or arrangement described in the preceding sentence.

(3)
“Employee Benefits” means the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which the Participant is entitled to participate, including without limitation any stock option, performance share, performance unit, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company or a Subsidiary), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter by the Company or a Subsidiary, providing benefits and service credit for benefits at least as great in the aggregate as are payable thereunder immediately prior to a Change of Control.

(v)
For purposes of this Section 12(a), an award shall be considered assumed (“Assumed”) if each of the following conditions are met:

(A)
Option Rights, Appreciation Rights and Other Awards (to the extent such Other Awards are payable in cash and not subject to Management Objectives) are converted into replacement awards in a manner that complies with Section 409A;

(B)
Restricted Stock Unit and Restricted Stock awards that are not subject to Management Objectives are converted into replacement awards covering a number of shares of the entity effecting the Change of Control (or a successor or parent corporation), as determined in a manner substantially similar to the treatment of an equal number of shares of Common Stock covered by the awards; provided, that to the extent that any portion of the consideration received by holders of shares of Common Stock in the Change of Control transaction is not in the form of the common stock of such entity (or a successor or parent corporation), the number of shares covered by the replacement awards shall be based on the average of the high and low selling prices of the common stock of such entity (or a successor or parent corporation) on the established stock exchange on the trading day immediately preceding the date of the Change of Control;

(C)
Performance Shares, Performance Units and all other awards subject to Management Objectives are converted into replacement awards that preserve the value of such awards at the time of the Change of Control;






(D)
the replacement awards contain provisions for scheduled vesting and treatment on termination of employment (including the definition of Cause and Good Reason) that are no less favorable to the Participant than the underlying awards being replaced, and all other terms of the replacement awards (other than the security and number of shares represented by the replacement awards) are substantially similar to, or more favorable to the Participant than, the terms of the underlying awards; and

(E)
the security represented by the replacement awards, if any, is of a class that is publicly held and widely traded on an established stock exchange.

(b)
Awards Not Assumed by Successor

(i)
Upon the occurrence of a Change of Control, any awards made under this Plan that are not Assumed by the entity effecting the Change of Control shall become fully vested and exercisable on the date of the Change of Control or shall immediately vest and become immediately payable in accordance with their terms as if 100% of the applicable Management Objectives have been achieved, and any restrictions that apply to such awards shall lapse.

(ii)
For each Option Right and Appreciation Right, the Participant shall receive a payment equal to the difference between the consideration (consisting of cash or other property (including securities of a successor or parent corporation)) received by holders of Common Stock in the Change of Control transaction and the exercise price of the applicable Option Right or Appreciation Right, if such difference is positive. Such payment shall be made in the same form as the consideration received by holders of Common Stock. Any Option Rights or Appreciation Rights with an exercise price that is higher than the per share consideration received by holders of Common Stock in connection with the Change of Control shall be cancelled for no additional consideration.

(iii)
The Participant shall receive the consideration (consisting of cash or other property (including securities of a successor or parent corporation)) that such Participant would have received in the Change of Control transaction had he or she been, immediately prior to such transaction, a holder of the number of shares of Common Stock equal to the number of Restricted Stock Units, Other Awards, and/or shares of Restricted Stock covered by the award and the number of shares of Common Stock payable under Section 12(b)(i) for awards subject to Management Objectives.

(iv)
The payments contemplated by Sections 12(b)(ii) and 12(b)(iii) shall be made at the same time as consideration is paid to the holders of the Common Stock in connection with the Change of Control.

(v)
Notwithstanding anything to the contrary in this Plan, if the Change of Control does not constitute a 409A Change in Control (as defined in Section 17(d)) and the payment or benefit constitutes a deferral of compensation under Section 409A, then to the extent necessary to comply with Section 409A payment or delivery shall be made on the date of payment or delivery originally provided for such payment or benefit.

(c)
“Change of Control” shall mean, except as otherwise provided in an Evidence of Award, the occurrence of any of the following events:

(i)
any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) is or becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of the combined voting power of the then-outstanding Voting Stock of the Company; provided, however, that:

(A)
for purposes of this Section 12(c)(i), the following acquisitions will not constitute a Change of Control: (1) any acquisition of Voting Stock directly from the Company that is approved by a majority of the Incumbent Directors, (2) any acquisition of Voting Stock by the Company or any Subsidiary, (3) any acquisition of Voting Stock by the trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, and (4) any acquisition of Voting Stock by any Person pursuant to a Business Transaction that complies with clauses (A), (B) and (C) of Section 12(c)(iii) below;






(B)
if any Person is or becomes the beneficial owner of 30% or more of combined voting power of the then-outstanding Voting Stock as a result of a transaction described in clause (1) of Section 12(c)(i)(A) above and such Person thereafter becomes the beneficial owner of any additional shares of Voting Stock representing 1% or more of the then-outstanding Voting Stock, other than in an acquisition directly from the Company that is approved by a majority of the Incumbent Directors or other than as a result of a stock dividend, stock split or similar transaction effected by the Company in which all holders of Voting Stock are treated equally, such subsequent acquisition shall be treated as a Change of Control;

(C)
a Change of Control will not be deemed to have occurred if a Person is or becomes the beneficial owner of 30% or more of the Voting Stock as a result of a reduction in the number of shares of Voting Stock outstanding pursuant to a transaction or series of transactions that is approved by a majority of the Incumbent Directors unless and until such Person thereafter becomes the beneficial owner of any additional shares of Voting Stock representing 1% or more of the then-outstanding Voting Stock, other than as a result of a stock dividend, stock split or similar transaction effected by the Company in which all holders of Voting Stock are treated equally; and

(D)
if at least a majority of the Incumbent Directors determine in good faith that a Person has acquired beneficial ownership of 30% or more of the Voting Stock inadvertently, and such Person divests as promptly as practicable but no later than the date, if any, set by the Incumbent Directors a sufficient number of shares so that such Person beneficially owns less than 30% of the Voting Stock, then no Change of Control shall have occurred as a result of such Person’s acquisition; or

(ii)
a majority of the Board ceases to be comprised of Incumbent Directors; or

(iii)
the consummation of a reorganization, merger or consolidation, or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of the stock or assets of another corporation, or other similar transaction (each, a “Business Transaction”), unless, in each case, immediately following such Business Transaction (A) the Voting Stock outstanding immediately prior to such Business Transaction continues to represent (either by remaining outstanding or by being converted into voting stock of the surviving entity or any parent thereof), more than 50% of the combined voting power of the then outstanding shares of voting stock of the entity resulting from such Business Transaction (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (B) no Person (other than the Company, such entity resulting from such Business Transaction, or any employee benefit plan (or related trust) sponsored or maintained by the Company, any Subsidiary or such entity resulting from such Business Transaction) beneficially owns, directly or indirectly, 30% or more of the combined voting power of the then outstanding shares of voting stock of the entity resulting from such Business Transaction, and (C) at least a majority of the members of the board of directors of the entity resulting from such Business Transaction were Incumbent Directors at the time of the execution of the initial agreement or of the action of the Board providing for such Business Transaction; or

(iv)
the consummation of the liquidation or dissolution of the Company, except pursuant to a Business Transaction that complies with clauses (A), (B) and (C) of Section 12(c)(iii).

(v)
For purposes of this Section 12(c), the terms (A) “Incumbent Directors” shall mean, during any period of two consecutive years, individuals who at the beginning of such period constituted the Board and any new Director (other than a Director initially elected or nominated as a Director as a result of an actual or threatened election contest with respect to Directors or any other actual or threatened solicitation of proxies by or on behalf of such Director, including any Director nominated or elected to the Board pursuant to any proxy access procedures included in the Company’s organizational documents) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination





for election was previously so approved and (B) “Voting Stock” shall mean the voting securities of the Company which have the right to vote on the election of members of the Board .

13.
Recapture Provisions . Any Evidence of Award (or any part thereof) may provide for the cancellation or forfeiture of an award or the forfeiture and repayment to the Company of any gain related to an award, or other provisions intended to have a similar effect, upon such terms and conditions as may be determined by the Board in accordance with the Company’s Executive Adjustment and Recapture Policy, as may be amended from time to time, any successor policy or otherwise, including as required by the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or other applicable law, regulation or stock exchange listing requirement, as may be in effect from time to time, and which may operate to create additional rights for the Company with respect to awards and recovery of amounts relating thereto. By accepting awards under this Plan, Participants agree and acknowledge that they are obligated to cooperate with, and provide any and all assistance necessary to, the Company to recover or recoup any award or amount paid under this Plan subject to clawback pursuant to such law, government regulation, stock exchange listing requirement or Company policy. Such cooperation and assistance shall include, but is not limited to, executing, completing and submitting any documentation necessary to recover or recoup any award or amounts paid under this Plan from a Participant’s accounts, or pending or future compensation awards.

14.
Non U.S. Participants. In order to facilitate the making of any grant or combination of grants under this Plan, the Board may provide for such special terms for awards to Participants who are foreign nationals or who are employed by the Company or any Subsidiary outside of the United States of America or who provide services to the Company under an agreement with a foreign nation or agency, as the Board may consider necessary or appropriate to accommodate differences in local law, tax policy or custom, to comply with applicable foreign laws or facilitate the offering and administration of the Plan in view of such foreign laws and to allow for tax-preferred treatment of awards. Moreover, the Board may approve such supplements to or amendments, restatements or alternative versions of this Plan (including, without limitation, sub-plans) and modify exercise procedures, and other terms and procedures, as it may consider necessary or appropriate for such purposes, without thereby affecting the terms of this Plan as in effect for any other purpose, and the Secretary or other appropriate officer of the Company may certify any such document as having been approved and adopted in the same manner as this Plan. No such special terms, supplements, amendments, restatements, sub-plans or modifications, however, will include any provisions that are inconsistent with the terms of this Plan as then in effect unless this Plan could have been amended to eliminate such inconsistency without further approval by the shareholders of the Company.

15.
Transferability .

(a)
No award granted under this Plan shall be transferable by the Participant except by will or the laws of descent and distribution, and in no event shall any award granted under this Plan be transferred for value. Except as otherwise determined by the Board, Option Rights and Appreciation Rights will be exercisable during the Participant’s lifetime only by him or her or, in the event of the Participant’s legal incapacity to do so, by his or her guardian or legal representative acting on behalf of the Participant in a fiduciary capacity under state law and / or court supervision.

(b)
The Board may specify at the Date of Grant that part or all of the shares of Common Stock that are (i) to be issued or transferred by the Company upon the exercise of Option Rights or Appreciation Rights, upon the termination of the Restriction Period applicable to Restricted Stock Units or upon payment under any grant of Performance Shares, Performance Units or Other Awards or (ii) no longer subject to the substantial risk of forfeiture and restrictions on transfer referred to in Section 6, will be subject to further restrictions on transfer.

16.
Withholding Taxes. To the extent that the Company is required to withhold (including required to account to any tax authorities for) federal, state, local or foreign taxes or other amounts in connection with any payment made or benefit realized by a Participant or other person under this Plan, and the amounts available to the Company for such withholding are insufficient, it will be a condition to the receipt of such payment or the realization of such benefit that the Participant or such other person make arrangements satisfactory to the Company for payment of the balance of such taxes and other amounts required to be withheld, which arrangements (in the discretion of the Board) may include relinquishment of a portion of such benefit. If a Participant’s benefit is to be received in the form of Common Stock, and such Participant fails to make arrangements for the payment of tax and other amounts, the Company shall withhold such shares of Common Stock having a value equal to the amount required to be withheld. Notwithstanding the foregoing, unless otherwise provided by the Board, when a Participant is required to pay the Company an amount required to be withheld under applicable income and employment tax and other laws and regulations, the Participant may elect to satisfy the obligation, in whole or in part, by electing to have withheld, from the shares required to be





delivered to the Participant, shares of Common Stock having a value equal to the amount required to be withheld (except in the case of Restricted Stock where an election under Section 83(b) of the Code has been made), or by delivering to the Company other shares of Common Stock held by such Participant. The shares used for tax withholding will be valued at an amount equal to the real-time fair market value per share of such Common Stock at the time of exercise or vesting or when the benefit is to be included in Participant’s income. In no event shall the fair market value of the shares of Common Stock to be withheld and/or delivered pursuant to this Section to satisfy applicable withholding taxes or other amounts in connection with the benefit exceed the minimum amount of taxes or other amounts required to be withheld (except as otherwise approved by the Board, in its discretion). Participants shall also make such arrangements as the Company may require for the payment of any withholding tax or other obligation that may arise in connection with the disposition of shares of Common Stock acquired upon the exercise of Option Rights, Appreciation Rights or any other award.

17.
Compliance with Section 409A .

(a)
To the extent applicable, it is intended that this Plan and any grants made hereunder comply with the provisions of Section 409A of the Code and the regulations promulgated thereunder (“Section 409A”), so that the income inclusion provisions of Section 409A(a)(1) do not apply to the Participants. This Plan and any grants made hereunder shall be construed and administered in a manner such that the grant either (i) qualifies for an exemption from the requirements of Section 409A or (ii) satisfies the requirements of Section 409A. If a grant under this Plan is subject to Section 409A, then (i) distributions shall only be made in a manner and upon an event permitted under Section 409A, (ii) payments to be made upon termination of employment shall only be made upon a “separation from service” under Section 409A, (iii) unless the grant agreement specifies otherwise, each installment payment shall be treated as a separate payment for purposes of Section 409A, and (iv) in no event shall a Participant, directly or indirectly, designate the calendar year in which a distribution is made except as permitted in accordance with Section 409A. Any reference in this Plan to Section 409A will also include any regulations or any other formal guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service.

(b)
Neither a Participant nor any of a Participant’s creditors or beneficiaries shall have the right to subject any deferred compensation (within the meaning of Section 409A) payable under this Plan and grants of deferred compensation hereunder to any anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment. Except as permitted under Section 409A, any deferred compensation (within the meaning of Section 409A) payable to a Participant or for a Participant’s benefit under this Plan and grants of deferred compensation hereunder may not be reduced by, or offset against, any amount owing by a Participant to the Company or any of its affiliates.

(c)
If, at the time of a Participant’s separation from service (within the meaning of Section 409A), (i) the Participant shall be a specified employee (within the meaning of Section 409A and using the identification methodology selected by the Company from time to time) and (ii) the Company determines that an amount payable hereunder constitutes deferred compensation (within the meaning of Section 409A) and the payment of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A in order to avoid taxes or penalties under Section 409A, then the Company shall not pay such amount on the otherwise scheduled payment date but shall instead pay it, without interest, on the tenth business day of the month after such six-month period.

(d)
For purposes of this Plan and its underlying agreements, a “409A Change in Control” means the date on which any one of the following occurs: (i) any one person, or more than one person acting as a group (as determined under Section 409A and the regulations promulgated thereunder), acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company possessing 30% or more of the total voting power of the stock of the Company; or (ii) a majority of the members of the Board is replaced during any 12-month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of such appointment or election; or (iii) any one person, or more than one person acting as a group (as determined under Section 409A and the regulations promulgated thereunder), acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Company; or (iv) any one person, or more than one person acting as a group (as determined under Section 409A and the regulations thereunder), acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than 40% of the





total gross fair market value of all of the assets of the Company before such acquisition or acquisitions. For this purpose, “gross fair market value” means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

(e)
Notwithstanding any provision of this Plan and grants hereunder to the contrary, in light of the uncertainty with respect to the proper application of Section 409A, the Company reserves the right to make amendments to this Plan and grants hereunder as the Company deems necessary or desirable to avoid the imposition of taxes or penalties under Section 409A. In any case, a Participant shall be solely responsible and liable for the satisfaction of all taxes and penalties that may be imposed on a Participant or for a Participant’s account in connection with this Plan and grants hereunder (including any taxes, interest and/or penalties under Section 409A), and neither the Company nor any of its affiliates shall have any obligation to indemnify or otherwise hold a Participant harmless from any or all of such taxes, interest and/or penalties.

18.
Additional Restrictions with Respect to Qualified Performance-Based Awards . Effective for tax years after 2017, the qualified performance-based compensation exception from Section 162(m) of the Code’s tax deduction limitation was repealed; provided, however, that notwithstanding such repeal, the performance-based compensation under Section 162(m) of the Code is subject to a transition rule for remuneration that is payable pursuant to a written binding contract that was in effect on November 2, 2017 and is not materially modified thereafter. For the avoidance of doubt, it is the intent of the Company to preserve the performance-based compensation exception that is or may be available for Awards payable under this Plan to the maximum extent permitted by law. Notwithstanding anything contained in this Plan to the contrary:

(a)
Qualified Performance-Based Awards shall be granted by a committee, which may be the Compensation and Management Development Committee or any other committee of the Board (or a subcommittee thereof), provided that such committee consists solely of two or more “outside directors” within the meaning of Section 162(m).

(b)
To the extent that a Qualified Performance-Based Award shall be based on achievement of Management Objectives, the committee shall establish and approve in writing (i) the applicable Participants and performance period, (ii) the Management Objectives, (iii) the maximum amounts that may be paid if the Management Objectives are met, and (iv) any other conditions that the committee deems appropriate and consistent with this Plan and the requirements of Section 162(m) for “qualified performance-based compensation.” The establishment and approval of such items shall be made within the earlier of (i) 90 days after the commencement of the relevant performance cycle and (ii) the first 25% of such performance cycle (or such other date as may be required or permitted under applicable regulations under Section 162(m)), and while the attainment of the Management Objectives remains substantially uncertain.

(c)
Other than in connection with the Participant’s death or disability, or a Change of Control, the terms of a Qualified Performance-Based Award may not be amended where such action would result in the loss of the otherwise available exemption of the award under Section 162(m).

(d)
In no event shall a Participant’s Qualified Performance-Based Awards exceed the Individual Participant Limits described in Section 3(c).

(e)
Qualified Performance-Based Awards are intended to satisfy the requirements for “qualified performance-based compensation” under Section 162(m) and the terms relating to such awards are to be interpreted and operated accordingly.

(f)
The Committee will certify the results and amounts to be paid, if any, for the applicable performance period under a Qualified Performance-Based Award to all affected Participants after it determines whether and to what extent the Management Objectives have been satisfied.

19.
Effective Date. The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan first became effective on April 20, 2006, the date immediately following the date it was approved by shareholders, and was subsequently amended and restated effective April 21, 2010, February 17, 2015, April 19, 2017 and February 13, 2018. Notwithstanding the foregoing or anything else contained herein to the contrary, for any Award subject to Section 18, with respect to any compensation to be paid under a written binding contract that was in effect on November 2, 2017, all terms and conditions of the payment of any such compensation shall be governed by the terms and conditions of





this Plan and any underlying documents that combined to constitute the applicable written binding contract relating to such compensation that was in effect on November 2, 2017.

20.
Amendments .

(a)
The Board may at any time and from time to time amend this Plan in whole or in part; provided, however, that if an amendment to this Plan (i) would materially increase the benefits accruing to Participants under this Plan, (ii) would materially increase the number of securities which may be issued under this Plan, (iii) would materially modify the requirements for participation in this Plan or (iv) must otherwise be approved by the shareholders of the Company in order to comply with applicable law or the rules of the New York Stock Exchange or, if the shares of Common Stock are not traded on the New York Stock Exchange, the principal national securities exchange upon which the shares of Common Stock are traded or quoted, then, such amendment will be subject to shareholder approval and will not be effective unless and until such approval has been obtained.

(b)
Except in connection with a corporate transaction or event described in Sections 11 or 12, the Board may not, without obtaining shareholder approval, (i) amend the terms of outstanding Option Rights or Appreciation Rights to reduce the Option Price or Base Price, as applicable, of such outstanding Option Rights or Appreciation Rights; (ii) cancel outstanding Option Rights or Appreciation Rights in exchange for Option Rights or Appreciation Rights with an Option Price or Base Price, as applicable, that is less than the Option Price or Base Price, as applicable, of the original Option Rights or Appreciation Rights; or (iii) cancel outstanding Option Rights or Appreciation Rights with an Option Price or Base Price, as applicable, above the current Common Stock price in exchange for cash or other securities. This Section 20(b) is intended to prohibit the repricing of “underwater” Option Rights and/or Appreciation Rights and will not be construed to prohibit the adjustments provided for in Section 11 or Section 12. Notwithstanding any provision of this Plan to the contrary, this Section 20(b) may not be amended without shareholder approval.

(c)
If permitted by Section 409A, but subject to the paragraph that follows, in case of termination of employment by reason of death or disability of a Participant who holds an Option Right or Appreciation Right not immediately exercisable in full, or any shares of Restricted Stock as to which the substantial risk of forfeiture or the prohibition or restriction on transfer has not lapsed, or any Restricted Stock Units as to which the Restriction Period has not been completed, or any Performance Shares or Performance Units which have not been fully earned, or any Other Awards that have not been fully earned or that are subject to any vesting schedule or transfer restriction, or who holds shares of Common Stock subject to any transfer restriction imposed pursuant to Section 15, the Board may, in its sole discretion, accelerate the time at which such Option Right, Appreciation Right or other award may be exercised or the time at which such substantial risk of forfeiture or prohibition or restriction on transfer will lapse or the time when such Restriction Period will end or the time at which such Performance Shares or Performance Units will be deemed to have been fully earned or the time when such Other Awards shall be deemed to have been fully earned or vested or that such transfer restriction will terminate or may waive any other limitation or requirement under any such award, except as otherwise provided in Section 12.

Subject to Section 20(b), the Board may amend the terms of any award theretofore granted under this Plan prospectively or retroactively, except in the case of a Qualified Performance-Based Award (other than in connection with the Participant’s death or disability, or a Change of Control) where such action would result in the loss of the otherwise available exemption of the award under Section 162(m). In such case, the Board will not make any modification of the Management Objectives or the level or levels of achievement with respect to such Qualified Performance-Based Award. Subject to Section 11, no such amendment shall materially impair the rights of any Participant without his or her consent. The Board may, in its discretion, terminate this Plan at any time. Termination of this Plan will not affect the rights of Participants or their successors under any awards outstanding hereunder and not exercised in full on the date of termination.
21.
Termination. No grant will be made under this Plan more than 10 years after the date on which this amended and restated Plan is approved by the shareholders of the Company, but all grants made on or prior to such date will continue in effect thereafter subject to the terms thereof and of this Plan.

22.
Governing Law. This Plan and all grants and awards and actions taken thereunder shall be governed by and construed in accordance with the internal substantive laws of the State of Ohio, without giving effect to the conflict of law provisions thereof.






23.
Miscellaneous Provisions .

(a)
The Company will not be required to issue any fractional shares of Common Stock pursuant to this Plan. The Board may provide for the elimination of fractions or for the settlement of fractions in cash.

(b)
Neither this Plan nor a grant of an award under this Plan will confer upon any Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate such Participant’s employment or other service at any time.

(c)
To the extent that any provision of this Plan would prevent any Option Right that was intended to qualify as an Incentive Stock Option from qualifying as such, that provision will be null and void with respect to such Option Right. Such provision, however, will remain in effect for other Option Rights and there will be no further effect on any provision of this Plan.

(d)
No award under this Plan may be exercised by the holder thereof if such exercise, and the receipt of cash or stock thereunder, would be, in the opinion of counsel selected by the Board, contrary to law or the regulations of any duly constituted authority having jurisdiction over this Plan.

(e)
No Participant shall have any rights as a shareholder with respect to any shares subject to awards granted to him or her under this Plan prior to the date as of which he or she is actually recorded as the holder of such shares upon the stock records of the Company.

(f)
The Board may condition the grant of any award or combination of awards authorized under this Plan on the surrender or deferral by the Participant of his or her right to receive a cash bonus or other compensation otherwise payable by the Company or a Subsidiary to the Participant.

(g)
Participants shall provide the Company with a written election form setting forth the name and contact information of the person who will have beneficial ownership rights upon the death of the Participant.

(h)
If any provision of this Plan is or becomes invalid, illegal or unenforceable in any jurisdiction, or would disqualify this Plan or any award under any law deemed applicable by the Board, such provision shall be construed or deemed amended or limited in scope to conform to applicable laws or, in the discretion of the Board, it shall be stricken and the remainder of this Plan shall remain in full force and effect.







EXHIBIT 10(p)

THE SHERWIN-WILLIAMS COMPANY
2006 EQUITY AND PERFORMANCE INCENTIVE PLAN
(AMENDED AND RESTATED AS OF APRIL 19, 2017)

Nonqualified Stock Option Award - Additional Terms and Conditions
1.     Grant of Option. The Board of Directors (the “Board”) of The Sherwin-Williams Company (the “Company”) has granted an option to you (“you” or “Grantee”) pursuant to an Evidence of Award that has been delivered to you. Each option entitles you to purchase from the Company one share of Common Stock at the Option Price per share, in accordance with the terms of The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of April 19, 2017, the “Plan”), the related Prospectus, the Evidence of Award, these Additional Terms and Conditions, and such other rules and procedures as may be adopted by the Company. Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan.

2.     Vesting of Option .
  
(A)     The option (unless terminated as hereinafter provided) shall become vested and exercisable only to the extent of one-third of the shares after you shall have been in the continuous employ of the Company or any Subsidiary for one full year from the Date of Grant and to the extent of an additional one-third of such shares after each of the next two successive full years thereafter during which you shall have been in the continuous employ of the Company or any Subsidiary.
(B)    Notwithstanding Section 2(A) above, the option shall immediately vest and become exercisable in full if you should die while in the employ of the Company or any Subsidiary.

(C)    Notwithstanding Section 2(A) above, if you should “Retire” while in the employ of the Company or any Subsidiary, you shall be treated as being in the continuous employ with the Company or any Subsidiary during your “Retirement” for purposes of this Section 2 and, as a result, the option shall continue to vest and become exercisable on the dates set forth in Section 2(A) above notwithstanding your Retirement, consistent with the terms of the Plan. The terms “Retire” or “Retirement” as used in these Additional Terms and Conditions means your cessation of employment with the Company or any Subsidiary after: (1) the attainment of age 65; (2) the attainment of age 55-59 with at least twenty (20) years of service with the Company or any Subsidiary; or (3) the attainment of age 60 or older and your combination of age and years of service with the Company or any Subsidiary equals at least 75.
(D)    Notwithstanding Section 2(A) above, in the event of a Change of Control, any unvested number of options shall vest and become exercisable in accordance with Section 12 of the Plan.
3.     Exercisability of Option . Notwithstanding anything herein to the contrary:

(A)     Except as otherwise provided in Section 3(B) below, the option shall terminate and cease to be exercisable to the extent vested on the earliest of the following dates:
(i) The date on which you cease to be an employee of the Company or a Subsidiary, unless you cease to be such employee by reason of (a) death, (b) disability, or (c) Retirement;

(ii) Three years after the date of your death if (a) you die while an employee of the Company or a Subsidiary or (b) you die following your Retirement;

(iii) Three years after the date you are terminated by the Company or a Subsidiary as a result of expiration of available disability leave of absence pursuant to applicable Company policy due to sickness or bodily injury;






(iv) Ten years from the Date of Grant; or

(v) The date on which you knowingly or willfully engage in misconduct, which is materially harmful to the interests of the Company or a Subsidiary, as may be determined by the Board, in its sole discretion, or the date you violate Section 12 or Section 13 of these Additional Terms and Conditions.

(B)     Notwithstanding anything in these Additional Terms and Conditions to the contrary, but subject to applicable law, if and only if, at 4:15 p.m. Eastern Time on the date on which the option would otherwise terminate pursuant to Section 3(A)(iv) above (the “Option Expiration Date”), (i) the closing sales price of one share of Common Stock on the principal stock exchange on which the Common Stock is then listed as of the Option Expiration Date (or, if there are no sales of Common Stock on such Option Expiration Date, on the next preceding trading day during which a sale of Common Stock occurred) exceeds the Option Price per share, (ii) to the extent the option is exercisable and you have not exercised the option, and (iii) to the extent the option has not otherwise expired, terminated, or been cancelled or forfeited, then the Company will deem such remaining exercisable portion of the option to have been exercised by you on the Option Expiration Date (and prior to the option’s termination) at such time (the “Automatic Exercise”). Further to such Automatic Exercise, payment of the aggregate Option Price for such Automatic Exercise and any applicable withholding taxes in connection with such Automatic Exercise will be deemed to have been made by the Company withholding a number of shares of Common Stock otherwise issuable in connection with such Automatic Exercise that are equal in value to the amount necessary to satisfy such aggregate Option Price payment and minimum required withholding taxes. To clarify, upon Automatic Exercise, the Company will deliver to you the number of whole shares of Common Stock resulting from such Automatic Exercise less a number of shares of Common Stock equal in value to (x) the aggregate Option Price plus (y) any minimum required withholding taxes; provided, however, that any fractional share otherwise deliverable to you will be settled in cash.

4.     Exercise and Payment of Option . To the extent exercisable, the option may be exercised in whole or in part from time to time by giving appropriate notice (in any form prescribed by the Company). The Option Price shall be payable (i) in cash or by check acceptable to the Company or by wire transfer of immediately available funds, (ii) by the actual or constructive transfer to the Company by you of nonforfeitable, unrestricted shares of Common Stock of the Company owned by you and having an aggregate fair market value at the time of exercise equal to the total Option Price, (iii) through a special sale and remittance procedure pursuant to which you shall concurrently provide irrevocable instructions (A) to a brokerage firm (with such brokerage firm reasonably satisfactory to the Company for purposes of administering such procedure in compliance with any applicable pre-clearance or pre-notification requirements) to effect the immediate sale of the purchased shares of Common Stock of the Company and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares of Common Stock of the Company plus all applicable taxes required to be withheld by the Company by reason of such exercise and (B) to the Company to deliver the certificates for the purchased shares directly to such brokerage firm on the settlement date in order to complete the sale, (iv) by a combination of such methods of payment, or (v) by such other methods as may be approved by the Board.

5.     Transferability, Binding Effect . The option is not transferable by you otherwise than by will or the laws of descent and distribution, and in no event shall this award be transferred for value. Except as otherwise determined by the Board, this option is exercisable, during your lifetime, only by you or, in the case of your legal incapacity, only by your guardian or legal representative. These Additional Terms and Conditions bind you and your guardians, legal representatives and heirs.

6.     Compliance with Law . The option shall not be exercisable if such exercise would involve a violation of any law.

7.     Withholding; Taxes . If the Company shall be required to withhold (including required to account to any tax authorities for) any federal, state, local or foreign tax or other amounts in connection with exercise of the option, it shall be a condition to such exercise that you pay or make provision satisfactory to the Company for payment of all such taxes and other amounts. Notwithstanding any other provision of this option award or the Plan, the Company shall not be obligated to guarantee any particular tax result for you with respect to any award and/or payment provided to you hereunder, and you shall be responsible for any taxes or other amounts imposed on you with respect to such award and/or payment.

8.     No Right to Future Awards or Employment . The option award is a voluntary, discretionary bonus being made on a one-time basis and does not constitute a commitment to make any future awards. The option award and any related payments made to you will not be considered salary or other compensation for purposes of any severance pay or similar allowance, except as otherwise required by law. Nothing contained herein will confer upon you any right with respect to





continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate your employment or other service at any time.

9.     Severability . If any provision of these Additional Terms and Conditions or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of these Additional Terms and Conditions and the application of such provision to any other person or circumstances shall not be affected, and the provisions so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent (and only to the extent) necessary to make it enforceable, valid and legal.

10.     Governing Law. These Additional Terms and Conditions shall be governed by and construed with the internal substantive laws of the State of Ohio, without giving effect to any principle of law that would result in the application of the law of any other jurisdiction.

11.     Application of The Sherwin-Williams Company Executive Compensation Adjustment and Recapture Policy . You acknowledge and agree that the terms and conditions set forth in The Sherwin-Williams Company Executive Compensation Adjustment and Recapture Policy (“Policy”) are incorporated in these Additional Terms and Conditions by reference. To the extent the Policy is applicable to you, it creates additional rights for the Company with respect to your option award. Notwithstanding any provisions in these Additional Terms and Conditions to the contrary, any option granted hereunder will be subject to mandatory repayment by you to the Company to the extent you are, or in the future become, subject to (A) any Company clawback or recoupment policy that is adopted to comply with the requirements of any applicable laws, rules or regulations, or otherwise, or (B) any applicable laws which impose mandatory recoupment, under circumstances set forth in such applicable laws, including as required by the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or other applicable law, regulation or stock exchange listing requirement, as may be in effect from time to time, and which may operate to create additional rights for the Company with respect to awards and recovery of amounts relating thereto. By accepting this option award, you hereby agree and acknowledge that you are obligated to cooperate with, and provide any and all assistance necessary to, the Company to recover or recoup this option award or amount paid under this award subject to clawback pursuant to such law, government regulation, stock exchange listing requirement or Company policy. Such cooperation and assistance shall include, but is not limited to, executing, completing and submitting any documentation necessary to recover or recoup this grant or amounts paid hereunder from your accounts, or pending or future compensation awards that may be made to you.

12.     Ownership and Protection of Intellectual Property and Confidential Information.

(A) All information, ideas, concepts, improvements, innovations, developments, methods, processes, designs, analyses, drawings, reports, discoveries, and inventions, whether patentable or not or reduced to practice, which are conceived, made, developed or acquired by you, individually or in conjunction with others, during Grantee’s employment by the Company or any of its Subsidiaries, both before and after the Date of Grant (whether during business hours or otherwise and whether on the Company’s premises or otherwise) which relate to the business, products or services of the Company or its Subsidiaries (including, without limitation, all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts within the customer’s organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names, marks, and any copyrightable work, trade mark, trade secret or other intellectual property rights (whether or not composing confidential information), and all writings or materials of any type embodying any of such items (collectively, “Work Product”), shall be the sole and exclusive property of the Company or a Subsidiary, as the case may be, and shall be treated as “work for hire.” It is recognized that Grantee is an experienced executive in the business of the Company and its Subsidiaries and through several decades of prior work in the industry acquired and retains knowledge, contacts, and information which are not bound by this Section 12.

(B) Grantee shall promptly and fully disclose all Work Product to the Company and shall cooperate and perform all actions reasonably requested by the Company (whether during or after the term of employment) to establish, confirm and protect the Company’s and/or its Subsidiaries’ right, title and interest in such Work Product. Without limiting the generality of the foregoing, Grantee agrees to assist the Company, at the Company’s expense, to secure the Company’s and its Subsidiaries’ rights in the Work Product in any and all countries, including the execution by Grantee of all applications and all other instruments and documents which the Company and/or its Subsidiaries shall deem necessary in order to apply for and obtain rights in such Work Product and in order to assign and convey to the Company and/or its Subsidiaries the sole and exclusive right, title and interest in and to such Work Product. If the Company is unable because of Grantee’s mental or physical incapacity or for any other reason (including Grantee’s





refusal to do so after request therefor is made by the Company) to secure Grantee’s signature to apply for or to pursue any application for any United States or foreign patents or copyright registrations covering Work Product belonging to or assigned to the Company and/or its Subsidiaries pursuant to Section 12(A) above, then Grantee by these Additional Terms and Conditions irrevocably designates and appoints the Company and its duly authorized officers and agents as Grantee’s agent and attorney-in-fact to act for and in your behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents or copyright registrations thereon with the same legal force and effect as if executed by Grantee. The Grantee agrees not to apply for or pursue any application for any United States or foreign patents or copyright registrations covering any Work Product other than pursuant to this Section 12 in circumstances where such patents or copyright registrations are or have been or are required to be assigned to the Company or any of its Subsidiaries.

(C) Grantee acknowledges that the businesses of the Company and its Subsidiaries are highly competitive and that their strategies, methods, books, records, and documents, their technical information concerning their products, equipment, services, and processes, procurement procedures and pricing techniques, the names of and other information (such as credit and financial data) concerning their former, present or prospective customers and business affiliates, all comprise confidential business information and trade secrets which are valuable, special, and unique assets which the Company and/or its Subsidiaries use in their business to obtain a competitive advantage over their competitors. The Grantee further acknowledges that protection of such confidential business information and trade secrets against unauthorized disclosure and use is of critical importance to the Company and its Subsidiaries in maintaining their competitive position. The Grantee acknowledges that by reason of the Grantee’s duties to, and association with, the Company and its Subsidiaries, the Grantee has had and will have access to, and has and will become informed of, confidential business information which is a competitive asset of the Company and its Subsidiaries. The Grantee hereby agrees that the Grantee will not, at any time during or after his or her employment by the Company or its Subsidiaries, make any unauthorized disclosure of any confidential business information or trade secrets of the Company or its Subsidiaries, or make any use thereof, except in the carrying out of his or her employment responsibilities hereunder. The Grantee shall take all necessary and appropriate steps to safeguard confidential business information and protect it against disclosure, misappropriation, misuse, loss and theft. Confidential business information shall not include information in the public domain (but only if the same becomes part of the public domain through a means other than a disclosure prohibited hereunder). The above notwithstanding, a disclosure shall not be unauthorized if (i) it is required by law or by a court of competent jurisdiction or (ii) it is in connection with any judicial, arbitration, dispute resolution or other legal proceeding in which Grantee’s legal rights and obligations as an employee or under these Additional Terms and Conditions are at issue; provided, however, that the Grantee shall, to the extent practicable and lawful in any such events, give prior notice to the Company of his or her intent to disclose any such confidential business information in such context so as to allow the Company or its Subsidiaries an opportunity (which the Grantee will not oppose) to obtain such protective orders or similar relief with respect thereto as may be deemed appropriate. Any information not specifically related to the Company and its Subsidiaries would not be considered confidential to the Company and its Subsidiaries.

(D) All written materials, records, and other documents made by, or coming into the possession of, the Grantee during the period of Grantee’s employment by the Company or its Subsidiaries which contain or disclose confidential business information or trade secrets of the Company or its Subsidiaries, or which relate to Grantee’s Work Product described in Section 12(A) above, shall be and remain the property of the Company, or its Subsidiaries, as the case may be. Upon termination of Grantee’s employment, for any reason, the Grantee promptly shall deliver the same, and all copies thereof, to the Company.

(E) Nothing in these Additional Terms and Conditions shall prohibit or restrict the Grantee 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. The Grantee does not need the prior authorization of the Company to engage in conduct protected by this Section 12, and the Grantee does not need to notify the Company that the Grantee 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.






13.     Covenant Not to Compete.

(A)    Grantee hereby agrees that during his or her employment with the Company or any of its Subsidiaries and for a period of two years following Grantee’s termination of employment with the Company and its Subsidiaries (the “Non-Compete Period”), he or she will not, in association with or as an officer, principal, manager, member, advisor, agent, partner, director, material shareholder, employee or consultant of any corporation (or sub-unit, in the case of a diversified business) or other enterprise, entity or association, work on the acquisition or development of, or engage in any line of business, property or project which is, directly or indirectly, competitive with any business that the Company or any of its Subsidiaries engages in or is planning to engage in during the term of Grantee’s employment with the Company or any Subsidiary, including but not limited to, any business engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers (the “Business”). Such restriction shall cover Grantee’s activities anywhere in the contiguous United States.

(B)    Grantee agrees that during the Non-Compete Period and for a one (1) year period thereafter, the Grantee will not, directly or indirectly, on behalf of Grantee or any other person or entity, solicit, induce or attempt to solicit or induce any person who is or was employed by, or in a contractor relationship with, the Company or its Subsidiaries within the one (1) year period immediately preceding the date of solicitation or inducement, to (i) interfere with the activities or businesses of the Company or any of its Subsidiaries, (ii) discontinue employment or contractor status with the Company or any of its Subsidiaries, or (iii) interfere with, alter or modify their employment or contractor relationship with the Company or any of its Subsidiaries. Grantee also agrees that during the Non-Compete Period and for a one (1) year period thereafter, the Grantee will not, on behalf of Grantee or any other person or entity, hire, attempt to hire, assist in any way with the hiring of, or otherwise employ or engage, or attempt to employ or engage, any person who is or was employed by or in a contractor relationship with the Company or its Subsidiaries within the one (1) year period immediately preceding the date of such hiring, assistance with hiring, employment or engagement.

(C)    Grantee agrees that during the Non-Compete Period, the Grantee will not, directly or indirectly, influence or attempt to influence any customers, distributors or suppliers of the Company or any of its Subsidiaries to divert their business to any competitor of the Company or any of its Subsidiaries or in any way interfere with the relationship between any such customer, distributor or supplier and the Company and/or any of its Subsidiaries (including, without limitation, making any negative statements or communications about the Company and its Subsidiaries). During such Non-Compete Period, the Grantee will not, directly or indirectly, acquire or attempt to acquire any business in the contiguous United States to which the Company or any of its Subsidiaries, prior to the Grantee’s termination of employment with the Company and its Subsidiaries, has made an acquisition proposal relating to the possible acquisition of such business by the Company or any of its Subsidiaries, or has planned, discussed or contemplated making such an acquisition proposal (such business, an “Acquisition Target”), or take any action to induce or attempt to induce any Acquisition Target to consummate any acquisition, investment or other similar transaction with any person other than the Company or any of its Subsidiaries.

(D)    Grantee understands that the provisions of Section 12 and Section 13 hereof may limit his or her ability to earn a livelihood in a business in which he or she is involved, but as a member of the management group of the Company and its Subsidiaries he or she nevertheless agrees and hereby acknowledges that: (i) such provisions do not impose a greater restraint than is necessary to protect the goodwill or other business interests of the Company and any of its Subsidiaries; (ii) such provisions contain reasonable limitations as to time, scope of activity, and geographical area to be restrained; and (iii) the consideration provided hereunder is sufficient to compensate the Grantee for the restrictions contained in Section 12 and Section 13 hereof. In consideration of the foregoing and in light of the Grantee’s education, skills and abilities, the Grantee agrees that he or she will not assert that, and it should not be considered that, any provisions of Section 12 and Section 13 otherwise are void, voidable or unenforceable or should be voided or held unenforceable.

(E)    If, at the time of enforcement of Section 12 or Section 13 of these Additional Terms and Conditions, a court shall hold that the duration, scope, or area restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed and directed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. The Grantee acknowledges that he or she is a member of the Company’s and its Subsidiaries’ management group with access to the Company’s and its Subsidiaries’ confidential business information and his or her services are unique to the Company





and its Subsidiaries. The Grantee therefore agrees that the remedy at law for any breach by him or her of any of the covenants and agreements set forth in Section 12 or Section 13 hereof will be inadequate and that in the event of any such breach, the Company and its Subsidiaries may, in addition to the other remedies which may be available to them at law, apply to any court of competent jurisdiction to obtain specific performance and/or injunctive relief prohibiting the Grantee (together with all those persons associated with him or her) from the breach of such covenants and agreements and to enforce, or prevent any violations of, the provisions of these Additional Terms and Conditions. In addition, in the event of a breach or violation by the Grantee of this Section 13, the Non-Compete Period set forth herein shall be tolled until such breach or violation has been cured.

(F) Each of the covenants of Section 12 and Section 13 hereof are given by the Grantee as part of the consideration for the option award granted hereunder and as an inducement to the Company to grant such options and accept the obligations thereunder.

14.     Electronic Delivery . The Company may, in its sole discretion, deliver any documents relating to your options and your participation in the Plan, or future awards that may be granted under the Plan, by electronic means or request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and, if requested, agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third-party designated by the Company.

15.     Construction . Your option award is made and granted pursuant to the Plan and is in all respects limited by and subject to the terms of the Plan. In the event of any inconsistency between the Plan and these Additional Terms and Conditions, the terms of the Plan shall control.

16.      Compliance with Laws and Regulations; No Shareholder Rights . The issuance of shares of Common Stock pursuant to your exercise of your option shall be subject to compliance by you with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which the Company’s Common Stock may be listed for trading at the time of such issuance. Neither you, nor any person entitled to exercise your rights in the event of your death, shall have any of the rights and/or privileges of a shareholder with respect to shares of the Company’s Common Stock subject to the option, until such shares have been issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), notwithstanding the exercise of the option.

17.      Binding Effect; No Third Party Beneficiaries . These Additional Terms and Conditions shall be binding upon and inure to the benefit of the Company and you and each of our respective heirs, representatives, successors and permitted assigns. These Additional Terms and Conditions shall not confer any rights or remedies upon any person other than the Company and you and each of our respective heirs, representatives, successor and permitted assigns.

18.     Notice . Any notice required to be given or delivered to the Company under the terms of these Additional Terms and Conditions shall be in writing and addressed to the Company at its principal corporate office. Except to the extent electronic notice is authorized hereunder, any notice required to be given or delivered to you shall be in writing and addressed to you at your most recent address set forth in the Company’s records. All notices shall be deemed effective upon personal delivery (or electronic delivery to the extent authorized hereunder) or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

19.     Section 409A . The option is intended to be excepted from coverage under Section 409A of the Code (“Section 409A”) and shall be administered, interpreted and construed accordingly. The Company may, in its sole discretion and without your consent, modify or amend these Additional Terms and Conditions, impose conditions on the timing and effectiveness of the exercise of the option by you, or take any other action it deems necessary or advisable, to cause the option to be excepted from Section 409A (or to comply therewith to the extent the Company determines it is not excepted). Notwithstanding the foregoing, you recognize and acknowledge that Section 409A may impose upon you certain taxes or interest charges for which you are and shall remain solely responsible.















THE SHERWIN-WILLIAMS COMPANY
2006 EQUITY AND PERFORMANCE INCENTIVE PLAN
(AMENDED AND RESTATED AS OF APRIL 19, 2017)
Incentive Stock Option Award - Additional Terms and Conditions
1.     Grant and Nature of Option. The Board of Directors (the “Board”) of The Sherwin-Williams Company (the “Company”) has granted an option to you (“you” or “Grantee”) pursuant to an Evidence of Award that has been delivered to you. This option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. Each option entitles you to purchase from the Company one share of Common Stock at the Option Price per share, in accordance with the terms of The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of April 19, 2017, the “Plan”), the related Prospectus, the Evidence of Award, these Additional Terms and Conditions, and such other rules and procedures as may be adopted by the Company. Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan.
2.     Vesting of Option .
(A)     The option (unless terminated as hereinafter provided) shall become vested and exercisable only to the extent of one-third of the shares after you shall have been in the continuous employ of the Company or any Subsidiary for one full year from the Date of Grant and to the extent of an additional one-third of such shares after each of the next two successive full years thereafter during which you shall have been in the continuous employ of the Company or any Subsidiary.
(B)    Notwithstanding Section 2(A) above, the option shall immediately vest and become exercisable in full if you should die while in the employ of the Company or any Subsidiary.
(C)    Notwithstanding Section 2(A) above, if you should “Retire” while in the employ of the Company or any Subsidiary, you shall be treated as being in the continuous employ with the Company or any Subsidiary during your “Retirement” for purposes of this Section 2 and, as a result, the option shall continue to vest and become exercisable on the dates set forth in Section 2(A) above notwithstanding your Retirement, consistent with the terms of the Plan. The terms “Retire” or “Retirement” as used in these Additional Terms and Conditions means your cessation of employment with the Company or any Subsidiary after: (1) the attainment of age 65; (2) the attainment of age 55-59 with at least twenty (20) years of service with the Company or any Subsidiary; or (3) the attainment of age 60 or older and your combination of age and years of service with the Company or any Subsidiary equals at least 75.
(D)    Notwithstanding Section 2(A) above, in the event of a Change of Control, any unvested number of options shall vest and become exercisable in accordance with Section 12 of the Plan.
3.     Exercisability of Option. Notwithstanding anything herein to the contrary:
(A)     Except as otherwise provided in Section 3(B) below, the option shall terminate and cease to be exercisable to the extent vested on the earliest of the following dates:
(i)    The date on which you cease to be an employee of the Company or a Subsidiary, unless you cease to be such employee by reason of (a) death, (b) disability, or (c) Retirement;
(ii)    Three years after the date of your death if (a) you die while an employee of the Company or a Subsidiary or (b) you die following your Retirement;
(iii)    Three years after the date you are terminated by the Company or a Subsidiary as a result of expiration of available disability leave of absence pursuant to applicable Company policy due to sickness or bodily injury;
(iv)    Ten years from the Date of Grant; or





(v)    The date on which you knowingly or willfully engage in misconduct, which is materially harmful to the interests of the Company or a Subsidiary, as may be determined by the Board, in its sole discretion, or the date you violate Section 13 or Section 14 of these Additional Terms and Conditions.
(B)    Notwithstanding anything in these Additional Terms and Conditions to the contrary, but subject to applicable law, if and only if, at 4:15 p.m. Eastern Time on the date on which the option would otherwise terminate pursuant to Section 3(A)(iv) above (the “Option Expiration Date”), (i) the closing sales price of one share of Common Stock on the principal stock exchange on which the Common Stock is then listed as of the Option Expiration Date (or, if there are no sales of Common Stock on such Option Expiration Date, on the next preceding trading day during which a sale of Common Stock occurred) exceeds the Option Price per share, (ii) to the extent the option is exercisable and you have not exercised the option, and (iii) to the extent the option has not otherwise expired, terminated, or been cancelled or forfeited, then the Company will deem such remaining exercisable portion of the option to have been exercised by you on the Option Expiration Date (and prior to the option’s termination) at such time (the “Automatic Exercise”). Further to such Automatic Exercise, payment of the aggregate Option Price for such Automatic Exercise and any applicable withholding taxes in connection with such Automatic Exercise will be deemed to have been made by the Company withholding a number of shares of Common Stock otherwise issuable in connection with such Automatic Exercise that are equal in value to the amount necessary to satisfy such aggregate Option Price payment and minimum required withholding taxes. To clarify, upon Automatic Exercise, the Company will deliver to you the number of whole shares of Common Stock resulting from such Automatic Exercise less a number of shares of Common Stock equal in value to (x) the aggregate Option Price plus (y) any minimum required withholding taxes; provided, however, that any fractional share otherwise deliverable to you will be settled in cash.
4.     Exercise and Payment of Option . To the extent exercisable, the option may be exercised in whole or in part from time to time by giving appropriate notice (in any form prescribed by the Company). The Option Price shall be payable (i) in cash or by check acceptable to the Company or by wire transfer of immediately available funds, (ii) by the actual or constructive transfer to the Company by you of nonforfeitable, unrestricted shares of Common Stock of the Company owned by you and having an aggregate fair market value at the time of exercise equal to the total Option Price, (iii) through a special sale and remittance procedure pursuant to which you shall concurrently provide irrevocable instructions (A) to a brokerage firm (with such brokerage firm reasonably satisfactory to the Company for purposes of administering such procedure in compliance with any applicable pre-clearance or pre-notification requirements) to effect the immediate sale of the purchased shares of Common Stock of the Company and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares of Common Stock of the Company plus all applicable taxes required to be withheld by the Company by reason of such exercise and (B) to the Company to deliver the certificates for the purchased shares directly to such brokerage firm on the settlement date in order to complete the sale, (iv) by a combination of such methods of payment, or (v) by such other methods as may be approved by the Board.
5.     Designation as Incentive Stock Option . The option is designated as an incentive stock option under Section 422 of the Code. Notwithstanding the foregoing: (i) the option shall not qualify as an incentive stock option under the Code if (A) you make a disposition of the Common Stock you receive upon exercise of the option within two years from the date of grant or within one year after the transfer of such Common Stock to you, or (B) you are not an employee of the Company or its Subsidiaries on the day that is three months (or 12 months in the event of your disability (within the meaning of Section 22(e)(3) of the Code)) before the date you exercise the option; and (ii) if the aggregate fair market value of the Common Stock on the Date of Grant with respect to which incentive stock options are exercisable for the first time by you during any calendar year under the Plan or any other stock option plan of the Company or a parent or subsidiary exceeds $100,000, then the option, as to the excess, shall be treated as a non-qualified stock option that does not meet the requirements of Section 422 of the Code. If and to the extent that the option fails to qualify as an incentive stock option under the Code, the option shall remain outstanding according to its terms as a non-qualified stock option. You acknowledge and agree that (A) favorable incentive stock option tax treatment is available only if the option is exercised while you are an employee of the Company or a parent or subsidiary of the Company or within a period of time specified in the Code after you cease to be an employee, (B) you are responsible for the income tax consequences of the option and, among other tax consequences, you understand that you may be subject to the alternative minimum tax under the Code in the year in which the option is exercised, (C) you will consult with your tax adviser regarding the tax consequences of the option, and (D) you shall immediately notify the Company in writing, and provide the Company with any information requested by it, if you sell or otherwise dispose of any shares of the Company’s Common Stock acquired upon the exercise of the option and such sale or other disposition occurs on or before the later of (i) two years after the date of grant or (ii) one year after the exercise of the option.
6.     Transferability, Binding Effect . The option is not transferable by you otherwise than by will or the laws of descent and distribution, and in no event shall this award be transferred for value. This option is exercisable, during





your lifetime, only by you. These Additional Terms and Conditions bind you and your guardians, legal representatives and heirs.
7.     Compliance with Law . The option shall not be exercisable if such exercise would involve a violation of any law.
8.     Withholding; Taxes . If the Company shall be required to withhold (including required to account to any tax authorities for) any federal, state, local or foreign tax or other amounts in connection with exercise of the option, it shall be a condition to such exercise that you pay or make provision satisfactory to the Company for payment of all such taxes and other amounts. Notwithstanding any other provision of this option award or the Plan, the Company shall not be obligated to guarantee any particular tax result for you with respect to any award and/or payment provided to you hereunder, and you shall be responsible for any taxes or other amounts imposed on you with respect to such award and/or payment.
9.     No Right to Future Awards or Employment . The option award is a voluntary, discretionary bonus being made on a one-time basis and does not constitute a commitment to make any future awards. The option award and any related payments made to you will not be considered salary or other compensation for purposes of any severance pay or similar allowance, except as otherwise required by law. Nothing contained herein will confer upon you any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate your employment or other service at any time.
10.     Severability . If any provision of these Additional Terms and Conditions or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of these Additional Terms and Conditions and the application of such provision to any other person or circumstances shall not be affected, and the provisions so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent (and only to the extent) necessary to make it enforceable, valid and legal.
11.     Governing Law. These Additional Terms and Conditions shall be governed by and construed with the internal substantive laws of the State of Ohio, without giving effect to any principle of law that would result in the application of the law of any other jurisdiction.
12.     Application of The Sherwin-Williams Company Executive Compensation Adjustment and Recapture Policy . You acknowledge and agree that the terms and conditions set forth in The Sherwin-Williams Company Executive Compensation Adjustment and Recapture Policy (“Policy”) are incorporated in these Additional Terms and Conditions by reference. To the extent the Policy is applicable to you, it creates additional rights for the Company with respect to your option award. Notwithstanding any provisions in these Additional Terms and Conditions to the contrary, any option granted hereunder will be subject to mandatory repayment by you to the Company to the extent you are, or in the future become, subject to (A) any Company clawback or recoupment policy that is adopted to comply with the requirements of any applicable laws, rules or regulations, or otherwise, or (B) any applicable laws which impose mandatory recoupment, under circumstances set forth in such applicable laws, including as required by the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or other applicable law, regulation or stock exchange listing requirement, as may be in effect from time to time, and which may operate to create additional rights for the Company with respect to awards and recovery of amounts relating thereto. By accepting this option award, you hereby agree and acknowledge that you are obligated to cooperate with, and provide any and all assistance necessary to, the Company to recover or recoup this option award or amount paid under this award subject to clawback pursuant to such law, government regulation, stock exchange listing requirement or Company policy. Such cooperation and assistance shall include, but is not limited to, executing, completing and submitting any documentation necessary to recover or recoup this grant or amounts paid hereunder from your accounts, or pending or future compensation awards that may be made to you.

13.     Ownership and Protection of Intellectual Property and Confidential Information.

(A)    All information, ideas, concepts, improvements, innovations, developments, methods, processes, designs, analyses, drawings, reports, discoveries, and inventions, whether patentable or not or reduced to practice, which are conceived, made, developed or acquired by Grantee, individually or in conjunction with others, during Grantee’s employment by the Company or any of its Subsidiaries, both before and after the Date of Grant (whether during business hours or otherwise and whether on the Company’s premises or otherwise) which relate to the business, products or services of the Company or its Subsidiaries (including, without limitation, all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts within the customer’s organizations or within the organization of acquisition prospects, or marketing and





merchandising techniques, prospective names, marks, and any copyrightable work, trade mark, trade secret or other intellectual property rights (whether or not composing confidential information), and all writings or materials of any type embodying any of such items (collectively, “Work Product”), shall be the sole and exclusive property of the Company or a Subsidiary, as the case may be, and shall be treated as “work for hire.” It is recognized that the Grantee is an experienced executive in the business of the Company and its Subsidiaries and through several decades of prior work in the industry acquired and retains knowledge, contacts, and information which are not bound by this Section 13.

(B)    Grantee shall promptly and fully disclose all Work Product to the Company and shall cooperate and perform all actions reasonably requested by the Company (whether during or after the term of employment) to establish, confirm and protect the Company’s and/or its Subsidiaries’ right, title and interest in such Work Product. Without limiting the generality of the foregoing, the Grantee agrees to assist the Company, at the Company’s expense, to secure the Company’s and its Subsidiaries’ rights in the Work Product in any and all countries, including the execution by the Grantee of all applications and all other instruments and documents which the Company and/or its Subsidiaries shall deem necessary in order to apply for and obtain rights in such Work Product and in order to assign and convey to the Company and/or its Subsidiaries the sole and exclusive right, title and interest in and to such Work Product. If the Company is unable because of Grantee’s mental or physical incapacity or for any other reason (including Grantee’s refusal to do so after request therefor is made by the Company) to secure Grantee’s signature to apply for or to pursue any application for any United States or foreign patents or copyright registrations covering Work Product belonging to or assigned to the Company and/or its Subsidiaries pursuant to Section 13(A) above, then the Grantee by these Additional Terms and Conditions irrevocably designates and appoints the Company and its duly authorized officers and agents as Grantee’s agent and attorney-in-fact to act for and in Grantee’s behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents or copyright registrations thereon with the same legal force and effect as if executed by Grantee. The Grantee agrees not to apply for or pursue any application for any United States or foreign patents or copyright registrations covering any Work Product other than pursuant to this Section 13 in circumstances where such patents or copyright registrations are or have been or are required to be assigned to the Company or any of its Subsidiaries.

(C)    Grantee acknowledges that the businesses of the Company and its Subsidiaries are highly competitive and that their strategies, methods, books, records, and documents, their technical information concerning their products, equipment, services, and processes, procurement procedures and pricing techniques, the names of and other information (such as credit and financial data) concerning their former, present or prospective customers and business affiliates, all comprise confidential business information and trade secrets which are valuable, special, and unique assets which the Company and/or its Subsidiaries use in their business to obtain a competitive advantage over their competitors. The Grantee further acknowledges that protection of such confidential business information and trade secrets against unauthorized disclosure and use is of critical importance to the Company and its Subsidiaries in maintaining their competitive position. The Grantee acknowledges that by reason of the Grantee’s duties to, and association with, the Company and its Subsidiaries, the Grantee has had and will have access to, and has and will become informed of, confidential business information which is a competitive asset of the Company and its Subsidiaries. The Grantee hereby agrees that the Grantee will not, at any time during or after his or her employment by the Company or its Subsidiaries, make any unauthorized disclosure of any confidential business information or trade secrets of the Company or its Subsidiaries, or make any use thereof, except in the carrying out of his or her employment responsibilities hereunder. The Grantee shall take all necessary and appropriate steps to safeguard confidential business information and protect it against disclosure, misappropriation, misuse, loss and theft. Confidential business information shall not include information in the public domain (but only if the same becomes part of the public domain through a means other than a disclosure prohibited hereunder). The above notwithstanding, a disclosure shall not be unauthorized if (i) it is required by law or by a court of competent jurisdiction or (ii) it is in connection with any judicial, arbitration, dispute resolution or other legal proceeding in which Grantee’s legal rights and obligations as an employee or under these Additional Terms and Conditions are at issue; provided, however, that the Grantee shall, to the extent practicable and lawful in any such events, give prior notice to the Company of his or her intent to disclose any such confidential business information in such context so as to allow the Company or its Subsidiaries an opportunity (which the Grantee will not oppose) to obtain such protective orders or similar relief with respect thereto as may be deemed appropriate. Any information not specifically related to the Company and its Subsidiaries would not be considered confidential to the Company and its Subsidiaries.

(D)    All written materials, records, and other documents made by, or coming into the possession of, the Grantee during the period of Grantee’s employment by the Company or its Subsidiaries which contain or disclose confidential business information or trade secrets of the Company or its Subsidiaries, or which relate to Grantee’s Work Product described in Section 13(A) above, shall be and remain the property of the Company, or its Subsidiaries,





as the case may be. Upon termination of Grantee’s employment, for any reason, the Grantee promptly shall deliver the same, and all copies thereof, to the Company.

(E)    Nothing in these Additional Terms and Conditions shall prohibit or restrict the Grantee 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. The Grantee does not need the prior authorization of the Company to engage in conduct protected by this Section 13, and the Grantee does not need to notify the Company that the Grantee 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.

14.     Covenant Not to Compete.

(A)    Grantee hereby agrees that during his or her employment with the Company or any of its Subsidiaries and for a period of two years following Grantee’s termination of employment with the Company and its Subsidiaries (the “Non-Compete Period”), he or she will not, in association with or as an officer, principal, manager, member, advisor, agent, partner, director, material shareholder, employee or consultant of any corporation (or sub-unit, in the case of a diversified business) or other enterprise, entity or association, work on the acquisition or development of, or engage in any line of business, property or project which is, directly or indirectly, competitive with any business that the Company or any of its Subsidiaries engages in or is planning to engage in during the term of Grantee’s employment with the Company or any Subsidiary, including but not limited to, any business engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers (the “Business”). Such restriction shall cover Grantee’s activities anywhere in the contiguous United States.

(B)    Grantee agrees that during the Non-Compete Period and for a one (1) year period thereafter, the Grantee will not, directly or indirectly, on behalf of Grantee or any other person or entity, solicit, induce or attempt to solicit or induce any person who is or was employed by, or in a contractor relationship with, the Company or its Subsidiaries within the one (1) year period immediately preceding the date of solicitation or inducement, to (i) interfere with the activities or businesses of the Company or any of its Subsidiaries, (ii) discontinue employment or contractor status with the Company or any of its Subsidiaries, or (iii) interfere with, alter or modify their employment or contractor relationship with the Company or any of its Subsidiaries. Grantee also agrees that during the Non-Compete Period and for a one (1) year period thereafter, the Grantee will not, on behalf of Grantee or any other person or entity, hire, attempt to hire, assist in any way with the hiring of, or otherwise employ or engage, or attempt to employ or engage, any person who is or was employed by or in a contractor relationship with the Company or its Subsidiaries within the one (1) year period immediately preceding the date of such hiring, assistance with hiring, employment or engagement.

(C)    Grantee agrees that during the Non-Compete Period, the Grantee will not, directly or indirectly, influence or attempt to influence any customers, distributors or suppliers of the Company or any of its Subsidiaries to divert their business to any competitor of the Company or any of its Subsidiaries or in any way interfere with the relationship between any such customer, distributor or supplier and the Company and/or any of its Subsidiaries (including, without limitation, making any negative statements or communications about the Company and its Subsidiaries). During such Non-Compete Period, the Grantee will not, directly or indirectly, acquire or attempt to acquire any business in the contiguous United States to which the Company or any of its Subsidiaries, prior to the Grantee’s termination of employment with the Company and its Subsidiaries, has made an acquisition proposal relating to the possible acquisition of such business by the Company or any of its Subsidiaries, or has planned, discussed or contemplated making such an acquisition proposal (such business, an “Acquisition Target”), or take any action to induce or attempt to induce any Acquisition Target to consummate any acquisition, investment or other similar transaction with any person other than the Company or any of its Subsidiaries.






(D)    Grantee understands that the provisions of Section 13 and Section 14 hereof may limit his or her ability to earn a livelihood in a business in which he or she is involved, but as a member of the management group of the Company and its Subsidiaries he or she nevertheless agrees and hereby acknowledges that: (i) such provisions do not impose a greater restraint than is necessary to protect the goodwill or other business interests of the Company and any of its Subsidiaries; (ii) such provisions contain reasonable limitations as to time, scope of activity, and geographical area to be restrained; and (iii) the consideration provided hereunder is sufficient to compensate the Grantee for the restrictions contained in Section 13 and Section 14 hereof. In consideration of the foregoing and in light of the Grantee’s education, skills and abilities, the Grantee agrees that he or she will not assert that, and it should not be considered that, any provisions of Section 13 and Section 14 otherwise are void, voidable or unenforceable or should be voided or held unenforceable.

(E)    If, at the time of enforcement of Section 13 or Section 14 of these Additional Terms and Conditions, a court shall hold that the duration, scope, or area restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed and directed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. The Grantee acknowledges that he or she is a member of the Company’s and its Subsidiaries’ management group with access to the Company’s and its Subsidiaries’ confidential business information and his or her services are unique to the Company and its Subsidiaries. The Grantee therefore agrees that the remedy at law for any breach by him or her of any of the covenants and agreements set forth in Section 13 or Section 14 hereof will be inadequate and that in the event of any such breach, the Company and its Subsidiaries may, in addition to the other remedies which may be available to them at law, apply to any court of competent jurisdiction to obtain specific performance and/or injunctive relief prohibiting the Grantee (together with all those persons associated with him or her) from the breach of such covenants and agreements and to enforce, or prevent any violations of, the provisions of these Additional Terms and Conditions. In addition, in the event of a breach or violation by the Grantee of this Section 14, the Non-Compete Period set forth herein shall be tolled until such breach or violation has been cured.

(F)    Each of the covenants of Section 13 and Section 14 hereof are given by the Grantee as part of the consideration for the option award granted hereunder and as an inducement to the Company to grant such options and accept the obligations thereunder.

15.     Electronic Delivery . The Company may, in its sole discretion, deliver any documents relating to your options and your participation in the Plan, or future awards that may be granted under the Plan, by electronic means or request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and, if requested, agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third-party designated by the Company.

16.     Construction . Your option award is made and granted pursuant to the Plan and is in all respects limited by and subject to the terms of the Plan. In the event of any inconsistency between the Plan and these Additional Terms and Conditions, the terms of the Plan shall control.

17.     Compliance with Laws and Regulations; No Shareholder Rights . The issuance of shares of Common Stock pursuant to your exercise of your option shall be subject to compliance by you with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which the Company’s Common Stock may be listed for trading at the time of such issuance. Neither you, nor any person entitled to exercise your rights in the event of your death, shall have any of the rights and/or privileges of a shareholder with respect to shares of the Company’s Common Stock subject to the option, until such shares have been issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), notwithstanding the exercise of the option.

18.     Binding Effect; No Third Party Beneficiaries . These Additional Terms and Conditions shall be binding upon and inure to the benefit of the Company and you and each of our respective heirs, representatives, successors and permitted assigns. These Additional Terms and Conditions shall not confer any rights or remedies upon any person other than the Company and you and each of our respective heirs, representatives, successor and permitted assigns.

19.     Notice . Any notice required to be given or delivered to the Company under the terms of these Additional Terms and Conditions shall be in writing and addressed to the Company at its principal corporate office. Except to the extent electronic notice is authorized hereunder, any notice required to be given or delivered to you shall be in writing and addressed to you at your most recent address set forth in the Company’s records. All notices shall be deemed effective upon





personal delivery (or electronic delivery to the extent authorized hereunder) or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

20.     Section 409A . The option is intended to be excepted from coverage under Section 409A of the Code (“Section 409A”) and shall be administered, interpreted and construed accordingly. The Company may, in its sole discretion and without your consent, modify or amend these Additional Terms and Conditions, impose conditions on the timing and effectiveness of the exercise of the option by you, or take any other action it deems necessary or advisable, to cause the option to be excepted from Section 409A (or to comply therewith to the extent the Company determines it is not excepted). Notwithstanding the foregoing, you recognize and acknowledge that Section 409A may impose upon you certain taxes or interest charges for which you are and shall remain solely responsible.





EXHIBIT 10(s)

THE SHERWIN-WILLIAMS COMPANY
2006 EQUITY AND PERFORMANCE INCENTIVE PLAN
(AMENDED AND RESTATED AS OF APRIL 19, 2017)

Restricted Stock Units Award Agreement

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

1.      Grant of Restricted Stock Units. The Compensation and Management Development Committee of the Board of Directors (the “Committee”) of The Sherwin-Williams Company (the “Company”) or its delegate has granted to you (“Grantee”) the Restricted Stock Unit awards (the “RSUs”) set forth above in accordance with the terms of this Restricted Stock Units Award Agreement (this “Agreement”) and the terms of The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of April 19, 2017) (the “Plan”), the related Prospectus and any Prospectus Supplement, and such other rules and procedures as may be adopted by the Company. The Total RSUs consist of the Target EPS RSUs and Target RONAE RSUs (collectively, the “Target RSUs”), as set forth above, and subject to the terms and conditions set forth herein, in the Plan, and on file with the Committee. Capitalized terms used herein without definition or other identification shall have the meanings assigned to them in the Plan.

2.     Vesting of RSUs .

(A) Vesting of Performance-Based EPS RSUs. Subject to Section 3 hereof, provided Grantee is continuously employed with the Company or a Subsidiary from the Date of Grant through the Date of Vesting, inclusive (the “Restriction Period”), in Grantee’s present position or in such other position that, as the Committee may determine, entitles Grantee to retain the rights under this grant (each such position being hereinafter referred to as a “Participating Position”), a percentage ranging from 0% to 200% of the Target EPS RSUs shall become nonforfeitable (“Vested,” “Vested RSUs” or similar terms) in accordance with the relative level of achievement of the Management Objective set forth below (the “Vesting Percentage”) and shall be settled in accordance with the terms of Section 4 hereof. The determination of the Vesting Percentage shall be made after such time as the Committee has obtained the information, made the decisions, and completed the calculations necessary to make such determination. The Vesting Percentage is based upon the Company’s Earnings Per Share (“Cumulative EPS”) during the three-year period ending on December 31 of the most recently completed fiscal year prior to the Date of Vesting (the “Measurement Period”), as determined in accordance with the following table:





Cumulative EPS
Vesting Percentage
Equal to or greater than
200%
 
175%
 
150%
 
125%
 
100%
 
88%
 
75%
 
63%
 
50%
 
38%
 
25%
Less than
0%

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

Average Annual RONAE
Vesting Percentage
Equal to or greater than
200%
 
175%
 
150%
 
125%
 
100%
 
88%
 
75%
 
63%
 
50%
 
38%
 
25%
Less than
0%

When the Average Annual RONAE results during the Measurement Period fall between the table values, straight-line mathematical interpolation will be used to determine the Vesting Percentage calculated to the nearest hundredth of a percentage. The manner in which the Committee will determine Average Annual RONAE during the Measurement Period is set forth on Exhibit B attached hereto, subject to terms set by and on file with the Committee.

3.     Termination of Rights to Total RSUs; Acceleration of Vesting. Notwithstanding anything herein to the contrary:
(A)    On the date Grantee ceases to be continuously employed in any Participating Position(s) at any time during the Restriction Period, the Total RSUs shall be forfeited and Grantee shall forfeit and lose all rights to the Total RSUs





that are not Vested as of such date, except as otherwise provided below or as otherwise provided in an agreement between the Grantee and the Company or a plan in which the Grantee is a participant:

(i) In the event of the death of Grantee during the Restriction Period, the greater of (I) 100% of the Target RSUs or (II) the Vesting Percentage of the Target RSUs based on the actual Cumulative EPS and Average Annual RONAE measured as of the end of the last completed fiscal quarter preceding the date of Grantee’s death and the projected forecast of Cumulative EPS and Average Annual RONAE over the remaining Restriction Period, shall immediately be Vested.

(ii) In the event Grantee becomes Disabled, the greater of (I) 100% of the Target RSUs or (II) the Vesting Percentage of the Target RSUs based on the actual Cumulative EPS and Average Annual RONAE measured as of the end of the last completed fiscal quarter preceding the date on which Grantee becomes Disabled and the projected forecast of Cumulative EPS and Average Annual RONAE over the remaining Restriction Period, shall immediately be Vested.

(iii) In the event Grantee’s employment terminates as a result of “Retirement,” all rights of Grantee under this grant with respect to the Target RSUs shall continue as if Grantee had continued employment in a Participating Position, and the Vesting Percentage of the Target RSUs will be determined as if Grantee had remained employed in a Participating Position throughout the Restriction Period. “Retirement” shall be defined as: (x) the attainment of age 65; (y) the attainment of age 55-59 with at least twenty (20) years of service with the Company or a Subsidiary; or (z) the attainment of age 60 or older and the Grantee’s combination of age and service with the Company or any Subsidiary equals at least 75.

(iv) Notwithstanding Section 2 above, in the event of a Change of Control, the Total RSUs shall Vest on fulfillment of the conditions specified in Section 12 of the Plan, and, for clarification in this regard, the phrase “as if 100% of the Management Objectives have been achieved” contained in Section 12 of the Plan, as applied to this Agreement, means as if all Management Objectives have been achieved (i.e., achievement at or above the maximum target levels set forth in this Agreement).

(B) With respect to a Grantee that is a corporate officer and operating management, in the event Grantee is transferred from a Participating Position, the Committee shall have the right to cancel Grantee’s rights hereunder, continue Grantee’s rights hereunder in full, or prorate the number of Total RSUs evidenced hereby for the portion of the Restriction Period completed as of the date of such transfer or as the Committee may otherwise deem appropriate. In the event Grantee’s rights hereunder continue in full or the number of Total RSUs is prorated, the other requirements for Vesting will continue to apply, including that Grantee remain continuously employed by the Company or a Subsidiary through the Date of Vesting, subject to earlier Vesting pursuant to Section 3(A). Any such Award will be settled in accordance with Section 4.

(C) In the event that Grantee knowingly or willfully engages in misconduct, which is materially harmful to the interests of the Company or a Subsidiary, as may be determined by the Committee, in its sole discretion, or violates Section 14 or Section 15 of this Agreement, all rights of Grantee to the RSUs shall terminate.

4.     Settlement of RSUs.

(A)     General. Upon satisfaction of the Vesting requirements set forth in Sections 2 and/or 3 hereof, and as soon as administratively practicable following (but no later than thirty (30) days following) the Date of Vesting, the Company shall issue Grantee one share of Common Stock free and clear of any restrictions for each Vested RSU.

(B)     Other Payment Events for Vested RSUs . Notwithstanding Section 4(A), to the extent that prior to the Date of Vesting there are any Vested RSUs pursuant to Section 3 hereof, such Vested RSUs shall be settled prior to the date set forth under Section 4(A) as follows:

(i) Death . In the event of the death of the Grantee during the Restriction Period, the Company shall issue to Grantee’s proper beneficiaries one share of Common Stock free and clear of any restrictions for each Vested RSU within thirty (30) days of the date of Grantee’s death.

(ii) Disability . In the event that Grantee becomes “Disabled” during the Restriction Period, the Company shall issue Grantee one share of Common Stock free and clear of any restrictions for each Vested RSU within thirty (30) days of the date on which Grantee becomes Disabled. “Disabled” shall mean that Grantee (x) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (y) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a





continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Company.

(iii) Change of Control . In the event of a Change of Control during the Restriction Period, Vested RSUs shall be settled in accordance with Section 12 of the Plan. Notwithstanding any provision of this Agreement or the Plan to the contrary, if Section 409A of the Code applies to the payment and Grantee experiences a termination of employment after the Change of Control resulting in Vested RSUs under Section 12 of the Plan, Grantee is entitled to receive settlement of any Vested RSUs under Section 12 of the Plan on the date that would have otherwise applied pursuant to Sections 4(A), 4(B)(i) or 4(B)(ii) as though such Change of Control had not occurred. Notwithstanding any provision of this Agreement or the Plan to the contrary and to the extent required to comply with Section 409A, if any Target RSU is Assumed, any outstanding Target RSUs which at the time of the Change of Control are not subject to a “substantial risk of forfeiture” (within the meaning of Section 409A of the Code) will be deemed to be not Assumed and will be payable in accordance with Section 12(b) of the Plan.

5.     Dividend Equivalents; Other Rights. From and after the Date of Grant and until the earlier of (A) the time when the RSUs Vest and are settled in accordance with Section 4 hereof or (B) the time when Grantee’s rights to the RSUs are forfeited in accordance with Section 3 hereof, on the date that the Company pays a cash dividend (if any) to holders of Common Stock generally, Grantee shall be entitled to a deferred cash payment equal to the value of the product of (x) the dollar amount of the cash dividend paid per share of Common Stock on such date and (y) 200% of the Target RSUs; however, such dividend equivalents (if any) shall be paid in cash only, and shall not be paid unless and until the Restriction Period has lapsed, and shall be subject to such other applicable terms and conditions (including payment or forfeitability) as the RSUs on which the dividend equivalents were credited. In this regard, the right to any such dividend equivalent payment shall Vest at the same time as the RSUs to which they relate and shall be distributed to Grantee concurrently with the RSUs (and in proportion to the percentage of the RSUs that Vest and are to be paid in Common Stock in settlement of such RSUs), without regard to the number of shares of Common Stock withheld to pay any applicable withholding tax obligations. The obligations of the Company hereunder will be merely that of an unfunded and unsecured promise of the Company to deliver shares of Common Stock or cash, as the case may be, in the future, and the rights of Grantee will be no greater than that of an unsecured general creditor. No assets of the Company will be held or set aside as security for the obligations of the Company hereunder.

6.     No Shareholder/Voting Rights. Grantee will not be a shareholder of record and shall have no voting rights with respect to shares of Common Stock underlying an RSU prior to the Company’s issuance of such shares following the Date of Vesting or the otherwise applicable settlement date.

7.     Transferability. During the Restriction Period, Grantee shall not be permitted to sell, transfer, pledge, encumber, assign or dispose of the RSUs.

8.     Withholding; Taxes. If the Company shall be required to withhold (including required to account to any tax authority for) any federal, state, local or foreign taxes or other amounts in connection with the RSUs or the underlying shares of Common Stock, Grantee shall pay or make provision satisfactory to the Company for payment of all such taxes. In accordance with administrative procedures established by the Company, Grantee may elect to satisfy Grantee’s statutory withholding tax obligations on account of Vesting hereunder in one or a combination of the following methods: (A) in cash or by separate check made payable to the Company; (B) authorizing the Company to withhold a number of shares of Common Stock issued hereunder equal to the applicable minimum statutory withholding tax obligation (or such other amount as permitted by the Plan and authorized by the Committee or its delegate) and/or (C) by delivering to the Company other shares of Common Stock held by Grantee. Notwithstanding any other provision of this Agreement or the Plan, the Company shall not be obligated to guarantee any particular tax result for Grantee with respect to any payment provided to Grantee hereunder, and Grantee shall be responsible for any taxes imposed on Grantee with respect to any such payment.

9.     No Right to Future Awards or Employment. The grant is a voluntary, discretionary bonus being made on a one-time basis and it does not constitute a commitment to make any future awards. The grant and any related payments made to Grantee will not be considered salary or other compensation for purposes of any severance pay or similar allowance, except as otherwise required by law. Nothing contained herein will confer upon Grantee any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate Grantee’s employment or other service at any time.

10.     Nature of Grant. Grantee acknowledges that (A) the future value of the underlying shares of Common Stock is unknown and cannot be predicted with certainty and (B) in consideration of the grant of the RSUs, no claim or entitlement to compensation or damages shall arise from termination of the RSUs or diminution in value of the shares received upon settlement including (without limitation) any claim or entitlement resulting from termination of Grantee’s active employment by the Company or a Subsidiary (for any reason whatsoever and whether or not in breach of local labor laws) and Grantee





hereby releases the Company and its Subsidiaries from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by accepting the RSUs and this Agreement, Grantee shall be deemed irrevocably to have waived his or her entitlement to pursue such claim.

11.     Severability. If any provision of this grant or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this grant and the application of such provision to any other person or circumstances shall not be affected, and the provisions so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent (and only to the extent) necessary to make it enforceable, valid and legal.

12.     Governing Law. This grant shall be governed by and construed with the internal substantive laws of the State of Ohio, without giving effect to any principle of law that would result in the application of the law of any other jurisdiction.

13.     Recapture/Recoupment Rights and Policies. Grantee acknowledges and agrees that the terms and conditions set forth in The Sherwin-Williams Company Executive Compensation Adjustment and Recapture Policy (“Policy”) are incorporated in this Agreement by reference. To the extent the Policy is applicable to Grantee, it creates additional rights for the Company with respect to Grantee’s RSUs. Notwithstanding any provisions in this Agreement to the contrary, any RSU granted under this Agreement will be subject to mandatory repayment by the Grantee to the Company to the extent the Grantee is, or in the future becomes, subject to (A) any Company clawback or recoupment policy that is adopted to comply with the requirements of any applicable laws, rules or regulations, or otherwise, or (B) any applicable laws which impose mandatory recoupment, under circumstances set forth in such applicable laws, including as required by the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or other applicable law, regulation or stock exchange listing requirement, as may be in effect from time to time, and which may operate to create additional rights for the Company with respect to awards and recovery of amounts relating thereto. By accepting this grant of RSUs, Grantee agrees and acknowledges that Grantee is obligated to cooperate with, and provide any and all assistance necessary to, the Company to recover or recoup the grant of RSUs or amount paid under this grant subject to clawback pursuant to such law, government regulation, stock exchange listing requirement or Company policy. Such cooperation and assistance shall include, but is not limited to, executing, completing and submitting any documentation necessary to recover or recoup this grant or amounts paid hereunder from a Grantees’ accounts, or pending or future compensation awards that may be made to Grantee.

14.     Ownership and Protection of Intellectual Property and Confidential Information.

(A)    All information, ideas, concepts, improvements, innovations, developments, methods, processes, designs, analyses, drawings, reports, discoveries, and inventions, whether patentable or not or reduced to practice, which are conceived, made, developed or acquired by Grantee, individually or in conjunction with others, during Grantee’s employment by the Company or any of its Subsidiaries, both before and after the Date of Grant (whether during business hours or otherwise and whether on the Company’s premises or otherwise) which relate to the business, products or services of the Company or its Subsidiaries (including, without limitation, all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts within the customer’s organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names, marks, and any copyrightable work, trade mark, trade secret or other intellectual property rights (whether or not composing confidential information), and all writings or materials of any type embodying any of such items (collectively, “Work Product”), shall be the sole and exclusive property of the Company or a Subsidiary, as the case may be, and shall be treated as “work for hire.” It is recognized that the Grantee is an experienced executive in the business of the Company and its Subsidiaries and through several decades of prior work in the industry acquired and retains knowledge, contacts, and information which are not bound by this Section 14.

(B)    Grantee shall promptly and fully disclose all Work Product to the Company and shall cooperate and perform all actions reasonably requested by the Company (whether during or after the term of employment) to establish, confirm and protect the Company’s and/or its Subsidiaries’ right, title and interest in such Work Product. Without limiting the generality of the foregoing, the Grantee agrees to assist the Company, at the Company’s expense, to secure the Company’s and its Subsidiaries’ rights in the Work Product in any and all countries, including the execution by the Grantee of all applications and all other instruments and documents which the Company and/or its Subsidiaries shall deem necessary in order to apply for and obtain rights in such Work Product and in order to assign and convey to the Company and/or its Subsidiaries the sole and exclusive right, title and interest in and to such Work Product. If the Company is unable because of Grantee’s mental or physical incapacity or for any other reason (including Grantee’s refusal to do so after request therefor is made by the Company) to secure Grantee’s signature to apply for or to pursue any application for any United States or foreign patents or copyright registrations covering Work Product belonging to or assigned to the Company and/or its Subsidiaries pursuant to Section 14(A) above, then the Grantee by this Agreement irrevocably designates and appoints the Company and its duly authorized officers





and agents as Grantee’s agent and attorney-in-fact to act for and in Grantee’s behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents or copyright registrations thereon with the same legal force and effect as if executed by Grantee. The Grantee agrees not to apply for or pursue any application for any United States or foreign patents or copyright registrations covering any Work Product other than pursuant to this Section 14 in circumstances where such patents or copyright registrations are or have been or are required to be assigned to the Company or any of its Subsidiaries.

(C)    Grantee acknowledges that the businesses of the Company and its Subsidiaries are highly competitive and that their strategies, methods, books, records, and documents, their technical information concerning their products, equipment, services, and processes, procurement procedures and pricing techniques, the names of and other information (such as credit and financial data) concerning their former, present or prospective customers and business affiliates, all comprise confidential business information and trade secrets which are valuable, special, and unique assets which the Company and/or its Subsidiaries use in their business to obtain a competitive advantage over their competitors. The Grantee further acknowledges that protection of such confidential business information and trade secrets against unauthorized disclosure and use is of critical importance to the Company and its Subsidiaries in maintaining their competitive position. The Grantee acknowledges that by reason of the Grantee’s duties to, and association with, the Company and its Subsidiaries, the Grantee has had and will have access to, and has and will become informed of, confidential business information which is a competitive asset of the Company and its Subsidiaries. The Grantee hereby agrees that the Grantee will not, at any time during or after his or her employment by the Company or its Subsidiaries, make any unauthorized disclosure of any confidential business information or trade secrets of the Company or its Subsidiaries, or make any use thereof, except in the carrying out of his or her employment responsibilities hereunder. The Grantee shall take all necessary and appropriate steps to safeguard confidential business information and protect it against disclosure, misappropriation, misuse, loss and theft. Confidential business information shall not include information in the public domain (but only if the same becomes part of the public domain through a means other than a disclosure prohibited hereunder). The above notwithstanding, a disclosure shall not be unauthorized if (i) it is required by law or by a court of competent jurisdiction or (ii) it is in connection with any judicial, arbitration, dispute resolution or other legal proceeding in which Grantee’s legal rights and obligations as an employee or under this Agreement are at issue; provided, however, that the Grantee shall, to the extent practicable and lawful in any such events, give prior notice to the Company of his or her intent to disclose any such confidential business information in such context so as to allow the Company or its Subsidiaries an opportunity (which the Grantee will not oppose) to obtain such protective orders or similar relief with respect thereto as may be deemed appropriate. Any information not specifically related to the Company and its Subsidiaries would not be considered confidential to the Company and its Subsidiaries.

(D) All written materials, records, and other documents made by, or coming into the possession of, the Grantee during the period of Grantee’s employment by the Company or its Subsidiaries which contain or disclose confidential business information or trade secrets of the Company or its Subsidiaries, or which relate to Grantee’s Work Product described in Section 14(A) above, shall be and remain the property of the Company, or its Subsidiaries, as the case may be. Upon termination of Grantee’s employment, for any reason, the Grantee promptly shall deliver the same, and all copies thereof, to the Company.

(E) Nothing in this Agreement shall prohibit or restrict the Grantee 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. The Grantee does not need the prior authorization of the Company to engage in conduct protected by this Section 14, and the Grantee does not need to notify the Company that the Grantee 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.

15.     Covenant Not to Compete .

(A)    Grantee hereby agrees that during his or her employment with the Company or any of its Subsidiaries and for a period of two years following Grantee’s termination of employment with the Company and its Subsidiaries (the “Non-Compete Period”), he or she will not, in association with or as an officer, principal, manager, member, advisor, agent, partner, director, material shareholder, employee or consultant of any corporation (or sub-unit, in the case of a





diversified business) or other enterprise, entity or association, work on the acquisition or development of, or engage in any line of business, property or project which is, directly or indirectly, competitive with any business that the Company or any of its Subsidiaries engages in or is planning to engage in during the term of Grantee’s employment with the Company or any Subsidiary, including but not limited to, any business engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers (the “Business”). Such restriction shall cover Grantee’s activities anywhere in the contiguous United States.

(B)    Grantee agrees that during the Non-Compete Period and for a one (1) year period thereafter, the Grantee will not, directly or indirectly, on behalf of Grantee or any other person or entity, solicit, induce or attempt to solicit or induce any person who is or was employed by, or in a contractor relationship with, the Company or its Subsidiaries within the one (1) year period immediately preceding the date of solicitation or inducement, to (i) interfere with the activities or businesses of the Company or any of its Subsidiaries, (ii) discontinue employment or contractor status with the Company or any of its Subsidiaries, or (iii) interfere with, alter or modify their employment or contractor relationship with the Company or any of its Subsidiaries. Grantee also agrees that during the Non-Compete Period and for a one (1) year period thereafter, the Grantee will not, on behalf of Grantee or any other person or entity, hire, attempt to hire, assist in any way with the hiring of, or otherwise employ or engage, or attempt to employ or engage, any person who is or was employed by or in a contractor relationship with the Company or its Subsidiaries within the one (1) year period immediately preceding the date of such hiring, assistance with hiring, employment or engagement.

(C)    Grantee agrees that during the Non-Compete Period, the Grantee will not, directly or indirectly, influence or attempt to influence any customers, distributors or suppliers of the Company or any of its Subsidiaries to divert their business to any competitor of the Company or any of its Subsidiaries or in any way interfere with the relationship between any such customer, distributor or supplier and the Company and/or any of its Subsidiaries (including, without limitation, making any negative statements or communications about the Company and its Subsidiaries). During such Non-Compete Period, the Grantee will not, directly or indirectly, acquire or attempt to acquire any business in the contiguous United States to which the Company or any of its Subsidiaries, prior to the Grantee’s termination of employment with the Company and its Subsidiaries, has made an acquisition proposal relating to the possible acquisition of such business by the Company or any of its Subsidiaries, or has planned, discussed or contemplated making such an acquisition proposal (such business, an “Acquisition Target”), or take any action to induce or attempt to induce any Acquisition Target to consummate any acquisition, investment or other similar transaction with any person other than the Company or any of its Subsidiaries.

(D)    Grantee understands that the provisions of Section 14 and Section 15 hereof may limit his or her ability to earn a livelihood in a business in which he or she is involved, but as a member of the management group of the Company and its Subsidiaries he or she nevertheless agrees and hereby acknowledges that: (i) such provisions do not impose a greater restraint than is necessary to protect the goodwill or other business interests of the Company and any of its Subsidiaries; (ii) such provisions contain reasonable limitations as to time, scope of activity, and geographical area to be restrained; and (iii) the consideration provided hereunder is sufficient to compensate the Grantee for the restrictions contained in Section 14 and Section 15 hereof. In consideration of the foregoing and in light of the Grantee’s education, skills and abilities, the Grantee agrees that he or she will not assert that, and it should not be considered that, any provisions of Section 14 and Section 15 otherwise are void, voidable or unenforceable or should be voided or held unenforceable.

(E)    If, at the time of enforcement of Section 14 or Section 15 of this Agreement, a court shall hold that the duration, scope, or area restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed and directed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. The Grantee acknowledges that he or she is a member of the Company’s and its Subsidiaries’ management group with access to the Company’s and its Subsidiaries’ confidential business information and his or her services are unique to the Company and its Subsidiaries. The Grantee therefore agrees that the remedy at law for any breach by him or her of any of the covenants and agreements set forth in Section 14 or Section 15 hereof will be inadequate and that in the event of any such breach, the Company and its Subsidiaries may, in addition to the other remedies which may be available to them at law, apply to any court of competent jurisdiction to obtain specific performance and/or injunctive relief prohibiting the Grantee (together with all those persons associated with him or her) from the breach of such covenants and agreements and to enforce, or prevent any violations of, the provisions of this Agreement. In addition, in the event of a breach or violation by the Grantee of this Section 15, the Non-Compete Period set forth herein shall be tolled until such breach or violation has been cured.

(F) Each of the covenants of Section 14 and Section 15 hereof are given by the Grantee as part of the consideration for the RSUs granted hereunder and as an inducement to the Company to grant such RSUs and accept the obligations thereunder.






16.     Data Privacy. Grantee explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of Grantee’s personal data as described in this document by and among, as applicable, Grantee’s employer (“Employer”) and the Company and its Subsidiaries, for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan. Grantee understands that Employer and the Company and its Subsidiaries hold (but only process or transfer to the extent required or permitted by local law) the following personal information about Grantee: Grantee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of Common Stock or directorships held in the Company, details of all RSUs or any other entitlement to shares of Common Stock awarded, canceled, exercised, vested, unvested or outstanding in Grantee’s favor, for the purpose of implementing, administering and managing the Plan (collectively, the “Data”). Grantee understands that Data may be transferred to third parties assisting in the implementation, administration and management of the Plan, including Fidelity Stock Plan Service LLC, that these recipients may be located in Grantee’s country or elsewhere (including countries outside of the European Union or the European Economic Area, such as the United States of America), and that the recipient’s country may have different data privacy laws and protections than those that apply in Grantee’s country. Grantee understands that Grantee may request a list with the names and addresses of any potential recipients of the Data by contacting Grantee’s local human resources representative. Grantee authorizes these recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing Grantee’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom Grantee may elect to deposit any shares acquired upon vesting or earning of the RSUs. Grantee understands that Data will be held only as long as is necessary to implement, administer and manage Grantee’s participation in the Plan and in accordance with local law. Grantee understands that Grantee may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing Grantee’s local human resources representative. Grantee understands, however, that refusing or withdrawing Grantee’s consent may affect Grantee’s ability to participate in the Plan. For more information on the consequences of Grantee’s refusal to consent or withdrawal of consent, Grantee hereby understands that Grantee may contact his or her local human resources representative.

17.     Electronic Delivery. The Company may, in its sole discretion, deliver any documents related to the RSUs and Grantee’s participation in the Plan, or future awards that may be granted under the Plan, by electronic means or request Grantee’s consent to participate in the Plan by electronic means. Grantee hereby consents to receive such documents by electronic delivery and, if requested, agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

18.     Compliance with Section 409A of the Code. The award covered by this Agreement is intended to be excepted from coverage under, or compliant with, the provisions of Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and other guidance promulgated thereunder (“Section 409A”). Notwithstanding the foregoing or any other provision of this Agreement or the Plan to the contrary, if the award is subject to the provisions of Section 409A (and not exempted therefrom), the provisions of this Agreement and the Plan shall be administered, interpreted and construed in a manner necessary to comply with Section 409A (or disregarded to the extent such provision cannot be so administered, interpreted or construed). If any payments or benefits hereunder may be deemed to constitute nonconforming deferred compensation subject to taxation under the provisions of Section 409A, Grantee agrees that the Company may, without the consent of Grantee, modify the Agreement to the extent and in the manner the Company deems necessary or advisable or take such other action or actions, including an amendment or action with retroactive effect, that the Company deems appropriate in order either to preclude any such payment or benefit from being deemed “deferred compensation” within the meaning of Section 409A or to provide such payments or benefits in a manner that complies with the provisions of Section 409A such that they will not be subject to the imposition of taxes and/or interest thereunder. If, at the time of Grantee’s separation from service (within the meaning of Section 409A of the Code), (A) Grantee shall be a specified employee (within the meaning of Section 409A of the Code and using the identification methodology selected by the Company from time to time) and (B) the Company shall make a good faith determination that an amount payable hereunder constitutes deferred compensation (within the meaning of Section 409A of the Code) the settlement of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A of the Code in order to avoid taxes or penalties under Section 409A of the Code, then the Company shall not settle such amount on the otherwise scheduled settlement date but shall instead settle it, without interest, on the first business day of the month after such six-month period. Notwithstanding the foregoing, the Company makes no representations and/or warranties with respect to compliance with Section 409A, and Grantee recognizes and acknowledges that Section 409A could potentially impose upon Grantee certain taxes and/or interest charges for which Participant is and shall remain solely responsible.






19.     Construction . This Agreement is made and granted pursuant to the Plan and is in all respects limited by and subject to the terms of the Plan. In the event of any inconsistency between the Plan and this Agreement, the terms of the Plan shall control.

20.     Compliance with Laws and Regulations . The issuance of shares of Common Stock pursuant to this Agreement shall be subject to compliance by Grantee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which Company’s stock may be listed for trading at the time of such issuance.

21.     Binding Effect; No Third Party Beneficiaries . This Agreement shall be binding upon and inure to the benefit of the Company and Grantee and their respective heirs, representatives, successors and permitted assigns. This Agreement shall not confer any rights or remedies upon any person other than the Company and Grantee and their respective heirs, representatives, successors and permitted assigns.

22.     Notice . Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Company at its principal corporate office. Except to the extent electronic notice is authorized hereunder, any notice required to be given or delivered to Grantee shall be in writing and addressed to Grantee at Grantee’s most recent address set forth in the Company’s records. All notices shall be deemed effective upon personal delivery (or electronic delivery to the extent authorized hereunder) or upon deposit in the U.S. mail, postage, prepaid and properly addressed to the party to be notified.











































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

Year 1 EPS
$[____]
Year 2 EPS
$[____]
Year 3 EPS
$[____]
Cumulative EPS
$[____]


Cumulative EPS = $[_____]




































Exhibit B

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

Example :

Year 1 RONAE
[_____]%
Year 2 RONAE
[_____]%
Year 3 RONAE
[_____]%
Average Annual RONAE
[_____]%


Average Annual RONAE = [_____]%






EXHIBIT 10(w)

THE SHERWIN-WILLIAMS COMPANY

2007 Executive Annual Performance Bonus Plan
(Amended and Restated as of April 19, 2017)
1.
Purpose . The purpose of The Sherwin-Williams Company 2007 Executive Annual Performance Bonus Plan (Amended and Restated Effective April 19, 2017) (formerly known as The Sherwin-Williams Company 2007 Executive Performance Bonus Plan) (the “Plan”) is to attract and retain executives and other key employees for The Sherwin-Williams Company, an Ohio corporation (the “Company”), and its Subsidiaries (as hereinafter defined) and to incent such persons for superior performance in producing results that increase shareholder value, as well as to encourage individual and team behavior that helps the Company achieve both short- and long-term corporate objectives. This Plan is intended to provide performance-based compensation to certain individuals as further described herein that is fully deductible by the Company under federal tax law and is to be interpreted and operated accordingly.

2.
Definitions.
(a)
“162(m) Participant” means an eligible individual who is, or who the Committee determines is, likely to become a “Covered Employee” within the meaning of Section 162(m) with respect to an Award of Performance-Based Compensation made under this Plan, in each case, as designated by the Committee.

(b)
“Award” means, with respect to each Participant, the award determined pursuant to Section 8 for a Plan Year. Each Award is determined by a Payout Formula(e) for the applicable Plan Year, subject to the Committee’s authority to adjust the Award otherwise payable.

(c)
“Base Salary” means, as to any Plan Year, the Participant’s actual salary paid during the Plan Year. Such Base Salary shall be determined before both (i) deductions for taxes or benefits, and (ii) deferrals of compensation pursuant to Company-sponsored plans.

(d)
“Board” means the Board of Directors of the Company.

(e)
“Code” means the Internal Revenue Code of 1986, as amended from time to time.

(f)
“Committee” means the Compensation and Management Development Committee of the Board, or a sub-committee of that Committee, which shall, with respect to payments hereunder intended to qualify as Performance-Based Compensation, consist solely of two or more members of the Board who are not employees of the Company and who otherwise qualify as “outside directors” within the meaning of Section 162(m).

(g)
“Determination Date” means the date which is 90 days after the commencement of the Plan Year (or such earlier or later date as may be required or permitted under applicable regulations under Section 162(m)).

(h)
“Maximum Award” means, as to any Participant for any particular Plan Year for any Performance-Based Compensation, $7.5 Million and 00/100 Dollars ($7,500,000.00) paid under this Plan for that year.

(i)
“Participant” means an eligible executive or other key employee of the Company or a Subsidiary participating in this Plan for a particular Plan Year as determined pursuant to Section 4.

(j)
“Payout Formula(e)” means as to any Plan Year, the formula(e), or payout matrix or matrices established by the Committee pursuant to Section 7 in order to determine the Awards (if any) to be paid to Participants. The formula(e), matrix or matrices may differ from Participant to Participant.

(k)
“Performance-Based Compensation” means compensation that is intended to qualify as “performance-based compensation” within the meaning of Section 162(m). Effective for tax years after 2017, the performance-based compensation exception under Section 162(m) was repealed; provided, however that notwithstanding





such repeal, the performance-based compensation exception under Section 162(m) is subject to a transition rule for remuneration that is payable pursuant to a written binding contract that was in effect on November 2, 2017 and is not materially modified thereafter. For the avoidance of doubt, it is the intent of the Company to preserve Performance-Based Compensation that is and/or may be payable under this Plan to the maximum extent permissible by law.

(l)
“Performance Goals” means the goal(s) (or combined goal(s)) determined by the Committee (in its discretion) to be applicable to a Participant with respect to an Award. As determined by the Committee, the Performance Goals applicable to an Award may be described in terms of Company-wide objectives and/or objectives that are related to the performance of an individual Participant or of a Subsidiary, division, department or function within the Company or Subsidiary in which the Participant is employed. Performance Goals may differ from Participant to Participant and from Award to Award.

(m)
“Plan Year” means the Company’s fiscal year.

(n)
“Section 162(m)” means Section 162(m) of the Code, or any successor to Section 162(m), as that Section may be interpreted from time to time by the Internal Revenue Service, whether by regulations, notice or otherwise.

(o)
“Shareholder Approved Performance Measurement(s)” means Performance Goal(s) determined by the Committee that are based upon measurements with respect to any of the following: appreciation in value of shares; shareholder return (including, without limitation, total shareholder return and absolute shareholder return); earnings per share; book value per share; operating income; net income; earnings (including, without limitation, pretax earnings, retained earnings, earnings before interest and taxes, and earnings before interest, taxes, depreciation and amortization); pro forma net income; return on equity; return on assets (including, without limitation, designated assets); return on net assets employed, return on capital; return on sales; sales; sales per employee; revenues; expenses; cash flow (including, without limitation, operating cash flow and free cash flow); cash flow return on investment; operating profit margin or net profit margin; cost of capital; total debt to capitalization; gallon growth; interest coverage; inventory management; profit after tax; reduction of fixed costs; working capital; return on equity; enterprise value; any of the above criteria as compared to the performance of a published or a special index deemed applicable by the Committee, including, but not limited to, the Standard & Poor’s 500 Stock Index; or any other objective goals established by the Committee. Where more specific metrics are listed within the categories herein, they are intended to be illustrative and are not to be construed as limitations on the more generic metrics.

Prior to the repeal of the exception relating to performance-based compensation under Section 162(m), Performance Goals for Performance-Based Compensation were based upon Shareholder Approved Performance Measurements in order to comply with the requirements of the qualified performance-based compensation exception under Section 162(m). For the avoidance of doubt, awards that are not intended to be Performance-Based Compensation, including awards to non-162(m) Participants and awards to 162(m) Participants established after January 1, 2018 that are not tax deductible, may be based on Performance Goals that are Shareholder Approved Performance Measurements.
To the extent consistent with Section 162(m), on or prior to the Determination Date, the Committee may determine that certain adjustments to Performance-Based Compensation shall apply, in whole or in part, in such manner as specified by the Committee, to exclude or include the effect of specified events that occur during a Plan Year, including the following: the impairment of tangible or intangible assets; asset write-downs; litigation or claim judgments or settlements; acquisitions or divestitures; gains or losses on the sale of assets; severance, contract termination and other costs relating to certain business activities; gains or losses from the disposition of businesses or assets or from the early extinguishment of debt; foreign exchange gains and/or losses; changes in tax law, accounting principles, accounting estimates or other such laws or provisions affecting reported results; changes in regulations that directly impact the business; the effect of any statements issued by the Financial Accounting Standards Board or its committees; business combinations, reorganizations and/or restructuring programs, including, but not limited to, reductions in force and early retirement incentives; currency fluctuations; any unusual, infrequent or non-recurring items, including, but not limited to, such items described in management’s discussion and analysis of financial condition and results of operations or the financial statements and/or notes thereto appearing in the Company’s annual report for the applicable period; and expenses related to goodwill and other intangible assets, stock offerings, stock repurchases and loan loss provisions.






Shareholder Approved Performance Measurement(s) applicable to an Award may be described in terms of Company-wide objectives or objectives that are related to the performance of an individual Participant or of a Subsidiary, division, department or function within the Company or Subsidiary in which the Participant is employed.  Shareholder Approved Performance Measurement(s) may also differ from Participant to Participant and from Award to Award.  Shareholder Approved Performance Measurement(s) relating to Performance-Based Compensation must be substantially uncertain at the time they are established by the Committee.
(p)
“Subsidiary” means a corporation, partnership, joint venture, unincorporated association or other entity in which the Company has a direct or indirect ownership or other equity interest.

(q)
“Target Award” means the target award payable under this Plan to a Participant for a Plan Year, expressed as a percentage of his or her Base Salary or a specific dollar amount, as may be determined by the Committee in accordance with Section 6.

3.
Administration.

(a)
The Committee shall be responsible for the general administration and interpretation of this Plan and for carrying out its provisions. The Committee may adopt, amend and rescind such rules and regulations as it deems necessary, desirable or appropriate in administering this Plan, and the Committee may act at a meeting or in a written action without a meeting.

(b)
Subject to the requirements for qualifying compensation as Performance-Based Compensation:

(i)
the Committee may delegate specific tasks, responsibilities and authority to the Company’s Chief Executive Officer, the Company’s and/or its Subsidiaries’ employees or others as it deems appropriate in accordance with this Plan and applicable law and regulations; and, in connection therewith, all references to the Committee in this Plan shall be deemed references to the Company’s Chief Executive Officer or such employee(s) as it relates to those aspects of this Plan that have been so delegated; and

(ii)
except as the Committee may otherwise delegate to Company and Subsidiary employees, the Committee shall, based on recommendations by the Chief Executive Officer:

1.
select from the employees of the Company or a Subsidiary, those employees who shall be Participants;

2.
make Awards in the forms and amounts as the Committee shall determine;

3.
impose such limitations, restrictions and conditions upon such Awards as the Committee shall deem appropriate;

4.
interpret this Plan and adopt, amend and rescind administrative guidelines and other rules and regulations relating to this Plan;

5.
correct any defect or omission or reconcile any inconsistency in this Plan or in any Award granted hereunder; and

6.
make all other necessary determinations and take all other actions as the Committee deems necessary or advisable for the implementation and administration of this Plan.

(c)
Any rule or decision by the Committee (including its delegates) that is not inconsistent with the provisions of this Plan shall be final, conclusive and binding on all persons, and shall be given the maximum deference permitted by law.

4.
Eligibility. The employees eligible to participate in this Plan for a given Plan Year shall be executives and other key employees of the Company or a Subsidiary as are designated by the Committee; provided, however that such





Committee designation shall take into consideration recommendations made by the Chief Executive Officer. No person shall be automatically entitled to participate in this Plan. Subject to Section 9, an employee who becomes eligible after the beginning of a Plan Year may participate in this Plan for that Plan Year.

5.
Performance Goal Determination.

(a)
Subject to Section 9, the Chief Executive Officer shall recommend, subject to the approval of the Committee, the process for measuring performance and results. Such recommendation may include, but shall not be limited to: (i) the organizational level of performance measurement, e.g. corporate, business unit, division, product line, function, individual or another level, either singly or in combination; (ii) specific measures of performance for each organizational level; and (iii) specific Performance Goals for each organizational level.

(b)
If the Committee, after consulting with the Chief Executive Officer, determines that external changes or other unanticipated business conditions make it appropriate to modify or adjust Performance Goals, in its sole discretion, then adjustments may be made to the Performance Goals (either up or down).

The Committee (including its delegates), in its sole discretion, may also establish such additional restrictions or conditions that must be satisfied as conditions precedent to the payment of all or a portion of any Awards. Such additional restrictions or conditions need not be performance-based and may include, among other things, the receipt by a Participant of a specified annual performance rating, the continued employment by the Participant and/or the achievement of specified Performance Goals by the Company, business unit or Participant. Furthermore, and notwithstanding any provision of this Plan to the contrary, the Committee (including its delegates), in its sole discretion, may retain the discretion to increase or reduce the amount of any Award to a Participant if it concludes that such increase or reduction is necessary or appropriate based upon: (i) an evaluation of such Participant’s performance; (ii) comparisons with compensation received by other similarly situated individuals working within the Company’s industry or peer group; (iii) the Company’s financial results and conditions; or (iv) such other factors or conditions that the Committee (and its delegates) deems relevant; provided, however, the Committee shall not use its discretionary authority to increase any Award of Performance-Based Compensation to the extent prohibited under Section 162(m).

Notwithstanding the foregoing, for Performance-Based Compensation, the Shareholder Approved Performance Measurement(s) shall be set forth in writing prior to the Determination Date and such Performance Measurement(s), as specified (including with related adjustments) prior to the Determination Date, shall not be subject to modification thereafter.
6.
Target Award Determination. Subject to Section 9, the Chief Executive Officer may recommend, subject to the approval of the Committee in its sole discretion, each Participant’s Target Award.

7.
Determination of Payout Formula(e). The Committee, in its sole discretion, shall establish a Payout Formula(e) for purposes of determining the Award (if any) payable to each Participant.

8.
Determination of Awards; Award Payment.

(a)
Determination and Certification . After the end of each Plan Year, and prior to March 15 of the immediately following calendar year, the Committee shall determine and certify in writing the extent to which any Shareholder Approved Performance Measurement(s) and Performance Goals applicable to each Participant for the Plan Year were achieved or exceeded and the resulting amount of the Award (if any) payable to each Participant pursuant to the Payout Formula(e), including any application of the Committee’s discretionary authority described herein. For purposes of this provision, and for so long as the Code permits, the minutes of the Committee meeting in which the certification is made may be treated as written certification.

(b)
Adjustment of Determination . Except as provided in Section 9, if Performance Goals are not achieved, the Chief Executive Officer may recommend, subject to approval of the Committee, payment of awards on a discretionary basis.

(c)
Right to Receive Payment . Participants must be actively employed by the Company or a Subsidiary on the last day of the Plan Year to receive an Award for that Plan Year; provided, however, that, subject to Section 9, a Participant who is not employed on the last day of the Plan Year as a result of the Participant’s death,





disability, retirement, a reduction in force (in the case of disability, retirement and a reduction in force, as determined in the sole discretion of the Committee) directly affecting the Participant or the Participant’s transfer to a non-included Subsidiary during the Plan Year, shall nonetheless be eligible to receive the Award, which Award shall be determined solely with respect to amounts of Base Salary earned by the Participant during the period of the Plan Year in which he/she was a Participant. Each Award under this Plan shall be paid solely from the general assets of the Company. Nothing in this Plan shall be construed to create a trust or to establish or evidence any Participant’s claim of any right to payment of an Award other than as an unsecured general creditor with respect to any payment to which he or she may be entitled.

(d)
Form of Payments . Payments of Awards, to the extent earned under the terms of this Plan, shall be made by the Company to the Participants in the form of cash.

(e)
Timing of Payments . The Company shall pay any amounts payable to Participants as soon as is practicable following the determination and written certification of the Award for a Plan Year, but in no event later than two and one-half months after the end of the applicable Plan Year.

(f)
Deferral of Awards . If applicable, a Participant may defer any or all of an amount otherwise payable in connection with an Award in accordance with the provisions of a deferred compensation plan maintained by the Company, if any, provided that: (i) the Participant makes such election by delivering to the Company written notice of such election, at such time and in such form as the Committee may from time to time prescribe in accordance with the deferral requirements set forth in Section 409A; (ii) such election is irrevocable; (iii) such deferred payment will be made in accordance with the provisions of such deferred compensation plan; and (iv) the terms of the deferred compensation plan and the election to defer under this Plan comply with Section 409A.

9.
Additional Restrictions with Respect to Performance-Based Compensation.

(a)
Notwithstanding anything contained herein to the contrary, the provisions of this Section 9 shall only apply to 162(m) Participants and only to Shareholder Approved Performance Measurement(s) that are intended to qualify a 162(m) Participant’s Award as Performance-Based Compensation that was available under Section 162(m) prior to the repeal of the performance-based compensation exception for tax years after 2017. In the event of any inconsistencies between this Section 9 and any other provisions of this Plan, the provisions of this Section 9 shall control.

(b)
A 162(m) Participant who becomes eligible after the beginning of a Plan Year may participate in this Plan beginning with the succeeding Plan Year, unless such Participant becomes eligible and is approved by the Committee for participation during the first 90 days of the current Plan Year (or such longer or shorter period as may be permitted or required by the regulations promulgated under Section 162(m)).

(c)
The Committee shall determine the Shareholder Approved Performance Measurement(s) and the portion of the Payout Formula(e) that establishes the maximum amount that would be payable to each 162(m) Participant upon satisfaction of the Shareholder Approved Performance Measurement(s) for the Plan Year in writing no later than 90 days after the beginning of the Plan Year (or such longer or shorter period as may be permitted or required by the regulations promulgated under Section 162(m)).

(d)
Once established, Shareholder Approved Performance Measurement(s) that are intended to qualify the Award as Performance-Based Compensation shall not be changed during the Plan Year, except as approved by the Committee in accordance with Section 2(o). 162(m) Participants shall not receive any payout pursuant to this Section 9 if the Shareholder Approved Performance Measurement(s) intended to qualify the Award as Performance-Based Compensation established by the Committee under the Payout Formula(e) are not met.

(e)
The Committee may not increase the amount payable under the Payout Formula(e) (or portion thereof) that is established to qualify the Award as Performance-Based Compensation, but retains the discretionary authority to reduce such amount or Award through the application of an additional Payout Formula(e) or otherwise. The Committee may establish factors to take into consideration in implementing its discretion, including, but not limited to, corporate, business unit and individual objectives, and other factors.

(f)
Notwithstanding anything to the contrary in this Section 9, in no event shall a Participant’s Award for any Plan Year exceed the Maximum Award.






10.
Amendment and Termination . The Committee may amend, modify, suspend or terminate this Plan, in whole or in part, at any time; provided, however, that no amendment, modification, suspension or termination shall be made which would materially impair any payments to Participants made prior to such amendment, modification, suspension or termination, unless the Committee has made a determination that such amendment or modification is in the best interests of all persons to whom Awards have theretofore been granted; provided further, however, that in no event with respect to 162(m) Participants, may such amendment or modification cause compensation that is, or may become, payable hereunder to fail to qualify as Performance-Based Compensation. If necessary under applicable law, Plan amendments shall be subject to shareholder approval. At no time before the actual payment of Awards to Participants under this Plan shall any Participant accrue any vested interest or right whatsoever under this Plan except as otherwise stated in this Plan.

11.
Withholding. Payments pursuant to this Plan shall be subject to all applicable federal, state, local and other tax and withholding requirements.

12.
At-Will Employment. No statement in this Plan should be construed to grant any employee an employment contract of fixed duration or any other contractual rights, nor should this Plan be interpreted as creating an implied or an expressed contract of employment or any other contractual rights between the Company or a Subsidiary and its employees. The employment relationship between the Company or a Subsidiary and its employees is terminable at-will. This means that an employee or the Company or a Subsidiary may terminate the employment relationship at any time and for any reason or no reason.

13.
Successors. All obligations of the Company under this Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business or assets of the Company.

14.
Nonassignment. The rights of a Participant under this Plan shall not be assignable or transferable by the Participant except by will or the laws of intestacy.

15.
Governing Law. This Plan shall be governed by the laws of the State of Ohio, without giving effect to its conflict of law provisions.

16.
Section 409A. The benefits provided under this Plan are intended to be excepted from coverage under Section 409A of the Code and the regulations promulgated thereunder (“Section 409A”) and shall be administered and construed accordingly. Notwithstanding any provision of this Plan to the contrary, (a) if any benefit provided under this Plan is subject to the provisions of Section 409A (and not excepted therefrom), the provisions of this Plan shall be administered, interpreted and construed in a manner necessary to comply with Section 409A (or disregarded to the extent such provision cannot be so administered, interpreted or construed), and (b) the Company shall be permitted at any time to make any amendment necessary or desirable to further the intent that this Plan be excepted from coverage under Section 409A or to comply with Section 409A (which amendment may be retroactive to the extent permitted by Section 409A and may be made by the Company without the consent of the Participant).

17.
Recapture Provisions. An Award (or any part thereof) may provide for the cancellation or forfeiture of an Award or the forfeiture and repayment to the Company of any gain related to an Award, or other provisions intended to have a similar effect, upon such terms and conditions as may be determined by the Board in accordance with the Company’s Executive Adjustment and Recapture Policy, as may be amended from time to time, any successor policy or otherwise, including as required by the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or other applicable law, regulation or stock exchange listing requirement, as may be in effect from time to time, and which may operate to create additional rights for the Company with respect to Awards and recovery of amounts relating thereto. By accepting Awards under this Plan, Participants agree and acknowledge that they are obligated to cooperate with, and provide any and all assistance necessary to, the Company to recover or recoup any Award or amount paid under this Plan subject to clawback pursuant to such law, government regulation, stock exchange listing requirement or Company policy. Such cooperation and assistance shall include, but is not limited to, executing, completing and submitting any documentation necessary to recover or recoup any Award or amounts paid under this Plan from a Participant’s accounts, or pending or future compensation or Awards.

18.
Effective Date. This Plan was last approved by the Company’s shareholders on April 19, 2017, and was further amended on February 13, 2018. Notwithstanding the foregoing, or anything else contained herein to the contrary, with respect to any compensation to be paid under the Plan with respect to a written binding contract that was in effect on





November 2, 2017, all terms and conditions of the payment of any such compensation shall be governed by the terms and conditions of this Plan and any underlying documents that combined to constitute the applicable written binding contract relating to such compensation that were in effect on November 2, 2017.



Exhibit 13
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FINANCIAL PERFORMANCE

G259918G99K04A02A01A05.JPG
 
FINANCIAL TABLE OF CONTENTS
 
Financial Summary
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Reports of Management and the Independent Registered Public Accounting Firm
 
 
Consolidated Financial Statements and Notes
 
 
Cautionary Statement Regarding Forward-Looking Information
 
 
Shareholder Information
 
 
Corporate Officers and Operating Management

17


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

 
2017
 
2016
 
2015
 
2014
 
2013
Operations
 
 
 
 
 
 
 
 
 
Net sales (1)
$
14,984

 
$
11,856

 
$
11,339

 
$
11,130

 
$
10,186

Cost of goods sold
8,203

 
5,933

 
5,780

 
5,965

 
5,569

Selling, general and administrative expenses
4,785

 
4,159

 
3,914

 
3,823

 
3,468

Amortization
207

 
26

 
28

 
30

 
29

Interest expense
263

 
154

 
62

 
64

 
63

Income from continuing operations before income taxes (2)
1,528

 
1,595

 
1,549

 
1,258

 
1,086

Net income from continuing operations (3)
1,814

 
1,133

 
1,054

 
866

 
753

Financial Position
 
 
 
 
 
 
 
 
 
Accounts receivable - net
$
2,105

 
$
1,231

 
$
1,114

 
$
1,131

 
$
1,098

Inventories
1,801

 
1,068

 
1,019

 
1,034

 
971

Working capital - net
479

 
798

 
515

 
(115
)
 
630

Property, plant and equipment - net
1,877

 
1,096

 
1,042

 
1,021

 
1,021

Total assets
19,958

 
6,753

 
5,779

 
5,699

 
6,383

Long-term debt
9,886

 
1,211

 
1,907

 
1,116

 
1,122

Total debt
10,521

 
1,953

 
1,950

 
1,799

 
1,722

Shareholders’ equity
3,692

 
1,878

 
868

 
996

 
1,775

Per Common Share Information
 
 
 
 
 
 
 
 
 
Average shares outstanding (thousands)
92,909

 
91,839

 
92,197

 
96,190

 
100,898

Book value
$
39.33

 
$
20.20

 
$
9.41

 
$
10.52

 
$
17.72

Net income from continuing operations - diluted (4)
19.11

 
11.99

 
11.15

 
8.77

 
7.25

Cash dividends
3.40

 
3.36

 
2.68

 
2.20

 
2.00

Financial Ratios
 
 
 
 
 
 
 
 
 
Return on sales
12.1
%
 
9.6
%
 
9.3
%
 
7.8
 %
 
7.4
%
Asset turnover
0.8
x
 
1.8
x
 
2.0
x
 
2.0
x
 
1.6
x
Return on assets
9.1
%
 
16.8
%
 
18.2
%
 
15.2
 %
 
11.8
%
Return on equity (5)
96.6
%
 
130.5
%
 
105.8
%
 
48.8
 %
 
42.0
%
Dividend payout ratio (6)
28.4
%
 
30.1
%
 
30.6
%
 
30.3
 %
 
33.2
%
Total debt to capitalization
74.0
%
 
51.0
%
 
69.2
%
 
64.4
 %
 
49.2
%
Current ratio
1.1

 
1.3

 
1.2

 
1.0

 
1.2

Interest coverage (7)
6.8
x
 
11.4
x
 
26.1
x
 
20.6
x
 
18.3
x
Net working capital to sales
3.2
%
 
6.7
%
 
4.5
%
 
(1.0
)%
 
6.2
%
Effective income tax rate (8)
25.1
%
 
29.0
%
 
32.0
%
 
31.2
 %
 
30.7
%
General
 
 
 
 
 
 
 
 
 
Earnings before interest, taxes, depreciation and amortization
$
2,283

 
$
1,947

 
$
1,809

 
$
1,521

 
$
1,336

Capital expenditures
223

 
239

 
234

 
201

 
167

Total technical expenditures (see Note 1)
216

 
153

 
150

 
155

 
144

Advertising expenditures
383

 
351

 
338

 
299

 
263

Repairs and maintenance
116

 
100

 
99

 
96

 
87

Depreciation
285

 
172

 
170

 
169

 
159

Shareholders of record (total count)
6,470

 
6,787

 
6,987

 
7,250

 
7,555

Number of employees (total count)
52,695

 
42,550

 
40,706

 
39,674

 
37,633

Sales per employee (thousands of dollars)
$
284

 
$
279

 
$
279

 
$
281

 
$
271

Sales per dollar of assets
0.75

 
1.76

 
1.96

 
1.95

 
1.60

(1)  
2017 includes Valspar sales since June 1, 2017.
(2)  
2017 includes acquisition and purchase accounting adjustments of $429.5 million and contribution from Valspar operations of $115.8 million. 2016 includes acquisition-related costs of $133.6 million.
(3)  
2017 includes the following: (a) one-time income tax benefit of $668.8 million from Deferred income tax reductions (see Note 14), (b) after-tax acquisition-related costs and purchase accounting adjustments of $285.1 million, and (c) after-tax contribution from Valspar operations of $76.0 million. 2016 includes after-tax acquisition-related costs of $81.5 million.
(4)  
2017 includes the following: (a) one-time benefit of $7.04 per share from Deferred income tax reductions, (b) charge of $3.00 per share for acquisition-related costs and purchase accounting impacts, and (c) $.80 per share contribution from Valspar operations. 2016 includes a charge of $.86 per share for acquisition-related costs.
(5)  
Based on net income and shareholders' equity at beginning of year.
(6)  
Based on cash dividends per common share and prior year's diluted net income per common share.
(7)  
Ratio of income before income taxes and interest expense to interest expense.
(8)  
Based on income from continuing operations before income taxes. 2017 excludes impact of one-time income tax benefit from the Deferred income tax reductions.


18  

 
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SUMMARY
The Sherwin-Williams Company, founded in 1866, and its consolidated wholly owned subsidiaries (collectively, the Company) are engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region, Europe, Asia and Australia. On June 1, 2017, the Company completed the acquisition (Acquisition) of The Valspar Corporation (Valspar) (See Note 2) for a total purchase price of $8.939 billion , which significantly affected the existing business. As of the close of the Acquisition, our reporting segments changed to better reflect the operations of the combined Companies. 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 pages 8 through 15 of this report and Note 18 , on pages 74 through 77 of this report, for more information concerning the Reportable Segments.
The Company’s financial condition, liquidity and cash flow continued to be strong in 2017 as net operating cash topped $1.000 billion for the fifth straight year primarily due to improved operating results in The Americas Group. Net working capital decreased $319.5 million at December 31, 2017 compared to 2016 due to a significant increase in current liabilities partially offset by a significant increase in current assets primarily due to the Acquisition. Cash and cash equivalents decreased $685.6 million , while the current portion of long-term debt decreased $699.3 million resulting from the payment of 1.35% senior notes maturing in 2017. On May 16, 2017, in order to fund the Acquisition, the Company issued $6.000 billion of senior notes in a public offering. In April 2016, the Company entered into agreements for a $7.300 billion Bridge Loan and a $2.000 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 $2.000 billion on the Term Loan. As of December 31, 2017 , the Term Loan had an outstanding balance of $850.0 million at an approximate interest rate of 2.62 percent . Total debt issuance costs related to all of the facilities of $63.6 million were incurred and recorded in Long-Term Debt as a reduction to the outstanding balances. Of this amount, $8.3 million was amortized and included in Interest expense for the year ended December 31, 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 increased $575.4 million in 2017 to a cash source of $1.884 billion from a cash source of $1.309 billion in 2016 .
 
Strong net operating cash provided the funds necessary to acquire Valspar, invest in new stores, manufacturing and distribution facilities, return cash to shareholders through dividends, and pay down debt.
Consolidated net sales increased 26.4 percent in 2017 to $14.984 billion from $11.856 billion in 2016 . The increase was due primarily to higher paint sales volume in The Americas Group and the addition of Valspar sales beginning in June. Excluding sales from Valspar, net sales from core Sherwin-Williams operations increased 5.6 percent during 2017. The increase in core operations was primarily due to increased sales volumes and pricing in The Americas Group and Performance Coatings Group partially offset by lower sales volumes in the Consumer Brands Group. Consolidated gross profit as a percent of consolidated net sales decreased to 45.3 percent in 2017 compared to 50.0 percent in 2016 due primarily to the Acquisition and related inventory purchase accounting adjustments and higher raw material costs, partially offset by increased paint volume. Selling, general and administrative expenses (SG&A) increased $650.9 million in 2017 compared to 2016 and decreased as a percent of consolidated net sales to 31.9 percent in 2017 from 34.9 percent in 2016 primarily due to the impact from Valspar operations. Amortization expense increased $181.4 million to $206.8 million in 2017 versus 2016 due primarily to the Acquisition and related purchase accounting fair value adjustments.
Interest expense increased $109.4 million in 2017 versus 2016 primarily due to increased debt levels to fund the Acquisition. Excluding the income tax benefit of $668.8 million from the Tax Cuts and Jobs Act of 2017 (Tax Act) and subsidiary mergers (collectively, Deferred income tax reductions), the effective income tax rate for income from continuing operations was 25.1 percent for 2017 and 29.0 percent for 2016 . See Note 14 on pages 70 through 72 for more information on Income taxes. The Company also 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 and reduced diluted net income per common share by $.44 per share. See Notes 1 and 14 for more information. Diluted net income per common share increased 55.7 percent to $18.67 per share for 2017 from $11.99 per share in 2016 . Diluted net income per common share from continuing operations was $19.11 per share in 2017 , including a one-time benefit of $7.04 per share from the Deferred income tax reductions. Diluted net income per common share for 2017 was decreased by charges of $3.00 per share from Acquisition costs, including inventory purchase accounting adjustments and increased amortization of intangible assets. Valspar operations increased Diluted net income per common share by $.80 per share for 2017 , including a $.92 per share charge from interest expense on new debt. Diluted net income per common share for

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2016 was decreased by charges of $.86 per share from Acquisition costs. Currency translation rate changes did not have a significant impact on diluted net income per common share in 2017 .
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation and fair presentation of the consolidated financial statements, accompanying notes and related financial information included in this report are the responsibility of management. The consolidated financial statements, accompanying notes and related financial information included in this report have been prepared in accordance with U.S. generally accepted accounting principles. The consolidated financial statements contain certain amounts that were based upon management’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances. Management considered the impact of the uncertain economic environment and utilized certain outside sources of economic information when developing the basis for their estimates and assumptions. The impact of the global economic conditions on the estimates and assumptions used by management was believed to be reasonable under the circumstances. Management used assumptions based on historical results, considering the current economic trends, and other assumptions to form the basis for determining appropriate carrying values of assets and liabilities that were not readily available from other sources. Actual results could differ from those estimates. Also, materially different amounts may result under materially different conditions, materially different economic trends or from using materially different assumptions. However, management believes that any materially different amounts resulting from materially different conditions or material changes in facts or circumstances are unlikely to significantly impact the current valuation of assets and liabilities that were not readily available from other sources.
All of the significant accounting policies that were followed in the preparation of the consolidated financial statements are disclosed in Note 1 , on pages 46 through 50 , of this report. The following procedures and assumptions utilized by management directly impacted many of the reported amounts in the consolidated financial statements.
Non-Traded Investments
The Company has investments in the U.S. affordable housing and historic renovation real estate markets and certain other investments that have been identified as variable interest entities. The Company does not have the power to direct the day-to-day operations of the investments and the risk of loss is limited to the amount of contributed capital, and therefore, the Company is not considered the primary beneficiary. In accordance with the Consolidation Topic of the ASC, the
 
investments are not consolidated. For affordable housing investments entered into prior to the January 1, 2015 adoption of ASU No. 2014-01, the Company uses the effective yield method to determine the carrying value of the investments. Under the effective yield method, the initial cost of the investments is amortized to income tax expense over the period that the tax credits are recognized. For affordable housing investments entered into on or after the January 1, 2015 adoption of ASU No. 2014-01, the Company uses the proportional amortization method. Under the proportional amortization method, the initial cost of the investments is amortized to income tax expense in proportion to the tax credits and other tax benefits received. The Company has no ongoing capital commitments, loan requirements or guarantees with the general partners that would require any future cash contributions other than the contractually committed capital contributions that are disclosed in the contractual obligations table on page 27 of this report. See Note 1 , on page 46 of this report, for more information on non-traded investments.
Accounts Receivable
Accounts receivable were recorded at the time of credit sales net of provisions for sales returns and allowances. All provisions for allowances for doubtful collection of accounts are included in Selling, general and administrative expenses and were based on management’s best judgment and assessment, including an analysis of historical bad debts, a review of the aging of Accounts receivable and a review of the current creditworthiness of customers. Management recorded allowances for such accounts which were believed to be uncollectible, including amounts for the resolution of potential credit and other collection issues such as disputed invoices, customer satisfaction claims and pricing discrepancies. However, depending on how such potential issues are resolved, or if the financial condition of any of the Company’s customers were to deteriorate and their ability to make required payments became impaired, increases in these allowances may be required. At December 31, 2017 , no individual customer constituted more than 5 percent of Accounts receivable.
Inventories
Inventories were stated at the lower of cost or market with cost determined principally on the last-in, first-out (LIFO) method based on inventory quantities and costs determined during the fourth quarter. Inventory quantities were adjusted during the fourth quarter as a result of annual physical inventory counts taken at all locations. If inventories accounted for on the LIFO method are reduced on a year-over-year basis, then liquidation of certain quantities carried at costs prevailing in prior years occurs. Management recorded the best estimate of net realizable value for obsolete and discontinued inventories based on historical experience and current trends through reductions to inventory cost by recording a provision included in

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Cost of goods sold. Where management estimated that the reasonable market value was below cost or determined that future demand was lower than current inventory levels, based on historical experience, current and projected market demand, current and projected volume trends and other relevant current and projected factors associated with the current economic conditions, a reduction in inventory cost to estimated net realizable value was made. See Note 3 , on page 51 of this report, for more information regarding the impact of the LIFO inventory valuation.
Purchase Accounting, Goodwill and Intangible Assets
In accordance with the Business Combinations Topic of the ASC, the Company used the purchase method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed were recognized as Goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. In addition to using management estimates and negotiated amounts, the Company used a variety of information sources to determine the estimated fair values of acquired assets and liabilities including: third-party appraisals for the estimated value and lives of identifiable intangible assets and property, plant and equipment; third-party actuaries for the estimated obligations of defined benefit pension plans and similar benefit obligations; and legal counsel or other experts to assess the obligations associated with legal, environmental and other contingent liabilities. The business and technical judgment of management was used in determining which intangible assets have indefinite lives and in determining the useful lives of finite-lived intangible assets in accordance with the Goodwill and Other Intangibles Topic of the ASC.
As required by the Goodwill and Other Intangibles Topic of the ASC, management performs impairment tests of goodwill and indefinite-lived intangible assets on an annual basis, as well as whenever an event occurs or circumstances change that indicate impairment has more likely than not occurred. An optional qualitative assessment allows companies to skip the annual two-step quantitative test if it is not more likely than not that impairment has occurred based on monitoring key Company financial performance metrics and macroeconomic conditions. The qualitative assessment is performed when deemed appropriate.
In accordance with the Goodwill and Other Intangibles Topic of the ASC, management tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment per the Segment Reporting Topic of the ASC or one level below the operating segment (component level) as determined by the
 
availability of discrete financial information that is regularly reviewed by operating segment management or an aggregate of component levels of an operating segment having similar economic characteristics. At the time of goodwill impairment testing (if performing a quantitative assessment), management determines fair value through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved for each reporting unit. If the calculated fair value is less than the current carrying value, then impairment of the reporting unit exists. The use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing. The key assumptions used in the discounted cash flow valuation model for impairment testing include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates are set by using the Weighted Average Cost of Capital (“WACC”) methodology. The WACC methodology considers market and industry data as well as Company-specific risk factors for each reporting unit in determining the appropriate discount rates to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business. Operational management, considering industry and Company-specific historical and projected data, develops growth rates, sales projections and cash flow projections for each reporting unit. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. As an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow valuation model, the aggregate of all reporting units' fair value is reconciled to the total market capitalization of the Company.
The Company had six components, some of which are aggregated due to similar economic characteristics, to form three reporting units (also the operating segments) with goodwill as of October 1, 2017, the date of the annual impairment test. The annual impairment review performed as of October 1, 2017 did not result in any of the reporting units having impairment or deemed at risk for impairment.
In accordance with the Goodwill and Other Intangibles Topic of the ASC, management tests indefinite-lived intangible assets for impairment at the asset level, as determined by appropriate asset valuations at acquisition. Management utilizes the royalty savings method and valuation model to determine the estimated fair value for each indefinite-lived intangible asset or trademark. In this method, management estimates the royalty savings arising from the ownership of the intangible asset. The key assumptions used in estimating the royalty savings for impairment testing include discount rates, royalty rates, growth rates, sales projections and terminal value rates. Discount rates

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used are similar to the rates developed by the WACC methodology considering any differences in Company-specific risk factors between reporting units and trademarks. Royalty rates are established by management and valuation experts and periodically substantiated by valuation experts. Operational management, considering industry and Company-specific historical and projected data, develops growth rates and sales projections for each significant trademark. Terminal value rate determination follows common methodology of capturing the present value of perpetual sales estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. The royalty savings valuation methodology and calculations used in 2017 impairment testing are consistent with prior years. The annual impairment review performed as of October 1, 2017 resulted in an impairment of a trademark in The Americas Group of $2.0 million .
The discounted cash flow and royalty savings valuation methodologies require management to make certain assumptions based upon information available at the time the valuations are performed. Actual results could differ from these assumptions. Management believes the assumptions used are reflective of what a market participant would have used in calculating fair value considering the current economic conditions. See Note 4 , on pages 51 through 52 of this report, for a discussion of goodwill and intangible assets and the impairment tests performed in accordance with the Goodwill and Other Intangibles Topic of the ASC.
Property, Plant and Equipment and Impairment of Long-Lived Assets
Property, plant and equipment was stated on the basis of cost and depreciated principally on a straight-line basis using industry standards and historical experience to estimate useful lives. In accordance with the Property, Plant and Equipment Topic of the ASC, if events or changes in circumstances indicated that the carrying value of long-lived assets may not be recoverable or the useful life had changed, impairment tests were performed or the useful life was adjusted. Undiscounted future cash flows were used to calculate the recoverable value of long-lived assets to determine if such assets were impaired. Where impairment was identified, management determined fair values for assets using a discounted cash flow valuation model, incorporating discount rates commensurate with the risks involved for each group of assets. Growth models were developed using both industry and Company historical results and forecasts. If the usefulness of an asset was determined to be impaired, then management estimated a new useful life based on the period of time for projected uses of the asset. Such models and changes in useful life required management to make certain assumptions based upon information available at the time the
 
valuation or determination was performed. Actual results could differ from these assumptions. Management believes the assumptions used are reflective of what a market participant would have used in calculating fair value or useful life considering the current economic conditions. All tested long-lived assets or groups of long-lived assets had undiscounted cash flows that were substantially in excess of their carrying value. See Notes 4 and 5 , on pages 51 through 54 of this report, for a discussion of the reductions in carrying value or useful life of long-lived assets in accordance with the Property, Plant and Equipment Topic of the ASC.
Exit or Disposal Activities
Management is continually re-evaluating the Company’s operating facilities against its long-term strategic goals. Liabilities associated with exit or disposal activities are recognized as incurred in accordance with the Exit or Disposal Cost Obligations Topic of the ASC and property, plant and equipment is tested for impairment in accordance with the Property, Plant and Equipment Topic of the ASC. Provisions for qualified exit costs are made at the time a facility is no longer operational, include amounts estimated by management and primarily include post-closure rent expenses or costs to terminate the contract before the end of its term and costs of employee terminations. Adjustments may be made to liabilities accrued for qualified exit costs if information becomes available upon which more accurate amounts can be reasonably estimated. If impairment of property, plant and equipment exists, then the carrying value is reduced to fair value estimated by management. Additional impairment may be recorded for subsequent revisions in estimated fair value. See Note 5 , on pages 52 through 54 of this report, for information concerning impairment of property, plant and equipment and accrued qualified exit costs.

Other Liabilities
The Company retains risk for certain liabilities, primarily worker’s compensation claims, employee medical benefits, and automobile, property, general and product liability claims. Estimated amounts were accrued for certain worker’s compensation, employee medical and disability benefits, automobile and property claims filed but unsettled and estimated claims incurred but not reported based upon management’s estimated aggregate liability for claims incurred using historical experience, actuarial assumptions followed in the insurance industry and actuarially-developed models for estimating certain liabilities. Certain estimated general and product liability claims filed but unsettled were accrued based on management’s best estimate of ultimate settlement or actuarial calculations of

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potential liability using industry experience and actuarial assumptions developed for similar types of claims.
Defined Benefit Pension and Other Postretirement Benefit Plans
To determine the Company’s ultimate obligation under its defined benefit pension plans and postretirement benefit plans other than pensions, management must estimate the future cost of benefits and attribute that cost to the time period during which each covered employee works. To determine the obligations of such benefit plans, management uses actuaries to calculate such amounts using key assumptions such as discount rates, inflation, long-term investment returns, mortality, employee turnover, rate of compensation increases and medical and prescription drug costs. Management reviews all of these assumptions on an ongoing basis to ensure that the most current information available is being considered. An increase or decrease in the assumptions or economic events outside management’s control could have a direct impact on the Company’s results of operations or financial condition.
In accordance with the Retirement Benefits Topic of the ASC, the Company recognizes each plan’s funded status as an asset for overfunded plans and as a liability for unfunded or underfunded plans. Actuarial gains and losses and prior service costs are recognized and recorded in Cumulative other comprehensive loss, a component of Shareholders’ equity. The amounts recorded in Cumulative other comprehensive loss will continue to be modified as actuarial assumptions and service costs change, and all such amounts will be amortized to expense over a period of years through the net pension and net periodic benefit costs.
Pension costs for 2018 are expected to decrease due to higher expected return on plan assets and decreased amortization of net actuarial losses. Postretirement benefit plan costs for 2018 are expected to increase primarily due to higher service and interest costs. See Note 6 , on pages 55 through 60 of this report, for information concerning the Company’s defined benefit pension plans and postretirement benefit plans other than pensions.
Debt
The fair values of the Company’s publicly traded long-term debt were based on quoted market prices. The fair values of the Company’s non-traded long-term debt were estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. See Note 1 , on page 46 of this report, for the carrying amounts and fair values of the Company’s long-term debt, and Note 7 , on pages 61 through 62 of this report, for a description of the Company’s long-term debt arrangements.
 
Environmental Matters
The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned sites and at a number of third-party sites. The Company accrues for environmental-related activities for which commitments or clean-up plans have been developed and for which costs can be reasonably estimated based on industry standards and professional judgment. All accrued amounts were recorded on an undiscounted basis. Environmental-related expenses included direct costs of investigation and remediation and indirect costs such as compensation and benefits for employees directly involved in the investigation and remediation activities and fees paid to outside engineering, actuarial, consulting and law firms. Due to uncertainties surrounding environmental investigations and remediation activities, the Company’s ultimate liability may result in costs that are significantly higher than currently accrued. See page 27 and Note 8 , on pages 62 through 63 of this report, for information concerning the accrual for extended environmental-related activities and a discussion concerning unaccrued future loss contingencies.
Litigation and Other Contingent Liabilities
In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims. Management believes that the Company has properly accrued for all known liabilities that existed and those where a loss was deemed probable for which a fair value was available or an amount could be reasonably estimated in accordance with all present U.S. generally accepted accounting principles. However, because litigation is inherently subject to many uncertainties and the ultimate result of any present or future litigation is unpredictable, the Company’s ultimate liability may result in costs that are significantly higher than currently accrued. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the liability may result in a material impact on net income for the annual or interim period during which such liability is accrued. Additionally, due to the uncertainties involved, any potential liability determined to be attributable to the Company arising out of such litigation may have a material adverse effect on the Company’s results of operations, liquidity or financial condition. See Note 9 on pages 63 through 66 of this report for information concerning litigation.
Income Taxes
The Company estimated income taxes in each jurisdiction that it operated. This involved estimating taxable earnings,

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specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets and possible exposures related to future tax audits. To the extent these estimates change, adjustments to deferred and accrued income taxes will be made in the period in which the changes occur.
On December 22, 2017, the Tax Act was enacted. The Tax Act significantly revised the U.S. corporate income tax system by, among other things, lowering corporate income tax rates from 35% to 21% , implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. Staff Accounting Bulletin (SAB) No. 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under the Tax Act. In accordance with SAB No. 118, based on the information available as of December 31, 2017 , the Company recorded provisional decreases in deferred tax liabilities which increased earnings for the year ended December 31, 2017. The majority of this benefit was driven by the effects of the implementation of the territorial tax system and the remeasurement of U.S. deferred tax liabilities on unremitted foreign earnings. The final impact of the Tax Act may differ from the provisional amounts recorded at December 31, 2017 due to changes in the Company's current interpretations and assumptions, clarification and implementation guidance that may be issued and actions the Company may take as a result of the Tax Act. See Note 14 , on pages 70 through 72 of this report, for more information.
Stock-Based Compensation
The cost of the Company’s stock-based compensation is recorded in accordance with the Stock Compensation Topic of the ASC. The Company estimates the fair value of option rights using a Black-Scholes-Merton option pricing model which requires management to make estimates for certain assumptions. Management and a consultant continuously review the following significant assumptions: risk-free interest rate, expected life of options, expected volatility of stock and expected dividend yield of stock. An increase or decrease in the assumptions or economic events outside management’s control could have a direct impact on the Company’s results of operations. See Note 12 , on pages 68 and 69 of this report, for more information on stock-based compensation.
Revenue Recognition
The Company’s revenue was primarily generated from the sale of products. All sales of products were recognized when shipped and title passed to unaffiliated customers. Collectibility of amounts recorded as revenue is reasonably assured at time of sale. Discounts were recorded as a reduction to sales in the same period as the sale resulting in an appropriate net sales amount for the period. Standard sales terms are final and returns or exchanges are not permitted unless expressly stated. Estimated
 
provisions for returns or exchanges, recorded as a reduction resulting in net sales, were established in cases where the right of return existed. The Company offered a variety of programs, primarily to its retail customers, designed to promote sales of its products. Such programs required periodic payments and allowances based on estimated results of specific programs and were recorded as a reduction resulting in net sales. The Company accrued the estimated total payments and allowances associated with each transaction at the time of sale. Additionally, the Company offered programs directly to consumers to promote the sale of its products. Promotions that reduced the ultimate consumer sale prices were recorded as a reduction resulting in net sales at the time the promotional offer was made, generally using estimated redemption and participation levels. The Company continually assesses the adequacy of accruals for customer and consumer promotional program costs earned but not yet paid. To the extent total program payments differ from estimates, adjustments may be necessary. Historically, these total program payments and adjustments have not been material. See Note 1 on page 50 for information on the new revenue standard.
FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW
Overview
On June 1, 2017, the Company completed the Acquisition for a total purchase price of $8.939 billion . On May 16, 2017, the Company issued $6.000 billion of senior notes (New Notes) in a public offering. The net proceeds from the issuance of the New Notes were used to fund the Acquisition. In April 2016, the Company entered into a $7.300 billion bridge credit agreement (Bridge Loan) and a $2.000 billion term loan credit agreement (Term Loan) as committed financing for the Acquisition. On June 1, 2017, the Company terminated the agreement for the Bridge Loan and borrowed the full $2.000 billion on the Term Loan. The Company continues to maintain sufficient short-term borrowing capacity at reasonable rates, and the Company has sufficient cash on hand and total available borrowing capacity to fund its current operating needs.
The Acquisition significantly affected the Company's financial condition, liquidity and cash flow. See Note 2 for a table detailing the preliminary opening balance sheet. Net working capital decreased $319.5 million at December 31, 2017 compared to 2016 due to a significant increase in current liabilities partially offset by a significant increase in current assets primarily due to the Acquisition. Total debt at December 31, 2017 increased $8.568 billion to $10.521 billion from $1.953 billion at December 31, 2016 and increased as a percentage of total capitalization to 74.0 percent from 51.0 percent the prior year. At December 31, 2017, the Company had remaining short-term borrowing ability of $1.725 billion .

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Net operating cash increased $575.4 million in 2017 to a cash source of $1.884 billion from a cash source of $1.309 billion in 2016 due primarily to an increase in net income of $639.6 million and increased cash generated by changes in working capital partially offset by changes in non-cash items when compared to 2016. Net operating cash increased as a percent to sales to 12.6 percent in 2017 compared to 11.0 percent in 2016 . During 2017 , strong net operating cash continued to provide the funds necessary to invest in new stores, manufacturing and distribution facilities and return cash to shareholders through dividends. In 2017, the Company used a portion of Net operating cash and Cash and cash equivalents to spend $222.8 million in capital additions and improvements and pay $319.0 million in cash dividends to its shareholders of common stock.
Net Working Capital
Total current assets less Total current liabilities (net working capital) decreased $319.5 million to a surplus of $478.7 million at December 31, 2017 from a surplus of $798.1 million at December 31, 2016 . The net working capital decrease is due to a significant increase in current liabilities partially offset by a significant increase in current assets. Cash and cash equivalents decreased $685.6 million and current portion of long-term debt decreased $699.3 million resulting from the payment of 1.35% senior notes becoming due in 2017 while Short-term borrowings increased $593.0 million . Accounts payable increased $756.9 million and other accruals increased $394.1 million primarily related to the Acquisition and Acquisition cost accruals. Accrued taxes increased $3.1 million and compensation, taxes withheld increased $110.1 million primarily due to the Acquisition and timing of payments. Accounts receivable increased $873.6 million and inventories increased $733.0 million primarily due to the Acquisition. As a result of the net effect of these changes, the Company’s current ratio decreased to 1.12 at December 31, 2017 from 1.28 at December 31, 2016 . Accounts receivable as a percent of Net sales increased to 14.0 percent in 2017 from 10.4 percent in 2016 . Accounts receivable days outstanding increased to 61 days in 2017 from 54 days in 2016 . In 2017 , provisions for allowance for doubtful collection of accounts increased $12.5 million , or 31.0 percent . Inventories as a percent of Net sales increased to 12.0 percent in 2017 from 9.0 percent in 2016 primarily due to the Acquisition. Inventory days outstanding was flat at 79 days in 2017 versus 2016 . The Company has sufficient total available borrowing capacity to fund its current operating needs.
Goodwill and Intangible Assets
Goodwill, which represents the excess of cost over the fair value of net assets acquired in purchase business combinations, increased $5.687 billion in 2017 due to the preliminary
 
purchase accounting for the Acquisition and foreign currency translation rate fluctuations. Intangible assets increased $5.747 billion in 2017 primarily due to purchase accounting additions of $5.848 billion related to the Acquisition. Decreases from amortization of finite-lived intangible assets of $206.8 million and impairments of $2.0 million were partially offset by $15.1 million of capitalized software costs. Foreign currency translation rate fluctuations of $93.0 million and other adjustments accounted for the remaining increases. Acquired finite-lived intangible assets included customer relationships and intellectual property. Costs related to designing, developing, obtaining and implementing internal use software are capitalized and amortized in accordance with the Goodwill and Other Intangibles Topic of the ASC. See Note 4 , on pages 51 through 52 of this report, for a description of goodwill, identifiable intangible assets and asset impairments recorded in accordance with the Goodwill and Other Intangibles Topic of the ASC and summaries of the remaining carrying values of goodwill and intangible assets.
Deferred Pension and Other Assets
Deferred pension assets of $296.7 million at December 31, 2017 represent the excess of the fair value of assets over the actuarially determined projected benefit obligations, primarily of the domestic salaried defined benefit pension plan. The increase in Deferred pension assets during 2017 of $71.2 million , from $225.5 million last year, was primarily due to a reduction in the discount rate to 3.6 percent , an increase in the fair value of plan assets and acquired Valspar plans. In accordance with the accounting prescribed by the Retirement Benefits Topic of the ASC, the increase in the value of the Deferred pension assets is offset in Cumulative other comprehensive loss and is amortized as a component of Net pension costs over a defined period of pension service. See Note 6 , on pages 55 through 60 of this report, for more information concerning the excess fair value of assets over projected benefit obligations of the salaried defined benefit pension plan and the amortization of actuarial gains or losses relating to changes in the excess assets and other actuarial assumptions.
Other assets increased $80.1 million to $502.0 million at December 31, 2017 due primarily to a reclass of current deferred tax assets to non-current due to the adoption of ASU No. 2015-17. See Note 1 , on pages 49 through 50 of this report, for more information on the impact of recently issued accounting standards.
Property, Plant and Equipment
Net property, plant and equipment increased $781.2 million to $1.877 billion at December 31, 2017 due primarily to the Acquisition of $833.0 million , capital expenditures of $222.8 million , and currency translation and other adjustments of

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

$63.1 million partially offset by depreciation expense of $285.0 million and sale or disposition of assets with remaining net book value of $52.7 million . Capital expenditures during 2017 in The Americas Group were primarily attributable to the opening of new paint stores and renovation and improvements in existing stores. In the Consumer Brands Group, capital expenditures during 2017 were primarily attributable to improvements and normal equipment replacements in manufacturing and distribution facilities. Capital expenditures in the Performance Coatings Group were primarily attributable to improvements in existing manufacturing and distribution facilities. The Administrative Segment incurred capital expenditures primarily for information systems hardware. In 2018 , the Company expects to spend more than 2017 for capital expenditures. The predominant share of the capital expenditures in 2018 is expected to be for various productivity improvement and maintenance projects at existing manufacturing, distribution and research and development facilities, new store openings and new or upgraded information systems hardware. The Company does not anticipate the need for any specific long-term external financing to support these capital expenditures.
Debt
On June 2, 2017, the Company closed its previously announced exchange offers and consent solicitations (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 (Exchange Notes). On May 16, 2017, the Company issued $6.0 billion of New Notes in a public offering. The net proceeds from the issuance of the New Notes were used to fund the Acquisition. The interest rate locks entered into during 2016 settled in March 2017 resulting in a pretax gain of $87.6 million recognized in Cumulative other comprehensive other 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 2017, the amortization of the unrealized gain reduced interest expense by $5.2 million .
In April 2016, the Company entered into a $7.3 billion Bridge Loan and a $2.0 billion Term Loan as committed financing for the Acquisition, as disclosed in Note 2 . On June 1, 2017, the Company terminated the agreement for the Bridge Loan and borrowed the full $2.0 billion on the Term Loan. As of December 31, 2017, the Term Loan had an outstanding balance of $850.0 million .
In August 2017, the Company entered into a floating rate loan of €225.0 million and a fixed rate loan of €20.0 million . The floating rate loan agreement bears interest at the six-month Euro Interbank Offered Rate plus a margin. The fixed rate loan bears interest at 0.92% . The proceeds will be used for general corporate purposes, including repaying a portion of outstanding short-term borrowings. The loans mature on August 23, 2021.
 
In September 2017, the Company entered into a five-year letter of credit agreement, subsequently amended, with an aggregate availability of $500.0 million . The credit agreement will be used for general corporate purposes. 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. At December 31, 2017 , there was $350.0 million borrowings outstanding under these credit agreements. There were no borrowings outstanding at December 31, 2016 . See Note 7 , on pages 61 through 62 of this report, for a detailed description of the Company’s debt outstanding and other available financing programs.
Defined Benefit Pension and Other Postretirement Benefit Plans
In accordance with the accounting prescribed by the Retirement Benefits Topic of the ASC, the Company’s total liability for unfunded or underfunded defined benefit pension plans increased $40.6 million to $93.8 million primarily due to the acquired Valspar plans. Postretirement benefits other than pensions increased $25.7 million to $290.8 million at December 31, 2017 due primarily to the Acquisition and changes in the actuarial assumptions.
The assumed discount rate used to determine the actuarial present value of projected defined benefit pension and other postretirement benefit obligations for domestic plans was decreased from 4.2 percent to 3.6 percent at December 31, 2017 due to decreased rates of high-quality, long-term investments and foreign defined benefit pension plans had similar discount rate decreases for the same reasons. The rate of compensation increases used to determine the projected benefit obligations increased to 3.3 percent in 2017 from 3.4 percent for domestic pension plans and similar increases on most foreign plans. In deciding on the rate of compensation increases, management considered historical Company increases as well as expectations for future increases. The expected long-term rate of return on assets decreased from 6.0 percent to 5.0 percent at December 31, 2017 for domestic pension plans and was slightly lower for most foreign plans. In establishing the expected long-term rate of return on plan assets for 2017 , management considered the historical rates of return, the nature of investments and an expectation for future investment strategies. The assumed health care cost trend rates used to determine the net periodic benefit cost of postretirement benefits other than pensions for 2017 were 5.5 percent and 10.5 percent , respectively, for medical and prescription drug cost increases, both decreasing gradually to 4.5 percent in 2026 . In developing the assumed health care cost trend rates, management considered industry data, historical

26  

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

Company experience and expectations for future health care costs.
For 2018 Net pension cost and Net periodic benefit cost recognition for domestic plans, the Company will use a discount rate of 3.60 percent , an expected long-term rate of return on assets of 5.0 percent and a rate of compensation increase of 3.3 percent . Lower discount rates and expected long-term rates of return on plan assets will be used for most foreign plans. Use of these assumptions and amortization of actuarial losses will result in a domestic Net pension cost in 2018 that is expected to be approximately $1.5 million lower than in 2017 . Net periodic benefit costs for postretirement benefits other than pensions is expected to increase $10.2 million in 2018 due to 2017 expense including a settlement gain of $9.3 million related to the termination of a life insurance benefit plan. See Note 6 , on pages 55 through 60 of this report, for more information on the Company’s obligations and funded status of its defined benefit pension plans and postretirement benefits other than pensions.
Deferred Income Taxes
Deferred income taxes at December 31, 2017 increased $1.360 billion from a year ago primarily due to increased deferred tax liabilities related to intangible assets recorded in purchase accounting for the Acquisition, partially offset by the Deferred income tax reductions. See Note 2 on page 50 and 51 and Note 14 on pages 70 through 72 of this report for more information.
Other Long-Term Liabilities
Other long-term liabilities increased $175.1 million during 2017 due primarily to acquired liabilities from the Acquisition.
 
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 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 2018 . See Note 8 , on pages 62 through 63 of this report, for further information on environmental-related long-term liabilities.

Contractual Obligations and Commercial Commitments
The Company has certain obligations and commitments to make future payments under contractual obligations and commercial commitments. The following tables summarize such obligations and commitments as of December 31, 2017 .
(thousands of dollars)
 
Payments Due by Period
Contractual Obligations
 
Total
 
Less than
1 Year
 
1–3 Years
 
3–5 Years
 
More than
5 Years
Long-term debt
 
$
9,917,040

 
$
1,179

 
$
1,922,807

 
$
2,669,434

 
$
5,323,620

Operating leases
 
1,855,528

 
391,009

 
645,826

 
416,013

 
402,680

Short-term borrowings
 
633,731

 
633,731

 
 
 
 
 
 
Interest on Long-term debt
 
4,225,057

 
341,319

 
630,641

 
512,690

 
2,740,407

Purchase obligations (1)
 
81,876

 
81,876

 
 
 
 
 
 
Other contractual obligations (2)
 
214,443

 
107,084

 
65,369

 
30,360

 
11,630

Total contractual cash obligations
 
$
16,927,675

 
$
1,556,198

 
$
3,264,643

 
$
3,628,497

 
$
8,478,337

(1)  
Relate to open purchase orders for raw materials at December 31, 2017 .
(2)  
Relate primarily to estimated future capital contributions to investments in the U.S. affordable housing and historic renovation real estate partnerships and various other contractual obligations.


27

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

 
 
Amount of Commitment Expiration Per Period
Commercial Commitments
 
Total
 
Less than
1 Year
 
1–3 Years
 
3–5 Years
 
More than
5 Years
Standby letters of credit
 
$
75,272

 
$
75,272

 
 
 
 
 
 
Surety bonds
 
71,645

 
71,645

 
 
 
 
 
 
Other commercial commitments
 
8,777

 
8,777

 
 
 
 
 
 
Total commercial commitments
 
$
155,694

 
$
155,694

 
$

 
$

 
$


Warranties
The Company offers product warranties for certain products. The specific terms and conditions of such warranties vary depending on the product or customer contract requirements. Management estimated the costs of unsettled product warranty claims based on historical results and experience. Management periodically assesses the adequacy of the accrual for product warranty claims and adjusts the accrual as necessary. Warranty accruals were acquired in connection with the Acquisition. This amount primarily includes warranties for certain products under extended furniture protection plans along with product warranties for other products. In the U.S., revenue related to furniture protection plans is deferred and recognized over the contract life. Changes in the Company’s accrual for product warranty claims during 2017 , 2016 and 2015 , including customer satisfaction settlements during the year, were as follows:
(thousands of dollars)
2017
 
2016
 
2015
Balance at January 1
$
34,419

 
$
31,878

 
$
27,723

Charges to expense
39,707

 
38,954

 
43,484

Settlements
(53,143
)
 
(36,413
)
 
(39,329
)
Acquisition Liabilities
130,442

 

 

Balance at December 31
$
151,425

 
$
34,419

 
$
31,878

Shareholders’ Equity
Shareholders’ equity increased $1.814 billion to $3.692 billion at December 31, 2017 from $1.878 billion last year primarily due to an increase in retained earnings of $1.453 billion and an increase in Other capital of $234.6 million . Retained earnings increased $1.453 billion during 2017 due to net income of $1.772 billion partially offset by $319.0 million in cash dividends paid. The increase in Other capital of $234.6 million was due primarily to the recognition of stock-based compensation expense and stock option exercises. Cumulative other comprehensive loss decreased $155.5 million due primarily to favorable foreign currency translation effects of $147.9 million attributable to the strengthening of most foreign operations’ functional currencies against the U.S. dollar and $40.2 million in net actuarial gains and prior service costs of defined benefit pension and other postretirement benefit plans net of amortization partially offset by a $34.0 million reduction in the unrealized gain on the interest rate locks.
 
The Company did not make any open market purchases of its common stock for treasury during 2017 . The Company acquires its common stock for general corporate purposes, and depending on its cash position and market conditions, it may acquire shares in the future. The Company had remaining authorization from its Board of Directors at December 31, 2017 to purchase 11.65 million shares of its common stock.
The Company's 2017 annual cash dividend of $3.40 per common share represented 28.4 percent of 2016 diluted net income per common share. The 2017 annual dividend represented the thirty-ninth consecutive year of dividend payments since the dividend was suspended in 1978. The Company is temporarily modifying its practice of paying 30.0 percent of the prior year’s diluted net income per common share in cash dividend. At a meeting held on February 14, 2018 , the Board of Directors increased the quarterly cash dividend to $.86 per common share. This quarterly dividend, if approved in each of the remaining quarters of 2018 , would result in an annual dividend for 2018 of $3.44 per common share or an 18.4 percent payout of 2017 diluted net income per common share. See the Statements of Consolidated Shareholders’ Equity, on page 44 of this report, and Notes 10 , 11 and 12 , on pages 67 through 69 of this report, for more information concerning Shareholders’ equity.
Cash Flow
Net operating cash increased $575.4 million to $1.884 billion in 2017 from $1.309 billion in 2016 due primarily to an increase in net income of $639.6 million and increased cash generated by changes in working capital, partially offset by changes in deferred income tax liabilities and other non-cash items when compared to 2016. Strong net operating cash provided the funds necessary to invest in new stores, manufacturing and distribution facilities, return cash to shareholders through dividends, and pay down debt from the Acquisition. Net investing cash usage increased $8.744 billion to a usage of $9.047 billion in 2017 from a usage of $303.8 million in 2016 due primarily to cash paid for the Acquisition of $8.810 billion , partially offset by decreases in cash used for other investments of $41.7 million and capital expenditures of $16.3 million and increased proceeds from sale of assets of $8.8 million . Net financing cash increased $6.821 billion to a source of $6.514 billion in 2017 from a usage of $307.4 million in 2016 due primarily to increased Net Proceeds from long-term debt of $6.422 billion , increased short-term borrowings of $357.2 million and higher proceeds from stock options exercised of

28  

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

$56.7 million , partially offset by increased payments of cash dividends of $6.9 million and increased cash used in all other financing activities of $24.3 million . In 2017 , the Company used Net operating cash and Cash and cash equivalents on hand to spend $222.8 million in capital additions and improvements, pay $319.0 million in cash dividends to its shareholders of common stock, fund the Acquisition and pay down long-term debt of $1.853 billion .
Management considers a measurement of cash flow that is not in accordance with U.S. generally accepted accounting principles to be a useful tool in its determination of appropriate uses of the Company’s Net operating cash. Management reduces Net operating cash, as shown in the Statements of Consolidated Cash Flows, by the amount reinvested in the business for Capital expenditures and the return of investment to its shareholders by the payments of cash dividends. The resulting value is referred to by management as “Free Cash Flow” which may not be comparable to values considered by other entities using the same terminology. The reader is cautioned that the Free Cash Flow measure should not be compared to other entities unknowingly, and it does not consider certain non-discretionary cash flows, such as mandatory debt and interest payments. The amount shown below should not be considered an alternative to Net operating cash or other cash flow amounts provided in accordance with U.S. generally accepted accounting principles disclosed in the Statements of Consolidated Cash Flows, on page 43 of this report. Free Cash Flow as defined and used by management is determined as follows: 
 
Year Ended December 31,
(thousands of dollars)
2017
 
2016
 
2015
Net operating cash
$
1,883,968

 
$
1,308,572

 
$
1,447,463

Capital expenditures
(222,767
)
 
(239,026
)
 
(234,340
)
Cash dividends
(319,029
)
 
(312,082
)
 
(249,647
)
Free cash flow
$
1,342,172

 
$
757,464

 
$
963,476

Litigation
See page 23 of this report and Note 9 on pages 63 through 66 for more information concerning litigation.
Market Risk
The Company is exposed to market risk associated with interest rate, foreign currency and commodity fluctuations. The Company occasionally utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes. The
 
Company entered into foreign currency option and forward currency exchange contracts with maturity dates of less than twelve months in 2017 , 2016 and 2015 , primarily to hedge against value changes in foreign currency. There were no material foreign currency option and forward contracts outstanding at December 31, 2017 , 2016 and 2015 . 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. See Notes 1 and 13 on pages 46 and 70 of this report.
Financial Covenant
Certain borrowings contain a consolidated leverage covenant. The covenant states 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 “Earnings Before Interest, Taxes, Depreciation and Amortization” (EBITDA) for the 12-month period ended on the same date. Refer to the “Results of Operations” caption below for a reconciliation of EBITDA to Net income. At December 31, 2017 , the Company was in compliance with the covenant. The Company’s Notes, Debentures and revolving credit agreement contain various default and cross-default provisions. In the event of default under any one of these arrangements, acceleration of the maturity of any one or more of these borrowings may result. See Note 7 on pages 61 through 62 of this report.
Employee Stock Ownership Plan (ESOP)
Participants in the Company’s ESOP are allowed to contribute up to the lesser of twenty percent of their annual compensation or the maximum dollar amount allowed under the Internal Revenue Code. The Company matches six percent of eligible employee contributions. The Company’s matching contributions to the ESOP charged to operations were $90.7 million in 2017 compared to $85.5 million in 2016 . At December 31, 2017 , there were 10,033,576 shares of the Company’s common stock being held by the ESOP, representing 10.7 percent of the total number of voting shares outstanding. See Note 11 , on page 67 of this report, for more information concerning the Company’s ESOP.


29

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

RESULTS OF OPERATIONS - 2017 vs. 2016
Shown below are net sales and segment profit and the percentage change for the current period by segment for 2017 and 2016 :
 
Year Ended December 31,
(thousands of dollars)
2017
 
2016
 
Change
Net Sales:
 
 
 
 
 
The Americas Group
$
9,117,279

 
$
8,377,083

 
8.8
 %
Consumer Brands Group
2,154,729

 
1,527,515

 
41.1
 %
Performance Coatings Group
3,706,134

 
1,946,004

 
90.4
 %
Administrative
5,646

 
5,000

 
12.9
 %
Net sales
$
14,983,788

 
$
11,855,602

 
26.4
 %
 
 
 
 
 
 
 
Year Ended December 31,
(thousands of dollars)
2017
 
2016
 
Change
Income Before Income Taxes:
 
 
 
 
 
The Americas Group

$
1,769,466

 
$
1,605,306

 
10.2
 %
Consumer Brands Group
226,001

 
301,041

 
-24.9
 %
Performance Coatings Group
298,503

 
257,187

 
16.1
 %
Administrative
(765,751
)
 
(568,301
)
 
-34.7
 %
Income before
income taxes
$
1,528,219

 
$
1,595,233

 
-4.2
 %
Consolidated net sales for 2017 increased due primarily to the addition of Valspar sales beginning in June and higher paint sales volume in The Americas Group. Excluding Valspar net sales, net sales increased 5.6 percent in the year. Currency translation rate changes increased 2017 consolidated net sales by 0.3 percent . Net sales of all consolidated foreign subsidiaries increased 71.9 percent to $ 2.960 billion for 2017 versus $ 1.722 billion for 2016 due primarily to the addition of Valspar sales since June. Net sales of all operations other than consolidated foreign subsidiaries increased 18.7 percent to $12.024 billion for 2017 versus $10.133 billion for 2016 .
Net sales in the The Americas Group increased in 2017 due primarily to higher architectural paint sales volume across all end market segments and selling price increases. Net sales from stores in the U.S., Canada and Latin America open for more than twelve calendar months increased 6.3 percent for the full year. During 2017 , The Americas Group opened 114 new stores and closed 13 redundant locations for a net increase of 101 stores, increasing the total number of stores in operation at December 31, 2017 to 4,620 in the United States, Canada, Latin America and the Caribbean. The Americas Group’s objective is to expand its store base an average of 2.5 percent each year, primarily through internal growth. Sales of products other than paint increased approximately 14.3 percent for the year over 2016 . 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 2017 primarily due to the inclusion of Valspar sales since June, partially offset by lower volume sales to some of the Group's retail customers. Valspar sales increased Group net sales 49.4 percent in the year. In 2018, the Consumer Brands Group plans to continue promotions of new and existing products and expand of its customer base and product assortment at existing customers.
The Performance Coatings Group’s net sales in 2017 increased due primarily to the inclusion of Valspar sales and selling price increases. Currency translation rate changes increased net sales 1.5 percent for 2017. In 2017 , the Performance Coatings Group opened 4 new branches and closed 2 locations increasing the total from 288 to 290 branches open in the United States, Canada, Mexico, South America, Europe and Asia at year-end. In 2018 , the Performance Coatings Group plans to continue expanding its worldwide presence and improving its customer base.
Net sales in the Administrative segment, which primarily consist of external leasing revenue of excess headquarters space and leasing of facilities no longer used by the Company in its primary business, decreased by an insignificant amount in 2017 .
Consolidated gross profit increased $858.5 million in 2017 due primarily to Valspar sales since June and higher paint sales volume, partially offset by raw material cost increases. Consolidated gross profit as a percent to net sales decreased to 45.3 percent from 50.0 percent in 2016 due primarily to Valspar sales, Acquisition-related inventory purchase accounting adjustments and raw material cost increases, partially offset by higher paint sales volume. The Americas Group’s gross profit for 2017 increased $297.7 million compared to 2016 due primarily to higher paint sales volume and selling price increases, partially offset by higher raw material costs. The Americas Group’s gross profit margins declined primarily due to increased raw material costs, partially offset by higher paint sales volume and selling price increases. The Consumer Brands Group’s gross profit increased $146.9 million due primarily to the inclusion of Valspar sales, partially offset by increased raw material costs, Acquisition-related inventory purchase accounting adjustments and lower sales volumes at certain customers compared to 2016. The Performance Coatings Group’s gross profit for 2017 increased $422.9 million due primarily to inclusion of Valspar sales and favorable currency translation rate changes, partially offset by higher raw material costs and Acquisition-related inventory purchase accounting adjustments. Acquisition-related purchase accounting adjustments decreased Consumer Brands and Performance Coatings Groups' gross profit by $49.2 million and $39.2 million , respectively, for 2017. Both Consumer Brands and Performance Coatings Groups' gross profit margins were lower due to inclusion of Valspar sales, higher raw material costs and Acquisition-related inventory purchase accounting adjustments to inventory, partially offset by selling price increases.

30  

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

SG&A increased by $650.9 million due primarily to the inclusion of Valspar SG&A, increased expenses to support higher sales levels and net new store openings, as well as increased Acquisition expenses in the Administrative segment. Acquisition expenses in the Administrative segment were $131.2 million and $58.4 million in 2017 and 2016, respectively. SG&A decreased as a percent of sales to 31.9 percent in 2017 from 34.9 percent in 2016 primarily due to the addition of Valspar sales beginning in June. Excluding Valspar SG&A and Acquisition expenses, SG&A as a percent of sales was 33.6 percent and 34.4 percent in 2017 and 2016, respectively. In The Americas Group, SG&A increased $144.6 million for the year due primarily to increased spending due to the number of new store openings and general comparable store expenses to support higher sales levels. The Consumer Brands Group’s SG&A increased by $168.3 million for the year from inclusion of Valspar SG&A, partially offset by improved expense control and integration synergies. The Performance Coatings Group’s SG&A increased by $253.2 million for the year primarily due to inclusion of Valspar SG&A, partially offset by improved expense control and integration synergies. The Administrative segment’s SG&A increased $84.8 million primarily due to increased Acquisition-related costs.
Amortization and impairment expenses in total increased $172.7 million in 2017 primarily due to amortization of Acquisition-related intangibles. Amortization of Acquisition-related intangibles was $127.8 million and $54.4 million for the Performance Coatings and Consumer Brands Groups, respectively. Impairment of goodwill and intangibles expenses decreased $8.7 million in 2017.
Other general expense - net increased $8.5 million in 2017 compared to 2016 . The increase was mainly caused by an increase of $10.5 million of expense in the Administrative segment, primarily due to a year-over-year decrease in gain on sale of assets of $38.0 million partially offset by a decrease in provisions for environmental matters of $27.5 million . See Note 13 , on page 69 and 70 of this report, for more information concerning Other general expense - net .
As required by the Goodwill and Other Intangibles Topic of the ASC, management performed an annual impairment test of goodwill and indefinite-lived intangible assets as of October 1, 2017 . The impairment tests in 2017 resulted in $2.0 million impairment of trademarks recorded in The Americas Group. The impairment tests in 2016 , resulted in $10.7 million impairment in goodwill from the same reporting unit. See Note 4 , on pages 51 and 52 of this report, for more information concerning the impairment of intangible assets.
Interest expense increased $109.4 million in 2017 primarily due to Acquisition-related debt incurred.
Other (income) expense - net increased $12.4 million in 2017 compared to 2016 . This increase was mainly due to an
 
increase in foreign currency related transaction losses of $6.9 million in 2017 , primarily in The Americas Group and Consumer Brands Group. There were no other items within Other income or Other expense that were individually significant at December 31, 2017 . See Note 13 on page 70 of this report for more information concerning Other (income) expense - net .
Consolidated Income before income taxes in 2017 decreased $67.0 million resulting from an increase of $650.9 million in SG&A, an increase of $172.7 million in amortization and impairment expenses in total, and an increase of $109.4 million in interest expense, partially offset by an increase of $858.5 million in gross profit. Income before income taxes increased $164.2 million in The Americas Group and $41.3 million in the Performance Coatings Group, but decreased $75.0 million in the Consumer Brands Group, when compared to 2016 . The Administrative segment expenses decreased Income before income taxes $197.5 million more than in 2016 resulting primarily from Acquisition expenses and increased Interest expense.
Net income increased in 2017 primarily due to the one-time benefit of $668.8 million from Deferred income tax reductions, which resulted in a consolidated effective income tax rate of (18.7) percent , improved operating results in The Americas Group and the inclusion of Valspar operating results, partially offset by Acquisition costs.
Excluding the impact of the Deferred income tax reductions, the effective income tax rate for continuing operations was 25.1 percent for 2017 and 29.0 percent for 2016 , primarily due to the year over year impacts of Employee share-based payments. Diluted net income per common share increased 55.7 percent to $18.67 per share for 2017 from $11.99 per share in 2016 . Diluted net income per common share from continuing operations was $19.11 per share in 2017 , including a one-time benefit of $7.04 per share from the Deferred income tax reductions. Diluted net income per common share for 2017 was decreased by charges of $3.00 per share from Acquisition costs, including inventory purchase accounting adjustments and increased amortization of intangible assets. Valspar operations increased Diluted net income per common share by $.80 per share for 2017 , including a $.92 per share charge from interest expense on new debt. Diluted net income per common share for 2016 was decreased by charges of $.86 per share from Acquisition costs. Currency translation rate changes did not have a significant impact on diluted net income per common share in 2017 .
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

31

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

measurement, management increases Net income for significant non-operating and non-cash expense items to arrive at an amount known as EBITDA. The reader is cautioned that the following value for EBITDA should not be compared to other entities unknowingly. EBITDA should not be considered an alternative to Net income or Net operating cash as an indicator of operating performance or as a measure of liquidity. The reader should refer to the determination of Net income and Net operating cash in accordance with U.S. generally accepted accounting principles disclosed in the Statements of Consolidated Income and Statements of Consolidated Cash Flows, on pages 40 and 43 of this report. EBITDA as used by management is calculated as follows:
 
Year Ended December 31,
(thousands of dollars)
2017
 
2016
 
2015
Net income from
continuing
operations
$
1,813,802

 
$
1,132,703

 
$
1,053,849

Interest Expense
263,471

 
154,088

 
61,791

Income Taxes
(285,583
)
 
462,530

 
495,117

Depreciation
284,997

 
172,074

 
170,323

Amortization
206,764

 
25,404

 
28,237

EBITDA from
continuing
operations
$
2,283,451

 
$
1,946,799

 
$
1,809,317

Valspar EBITDA *
160,563

 
(60,630
)
 
 
EBITDA from continuing operations without Valspar
$
2,122,888

 
$
2,007,429

 
$
1,809,317

* Valspar EBITDA for 2017 includes Valspar operations since June 1, 2017, purchase accounting items and acquisition costs. Valspar EBITDA for 2016 includes acquisition costs only.


 
RESULTS OF OPERATIONS - 2016 vs. 2015
Shown below are net sales and segment profit and the percentage change for the current period by segment for 2016 and 2015
 
Year Ended December 31,
(thousands of dollars)
2016
 
2015
 
Change
Net Sales:
 
 
 
 
 
The Americas Group

$
8,377,083

 
$
7,839,966

 
6.9
 %
Consumer Brands Group

1,527,515

 
1,577,955

 
-3.2
 %
Performance Coatings Group

1,946,004

 
1,916,300

 
1.6
 %
Administrative
5,000

 
5,083

 
-1.6
 %
Net sales
$
11,855,602

 
$
11,339,304

 
4.6
 %
 
 
 
 
 
 
  
Year Ended December 31,
(thousands of dollars)
2016
 
2015
 
Change
Income Before Income Taxes:
 
 
 
 
 
The Americas Group
$
1,605,306

 
$
1,451,998

 
10.6
 %
Consumer Brands Group
301,041

 
308,833

 
-2.5
 %
Performance Coatings Group
257,187

 
201,881

 
27.4
 %
Administrative
(568,301
)
 
(413,746
)
 
-37.4
 %
Income before
income taxes
$
1,595,233

 
$
1,548,966

 
3.0
 %
Consolidated net sales for 2016 increased due primarily to higher paint sales volume in The Americas Group and the impact of the Revenue reclassification beginning in the third quarter related to grossing up third-party service revenue and related costs which were previously netted and immaterial in prior periods. The Revenue reclassification increased sales in the year 1.1 percent. This prospective change primarily impacts The Americas and the Performance Coatings Groups. This change had no impact on segment profit, but reduced segment profit as a percent to net sales of the affected groups. Unfavorable currency translation rate changes decreased 2016 consolidated net sales 1.4 percent. Net sales of all consolidated foreign subsidiaries were down 3.7 percent to $1.722 billion for 2016 versus $1.789 billion for 2015 due primarily to unfavorable foreign currency translation rates. Net sales of all operations other than consolidated foreign subsidiaries were up 6.1 percent to $10.133 billion for 2016 versus $9.550 billion for 2015.

32  

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

Net sales in The Americas Group in 2016 increased primarily due to higher architectural paint sales volume across all end market segments. Net sales from stores open for more than twelve calendar months increased 5.3 percent for the full year. During 2016, The Americas Group opened 158 new stores and closed 16 redundant locations for a net increase of 142 stores, increasing the total number of stores in operation at December 31, 2016 to 4,519 in the United States, Canada, Latin America and the Caribbean. The Americas Group’s objective is to expand its store base an average of two and a half percent each year, primarily through internal growth. Sales of products other than paint increased approximately 7.0 percent for the year over 2015. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold.
Net sales of the Consumer Brands Group increased primarily due to higher volume sales to most of the Group's retail customers, partially offset by unfavorable currency translation rate changes decreased net sales 1.1 percent in the year. Sales of wood care coatings, brushes, rollers, caulk and other paint related products, were all up at least mid to high-single digits as compared to 2015 while sales of aerosol products were down slightly. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of paint-related merchandise sold.
The Performance Coatings Group’s net sales in 2016, when stated in U.S. dollars, decreased due primarily to unfavorable currency translation rate changes. Unfavorable currency translation rate changes in the year decreased net sales by 2.6 percent for 2016. In 2016, the Performance Coatings Group opened 5 new branches and closed 13 locations decreasing the total from 296 to 288 branches open in the United States, Canada, Mexico, South America, Europe and Asia at year-end.
Net sales in the Administrative segment, which primarily consist of external leasing revenue of excess headquarters space and leasing of facilities no longer used by the Company in its primary business, decreased by an insignificant amount in 2016.
Consolidated gross profit increased $363.0 million in 2016 and improved as a percent to net sales to 50.0 percent from 49.0 percent in 2015 due primarily to higher paint sales volume and improved operating efficiencies partially offset by unfavorable currency translation rate changes. Excluding the effect of the Revenue reclassification, consolidated gross profit percent to net sales was 50.4 percent for 2016. The Americas Group’s gross profit for 2016 increased $338.9 million compared to 2015 due primarily to higher paint sales volume. The Americas Group's gross profit margins increased primarily due to higher paint sales volume partially offset by the effect of the Revenue reclassification. The Consumer Brands Group’s gross profit increased $19.8 million due primarily to improved operating efficiency and increased paint sales volume. The Consumer
 
Brands Group’s gross profit margins increased for those same reasons. The Performance Coatings Group’s gross profit for 2016 increased $8.8 million due primarily to improved operating efficiencies and decreasing raw material costs partially offset by unfavorable currency translation rate changes. The Performance Coatings Group’s gross profit increased as a percent of sales for those same reasons. Foreign currency translation rate fluctuations decreased Performance Coatings Group’s gross profit by $15.7 million for 2016. The Administrative segment’s gross profit decreased by $4.4 million.
SG&A increased by $245.9 million due primarily to increased expenses to support higher sales levels and net new store openings as well as the impact of Acquisition expenses of $58.4 million recorded in the Administrative segment. SG&A increased as a percent of sales to 35.1 percent in 2016 from 34.5 percent in 2015 primarily due to those same reasons. In The Americas Group, SG&A increased $177.7 million for the year due primarily to the number of new store openings and general comparable store expenses to support higher sales levels. The Consumer Brands Group’s SG&A increased by $6.5 million for the year in support of increased sales levels. The Performance Coatings Group’s SG&A decreased by $22.1 million for the year relating primarily to foreign currency translation rate fluctuations reducing SG&A by $16.0 million. The Administrative segment’s SG&A increased $83.8 million primarily due to Acquisition expenses and incentive compensation.
Other general expense - net decreased $17.9 million in 2016 compared to 2015. The decrease was mainly caused by a decrease of $19.2 million of expense in the Administrative segment, primarily due to a year-over-year increase in gain on sale of assets of $29.8 million partially offset by an increase in provisions for environmental matters of $11.9 million. See Note 13 , on page 69 and 70 of this report, for more information concerning Other general expense - net.
As required by the Goodwill and Other Intangibles Topic of the ASC, management performed an annual impairment test of goodwill and indefinite-lived intangible assets as of October 1, 2016. The impairment tests in 2016 resulted in $10.7 million impairment of goodwill and trademarks recorded in The Americas Group for the Latin America operating unit. See Note 4 , on pages 51 and 52 of this report, for more information concerning the impairment of intangible assets.
Amortization of credit facility costs incurred in early 2016 and interest on debt issued in July 2015 increased interest expense $92.3 million in 2016.
Other (income) expense - net increased to $4.6 million income from $6.1 million expense in 2015. This was primarily due to decreased net expense from banking activities of $2.4 million and decreased miscellaneous net expenses of $5.2 million both primarily recorded in the Administrative segment.

33

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

Additionally, foreign currency related transaction losses of $7.3 million in 2016 compared to $9.5 million in 2015, primarily in The Americas Group and the Performance Coatings Group. See Note 13 , on page 70 of this report, for more information concerning Other expense (income) - net.
Consolidated Income before income taxes in 2016 increased $46.3 million due primarily to an increase of $363.0 million in gross profit partially offset by an increase of $245.9 million in SG&A and an increase of $60.2 million in interest expense, interest and net investment income and other expenses. Income before income taxes increased $153.3 million in The Americas Group, $10.4 million in the Consumer Brands Group, and $37.1 million in the Performance Coatings Group when compared to 2015. The Administrative segment had a decreased impact on Income before income taxes of $154.6 million when compared to 2015 resulting primarily from Acquisition expenses and increased interest expense. Segment profit of all consolidated foreign subsidiaries decreased 20.7 percent to $60.1 million for 2016 versus $75.8 million for 2015. Segment profit of all operations other than consolidated foreign subsidiaries increased 4.2 percent to $1.535 billion for 2016 versus $1.473 billion for 2015.
 
Net income increased $78.9 million in 2016 primarily due to the increase in Income before income taxes and the Income tax accounting change.
The effective income tax rate was 29.0 percent for 2016 and 32.0 percent for 2015. The decrease in the effective tax rate in 2016 compared to 2015 was primarily due to the Income tax accounting change. Excluding the impact of Acquisition expense tax benefits and the adoption of ASU No. 2016-09, the effective income tax rate was 32.3 percent for 2016. Diluted net income per common share increased 7.5 percent to $11.99 per share for 2016, including an $.86 per share charge for expenses associated with the Acquisition partially offset by an increase of $.40 per share related to the Income tax accounting change, from $11.15 per share a year ago. Unfavorable currency translation rate changes decreased diluted net income per common share by $.14 per share for the year.


34  

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







 




[THIS PAGE INTEIONALLY LEFT BLANK]

35


REPORT OF MANAGEMENT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

Shareholders of The Sherwin-Williams Company
We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. We recognize that internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and is subject to the possibility of human error or the circumvention or the overriding of internal control. Therefore, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, we believe we have designed into the process safeguards to reduce, though not eliminate, this risk. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In order to ensure that the Company’s internal control over financial reporting was effective as of December 31, 2017 , we conducted an assessment of its effectiveness under the supervision and with the participation of our management group, including our principal executive officer and principal financial officer. This assessment was based on the criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
On June 1, 2017, the Company completed the acquisition of the Valspar Corporation (Valspar). As permitted by the Securities and Exchange Commission, management excluded the Valspar operations from its assessment of internal control over financial reporting as of December 31, 2017. Valspar operations constituted 13 percent and 36 percent of total assets and net assets, respectively, as of December 31, 2017, and 16 percent of sales and 3 percent of net income for the year then ended. Valspar operations will be included in the Company's assessment as of December 31, 2018.
Based on our assessment of internal control over financial reporting under the criteria established in Internal Control – Integrated Framework, we have concluded that, as of December 31, 2017 , the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting as of December 31, 2017 has been audited by Ernst & Young LLP, an independent registered public accounting firm, and their report on the effectiveness of our internal control over financial reporting is included on page 37 of this report.

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

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

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

36  


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders of The Sherwin-Williams Company

Opinion on Internal Control over Financial Reporting
We have audited The Sherwin-Williams Company’s internal control over financial reporting as of December 31, 2017 , based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, The Sherwin-Williams Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017 , based on the COSO criteria.
As indicated in the accompanying Report of Management on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Valspar, which is included in the 2017 consolidated financial statements of the Company and constituted 13 percent and 36 percent of total and net assets, respectively, as of December 31, 2017 and 16 percent and 3 percent of total revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Valspar.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of The Sherwin-Williams Company as of December 31, 2017 , 2016 , and 2015 , and the related consolidated statements of income and comprehensive income, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2017 , and the related notes and our report dated February 23, 2018 expressed an unqualified opinion thereon.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

EYA01A03A01A05.JPG
Cleveland, Ohio
February 23, 2018

37


REPORT OF MANAGEMENT ON THE
CONSOLIDATED FINANCIAL STATEMENTS


Shareholders of The Sherwin-Williams Company
We are responsible for the preparation and fair presentation of the consolidated financial statements, accompanying notes and related financial information included in this report of The Sherwin-Williams Company and its consolidated subsidiaries (collectively, the “Company”) as of December 31, 2017 , 2016 and 2015 and for the years then ended in accordance with U.S. generally accepted accounting principles. The consolidated financial information included in this report contains certain amounts that were based upon our best estimates, judgments and assumptions that we believe were reasonable under the circumstances.
We have conducted an assessment of the effectiveness of internal control over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As discussed in the Report of Management on Internal Control Over Financial Reporting on page 36 of this report, we concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017 .
The Board of Directors pursues its responsibility for the oversight of the Company’s accounting policies and procedures, financial statement preparation and internal control over financial reporting through the Audit Committee, comprised exclusively of independent directors. The Audit Committee is responsible for the appointment and compensation of the independent registered public accounting firm. The Audit Committee meets at least quarterly with financial management, internal auditors and the independent registered public accounting firm to review the adequacy of financial controls, the effectiveness of the Company’s internal control over financial reporting and the nature, extent and results of the audit effort. Both the internal auditors and the independent registered public accounting firm have private and confidential access to the Audit Committee at all times.
We believe that the consolidated financial statements, accompanying notes and related financial information included in this report fairly reflect the form and substance of all material financial transactions and fairly present, in all material respects, the consolidated financial position, results of operations and cash flows as of and for the periods presented.
MORIKISSIGNATUREA03.JPG
J. G. Morikis
Chairman, President and Chief Executive Officer

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

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

38  


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


To the Board of Directors and Shareholders of The Sherwin-Williams Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Sherwin-Williams Company (the Company) as of December 31, 2017 , 2016 and 2015 , and the related consolidated statements of income and comprehensive income, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2017 , and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 , 2016 and 2015 , and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 , in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Sherwin-Williams Company's internal control over financial reporting as of December 31, 2017 , based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


EYA01A03A01A05.JPG

We have served as the Company‘s auditor since 1908.
Cleveland, Ohio
February 23, 2018

 


39

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


 
Year Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Net sales
$
14,983,788

 
$
11,855,602

 
$
11,339,304

Cost of goods sold
8,202,577

 
5,932,851

 
5,779,691

Gross profit
6,781,211

 
5,922,751

 
5,559,613

Percent to net sales
45.3
%
 
50.0
%
 
49.0
%
Selling, general and administrative expenses
4,785,415

 
4,134,517

 
3,885,668

Percent to net sales
31.9
%
 
34.9
%
 
34.3
%
Other general expense - net
20,865

 
12,368

 
30,268

Amortization
206,764

 
25,404

 
28,237

Impairment of goodwill and trademarks
2,022

 
10,688

 

Interest expense
263,471

 
154,088

 
61,791

Interest and net investment income
(8,571
)
 
(4,960
)
 
(1,399
)
Other (income) expense - net
(16,974
)
 
(4,587
)
 
6,082

 
 
 
 
 
 
Income from continuing operations before income taxes
1,528,219

 
1,595,233

 
1,548,966

Income tax (credit) expense
(285,583
)
 
462,530

 
495,117

 
 
 
 
 
 
Net income from continuing operations
1,813,802

 
1,132,703

 
1,053,849

 
 
 
 
 
 
 
 
 
 
 
 
Loss from discontinued operations

 

 

Income taxes
41,540

 


 


Net loss from discontinued operations
(41,540
)
 

 

 
 
 
 
 
 
Net income
$
1,772,262

 
$
1,132,703

 
$
1,053,849

 
 
 
 
 
 
Basic net income per common share:
 
 
 
 
 
Continuing operations
$
19.52

 
$
12.33

 
$
11.43

Discontinued operations
(.44
)
 

 

Net income per common share
$
19.08

 
$
12.33

 
$
11.43

 
 
 
 
 
 
Diluted net income per common share
 
 
 
 
 
Continuing operations
$
19.11

 
$
11.99

 
$
11.15

Discontinued operations
(.44
)
 

 

Net income per common share
$
18.67

 
$
11.99

 
$
11.15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 










See notes to consolidated financial statements.


40  

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

 
Year Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Net income
$
1,772,262

 
$
1,132,703

 
$
1,053,849

 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
147,930

 
(18,648
)
 
(128,245
)
 
 
 
 
 
 
Pension and other postretirement benefit adjustments:
 
 
 
 
 
Amounts recognized in Other
 
 
 
 
 
comprehensive loss (1)
47,995

 
(28,385
)
 
7,974

Amounts reclassified from Other
 
 
 
 
 
comprehensive loss (2)
(7,762
)
 
7,635

 
5,847

 
40,233

 
(20,750
)
 
13,821

Unrealized net gains (losses) on available-for-sale securities:
 
 
 
 
 
Amounts recognized in Other
 
 
 
 
 
comprehensive loss (3)
2,026

 
1,046

 
(1,191
)
Amounts reclassified from Other
 
 
 
 
 
comprehensive loss (4)
(720
)
 
89

 
478

 
1,306

 
1,135

 
(713
)
 
 
 
 
 
 
Unrealized net gains on cash flow hedges:
 
 
 
 
 
Amounts recognized in Other
 
 
 
 
 
comprehensive loss (5)
(30,765
)
 
85,007

 

Amounts reclassified from
 
 
 
 
 
Other comprehensive loss (6)
(3,223
)
 
 
 
 
 
(33,988
)
 
85,007

 

Other comprehensive income (loss)
155,481

 
46,744

 
(115,137
)
Comprehensive income
$
1,927,743

 
$
1,179,447

 
$
938,712


(1) Net of taxes of $(19,313) , $17,200 and $(3,399) , in 2017 , 2016 and 2015 , respectively.
(2) Net of taxes of $4,764 , $(4,691) and $(1,647) , in 2017 , 2016 and 2015 , respectively.
(3) Net of taxes of $(1,244) , $(643) and $736 , in 2017 , 2016 and 2015 , respectively.
(4) Net of taxes of $442 , $(55) and $(296) in 2017 , 2016 and 2015 , respectively.
(5) Net of taxes of $18,884 and $(52,226) in 2017 and 2016 , respectively.
(6) Net of taxes of $1,978 in 2017 .


























See notes to consolidated financial statements.

41

CONSOLIDATED BALANCE SHEETS
(thousands of dollars)

 
December 31,
 
2017
 
2016
 
2015
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
204,213

 
$
889,793

 
$
205,744

Accounts receivable, less allowance
2,104,555

 
1,230,987

 
1,114,275

Inventories:
 
 
 
 
 
Finished goods
1,415,339

 
898,627

 
840,603

Work in process and raw materials
386,036

 
169,699

 
177,927

 
1,801,375

 
1,068,326

 
1,018,530

Deferred income taxes

 
57,162

 
87,883

Other current assets
355,697

 
381,030

 
230,748

Total current assets
4,465,840

 
3,627,298

 
2,657,180

 
 
 
 
 
 
Goodwill
6,814,345

 
1,126,892

 
1,143,333

Intangible assets
6,002,361

 
255,010

 
255,371

Deferred pension assets
296,743

 
225,529

 
244,882

Other assets
502,023

 
421,904

 
436,309

Property, plant and equipment:
 
 
 
 
 
Land
254,676

 
115,555

 
119,530

Buildings
962,094

 
714,815

 
696,202

Machinery and equipment
2,572,963

 
2,153,437

 
2,026,617

Construction in progress
177,056

 
117,126

 
81,082

 
3,966,789

 
3,100,933

 
2,923,431

Less allowances for depreciation
2,089,674

 
2,005,045

 
1,881,569

 
1,877,115

 
1,095,888

 
1,041,862

Total Assets
$
19,958,427

 
$
6,752,521

 
$
5,778,937

 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term borrowings
$
633,731

 
$
40,739

 
$
39,462

Accounts payable
1,791,552

 
1,034,608

 
1,157,561

Compensation and taxes withheld
508,166

 
398,045

 
338,256

Accrued taxes
79,901

 
76,765

 
81,146

Current portion of long-term debt
1,179

 
700,475

 
3,154

Other accruals
972,651

 
578,547

 
522,280

Total current liabilities
3,987,180

 
2,829,179

 
2,141,859

 
 
 
 
 
 
Long-term debt
9,885,745

 
1,211,326

 
1,907,278

Postretirement benefits other than pensions
274,675

 
250,397

 
248,523

Deferred income taxes
1,434,196

 
73,833

 
138,709

Other long-term liabilities
684,443

 
509,345

 
474,658

 
 
 
 
 
 
Shareholders’ equity:
 
 
 
 
 
Common stock - $1.00 par value:
 
 
 
 
 
93,883,645, 93,013,031, and 92,246,525 shares outstanding
 
 
 
 
 
at December 31, 2017, 2016 and 2015, respectively
117,561

 
116,563

 
115,761

Other capital
2,723,183

 
2,488,564

 
2,330,426

Retained earnings
5,502,730

 
4,049,497

 
3,228,876

Treasury stock, at cost
(4,266,416
)
 
(4,235,832
)
 
(4,220,058
)
Cumulative other comprehensive loss
(384,870
)
 
(540,351
)
 
(587,095
)
Total shareholders’ equity
3,692,188

 
1,878,441

 
867,910

 
 
 
 
 
 
Total Liabilities and Shareholders’ Equity
$
19,958,427

 
$
6,752,521

 
$
5,778,937

See notes to consolidated financial statements.

42  

STATEMENTS OF CONSOLIDATED CASH FLOWS
(thousands of dollars)

 
Year Ended December 31,
Operating Activities
2017
 
2016
 
2015
Net income
$
1,772,262

 
$
1,132,703

 
$
1,053,849

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

41,540

 

 

Depreciation
284,997

 
172,074

 
170,323

Amortization of intangible assets
206,764

 
25,404

 
28,237

Amortization of inventory purchase accounting adjustments
54,924

 

 

Impairment of goodwill and trademarks
2,022

 
10,688

 

Amortization of credit facility and debt issuance costs
8,313

 
63,759

 
3,096

Provisions for environmental-related matters
15,443

 
42,932

 
31,071

Provisions for qualified exit costs
50,503

 
3,038

 
9,761

Deferred income taxes
(606,135
)
 
(68,241
)
 
4,976

Defined benefit pension plans net cost
18,153

 
14,851

 
6,491

Stock-based compensation expense
90,292

 
72,109

 
72,342

Net decrease in postretirement liability
(17,865
)
 
(12,373
)
 
(6,645
)
Decrease in non-traded investments
65,703

 
64,689

 
65,144

Loss (gain) on sale or disposition of assets
5,422

 
(30,564
)
 
(803
)
Other
1,051

 
5,334

 
3,617

Change in working capital accounts:
 
 
 
 
 
(Increase) in accounts receivable
(49,850
)
 
(113,855
)
 
(56,873
)
(Increase) in inventories
(89,959
)
 
(52,577
)
 
(40,733
)
Increase (decrease) in accounts payable
166,687

 
(118,893
)
 
160,111

(Decrease) increase in accrued taxes
(20,878
)
 
(2,159
)
 
4,606

Increase (decrease) in accrued compensation and taxes withheld
11,286

 
60,632

 
(13,128
)
(Increase) decrease in refundable income taxes
(15,520
)
 
(1,343
)
 
19,230

Other
16,270

 
56,215

 
(955
)
Costs incurred for environmental-related matters
(13,792
)
 
(15,178
)
 
(11,995
)
Costs incurred for qualified exit costs
(45,422
)
 
(6,267
)
 
(11,200
)
Other
(68,243
)
 
5,594

 
(43,059
)
Net operating cash
1,883,968

 
1,308,572

 
1,447,463

 
 
 
 
 
 
Investing Activities
 
 
 
 
 
Capital expenditures
(222,767
)
 
(239,026
)
 
(234,340
)
Acquisitions of businesses, net of cash acquired
(8,810,315
)
 
 
 

Proceeds from sale of assets
47,246

 
38,434

 
11,300

Increase in other investments
(61,526
)
 
(103,182
)
 
(65,593
)
Net investing cash
(9,047,362
)
 
(303,774
)
 
(288,633
)
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
Net increase (decrease) in short-term borrowings
356,320

 
(899
)
 
(630,226
)
Proceeds from long-term debt
8,275,169

 
500

 
797,514

Payments of long-term debt
(1,852,812
)
 
(1,111
)
 

Payments for credit facility and debt issuance costs
(49,376
)
 
(65,119
)
 
 
Payments of cash dividends
(319,029
)
 
(312,082
)
 
(249,647
)
Proceeds from stock options exercised
143,579

 
86,831

 
89,990

Income tax effect of stock-based compensation exercises and vesting

 

 
89,691

Treasury stock purchased
 
 

 
(1,035,291
)
Other
(39,761
)
 
(15,473
)
 
(42,384
)
Net financing cash
6,514,090

 
(307,353
)
 
(980,353
)
Effect of exchange rate changes on cash
(36,276
)
 
(13,396
)
 
(13,465
)
Net (decrease) increase in cash and cash equivalents
(685,580
)
 
684,049

 
165,012

Cash and cash equivalents at beginning of year
889,793

 
205,744

 
40,732

Cash and cash equivalents at end of year
$
204,213

 
$
889,793

 
$
205,744

Taxes paid on income
$
419,695

 
$
477,786

 
$
335,119

Interest paid on debt
220,630

 
153,850

 
48,644


See notes to consolidated financial statements.

43

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



 
Common
Stock
 
Other
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Cumulative
Other
Comprehensive
Loss
 
Total
Balance at January 1, 2015
$
114,525

 
$
2,079,639

 
$
2,424,674

 
$
(3,150,410
)
 
$
(471,958
)
 
$
996,470

Net income
 
 
 
 
1,053,849

 
 
 
 
 
1,053,849

Other comprehensive loss
 
 
 
 
 
 
 
 
(115,137
)
 
(115,137
)
Treasury stock purchased
 
 
 
 
 
 
(1,035,291
)
 
 
 
(1,035,291
)
Stock-based compensation activity
1,236

 
161,096

 
 
 
(34,357
)
 
 
 
127,975

Income tax effect of stock compensation
 
 
89,691

 
 
 
 
 
 
 
89,691

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

 
2,330,426

 
3,228,876

 
(4,220,058
)
 
(587,095
)
 
867,910

Net income
 
 
 
 
1,132,703

 
 
 
 
 
1,132,703

Other comprehensive income
 
 
 
 
 
 
 
 
46,744

 
46,744

Stock-based compensation activity
802

 
158,138

 
 
 
(15,774
)
 
 
 
143,166

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

 
2,488,564

 
4,049,497

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

Net income
 
 
 
 
1,772,262

 
 
 
 
 
1,772,262

Other comprehensive income
 
 
 
 
 
 
 
 
155,481

 
155,481

Stock-based compensation activity
998

 
232,351

 
 
 
(30,584
)
 
 
 
202,765

Acquired noncontrolling interest
 
 
2,268

 
 
 
 
 
 
 
2,268

Cash dividends -- $3.40 per common share
 
 
 
 
(319,029
)
 
 
 
 
 
(319,029
)
Balance at December 31, 2017
$
117,561

 
$
2,723,183

 
$
5,502,730

 
$
(4,266,416
)
 
$
(384,870
)
 
$
3,692,188

 
See notes to consolidated financial statements.





44  









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45

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

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The consolidated financial statements include the accounts of The Sherwin-Williams Company and its wholly owned subsidiaries (collectively, the Company). Inter-company accounts and transactions have been eliminated. In order to facilitate our year-end closing process, Valspar foreign subsidiaries’ financial results are included in our consolidated financial statements on a one-month lag.
Use of estimates. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those amounts.
Nature of operations. The Company is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America, with additional operations in the Caribbean region, Europe, Asia and Australia.
Reportable segments. See Note 18 for further details.
Cash flows. Management considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Fair value of financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported for Cash and cash equivalents approximate fair value.
Short-term investments: The carrying amounts reported for Short-term investments approximate fair value.
Investments in securities: Investments classified as available-for-sale are carried at market value. See the recurring fair value measurement table on page 47 .
Non-traded investments: The Company has investments in the U.S. affordable housing and historic
 
renovation real estate markets and certain other investments that have been identified as variable interest entities. However, because the Company does not have the power to direct the day-to-day operations of the investments and the risk of loss is limited to the amount of contributed capital, the Company is not considered the primary beneficiary. In accordance with the Consolidation Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), the investments are not consolidated. For affordable housing investments entered into prior to the January 1, 2015 adoption of Accounting Standard Update (ASU) No. 2014-01, the Company uses the effective yield method to determine the carrying value of the investments. Under the effective yield method, the initial cost of the investments is amortized to income tax expense over the period that the tax credits are recognized. For affordable housing investments entered into on or after the January 1, 2015 adoption of ASU No. 2014-01, the Company uses the proportional amortization method. Under the proportional amortization method, the initial cost of the investments is amortized to income tax expense in proportion to the tax credits and other tax benefits received. The carrying amounts of the investments, included in Other assets, were $189,386 , $193,413 and $189,484 at December 31, 2017 , 2016 and 2015 , respectively. The liabilities recorded on the balance sheets for estimated future capital contributions to the investments were $179,026 , $178,584 and $172,899 at December 31, 2017 , 2016 and 2015 , respectively.
Short-term borrowings: The carrying amounts reported for Short-term borrowings approximate fair value.
Long-term debt (including current portion): The fair values of the Company’s publicly traded debt, shown below, are based on quoted market prices. The fair values of the Company’s non-traded debt, also shown below, are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The Company's publicly traded debt and non-traded debt are classified as level 1 and level 2, respectively, in the fair value hierarchy. See Note 7 .

 
December 31,
 
2017
 
2016
 
2015
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Amount
 
Value
 
Amount
 
Value
 
Amount
 
Value
Publicly traded debt
$
8,742,739

 
$
9,054,277

 
$
1,907,704

 
$
1,912,646

 
$
1,905,650

 
$
1,960,169

Non-traded debt
1,144,185

 
1,088,630

 
4,097

 
3,783

 
4,782

 
4,555

 
 
 
 
 
 
 
 
 
 
 
 

Derivative instruments: The Company utilizes derivative instruments as part of its overall financial risk management policy. The Company entered into foreign currency option and forward currency exchange contracts with maturity dates of less than twelve months in 2017 , 2016 , and 2015 , primarily to hedge against value changes
 
in foreign currency. See Note 13 . There were no material foreign currency option and forward contracts outstanding at December 31, 2017 , 2016 and 2015 .


46  

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

In 2016 , the Company entered into a series of interest rate lock agreements which were designated as cash flow hedges. The interest rate locks settled during 2017 . See Note 7 .
 
Fair value measurements. The following tables summarize the Company’s assets and liabilities measured on a
recurring and non-recurring basis in accordance with the Fair Value Measurements and Disclosures Topic of the ASC:

Assets and Liabilities Reported at Fair Value on a Recurring Basis

 
Fair Value at December 31,
2017
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets (1)
$
61,097

 
$
34,433

 
$
26,664

 

Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liabilities (2)
$
70,850

 
$
70,850

 

 

(1)  
The deferred compensation plan assets consists of the investment funds maintained for the future payments under the Company’s executive deferred compensation plans, which are structured as rabbi trusts. The investments are marketable securities accounted for under the Debt and Equity Securities Topic of the ASC. The level 1 investments are valued using quoted market prices multiplied by the number of shares. The level 2 investments are valued based on vendor or broker models. The cost basis of the investment funds is $56,326 .
(2)  
The deferred compensation plan liabilities are the Company’s liabilities under its deferred compensation plans. The liabilities represent the fair value of the participant shadow accounts, and the value is based on quoted market prices in active markets for identical assets.
Assets and Liabilities Reported at Fair Value on a Nonrecurring Basis. As a result of the 2017 annual trademark impairment test performed in accordance with the Intangibles Topic of the ASC, a trademark with a carrying value of $2,022 was written off. See Note 4. Except for this trademark measurement and the acquisition-related fair value measurements described in Note 2, there were no assets and liabilities measured at fair value on a nonrecurring basis in 2017 . These fair value measurements qualify as level 3 measurements.
Accounts receivable and allowance for doubtful accounts. Accounts receivable were recorded at the time of credit sales net of provisions for sales returns and allowances. The Company recorded an allowance for doubtful accounts of $52,997 , $40,450 and $49,420 at December 31, 2017 , 2016 and 2015 , respectively, to reduce Accounts receivable to their estimated net realizable value. The allowance was based on an analysis of historical bad debts, a review of the aging of Accounts receivable and the current creditworthiness of customers. Accounts receivable balances are written-off against the allowance if a final determination of uncollectibility is made. All provisions for allowances for doubtful collection of accounts are related to the creditworthiness of accounts and are included in Selling, general and administrative expenses.
Reserve for obsolescence. The Company recorded a reserve for obsolescence of $103,698 , $87,715 and $91,217 at December 31, 2017 , 2016 and 2015 , respectively, to reduce Inventories to their estimated net realizable value. 
Goodwill. Goodwill represents the cost in excess of fair value of net assets acquired in business combinations accounted for by the purchase method. In accordance with the Intangibles Topic of the ASC, goodwill is tested for impairment on an annual basis and in between annual tests if events or circumstances indicate potential impairment. See Note 4 .
 
Intangible assets. Intangible assets include indefinite-lived trademarks, customer relationships and intellectual property. As required by the Goodwill and Other Intangibles
Topic of the ASC, indefinite-lived trademarks are not amortized, but instead are tested annually for impairment, and between annual tests whenever an event occurs or circumstances indicate potential impairment. See Note 4 . The costs of finite-lived intangible assets are amortized on a straight-line basis over the expected period of benefit, which ranges primarily from 15 to 20 years.
Impairment of long-lived assets. In accordance with the Property, Plant and Equipment Topic of the ASC, management evaluates the recoverability and estimated remaining lives of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. See Notes 4 and 5 .
Property, plant and equipment. Property, plant and equipment is stated on the basis of cost. Depreciation is provided by the straight-line method. Depreciation and amortization are included in the appropriate Cost of goods sold or Selling, general and administrative expense caption on the Statements of Consolidated Income. Included in Property, plant and equipment are leasehold improvements. The major classes of assets and ranges of annual depreciation rates are:
Buildings
4.0% – 20.0%
Machinery and equipment
10.0% – 20.0%
Furniture and fixtures
6.7% – 33.3%
Automobiles and trucks
10.0% – 33.3%
Standby letters of credit. The Company occasionally enters into standby letter of credit agreements to guarantee various operating activities. These agreements provide credit

47

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

availability to the various beneficiaries if certain contractual events occur. Amounts outstanding under these agreements totaled $75,272 , $43,658 and $45,407 at December 31, 2017 , 2016 and 2015 , respectively.
Product warranties. The Company offers product warranties for certain products. The specific terms and conditions of such warranties vary depending on the product or customer contract requirements. Management estimated the costs of unsettled product warranty claims based on historical results and experience and included an amount in Other accruals. Management periodically assesses the adequacy of the accrual for product warranty claims and adjusts the accrual as necessary. Changes in the Company’s accrual for product warranty claims during 2017 , 2016 and 2015 , including customer satisfaction settlements during the year, were as follows:
 
2017
 
2016
 
2015
Balance at January 1
$
34,419

 
$
31,878

 
$
27,723

Charges to expense
39,707

 
38,954

 
43,484

Settlements
(53,143
)
 
(36,413
)
 
(39,329
)
Acquisition
130,442

 


 


Balance at December 31
$
151,425

 
$
34,419

 
$
31,878


Warranty accruals of $130,442 were acquired in connection with the Valspar acquisition. This amount includes warranties from certain products under extended furniture protection plans along with other general customer warranties. Revenue related to the furniture protection plans is deferred and recognized over the contract life.
Environmental matters. Capital expenditures for ongoing environmental compliance measures were recorded in Property, plant and equipment, and related expenses were included in the normal operating expenses of conducting business. The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned sites and at a number of third-party sites. The Company accrued for environmental-related activities for which commitments or clean-up plans have been developed and when such costs could be reasonably estimated based on industry standards and professional judgment. All accrued amounts were recorded on an undiscounted basis. Environmental-related expenses included direct costs of investigation and remediation and indirect costs such as compensation and benefits for employees directly involved in the investigation and remediation activities and fees paid to outside engineering, consulting and law firms. See Notes 8 and 13 .
Employee Stock Purchase and Savings Plan. The Company accounts for the Employee Stock Purchase and Savings Plan (ESOP) in accordance with the Employee Stock Ownership Plans Subtopic of the Compensation – Stock Ownership Topic of the ASC. The Company recognized compensation expense for amounts contributed to the ESOP. See Note 11 .
 
Defined benefit pension and other postretirement benefit plans. The Company accounts for its defined benefit pension and other postretirement benefit plans in accordance with the Retirement Benefits Topic of the ASC, which requires the recognition of a plan’s funded status as an asset for overfunded plans and as a liability for unfunded or underfunded plans. See Note 6 .
Stock-based compensation. The cost of the Company’s stock-based compensation is recorded in accordance with the Stock Compensation Topic of the ASC. See Note 12 .
Foreign currency translation. All consolidated non-highly inflationary foreign operations use the local currency of the country of operation as the functional currency and translated the local currency asset and liability accounts at year-end exchange rates while income and expense accounts were translated at average exchange rates. The resulting translation adjustments were included in Cumulative other comprehensive loss, a component of Shareholders’ equity.
Cumulative other comprehensive loss. At December 31, 2017 , the ending balance of Cumulative other comprehensive loss included adjustments for foreign currency translation of $353,346 , net prior service costs and net actuarial losses related to pension and other postretirement benefit plans of $84,863 , unrealized net gains on marketable equity securities of $2,320 and unrealized net gains on interest rate lock cash flow hedges of $51,019 . At December 31, 2016 and 2015 , the ending balance of Cumulative other comprehensive loss included adjustments for foreign currency translation of $501,277 and $482,629 , respectively, net prior service costs and net actuarial losses related to pension and other postretirement benefit plans of $125,096 and $104,346 , respectively, and unrealized gains and losses on marketable equity securities of $1,015 and $120 , respectively.
Revenue recognition. The Company recognized revenue when products were shipped and title passed to unaffiliated customers. Collectibility of amounts recorded as revenue was reasonably assured at the time of recognition.
Third-party service revenue. The Company uses subcontractors to provide installation services for customers. Under these arrangements, the Company invoices the customer for both the product and installation and remitted payment to the subcontractor for the installation. Starting in the third quarter of 2016 , the Company recorded the installation revenue in Net sales and the payments to subcontractors in Cost of goods sold. Prior to the third quarter of 2016 , these amounts were netted and immaterial.
Customer and vendor consideration. The Company offered certain customers rebate and sales incentive programs which were classified as reductions in Net sales. Such programs were in the form of volume rebates, rebates that constituted a percentage of sales or rebates for attaining certain sales goals.

48  

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

The Company received consideration from certain suppliers of raw materials in the form of volume rebates or rebates that constituted a percentage of purchases. These rebates were recognized on an accrual basis by the Company as a reduction of the purchase price of the raw materials and a subsequent reduction of Cost of goods sold when the related product was sold.
Costs of goods sold. Included in Costs of goods sold were costs for materials, manufacturing, distribution and related support. Distribution costs included expenses related to the distribution of products including inbound freight charges, purchase and receiving costs, warehousing costs, internal transfer costs and other costs incurred to ship products. Also included in Costs of goods sold were total technical expenditures, which included research and development costs, quality control, product formulation expenditures and other similar items. Research and development costs included in technical expenditures were $58,474 , $58,041 and $57,667 for 2017 , 2016 and 2015 , respectively. See Note 9 .
Selling, general and administrative expenses. Selling costs included advertising expenses, marketing costs, employee and store costs and sales commissions. The cost of advertising was expensed as incurred. The Company incurred $374,059 , $351,002 and $338,188 in advertising costs during 2017 , 2016 and 2015 , respectively. General and administrative expenses included human resources, legal, finance and other support and administrative functions.
Earnings per share. Common stock held in a revocable trust (see Note 10 ) was not included in outstanding shares for basic or diluted income per common share calculations. All references to “shares” or “per share” information throughout this report relate to common shares and are stated on a diluted per common share basis, unless otherwise indicated. Basic and diluted net income per common share were calculated using the treasury stock method in accordance with the Earnings Per Common Share Topic of the ASC. Basic net income per common share amounts were computed based on the weighted-average number of common shares outstanding during the year. Diluted net income per common share amounts were computed based on the weighted-average number of common shares outstanding plus all dilutive securities potentially outstanding during the year. See Note 15 .
Impact of recently issued accounting standards. Effective January 1, 2017, the Company adopted 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 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 standard is not expected to have a material effect on the Company's results of operations, financial condition or liquidity .
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 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

49

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

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 will adopt the standard using the modified retrospective method. The Company has completed its determination of the expanded disclosures regarding revenue, as well as any impacts on the timing of recognition in some arrangements or contracts for the sale of goods or services. Management's assessment identified certain revenue components within the Consumer Brands Group that are recorded as Selling, general and administrative expenses of approximately $60.0 million as of December 31, 2017 , which upon adoption of the new standard would be recorded as a contra revenue in Net sales on the Statements of Consolidated Income. In addition, the Company has made enhancements to its information systems and internal controls in response to the new rule requirements. The Company is prepared to provide expanded disclosures in the consolidated financial statements upon adoption and it is expected that the adoption of this standard will not materially impact Net income or the Company's liquidity.
Reclassification. Certain amounts in the notes to the consolidated financial statements for 2015 and 2016 have been reclassified to conform to the 2017 presentation.

NOTE 2 – ACQUISITIONS
On June 1, 2017, the Company completed the acquisition of The Valspar Corporation (Valspar) at $113 per share in an all cash transaction for a total purchase price of $8.9 billion , net of divestiture proceeds of $431.0 million (Acquisition). On April 11, 2017, the Company and Valspar entered into a definitive agreement with Axalta Coating Systems Ltd. to divest the assets related to Valspar's North American industrial wood coatings business. The divestiture was also completed on June 1, 2017, and is reported as a discontinued operation with no pre-tax gain or loss, but includes the tax expense effect of this separate transaction. Proceeds of $431.0 million were received for the divested assets sold. The divestiture resulted in a tax provision of $41.5 million , which reduced basic and diluted net income per
 
common share by $.44 and $.44 , respectively, for the year ended December 31, 2017 . The Acquisition expands the Company's diversified array of brands and technologies, expands its global platform and adds new capabilities in its packaging and coil businesses.
The preliminary allocation of the fair value of the Acquisition is summarized in the following table. 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
$
129.1

Accounts receivable
817.5

Inventories
684.5

Indefinite-lived trademarks
775.9

Finite-lived intangible assets
5,071.8

Goodwill
5,675.2

Property, plant and equipment
833.0

All other assets
231.1

Accounts payable
(553.2
)
Long-term debt
(1,603.5
)
Deferred taxes
(2,028.9
)
All other liabilities
(1,093.1
)
Total
$
8,939.4

Total, net of cash
$
8,810.3

Finite-lived intangible assets include customer relationships of $3.3 billion and intellectual property and technology of $1.8 billion , which are being amortized over weighted average amortization periods ranging from 15 to 20 years. Based on the preliminary purchase accounting, goodwill of $2.3 billion , $1.9 billion and $1.5 billion was recorded in The Americas Group, Performance Coatings Group and Consumer Brands Group, respectively, and relates primarily to expected synergies.
The Company's Net sales and Net income for the year ended December 31, 2017  include sales of $2.464 billion and a profit before tax of $115.8 million related to the Acquisition. Net income for the year ended December 31, 2017 includes $183.1 million of intangibles amortization expense. During the year ended December 31, 2017 , the Company incurred transaction and integration related SG&A expense of $126.8 million and interest expense of $179.3 million related to the Acquisition.
During the year ended December 31, 2016 , the Company incurred transaction and integration related SG&A expense of $58.4 million and interest expense of $72.8 million related to the anticipated acquisition of Valspar.

50  

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


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 related to the Acquisition had been outstanding at January 1, 2016. Amortization of acquired intangibles and fixed asset step-ups has been adjusted as though the amortization period started January 1, 2016. The $54.9 million amortization of inventory cost increases resulting from the preliminary purchase accounting has been included in 2016 to reflect the pro forma transaction date of January 1, 2016, and thus this amount has been excluded for the year ended December 31, 2017 . 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 meant to be indicative of future results of operations of the combined companies under the ownership and operation of the Company.
 
2017
 
2016
Net sales
$
16,634,913

 
$
15,861,367

Net income from continuing
operations
1,854,613

 
1,008,138

Net income per common
share from continuing
operations
 
 
 
Basic
$
19.96

 
$
10.98

Diluted
$
19.54

 
$
10.67

NOTE 3 – INVENTORIES
Inventories were principally stated at the lower of cost or market with cost determined on the last-in, first-out (LIFO) method. The following presents the effect on inventories, net income and net income per common share had the Company used the first-in, first-out (FIFO) inventory valuation method adjusted for income taxes at the statutory rate in effect at each reporting date and assuming no other adjustments. Management believes that the use of LIFO results in a better matching of costs and revenues. This information is presented to enable the reader to make comparisons with companies using the FIFO method of inventory valuation. The decrease in percentage of total inventories on LIFO in 2017 was due to the Acquisition which only carried approximately 40 percent of its inventory on the LIFO method.
 
2017
 
2016
 
2015
Percentage of total
inventories on LIFO
66
%
 
79
%
 
78
%
Excess of FIFO over
LIFO
$
286,961

 
$
253,353

 
$
251,060

(Decrease) increase in net
income due to LIFO
(20,669
)
 
(1,421
)
 
49,658

(Decrease) increase in net
income per common
share due to LIFO
(.22
)
 
(.02
)
 
.53


 

NOTE 4 – GOODWILL, INTANGIBLE AND LONG-LIVED ASSETS
In accordance with the Property, Plant and Equipment Topic of the ASC, whenever events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable or the useful life may have changed, impairment tests are to be performed. Undiscounted cash flows are to be used to calculate the recoverable value of long-lived assets to determine if such assets are impaired. Where impairment is identified, a discounted cash flow valuation model, incorporating discount rates commensurate with the risks involved for each group of assets, is to be used to determine the fair value for the assets to measure any potential impairment. No material impairments were recorded in 2016 , 2015 and 2014.
During 2017 , the Company recorded preliminary goodwill of $5,675,244 , finite-lived intangibles of $5,071,800 and indefinite-lived trademarks of $775,900 in connection with the Acquisition. See Note 2.
In accordance with the Goodwill and Other Intangibles Topic of the ASC, goodwill and indefinite-lived intangible assets are tested for impairment annually, and interim impairment tests are performed whenever an event occurs or circumstances change that indicate an impairment has more likely than not occurred. October 1 has been established for the annual impairment review. At the time of impairment testing, values are estimated separately for goodwill and trademarks with indefinite lives using a discounted cash flow valuation model, incorporating discount rates commensurate with the risks involved for each group of assets. An optional qualitative assessment may alleviate the need to perform the quantitative goodwill impairment test when impairment is unlikely.
The annual impairment review performed as of October 1, 2017 resulted in trademark impairment of $2,022 in The Americas Group related to lower than anticipated sales of an acquired brand and no goodwill impairment. The annual impairment review performed as of October 1, 2016 resulted in goodwill and trademark impairment in The Americas Group of $10,455 and $233 , respectively. The annual impairment review performed as of October 1, 2015 did not result in any goodwill or trademark impairment.

51

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

A summary of changes in the Company’s carrying value of goodwill by Reportable Segment is as follows:
Goodwill
The Americas Group
 
Consumer Brands
Group
 
Performance Coatings
Group
 
Consolidated
Totals
Balance at January 1, 2015 (1)
$
295,129

 
$
702,206

 
$
161,011

 
$
1,158,346

Currency and other adjustments
(77
)
 
(1,135
)
 
(13,801
)
 
(15,013
)
Balance at December 31, 2015 (1)
295,052

 
701,071

 
147,210

 
1,143,333

Impairment charged to operations
(10,455
)
 
 
 
 
 
(10,455
)
Currency and other adjustments
813

 
(1,197
)
 
(5,602
)
 
(5,986
)
Balance at December 31, 2016 (2)
285,410

 
699,874

 
141,608

 
1,126,892

Acquisition
2,276,127

 
1,473,239

 
1,925,878

 
5,675,244

Currency and other adjustments
(5,928
)
 
60,128

 
(41,991
)
 
12,209

Balance at December 31, 2017 (2)
$
2,555,609

 
$
2,233,241

 
$
2,025,495

 
$
6,814,345

(1)  
Net of accumulated impairment losses of $8,904 ( $8,113 in the Consumer Brands Group and $791 in the Performance Coatings Group).
(2)  
Net of accumulated impairment losses of $19,359 ( $8,113 in the Consumer Brands Group, $791 in the Performance Coatings Group and $10,455 in The Americas Group).

A summary of the Company’s carrying value of intangible assets is as follows: 
 
Finite-Lived Intangible Assets
 
Trademarks
With 
Indefinite
Lives
 
Total
Intangible
Assets
 
Software
 
Customer Relationships
 
Intellectual Property
 
All Other
 
Subtotal
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average amortization period
7 years

 
15 years

 
20 years

 
13 years

 
17 years

 
 
 
 
Gross
$
165,019

 
$
3,361,675

 
$
1,774,000

 
$
329,440

 
$
5,630,134

 
 
 
 
Accumulated amortization
(116,621
)
 
(129,568
)
 
(51,742
)
 
(257,506
)
 
(555,437
)
 
 
 
 
Net value
$
48,398

 
$
3,232,107

 
$
1,722,258

 
$
71,934

 
$
5,074,697

 
$
927,664

 
$
6,002,361

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average amortization period
7 years

 
 
 
 
 
11 years

 
10 years

 
 
 
 
Gross
$
144,557

 
 
 
 
 
$
313,613

 
$
458,170

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

 

 

 
$
73,396

 
$
114,218

 
$
140,792

 
$
255,010

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average amortization period
8 years

 
 
 
 
 
12 years

 
11 years

 
 
 
 
Gross
$
123,863

 
 
 
 
 
$
312,119

 
$
435,982

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

 

 

 
$
83,198

 
$
112,053

 
$
143,318

 
$
255,371


Amortization of finite-lived intangible assets based on the in-process third-party valuation appraisals is as follows for the next five years: $330,029 in 2018 , $330,045 in 2019 , $326,992 in 2020 , $325,215 in 2021 and $322,245 in 2022 .

NOTE 5 – EXIT OR DISPOSAL ACTIVITIES
Management is continually re-evaluating the Company’s operating facilities, including acquired operating facilities, against its long-term strategic goals. Liabilities associated with exit or disposal activities are recognized as incurred in accordance with the Exit or Disposal Cost Obligations Topic of
 
the ASC. Provisions for qualified exit costs are made at the time a facility is no longer operational. Qualified exit costs primarily include post-closure rent expenses or costs to terminate the contract before the end of its term and costs of employee terminations. Adjustments may be made to liabilities accrued for qualified exit costs if information becomes available upon which more accurate amounts can be reasonably estimated. Concurrently, property, plant and equipment is tested for

52  

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

impairment in accordance with the Property, Plant and Equipment Topic of the ASC, and if impairment exists, the carrying value of the related assets is reduced to estimated fair value. Additional impairment may be recorded for subsequent revisions in estimated fair value. Adjustments to prior provisions and additional impairment charges for property, plant and equipment of closed sites being held for disposal are recorded in Other general expense – net.
During 2017 , 13 stores in The Americas Group and 2 branches in the Performance Coatings Group were closed due to lower demand or redundancy. Accruals for exit and disposal activities of $4,456 were acquired in connection with the Acquisition. The Company is currently evaluating all legacy operations in response to the Acquisition in order to optimize operations. These Acquisition-related restructuring charges are recorded in the Administrative segment as presented in the table below. Provisions of $47,308 and $143 for severance and other qualified exit costs related to the Acquisition and other 2017 activity were charged to the Administrative Segment and Performance Coatings Group, respectively. Provisions for severance and other qualified exit costs related to manufacturing facilities, distribution facilities, stores and branches closed prior to 2017 of $3,052 were recorded.
During 2016 , 16 stores in The Americas Group, 13 branches in the Performance Coatings Group and 2 facilities in Consumer Brands Group were closed due to lower demand or
 
redundancy. Provisions for severance and other qualified exit costs of $1,020 and $505 were charged to the Consumer Brands Group and Performance Coatings Group, respectively. Provisions for severance and other qualified exit costs related to manufacturing facilities, distribution facilities, stores and branches closed prior to 2016 of $1,513 were recorded.
During 2015 , 32 stores in The Americas Group and 7 branches in the Performance Coatings Group were closed due to lower demand or redundancy. In addition, the Performance Coatings Group exited a business in Europe. Provisions for severance and other qualified exit cost of $168 and $8,329 were charged to The Americas Group and Performance Coatings Group, respectively. Provisions for severance and other qualified exit costs related to manufacturing facilities, distribution facilities, stores and branches closed prior to 2015 of $1,264 were recorded.
At December 31, 2017 , a portion of the remaining accrual for qualified exit costs relating to facilities shutdown prior to 2015 is expected to be incurred by the end of 2018 . The remaining portion of the ending accrual for facilities shutdown prior to 2015 primarily represented post-closure contractual expenses related to certain owned facilities which are closed and being held for disposal. The Company cannot reasonably estimate when such matters will be concluded to permit disposition.
The following tables summarize the activity and remaining liabilities associated with qualified exit costs:
(Thousands of dollars)
 
Exit Plan
 
Balance at December 31, 2016
 
Acquired Balances
 
Provisions in
Cost of goods
sold or SG&A
 
Actual
expenditures
charged to
accrual
 
Balance at December 31, 2017
Administrative segment Acquisition-related restructuring in 2017:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
 
 
$
3,303

 
$
38,739

 
$
(36,023
)
 
$
6,019

Other qualified exit costs
 
 
 
1,153

 
8,569

 
(4,181
)
 
5,541

Performance Coatings Group stores shutdown in 2017:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
 
 
 
 
14

 

 
14

Other qualified exit costs
 
 
 
 
 
129

 
(8
)
 
121

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

 
 
 
2,910

 
(3,796
)
 
21

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

 
 
 

 
(136
)
 

Other qualified exit costs
 
269

 
 
 
97

 
(255
)
 
111

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

 
 
 
20

 
(215
)
 

Performance Coatings Group stores shutdown in 2015:
 
 
 
 
 
 
 
 
 
 
Other qualified exit costs
 
433

 
 
 
25

 
(446
)
 
12

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

 
 
 

 
(362
)
 
1,546

Totals
 
$
3,848

 
$
4,456

 
$
50,503

 
$
(45,422
)
 
$
13,385




53

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

(Thousands of dollars)
 
Exit Plan
 
Balance at December 31, 2015
 
Provisions in
Cost of goods
sold or SG&A
 
Actual
expenditures
charged to
accrual
 
Balance at December 31, 2016
Consumer Brands Group facilities shutdown in 2016:
 
 
 
 
 
 
 
 
Severance and related costs
 
 
 
$
1,020

 
$
(113
)
 
$
907

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

 
 
 
136

Other qualified exit costs
 
 
 
369

 
(100
)
 
269

The Americas Group stores shutdown in 2015:
 
 
 
 
 
 
 

Other qualified exit costs
 
$
12

 
481

 
(298
)
 
195

Performance Coatings Group stores shutdown in 2015:
 
 
 
 
 
 
 

Severance and related costs
 
1,096

 
 
 
(1,096
)
 

Other qualified exit costs
 
2,750

 
499

 
(2,816
)
 
433

The Americas Group stores shutdown in 2014:
 
 
 
 
 
 
 

Other qualified exit costs
 
184

 
 
 
(81
)
 
103

Consumer Brands Group facilities shutdown in 2014:
 
 
 
 
 
 
 

Severance and related costs
 
445

 
 
 
(46
)
 
399

Other qualified exit costs
 
52

 
 
 
(39
)
 
13

Performance Coatings Group exit of business in 2014:
 
 
 
 
 
 
 
 
Severance and related costs
 
430

 
 
 
(430
)
 

Other qualified exit costs
 
353

 
430

 
(600
)
 
183

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

 
103

 
(648
)
 
1,210

Totals
 
$
7,077

 
$
3,038

 
$
(6,267
)
 
$
3,848


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

 
$
(156
)
 
$
12

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

 
1,341

 
(245
)
 
1,096

Other qualified exit costs
 

 
6,988

 
(4,238
)
 
2,750

The Americas Group stores shutdown in 2014:
 
 
 
 
 
 
 
 
Other qualified exit costs
 
$
280

 
142

 
(238
)
 
184

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

 
466

 
(2,753
)
 
445

Other qualified exit costs
 
781

 
6

 
(735
)
 
52

Performance Coatings Group exit of business in 2014:
 
 
 
 
 
 
 
 
Severance and related costs
 
104

 
326

 
 
 
430

Other qualified exit costs
 
1,080

 
324

 
(1,051
)
 
353

The Americas Group facility shutdown in 2013:
 
 
 
 
 
 
 
 
Severance and related costs
 
654

 
 
 
(654
)
 

Other qualified exit costs
 
1,205

 
 
 
(411
)
 
794

Performance Coatings Group stores shutdown in 2013:
 
 
 
 
 
 
 
 
Severance and related costs
 
28

 
 
 
(28
)
 

Other qualified exit costs
 
138

 
 
 
(138
)
 

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

 
 
 
(553
)
 
961

Totals

$
8,516

 
$
9,761

 
$
(11,200
)
 
$
7,077




54  

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

NOTE 6 – PENSION, HEALTH CARE AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides pension benefits to substantially all employees through primarily noncontributory defined contribution or defined benefit plans and certain health care and life insurance benefits to domestic active employees and eligible retirees. In accordance with the Retirement Benefits Topic of the ASC, the Company recognizes an asset for overfunded defined benefit pension or other postretirement benefit plans and a liability for unfunded or underfunded plans. In addition, actuarial gains and losses and prior service costs of such plans are recorded in Cumulative other comprehensive loss, a component of Shareholders’ equity. The amounts recorded in Cumulative other comprehensive loss will continue to be modified as actuarial assumptions and service costs change, and all such amounts will be amortized to expense over a period of years through the net pension cost (credit) and net periodic benefit cost.
Health care plans. The Company provides certain domestic health care plans that are contributory and contain cost-sharing features such as deductibles and coinsurance. There were 26,565 , 22,708 and 21,918 active employees entitled to receive benefits under these plans at December 31, 2017 , 2016 and 2015 , respectively. The cost of these benefits for active employees, which includes claims incurred and claims incurred but not reported, amounted to $281,158 , $220,589 and $217,781 for 2017 , 2016 and 2015 , respectively.
Defined contribution pension plans. The Company’s annual contribution for its domestic defined contribution pension plan was $38,426 , $36,731 and $35,435 for 2017 , 2016 and 2015 , respectively. The contribution percentage ranges from two percent to seven percent of compensation for covered employees based on an age and service formula. Assets in employee accounts of the domestic defined contribution pension plan are invested in various investment funds as directed by the participants. These investment funds did not own a significant number of shares of the Company’s common stock for any year presented. In connection with the Acquisition, the Company acquired two defined contribution plans.
The Company’s annual contributions for its foreign defined contribution pension plans, which are based on various percentages of compensation for covered employees up to certain limits, were $10,480 , $6,676 and $5,888 for 2017 , 2016 and 2015 , respectively. Assets in employee accounts of the
 
foreign defined contribution pension plans are invested in various investment funds. These investment funds did not own a significant number of shares of the Company’s common stock for any year presented.
Defined benefit pension plans. Prior to December 31, 2017 , the Company had one salaried and one hourly domestic defined benefit pension plan. In connection with the Acquisition, the Company acquired Valspar's domestic defined benefit pension plan. Effective December 31, 2017 , the three domestic defined benefit pension plans were merged into one plan. The Company also has thirty-one foreign defined benefit pension plans, twelve of which were acquired through the Acquisition.
At December 31, 2017 , the domestic defined benefit pension plan was overfunded, with a projected benefit obligation of $916,175 , fair value of plan assets of $1,188,638 and excess plan assets of $272,463 . The plan is funded in accordance with all applicable regulations at December 31, 2017 and no funding will be required in 2018 . At December 31, 2016 , the domestic salaried and hourly defined benefit pension plans were overfunded, with a projected benefit obligation of $632,797 , fair value of plan assets of $847,013 and excess plan assets of $214,216 . At December 31, 2015 , the domestic salaried and hourly defined benefit pension plan were overfunded, with a projected benefit obligation of $624,791 , fair value of plan assets of $858,605 and excess plan assets of $233,814 .
At December 31, 2017 , twenty-six of the Company’s foreign defined benefit pension plans were unfunded or underfunded, with combined accumulated benefit obligations, projected benefit obligations, fair values of net assets and deficiencies of plan assets of $190,241 , $230,479 , $136,674 and $93,805 , respectively. The $142,725 increase in the combined projected benefit obligations of all foreign defined benefit pension plans from 2016 was primarily due to the acquired Valspar plans.
The Company expects to make the following benefit payments for all domestic and foreign defined benefit pension plans: $75,782 in 2018 ; $72,174 in 2019 ; $74,673 in 2020 ; $75,322 in 2021 ; $75,864 in 2022 ; and $375,592 in 2022 through 2026 . The Company expects to contribute $6,131 to the foreign plans in 2018 .
The estimated net actuarial losses and prior service costs for the defined benefit pension plans that are expected to be amortized from Cumulative other comprehensive loss into the net pension costs in 2018 are $1,532 and $1,458 , respectively.

55

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


The following table summarizes the components of the net pension costs and Cumulative other comprehensive loss related to the defined benefit pension plans:
 
Domestic
Defined Benefit Pension Plans
 
Foreign
Defined Benefit Pension Plans
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Net pension costs (credits):
 
 
 
 
 
 
 
 
 
 
 
Service costs
$
21,711

 
$
22,291

 
$
21,120

 
$
7,039

 
$
4,225

 
$
5,071

Interest costs
31,085

 
26,498

 
24,535

 
8,177

 
7,441

 
8,719

Expected returns on plan assets
(48,275
)
 
(50,197
)
 
(52,095
)
 
(9,070
)
 
(6,915
)
 
(9,296
)
Amortization of prior service costs
1,362

 
1,205

 
1,310

 
 
 
 
 
 
Amortization of actuarial losses
6,210

 
4,532

 
1,962

 
1,833

 
1,540

 
1,910

Ongoing pension costs (credits)
12,093

 
4,329

 
(3,168
)
 
7,979

 
6,291

 
6,404

Settlement costs (credits)
(1,990
)
 
 
 
 
 
71

 
4,231

 
3,255

Net pension costs (credits)
10,103

 
4,329

 
(3,168
)
 
8,050

 
10,522

 
9,659

Other changes in plan assets and projected benefit
obligation recognized in Cumulative other comprehensive loss (before taxes):
 
 
 
 
 
 
 
 
 
 
 
Net actuarial (gains) losses arising during the year
(65,829
)
 
18,926

 
15,359

 
(13,960
)
 
17,030

 
1,907

Prior service costs arising during the year
844

 
2,081

 


 
 
 
 
 
 
Amortization of actuarial losses
(4,220
)
 
(4,532
)
 
(1,962
)
 
(1,904
)
 
(1,540
)
 
(1,910
)
Amortization of prior service costs
(1,362
)
 
(1,205
)
 
(1,310
)
 
 
 
 
 
 
Exchange rate loss recognized during year
 
 
 
 
 
 
4,133

 
(11,627
)
 
(5,830
)
Total recognized in Cumulative other
comprehensive loss
(70,567
)
 
15,270

 
12,087

 
(11,731
)
 
3,863

 
(5,833
)
Total recognized in net pension costs (credits)
and Cumulative other comprehensive loss
$
(60,464
)
 
$
19,599

 
$
8,919

 
$
(3,681
)
 
$
14,385

 
$
3,826

 
 
 
 
 
 
 
 
 
 
 
 
The Company employs a total return investment approach for the domestic and foreign defined benefit pension plan assets. A mix of equities and fixed income investments are used to maximize the long-term return of assets for a prudent level of risk. In determining the expected long-term rate of return on defined benefit pension plan assets,
 
management considers the historical rates of return, the nature of investments and an expectation of future investment strategies. The target allocations for plan assets are 35 65 percent equity securities and 35 55 percent fixed income securities.

56  

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

The following tables summarize the fair value of the defined benefit pension plan assets at December 31, 2017 , 2016 and 2015 . The presentation is in accordance with the Retirement Benefits Topic of the ASC, as updated by ASU No. 2015-07 (see Note 1).
 
Fair value at December 31, 2017
 
Quoted Prices in 
Active Markets for Identical
Assets
(Level 1)
 
Significant Other
Observable 
Inputs
(Level 2)
 
Significant
Unobservable 
Inputs
(Level 3)
Investments at fair value:
 
 
 
 
 
 
 
Equity investments (1)
$
514,983

 
$
409,911

 
$
105,072

 
 
Fixed income investments (2)
380,902

 
146,816

 
234,086

 
 
Other assets (3)
39,196

 
 
 
39,196

 

Total investments in fair value hierarchy
935,081

 
$
556,727

 
$
378,354

 

Investments measured at NAV or its equivalent (4)
533,561

 
 
 
 
 
 
Total investments
$
1,468,642

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value at December 31, 2016
 
Quoted Prices in
Active Markets for Identical
Assets
(Level 1)
 
Significant Other
Observable 
Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Investments at fair value:
 
 
 
 
 
 
 
Equity investments (1)
$
393,045

 
$
321,152

 
$
71,893

 
 
Fixed income investments (2)
294,103

 
144,668

 
149,435

 
 
Other assets (3)
14,643

 
 
 
14,643

 
 
Total investments in fair value hierarchy
701,791

 
$
465,820

 
$
235,971

 

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

 
 
 
 
 
 
Total investments
$
1,012,021

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value at December 31, 2015
 
Quoted Prices in
Active Markets for Identical
Assets
(Level 1)
 
Significant Other
Observable 
Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Investments at fair value:
 
 
 
 
 
 
 
Equity investments (1)
$
435,690

 
$
372,033

 
$
63,657

 
 
Fixed income investments (2)
290,470

 
141,448

 
149,022

 
 
Other assets (3)
16,361

 
 
 
16,361

 
 
Total investments in fair value hierarchy
742,521

 
$
513,481

 
$
229,040

 

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

 
 
 
 
 
 
Total investments
$
1,020,944

 
 
 
 
 
 


(1) This category includes actively managed equity assets that track primarily to the S&P 500.
(2) This category includes government and corporate bonds that track primarily to the Barclays Capital Aggregate Bond Index.
(3) This category includes real estate and pooled investment funds.
(4) This category includes pooled investment funds and private equity funds that are measured at NAV or its equivalent using the practical expedient. Therefore, these investments are not classified in the fair value hierarchy.

Included as equity investments in the domestic defined benefit pension plan assets at December 31, 2017 were 300,000 shares of the Company’s common stock with a
 
market value of $123,012 , representing 10.3 percent of total domestic plan assets. Dividends received on the Company’s common stock during 2017 totaled $1,020 .

57

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

The following table summarizes the obligations, plan assets and assumptions used for the defined benefit pension plans, which are all measured as of December 31:
 
Domestic
Defined Benefit Pension Plans
 
Foreign
Defined Benefit Pension Plans
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Accumulated benefit obligations
at end of year
$
913,363

 
$
630,159

 
$
621,873

 
$
308,164

 
$
172,047

 
$
172,426

Projected benefit obligations:
 
 
 
 
 
 
 
 
 
 
 
Balances at beginning of year
$
632,797

 
$
624,791

 
$
653,338

 
$
206,873

 
$
201,854

 
$
234,524

Service costs
21,711

 
22,291

 
21,120

 
7,039

 
4,225

 
5,071

Interest costs
31,085

 
26,498

 
24,535

 
8,177

 
7,441

 
8,719

Actuarial losses (gains)
67,945

 
8,132

 
(40,602
)
 
(4,002
)
 
43,736

 
(3,045
)
Acquisition
246,894

 
 
 
 
 
115,045

 
 
 
 
Contributions and other
844

 
2,081

 

 
1,397

 
947

 
1,072

Settlements
(43,381
)
 
 
 
 
 
(758
)
 
(14,862
)
 
(18,707
)
Effect of foreign exchange
 
 
 
 
 
 
22,938

 
(30,360
)
 
(17,211
)
Benefits paid
(41,720
)
 
(50,996
)
 
(33,600
)
 
(7,112
)
 
(6,108
)
 
(8,569
)
Balances at end of year
916,175

 
632,797

 
624,791

 
349,597

 
206,873

 
201,854

Plan assets:
 
 
 
 
 
 
 
 
 
 
 
Balances at beginning of year
847,013

 
858,605

 
896,071

 
165,008

 
162,339

 
187,645

Actual returns on plan assets
182,049

 
39,404

 
(3,866
)
 
16,282

 
33,569

 
4,844

Acquisition
244,677

 
 
 
 
 
82,314

 
 
 
 
Contributions and other
 
 
 
 

 
6,048

 
15,019

 
11,424

Settlements
(43,381
)
 
 
 
 
 
(758
)
 
(14,862
)
 
(18,707
)
Effect of foreign exchange
 
 
 
 
 
 
18,222

 
(24,949
)
 
(14,298
)
Benefits paid
(41,720
)
 
(50,996
)
 
(33,600
)
 
(7,112
)
 
(6,108
)
 
(8,569
)
Balances at end of year
1,188,638

 
847,013

 
858,605

 
280,004

 
165,008

 
162,339

Excess (deficient) plan assets over
projected benefit obligations
$
272,463

 
$
214,216

 
$
233,814

 
$
(69,593
)
 
$
(41,865
)
 
$
(39,515
)
Assets and liabilities recognized in the
Consolidated Balance Sheets:
 
 
 
 
 
 
 
 

 
 
Deferred pension assets
$
272,463

 
$
214,216

 
$
233,814

 
$
24,280

 
$
11,313

 
$
11,068

Other accruals
 
 
 
 
 
 
(2,523
)
 
(1,522
)
 
(1,442
)
Other long-term liabilities
 
 

 


 
(91,350
)
 
(51,656
)
 
(49,141
)
 
$
272,463

 
$
214,216

 
$
233,814

 
$
(69,593
)
 
$
(41,865
)
 
$
(39,515
)
Amounts recognized in Cumulative other
comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial losses
$
(64,799
)
 
$
(134,847
)
 
$
(120,454
)
 
$
(33,873
)
 
$
(45,604
)
 
$
(41,741
)
Prior service costs
(5,496
)
 
(6,015
)
 
(5,138
)
 
 
 
 
 
 
 
$
(70,295
)
 
$
(140,862
)
 
$
(125,592
)
 
$
(33,873
)
 
$
(45,604
)
 
$
(41,741
)
Weighted-average assumptions used to
determine projected benefit obligations:
 
 
 
 
 
 
 
 
 
 
 
Discount rate
3.60
%
 
4.20
%
 
4.40
%
 
2.73
%
 
3.21
%
 
4.20
%
Rate of compensation increase
3.33
%
 
3.38
%
 
3.14
%
 
3.69
%
 
4.43
%
 
4.00
%
Weighted-average assumptions used to
determine net pension costs:
 
 
 
 
 
 
 
 
 
 
 
Discount rate
4.15
%
 
4.40
%
 
3.95
%
 
3.88
%
 
4.20
%
 
3.92
%
Expected long-term rate of
return on assets
5.00
%
 
6.00
%
 
6.00
%
 
4.75
%
 
4.70
%
 
4.84
%
Rate of compensation increase
3.30
%
 
3.14
%
 
4.00
%
 
4.33
%
 
4.00
%
 
3.70
%

58  

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

Postretirement Benefits Other Than Pensions. Employees of the Company hired in the United States prior to January 1, 1993 who are not members of a collective bargaining unit, and certain groups of employees added through acquisitions, are eligible for health care and life
insurance benefits upon
 
retirement, subject to the terms of the unfunded plans. There were 3,486 , 4,524 and 4,442 retired employees entitled to receive such postretirement benefits at December 31, 2017 , 2016 and 2015 , respectively.



The following table summarizes the obligation and the assumptions used for postretirement benefits other than pensions:
 
Postretirement Benefits Other than Pensions
 
2017
 
2016
 
2015
Benefit obligation:
 
 
 
 
 
Balance at beginning of year - unfunded
$
265,137

 
$
263,383

 
$
295,149

Service cost
2,105

 
2,244

 
2,485

Interest cost
10,749

 
11,009

 
11,182

Acquisition
17,010

 
 
 
 
Actuarial loss (gain)
11,637

 
7,548

 
(19,370
)
Plan amendments
 
 


 
(9,269
)
Benefits paid
(15,815
)
 
(19,047
)
 
(16,794
)
Balance at end of year - unfunded
$
290,823

 
$
265,137

 
$
263,383

Liabilities recognized in the Consolidated Balance Sheets:
 
 
 
 
 
Postretirement benefits other than pensions
$
(274,675
)
 
$
(250,397
)
 
$
(248,523
)
Other accruals
(16,148
)
 
(14,740
)
 
(14,860
)
 
$
(290,823
)
 
$
(265,137
)
 
$
(263,383
)
Amounts recognized in Cumulative other comprehensive loss:
 
 
 
 
 
Net actuarial losses
$
(44,147
)
 
$
(23,211
)
 
$
(15,664
)
Prior service credits
12,625

 
19,205

 
25,784

 
$
(31,522
)
 
$
(4,006
)
 
$
10,120

Weighted-average assumptions used to determine benefit obligation:
 
 
 
 
 
Discount rate
3.61
%
 
4.10
%
 
4.30
%
Health care cost trend rate - pre-65
7.00
%
 
6.00
%
 
6.00
%
Health care cost trend rate - post-65
5.00
%
 
5.50
%
 
5.00
%
Prescription drug cost increases
11.00
%
 
10.50
%
 
11.50
%
Employer Group Waiver Plan (EGWP) trend rate
11.00
%
 
10.60
%
 
11.50
%
Weighted-average assumptions used to determine net periodic benefit cost:
 
 
 
 
 
Discount rate
4.10
%
 
4.30
%
 
3.90
%
Health care cost trend rate - pre-65
6.00
%
 
6.00
%
 
7.00
%
Health care cost trend rate - post-65
5.50
%
 
5.00
%
 
6.50
%
Prescription drug cost increases
10.50
%
 
11.50
%
 
6.50
%



59

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

The following table summarizes the components of the net periodic benefit cost and Cumulative other comprehensive loss related to postretirement benefits other than pensions:
 
Postretirement Benefits Other than Pensions
 
2017
 
2016
 
2015
Net periodic benefit cost:
 
 
 
 
 
Service cost
$
2,105

 
$
2,244

 
$
2,485

Interest cost
10,749

 
11,009

 
11,182

Amortization of actuarial losses
32

 


 
1,011

Amortization of prior service credit
(6,579
)
 
(6,578
)
 
(4,529
)
Ongoing pension costs (credits)
6,307

 
6,675

 
10,149

  Settlement (credits) costs
(9,332
)
 
 
 
 
  Net pension (credits) costs
(3,025
)
 
6,675

 
10,149

 
 
 
 
 
 
Other changes in projected benefit obligation recognized in
Cumulative other comprehensive loss (before taxes):
 
 
 
 
 
Net actuarial loss (gain) arising during the year
11,637

 
7,548

 
(19,370
)
Prior service credit arising during the year
 
 


 
(9,269
)
Amortization of actuarial losses
(32
)
 


 
(1,011
)
Settlement costs
9,332

 
 
 
 
Amortization of prior service credit
6,579

 
6,578

 
4,529

Total recognized in Cumulative other comprehensive loss
27,516

 
14,126

 
(25,121
)
Total recognized in net periodic benefit cost and
Cumulative other comprehensive loss
$
24,491

 
$
20,801

 
$
(14,972
)



The estimated net actuarial losses and prior service (credits) for postretirement benefits other than pensions that are expected to be amortized from Cumulative other comprehensive loss into net periodic benefit cost in 2018 are $2,326 and $(6,569) , respectively.
The assumed health care cost trend rate and prescription drug cost increases used to determine the net periodic benefit cost for postretirement health care benefits for 2018 both decrease in each successive year until reaching 4.5 percent in 2026 . The assumed health care and prescription drug cost trend rates have a significant effect on the amounts reported for the postretirement health care benefit obligation. A one-percentage-point change in assumed health care and prescription drug cost trend rates would have had the following effects at December 31, 2017 :

 
One-Percentage Point
 
Increase
 
(Decrease)
Effect on total of service and interest cost components
$
104

 
$
(124
)
Effect on the postretirement benefit obligation
$
2,655

 
$
(2,794
)






 


The Company expects to make retiree health care benefit cash payments as follows:
 
Expected Cash
Payments
2018
$
17,192

2019
18,139

2020
19,058

2021
19,541

2022
19,816

2023 through 2027
98,270

Total expected benefit cash payments
$
192,016


60  

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

NOTE 7 – DEBT
Long-term debt
 
Due Date
 
2017
 
2016
 
2015
2.25% Senior Notes (1)
2020
 
$
1,493,106

 


 
 
3.45% Senior Notes  (1)
2027
 
1,483,244

 
 
 
 
2.75% Senior Notes  (1)
2022
 
1,240,758

 
 
 
 
4.50% Senior Notes (1)
2047
 
1,228,647

 
 
 
 
Term Loan
2022
 
847,337

 
 
 
 
3.125% Senior Notes (1)
2024
 
495,602

 
 
 
 
4.20% Senior Notes (2)
2022
 
422,370

 


 
 
3.45% Senior Notes
2025
 
397,260

 
$
396,898

 
$
396,536

4.55% Senior Notes
2045
 
393,859

 
393,637

 
393,414

3.95% Senior Notes (2)
2026
 
362,381

 


 
 
7.25% Senior Notes (2)
2019
 
319,394

 


 
 
4.00% Senior Notes
2042
 
296,094

 
295,938

 
295,781

Floating Rate Loan
2021
 
269,247

 
 
 
 
3.30% Senior Notes (2)
2025
 
249,207

 


 
 
4.40% Senior Notes (2)
2045
 
238,334

 


 
 
7.375% Debentures
2027
 
118,982

 
118,936

 
118,889

0.92% Fixed Rate Loan
2021
 
23,933

 
 
 
 
7.45% Debentures
2097
 
3,500

 
3,500

 
3,500

2.00% to 8.0% Promissory Notes
Through 2027
 
2,490

 
2,417

 
1,628

1.35% Senior Notes
2017
 


 


 
697,530

 
 
 
$
9,885,745

 
$
1,211,326

 
$
1,907,278

 
 
 
 
 
 
 
 
(1)  Senior notes issued in 2017 to fund the Acquisition (2)  Senior notes acquired in 2017 through the Acquisition
 
 
 
 
 
 
Maturities of long-term debt are as follows for the next five years: $1,179 in 2018 ; $297,740 in 2019 ; $1,625,067 in 2020 , $869,161 in 2021 and $1,800,273 in 2022 . Interest expense on long-term debt was $257,350 , $75,509 and $54,634 for 2017 , 2016 and 2015 , respectively.
Among other restrictions, the Company’s notes, debentures and revolving credit agreement contain certain covenants relating to liens, ratings changes, merger and sale of assets, consolidated leverage and change of control, as defined in the agreements. In the event of default under any one of these arrangements, acceleration of the maturity of any one or more of these borrowings may result. The Company was in compliance with all covenants for all years presented.
On 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. See Note 2. 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 year ended December 31, 2017 , the amortization of the unrealized gain reduced interest expense by $5.2 million .
 
On June 2, 2017 the Company closed its previously announced exchange offers and consent solicitations (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 (Exchange Notes). The Exchange Notes are unsecured senior obligations of the Company. The Company did not receive any cash proceeds from the issuance of the Exchange Notes.
In August 2017, the Company entered into a floating rate loan of €225.0 million and a fixed rate loan of €20.0 million . The floating rate loan agreement bears interest at the six-month Euro Interbank Offered Rate plus a margin. The fixed rate loan bears interest at 0.92% . The proceeds are being used for general corporate purposes. The loans mature on August 23, 2021.
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. 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% . As of December 31, 2017 , the term loan had an outstanding principal balance of $850.0 million at an approximate interest rate of 2.62% .

61

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

On July 28, 2015, the Company issued $400,000 of 3.45% Senior Notes due 2025 and $400,000 of 4.55% Senior Notes due 2045. The notes are covered under a shelf registration filed with the Securities and Exchange Commission (SEC) on July 28, 2015. The proceeds were used for general corporate purposes, including repayment of a portion of the Company’s outstanding short-term borrowings.
Short-term borrowings. In September 2017, the Company entered into a five -year letter of credit agreement, subsequently amended, with an aggregate availability of $500.0 million . On May 6, 2016, the Company entered into a five -year credit agreement, subsequently amended on multiple dates. The credit agreement gives the Company the right to borrow and to obtain the issuance, renewal, extension and increase of a letter of credit up to an aggregate availability of $500.0 million . The credit agreements are being used for general corporate purposes. At December 31, 2017 , there was $350.0 million borrowings outstanding under these credit agreements. There were no borrowings outstanding at December 31, 2016 and 2015 .
On July 16, 2015, the Company and three of its wholly owned subsidiaries, Sherwin-Williams Canada, Inc. (SW Canada), Sherwin-Williams Luxembourg S.à r.l. (SW Lux) and Sherwin-Williams UK Holding Limited, entered into a multi-currency five -year $1.350 billion credit agreement (multi-currency credit agreement). The multi-currency credit agreement is being used for general corporate purposes, including the financing of working capital requirements. The multi-currency credit agreement allows the Company to extend the maturity of the facility with two one -year extension options and to increase the aggregate amount of the facility to $1.850 billion , both of which are subject to the discretion of each lender. The multi-currency credit agreement replaced the previous credit agreements for the Company, SW Canada and SW Lux in the amounts of $1.050 billion , CAD 150,000 and €95,000 (Euro), respectively. At December 31, 2017 , there were no short-term borrowings under the multi-currency credit agreement. Borrowings outstanding under various other foreign programs were $8,967 at December 31, 2017 with a weighted average interest rate of 3.2% .
There were $274.8 million borrowings outstanding under the Company's domestic commercial paper program at December 31, 2017 . There were no borrowings outstanding at December 31, 2016 and 2015 .

NOTE 8 – OTHER LONG-TERM LIABILITIES
The operations of the Company, like those of other companies in our industry, are subject to various domestic and foreign environmental laws and regulations. These laws and regulations not only govern current operations and products, but also impose potential liability on the Company for past
 
operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and the industry in the future. Management believes that the Company conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance.
The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned sites (including sites which were previously owned and/or operated by businesses acquired by the Company). In addition, the Company, together with other parties, has been designated a potentially responsible party under federal and state environmental protection laws for the investigation and remediation of environmental contamination and hazardous waste at a number of third-party sites, primarily Superfund sites. In general, these laws provide that potentially responsible parties may be held jointly and severally liable for investigation and remediation costs regardless of fault. The Company may be similarly designated with respect to additional third-party sites in the future.
The Company initially provides for estimated costs of environmental-related activities relating to its past operations and third-party sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs are determined based on currently available facts regarding each site. If the best estimate of costs can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is provided. The Company continuously assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Included in Other long-term liabilities at December 31, 2017 , 2016 and 2015 were accruals for extended environmental-related activities of $179,593 , $163,847 and $129,856 , respectively. Included in Other accruals at December 31, 2017 , 2016 and 2015 were accruals for estimated costs of current investigation and remediation activities of $28,556 , $19,969 and $22,493 , respectively.
Actual costs incurred may vary from the accrued estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to any given site, the volumetric contribution which may be attributed to the Company relative to that attributed to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site. If the Company’s future loss contingency is

62  

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

ultimately determined to be at the unaccrued maximum of the estimated range of possible outcomes for every site for which costs can be reasonably estimated, the Company’s accrual for environmental-related activities would be $98,751 higher than the minimum accruals at December 31, 2017 .
Four of the Company’s currently and formerly owned manufacturing sites account for the majority of the accrual for environmental-related activities and the unaccrued maximum of the estimated range of possible outcomes at December 31, 2017 . At December 31, 2017 , $162,378 , or 78.0 percent of the total accrual, related directly to these four sites. In the aggregate unaccrued maximum of $98,751 at December 31, 2017 , $77,762 , or 87.6 percent , related to the four manufacturing sites. While environmental investigations and remedial actions are in different stages at these sites, additional investigations, remedial actions and monitoring will likely be required at each site. Management cannot presently estimate the ultimate potential loss contingencies related to these sites or other less significant sites until such time as a substantial portion of the investigation at the sites is completed and remedial action plans are developed. In the event any future loss contingency significantly exceeds the current amount accrued, the recording of the ultimate liability may result in a material impact on net income for the annual or interim period during which the additional costs are accrued. Management does not believe that any potential liability ultimately attributed to the Company for its environmental-related matters will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time during which environmental investigation and remediation takes place. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.
Management expects these contingent environmental-related liabilities to be resolved over an extended period of time. Management is unable to provide a more specific time frame due to the indefinite amount of time to conduct investigation activities at any site, the indefinite amount of time to obtain environmental agency approval, as necessary, with respect to investigation and remediation activities, and the indefinite amount of time necessary to conduct remediation activities.
The Asset Retirement and Environmental Obligations Topic of the ASC requires a liability to be recognized for the fair value of a conditional asset retirement obligation if a settlement date and fair value can be reasonably estimated. The Company recognizes a liability for any conditional asset retirement obligation when sufficient information is available to reasonably estimate a settlement date to determine the fair value of such a liability. The Company has identified certain conditional asset
 
retirement obligations at various current and closed manufacturing, distribution and store facilities. These obligations relate primarily to asbestos abatement, hazardous waste Resource Conservation and Recovery Act (RCRA) closures, well abandonment, transformers and used oil disposals and underground storage tank closures. Using investigative, remediation and disposal methods that are currently available to the Company, the estimated costs of these obligations were accrued and are not significant. The recording of additional liabilities for future conditional asset retirement obligations may result in a material impact on net income for the annual or interim period during which the costs are accrued. Management does not believe that any potential liability ultimately attributed to the Company for its conditional asset retirement obligations will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time over which sufficient information may become available regarding the closure or modification of any one or group of the Company’s facilities.
An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.
NOTE 9 – LITIGATION
In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, the Company accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and the amount of any such loss cannot be reasonably estimated, any potential liability ultimately determined to be attributable to the Company may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. In those cases where no accrual is recorded or exposure to loss exists in

63

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

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 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, with the exception of the public nuisance litigation in California discussed below, 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

64  

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

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 judgment without the requirement to post a bond. Oral argument before the Sixth District Court of Appeal was held on August 24, 2017. On November 14, 2017, the Sixth District Court of Appeal entered its decision, which affirmed the trial court’s judgment of liability with respect to residences built before 1951 and reversed and vacated the trial court’s judgment with respect to residences built after 1950. The Sixth District Court of Appeal directed the trial court to: (i) recalculate the amount of the abatement fund to limit the fund to the amount necessary to cover the cost of inspecting and remediating pre-1951 residences; and (ii) hold an evidentiary hearing to appoint a suitable receiver. On November 29, 2017, the Company and the two other defendants filed
 
separate Petitions for Rehearing, which the Sixth District Court of Appeal denied on December 6, 2017. The Sixth District Court of Appeal’s decision became final on December 14, 2017. On December 22, 2017, the Company and the two other defendants submitted separate Petitions for Review to the California Supreme Court. On February 14, 2018, the California Supreme Court issued an order denying the Petitions for Review. The Company believes that the judgment conflicts with established principles of law and is unsupported by the evidence. The Company intends to file a Petition for Writ of Certiorari with the Supreme Court of the United States seeking discretionary review. The Company also intends to file a motion to stay the Santa Clara County, California proceeding while the Petition for Writ of Certiorari is pending.
Although the Company believes it is probable that a loss has occurred, the Company has concluded that it is not possible to reasonably estimate the range of potential loss due to the numerous possible outcomes and uncertainties, including, but not limited to, (i) the final amount of the abatement fund necessary to cover the cost of inspecting and remediating pre-1951 residences, as recalculated by the trial court, and (ii) the portion of the abatement fund for which the Company, the two other defendants and others are determined to be responsible. If the Company concludes that it is possible to reasonably estimate the range of potential loss once more definitive information becomes available, the Company will recognize the loss and disclose such information. Because of joint and several liability, it is possible the Company could ultimately be liable for the total amount of the abatement fund. In the event any significant liability is determined to be attributable to the Company relating to such litigation, the recording of any 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 liability is accrued.
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

65

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

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 are pending in the United States District Court for the Eastern District of Wisconsin (Ravon Owens v. American Cyanamid, et al., Cesar Sifuentes v. American Cyanamid, et al., and Glenn Burton, Jr. v. American Cyanamid, et al.) in which dispositive motions have been filed and are currently pending. No trial dates have been set by the District Court. In Maniya Allen, et al. v. American Cyanamid, et al., also pending in the United States District Court for the Eastern District of Wisconsin, cases involving seven of the 166 plaintiffs have been selected for discovery, although no trial dates have been set by the District Court.
 
Insurance coverage litigation . The Company and its liability insurers, including certain underwriters at Lloyd’s of London, initiated legal proceedings against each other to primarily determine, among other things, whether the costs and liabilities associated with the abatement of lead pigment are covered under certain insurance policies issued to the Company. The Company’s action, filed on March 3, 2006 in the Common Pleas Court, Cuyahoga County, Ohio, is currently stayed and inactive. The liability insurers’ action, which was filed on February 23, 2006 in the Supreme Court of the State of New York, County of New York, has been dismissed. An ultimate loss in the insurance coverage litigation would mean that insurance proceeds could be unavailable under the policies at issue to mitigate any ultimate abatement related costs and liabilities. The Company has not recorded any assets related to these insurance policies or otherwise assumed that proceeds from these insurance policies would be received in estimating any contingent liability accrual. Therefore, an ultimate loss in the insurance coverage litigation without a determination of liability against the Company in the lead pigment or lead-based paint litigation will have no impact on the Company’s results of operation, liquidity or financial condition. As previously stated, however, the Company has not accrued any amounts for the lead pigment or lead-based paint litigation and any significant liability ultimately determined to be attributable to the Company relating to such litigation may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued.


66  

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

NOTE 10 – CAPITAL STOCK
At December 31, 2017 , there were 300,000,000 shares of common stock and 30,000,000 shares of serial preferred stock authorized for issuance. Of the authorized serial preferred stock, 3,000,000 shares are designated as cumulative redeemable serial preferred and 1,000,000 shares are designated as convertible serial preferred stock. See Note 11 . Under the 2006 Equity and Performance Incentive Plan (2006 Employee Plan), 23,700,000 common shares may be issued or transferred. See Note 12 . An aggregate of 10,715,939 , 7,720,815 and 8,824,943 shares of common stock at December 31, 2017 , 2016 and 2015 , respectively, were reserved for the exercise and future grants of
 
option rights and future grants of restricted stock and restricted stock units. See Note 12 . Common shares outstanding shown in the following table included 489,260 , 488,714 and 487,900 shares of common stock held in a revocable trust at December 31, 2017 , 2016 and 2015 , respectively. The revocable trust is used to accumulate assets for the purpose of funding the ultimate obligation of certain non-qualified benefit plans. Transactions between the Company and the trust are accounted for in accordance with the Deferred Compensation – Rabbi Trusts Subtopic of the Compensation Topic of the ASC, which requires the assets held by the trust be consolidated with the Company’s accounts.
 
 
Common Shares
in Treasury
 
Common Shares
Outstanding
Balance at January 1, 2015
19,813,079

 
94,704,173

Shares tendered as payment for option rights exercised
14,542

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

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

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

Treasury stock purchased
3,575,000

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

 
92,246,525

Shares tendered as payment for option rights exercised
3,441

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

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

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

Balance at December 31, 2016
23,577,411

 
93,013,031

Shares tendered as payment for option rights exercised
16,545

 
(16,545
)
Shares issued for exercise of option rights
 
 
1,152,015

Shares tendered in connection with grants of restricted stock
82,777

 
(82,777
)
Net shares issued for grants of restricted stock
 
 
(182,079
)
Balance at December 31, 2017
23,676,733

 
93,883,645


NOTE 11 – STOCK PURCHASE PLAN
As of December 31, 2017 , 36,584 employees contributed to the Company’s ESOP, a voluntary defined contribution plan available to all eligible salaried employees. Participants are allowed to contribute, on a pretax or after-tax basis, up to the lesser of twenty percent of their annual compensation or the maximum dollar amount allowed under the Internal Revenue Code. The Company matches one hundred percent of all contributions up to six percent of eligible employee contributions. Such participant contributions may be invested in a variety of investment funds or a Company common stock fund and may be exchanged between investments as directed by the participant. Participants are permitted to diversify both future and prior Company matching contributions previously allocated to the Company common stock fund into a variety of investment funds.
 
The Company made contributions to the ESOP on behalf of participating employees, representing amounts authorized by employees to be withheld from their earnings, of $138,731 , $127,697 and $120,514 in 2017 , 2016 and 2015 , respectively. The Company’s matching contributions to the ESOP charged to operations were $90,682 , $85,525 and $80,356 for 2017 , 2016 and 2015 , respectively.
At December 31, 2017 , there were 10,033,576 shares of the Company’s common stock being held by the ESOP, representing 10.7 percent of the total number of voting shares outstanding. Shares of Company common stock credited to each member’s account under the ESOP are voted by the trustee under instructions from each individual plan member. Shares for which no instructions are received are voted by the trustee in the same proportion as those for which instructions are received.


67

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

NOTE 12 – STOCK-BASED COMPENSATION
The 2006 Employee Plan authorizes the Board of Directors, or a committee of the Board of Directors, to issue or transfer up to an aggregate of 23,700,000 shares of common stock, plus any shares relating to awards that expire, are forfeited or canceled. The Company issues new shares upon exercise of option rights and vesting of RSUs. The Employee Plan permits the granting of option rights, appreciation rights, restricted stock, restricted stock units (RSUs), performance shares and performance units to eligible employees. At December 31, 2017 , no appreciation rights, performance shares or performance units had been granted under the 2006 Employee Plan.
The 2006 Stock Plan for Nonemployee Directors (Nonemployee Director Plan) authorizes the Board of Directors, or a committee of the Board of Directors, to issue or transfer up to an aggregate of 200,000 shares of common stock, plus any shares relating to awards that expire, are forfeited or are canceled. The Nonemployee Director Plan permits the granting of option rights, appreciation rights, restricted stock and RSUs to members of the Board of Directors who are not employees of the Company. At December 31, 2017 , no option rights or appreciation rights had been granted under the Nonemployee Director Plan.
In connection with the Acquisition (see Note 2), the Company assumed certain outstanding RSUs of Valspar granted under the Amended and Restated 2015 Omnibus Equity Plan. Upon close of the Acquisition, the Valspar RSUs were converted into RSUs relating to common stock of the Company.
The cost of the Company’s stock-based compensation is recorded in accordance with the Stock Compensation Topic of the ASC. At December 31, 2017 , the Company had total unrecognized stock-based compensation expense of $127,222 that is expected to be recognized over a weighted-average period of 1.07 years. Stock-based compensation expense during 2017 , 2016 and 2015 was $90,292 , $72,109 and $72,342 , respectively. The related tax benefit was $34,343 , $27,442 and $27,634 during 2017 , 2016 and 2015 , respectively. Subsequent to the adoption of ASU No. 2016-09 in 2016 , excess tax benefits from share-based payments are recognized in the income tax provision rather than in other capital. For the years ended December 31, 2017 and 2016 , the Company's tax benefit from options exercised reduced the income tax provision by $86,540 and $44,233 , respectively.
 
Option rights. The fair value of the Company’s option rights was estimated at the date of grant using a Black-Scholes-Merton option-pricing model with the following weighted-average assumptions for all options granted:
 
2017
 
2016
 
2015
Risk-free interest rate
1.97%
 
1.24%
 
1.37%
Expected life of option rights
5.05 years
 
5.05 years
 
5.05 years
Expected dividend yield
of stock
0.85%
 
1.06%
 
1.13%
Expected volatility of stock
.213
 
.212
 
.245
The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant. The expected life of option rights was calculated using a scenario analysis model. Historical data was used to aggregate the holding period from actual exercises, post-vesting cancellations and hypothetical assumed exercises on all outstanding option rights. The expected dividend yield of stock is the Company’s best estimate of the expected future dividend yield. Expected volatility of stock was calculated using historical and implied volatilities. The Company applied an estimated forfeiture rate of 2.00 percent to the 2017 grants. This rate was calculated based upon historical activity and is an estimate of granted shares not expected to vest. If actual forfeitures differ from the expected rate, the Company may be required to make additional adjustments to compensation expense in future periods.
Grants of option rights for non-qualified and incentive stock options have been awarded to certain officers and key employees under the 2006 Employee Plan and the 2003 Stock Plan. The option rights generally become exercisable to the extent of one-third of the optioned shares for each full year following the date of grant and generally expire ten years after the date of grant. Unrecognized compensation expense with respect to option rights granted to eligible employees amounted to $56,986 at December 31, 2017 . The unrecognized compensation expense is being amortized on a straight-line basis over the three -year vesting period and is expected to be recognized over a weighted-average period of 1.10 years.
The weighted-average per share grant date fair value of options granted during 2017 , 2016 and 2015 was $77.14 , $49.36 and $50.73 , respectively. The total intrinsic value of option rights exercised during 2017 , 2016 , and 2015 was $255,482 , $129,230 and $223,417 , respectively. The total fair value of options vested during 2017 , 2016 and 2015 was $31,292 , $32,476 and $32,655 , respectively. There were no outstanding option rights for nonemployee directors at December 31, 2017 , 2016 and 2015 .

68  

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

A summary of the Company’s non-qualified and incentive stock option right activity is shown in the following table:
 
2017
 
2016
 
2015
 
Optioned
Shares
 
Weighted-
Average
Exercise
Price
Per Share
 
Aggregate
Intrinsic
Value
 
Optioned
Shares
 
Weighted-
Average
Exercise
Price
Per Share
 
Aggregate
Intrinsic
Value
 
Optioned
Shares
 
Weighted-
Average
Exercise
Price
Per Share
 
Aggregate
Intrinsic
Value
Outstanding beginning
of year
5,163,709

 
$
163.61

 
 
 
5,219,506

 
$
141.58

 
 
 
5,699,892

 
$
117.31

 
 
Granted
689,506

 
377.84

 
 
 
712,967

 
271.46

 
 
 
697,423

 
241.84

 
 
Exercised
(1,154,698
)
 
123.16

 
 
 
(733,876
)
 
108.81

 
 
 
(1,133,287
)
 
79.41

 
 
Forfeited
(49,977
)
 
267.02

 
 
 
(26,653
)
 
232.83

 
 
 
(43,632
)
 
193.60

 
 
Expired
(2,227
)
 
236.97

 
 
 
(8,235
)
 
176.28

 
 
 
(890
)
 
87.59

 
 
Outstanding end of year
4,646,313

 
$
204.33

 
$
955,810

 
5,163,709

 
$
163.61

 
$
545,531

 
5,219,506

 
$
141.58

 
$
616,866

Exercisable at end of year
3,288,237

 
$
156.43

 
$
833,938

 
3,783,755

 
$
130.59

 
$
522,921

 
3,807,351

 
$
110.96

 
$
565,934

 
The weighted-average remaining term for options outstanding at the end of 2017 , 2016 and 2015 was 6.28 , 6.25 and 6.44 years, respectively. The weighted-average remaining term for options exercisable at the end of 2017 , 2016 and 2015 was 5.11 , 5.20 and 5.47 years, respectively. Shares reserved for future grants of option rights, restricted stock and RSUs were 6,041,092 , 2,557,106 and 3,605,437 at December 31, 2017 , 2016 and 2015 , respectively.
Restricted stock and RSUs. Grants of RSUs, which generally require three years of continuous employment from the date of grant before vesting and receiving the stock without restriction, have been awarded to certain officers and key employees under the 2006 Employee Plan. The February 2017 and 2016 grants consisted of performance-based awards that vest at the end of a three -year period based on the Company’s achievement of specified financial goals relating to earnings per share and return on net assets employed. The February 2015 grant consisted of a combination of performance-based awards and time-based awards. The performance based awards vest at the end of a three -year period based on the Company’s achievement of specified financial goals relating to earnings per share. The time-based awards vest at the end of a three -year period based on continuous employment.
Unrecognized compensation expense with respect to grants of RSUs to eligible employees amounted to $68,540 at December 31, 2017 and is being amortized on a straight-line basis over the vesting period and is expected to be recognized over a weighted-average period of 0.94 years.
Grants of RSUs have been awarded to nonemployee directors under the Nonemployee Director Plan. These grants generally vest and stock is received without restriction to the extent of one-third of the RSUs for each year following the date of grant. Unrecognized compensation expense with respect to grants of RSUs to nonemployee directors amounted to $1,697 at December 31, 2017 and is being amortized on a straight-line
 
basis over the three -year vesting period and is expected to be recognized over a weighted-average period of 0.94 years.
A summary of the Company’s RSU activity for the years ended December 31 is shown in the following table:
 
2017
 
2016
 
2015
Outstanding at beginning
of year
397,326

 
467,744

 
655,276

Granted
112,647

 
99,662

 
112,494

Exchanged Valspar awards (net of forfeitures)
51,009

 

 

Vested
(215,433
)
 
(166,405
)
 
(290,901
)
Forfeited
(9,753
)
 
(3,675
)
 
(9,125
)
Outstanding at end of year
335,796

 
397,326

 
467,744

The weighted-average per share fair value of RSUs granted during 2017 , 2016 and 2015 was $313.88 , $257.99 and $285.88 , respectively.

NOTE 13 – OTHER
Other general expense - net . Included in Other general expense - net were the following:
 
2017
 
2016
 
2015
Provisions for environmental
matters - net
$
15,443

 
$
42,932

 
$
31,071

Loss (gain) on sale or disposition of assets
5,422

 
(30,564
)
 
(803
)
Total
$
20,865

 
$
12,368

 
$
30,268

Provisions for environmental matters–net represent initial provisions for site-specific estimated costs of environmental investigation or remediation and increases or decreases to

69

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

environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Environmental-related accruals are not recorded net of insurance proceeds in accordance with the Offsetting Subtopic of the Balance Sheet Topic of the ASC. See Note 8 for further details on the Company’s environmental-related activities.
The loss (gain) on sale or disposition of assets represents the net realized loss (gain) associated with the sale or disposal of property, plant and equipment and intangible assets previously used in the conduct of the primary business of the Company. The 2016 gain primarily relates to the sale of a closed domestic facility.
Other (income) expense - net . Included in Other (income) expense - net were the following:
 
2017
 
2016
 
2015
Dividend and royalty income
$
(7,648
)
 
$
(4,573
)
 
$
(3,668
)
Net expense from
financing activities
9,843

 
8,667

 
11,091

Foreign currency transaction related losses
450

 
7,335

 
9,503

Other income
(32,570
)
 
(25,279
)
 
(23,880
)
Other expense
12,951

 
9,263

 
13,036

Total
$
(16,974
)
 
$
(4,587
)
 
$
6,082

The Net expense from financing activities includes the net expense relating to changes in the Company’s financing fees.
Foreign currency transaction related losses represent net realized losses on U.S. dollar-denominated liabilities of foreign subsidiaries and net realized and unrealized losses from foreign currency option and forward contracts. There were no material foreign currency option and forward contracts outstanding at December 31, 2017 , 2016 and 2015 .
Other income and Other expense included items of revenue, gains, expenses and losses that were unrelated to the primary business purpose of the Company. There were no items
 
within Other income or Other expense that were individually significant at December 31, 2017 , 2016 and 2015 .
NOTE 14 – INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted. The Tax Act significantly revised the U.S. corporate income tax system by, among other things, lowering corporate income tax rates from 35% to 21% , implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. Staff Accounting Bulletin (SAB) No. 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under the Tax Act.
In accordance with SAB No. 118, based on the information available as of December 31, 2017 the Company recorded a provisional reduction of income taxes of $607,919 as a result of the Tax Act. The Company’s deferred tax liabilities were reduced by $560,198 due to the lower income tax rate. The remaining $47,721 is the effects of the implementation of the territorial tax system and the remeasurement of U.S. deferred tax liabilities on unremitted foreign earnings.
The final impact of the Tax Act may differ from the provisional amounts recorded at December 31, 2017 , due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Act.
During the fourth quarter of 2017 , the Company merged certain Valspar domestic subsidiaries that were acquired in a stock acquisition on June 1, 2017 into The Sherwin-Williams Company (Subsidiary mergers). As a result, the Company released $93,630 of deferred state income tax liabilities, which had a net income tax benefit of $60,860 .
The Subsidiary mergers along with the Tax Act reduced deferred income taxes by $668,779 in total in the fourth quarter 2017 (Deferred income tax reductions).

70  

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

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using the enacted tax rates and laws that are currently in effect. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2017 , 2016 and 2015 were as follows:
 
2017
 
2016
 
2015
Deferred tax assets:
 
 
 
 
 
Exit costs, environ-mental and other
similar items
$
50,193

 
$
74,535

 
$
63,851

Employee related and benefit items
104,098

 
166,313

 
141,974

Other items
110,960

 
148,910

 
116,302

Total deferred
tax assets
265,251

 
389,758

 
322,127

 
 
 
 
 
 
Deferred tax liabilities:
 
 
 
 
 
Depreciation and
amortization
1,506,650

 
254,430

 
241,101

LIFO inventories
78,952

 
83,659

 
89,330

Other items
49,670

 
59,746

 
33,433

Total deferred tax liabilities
1,635,272

 
397,835

 
363,864

 
 
 
 
 
 
Net deferred tax liabilities
$
1,370,021

 
$
8,077

 
$
41,737

As of December 31, 2017 , the Company’s deferred income tax liability recorded related to the preliminary purchase price accounting for Valspar was approximately $1,966,000 . This amount is preliminary and is subject to measurement period adjustments. Included in this amount are deferred tax liabilities recorded for intangible assets of $1,761,866 , estimated taxes payable of $47,963 on undistributed earnings of certain foreign subsidiaries expected to be repatriated by the Company and a $30,500 valuation allowance related to foreign tax credits.
Netted against the Company’s other deferred tax assets were valuation allowances of $44,101 , $17,292 and $14,663 at December 31, 2017 , 2016 and 2015 , respectively. The increase in the valuation allowance in 2017 can be attributed to the Acquisition, which increased the reserve by $20,784 . These
 
reserves resulted from the uncertainty as to the realization of the tax benefits from foreign net operating losses and other foreign assets. The Company has $25,095 of domestic net operating loss carryforwards acquired through acquisitions that have expiration dates through the tax year 2037 and foreign net operating losses of $250,461 ,which includes $138,746 of losses acquired as a part of the Acquisition. The foreign net operating losses are related to various jurisdictions that provide for both indefinite carryforward periods and others with carryforward periods that range from the tax years 2017 to 2037.
Significant components of the provisions for income taxes were as follows:
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
Federal
$
269,330

 
$
438,244

 
$
399,677

Foreign
53,442

 
31,125

 
30,145

State and local
39,320

 
61,402

 
60,319

Total current
362,092

 
530,771

 
490,141

Deferred:
 
 
 
 
 
Federal
(474,889
)
 
(56,891
)
 
13,505

Foreign
(42,292
)
 
(2,121
)
 
(10,752
)
State and local
(88,954
)
 
(9,229
)
 
2,223

Total deferred
(606,135
)
 
(68,241
)
 
4,976

Total (credits) provisions for income taxes
$
(244,043
)
 
$
462,530

 
$
495,117


The provisions for income taxes included the tax benefit from the Deferred income tax reductions and estimated taxes payable on that portion of undistributed earnings of foreign subsidiaries expected to be repatriated. The 2017 provision for income taxes included a $41,540 income tax expense related to discontinued operations.
Significant components of income before income taxes as used for income tax purposes, were as follows:
 
2017
 
2016
 
2015
Domestic
$
1,474,481

 
$
1,504,990

 
$
1,440,511

Foreign
53,738

 
90,243

 
108,455

 
$
1,528,219

 
$
1,595,233

 
$
1,548,966


71

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

A reconciliation of the statutory federal income tax rate to the effective tax rate follows: 
 
2017
 
2016
 
2015
Statutory federal
income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
Effect of:
 
 
 
 
 
State and local
income taxes
2.2

 
2.3

 
2.6

Investment vehicles
(1.4
)
 
(1.5
)
 
(1.6
)
Domestic production
activities
(3.0
)
 
(2.9
)
 
(2.2
)
Employee share-based payments
(5.6
)
 
(2.8
)
 


Other - net
(2.1
)
 
(1.1
)
 
(1.8
)
Subtotal
25.1
 %
 
29.0
 %
 
32.0
 %
Effect of:
 
 
 
 
 
Tax Act
(39.8
)
 

 

Subsidiary mergers
(4.0
)
 


 


Reported effective tax rate
(18.7
)%
 
29.0
 %
 
32.0
 %
The 2017 state and local income taxes, investment vehicles and domestic production activities components of the effective tax rate were consistent with the 2016 tax year. The tax benefit related to employee share based payments increased in 2017 compared to 2016 due to a significant increase in the excess tax benefit related to Company stock options exercised by current and former employees of the Company. The Company began receiving a tax benefit in 2016 by adopting ASU No. 2016-09. The impact of the Tax Cuts and Jobs Act legislation and the merger of the Valspar domestic subsidiaries is reflected in the reconciliation above.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The IRS is currently auditing the Company’s 2014 and 2015 income tax returns as well as the 2014 and 2015 tax years of a Valspar subsidiary. There has been no significant adjustments proposed by the IRS at this point of the audits. The IRS concluded the refund claim audits for the 2010, 2011 and 2012 tax years and has approved the refunds and submitted them to the Joint Committee of Taxation for approval. As of December 31, 2017 , the federal statute of limitations has not expired for the 2013, 2014, 2015 and 2016 tax years.
As of December 31, 2017 , the Company is subject to non-U.S. income tax examinations for the tax years of 2010 through 2016 . In addition, the Company is subject to state and local income tax examinations for the tax years 2005 through 2016 .
 
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 
2017
 
2016
 
2015
Balance at beginning
of year
$
32,805

 
$
33,873

 
$
31,560

Additions from the Acquisition
18,928

 


 


Additions based on
tax positions related
to the current year
6,780

 
5,674

 
4,228

Additions for tax
positions of prior
years
4,033

 
3,890

 
8,450

Reductions for tax
positions of prior
years
(1,168
)
 
(5,901
)
 
(4,862
)
Settlements
(368
)
 
(3,763
)
 
(968
)
Lapses of statutes
of limitations
(2,009
)
 
(968
)
 
(4,535
)
Balance at end of year
$
59,001

 
$
32,805

 
$
33,873

The $18,928 in unrecognized tax benefits included in the balance of unrecognized tax benefits at December 31, 2017 were recorded as a part of the Acquisition. Included in the balance of unrecognized tax benefits at December 31, 2017 , 2016 and 2015 is $49,520 , $27,686 and $30,007 in unrecognized tax benefits, the recognition of which would have an effect on the effective tax rate.
Included in the balance of unrecognized tax benefits at December 31, 2017 is $5,184 related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised primarily of items related to federal audits of partnership investments and expiring statutes in federal, foreign and state jurisdictions.
The Company classifies all income tax related interest and penalties as income tax expense. During the year ended December 31, 2017 , there was a decrease in income tax interest and penalties of $790 . There was an increase in income tax interest and penalties of $1,410 and $2,918 for the years ended December 31, 2016 and 2015 , respectively. At December 31, 2017 , 2016 and 2015 , the Company accrued $14,592 , $9,275 and $8,550 , respectively, for the potential payment of interest and penalties.

72  

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

NOTE 15 – NET INCOME PER COMMON SHARE  
 
2017
 
2016
 
2015
Basic
 
 
 
 
 
     Average common shares outstanding
92,908,638

 
91,838,603

 
92,197,207

     Net income
 
 
 
 
 
Continuing operations
$
1,813,802

 
$
1,132,703

 
$
1,053,849

Discontinued operations
(41,540
)
 

 

Net income
$
1,772,262

 
$
1,132,703

 
$
1,053,849

Basic net income per common share
 
 
 
 
 
Continuing operations
$
19.52

 
$
12.33

 
$
11.43

Discontinued operations
(.44
)
 

 

Net income per common share
$
19.08

 
$
12.33

 
$
11.43

 
 
 
 
 
 
Diluted
 
 
 
 
 
Average common shares outstanding
92,908,638

 
91,838,603

 
92,197,207

Stock options and other contingently issuable shares (1)
1,931,157

 
2,089,921

 
1,826,885

Non-vested restricted stock grants
87,418

 
559,562

 
519,451

Average common shares outstanding assuming dilution
94,927,213

 
94,488,086

 
94,543,543

 
 
 
 
 
 
Net income
 
 
 
 
 
Continuing operations
$
1,813,802

 
$
1,132,703

 
$
1,053,849

Discontinued operations
(41,540
)
 

 

Net income
$
1,772,262

 
$
1,132,703

 
$
1,053,849

 
 
 
 
 
 
Diluted net income per common share
 
 
 
 
 
Continuing operations
$
19.11

 
$
11.99

 
$
11.15

Discontinued operations
(.44
)
 

 

Net income per common share
$
18.67

 
$
11.99

 
$
11.15


(1)  
Stock options and other contingently issuable shares excludes 638,795 , 62,935 and 34,463 shares at December 31, 2017 , 2016 and 2015 , respectively, due to their anti-dilutive effect.

Basic and diluted net income per common share are calculated using the treasury stock method.

73

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

NOTE 16 – SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)  
 
2017
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 
Full Year
Net sales
$
2,761,387

 
$
3,735,817

 
$
4,507,020

 
$
3,979,564

 
$
14,983,788

Gross profit
1,343,274

 
1,737,056

 
1,902,142

 
1,798,739

 
6,781,211

Net income
239,152

 
319,111

 
316,606

 
897,393

 
1,772,262

Net income per common share - basic
2.58

 
3.44

 
3.40

 
9.62

 
19.08

Net income per common share - diluted
2.53

 
3.36

 
3.33

 
9.39

 
18.67

 
2016
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 
Full Year
Net sales
$
2,574,024

 
$
3,219,525

 
$
3,279,462

 
$
2,782,591

 
$
11,855,602

Gross profit
1,261,845

 
1,635,901

 
1,636,425

 
1,388,580

 
5,922,751

Net income
164,876

 
378,064

 
386,733

 
203,030

 
1,132,703

Net income per common share - basic
1.80

 
4.12

 
4.20

 
2.20

 
12.33

Net income per common share - diluted
1.75

 
3.99

 
4.08

 
2.15

 
11.99

 
 
 
 
 
 
 
 
 
 

Net income for the three months and year ended December 31, 2017 included a tax benefit of $668,779 related to the Deferred income tax reductions. See Note 14.
Net income in the fourth quarter of 2016 included a gain on sale of assets of $30,916 , increased provisions for environmental matters of $9,330 and impairment of goodwill and trademarks of $10,688 .
NOTE 17 – OPERATING LEASES
The Company leases certain stores, warehouses, manufacturing facilities, office space and equipment. Renewal options are available on the majority of leases and, under certain conditions, options exist to purchase certain properties. Rental expense for operating leases, recognized on a straight-line basis over the lease term in accordance with the Leases Topic of the ASC was $464,616 , $417,549 and $394,359 for 2017 , 2016 and 2015 , respectively. Certain store leases require the payment of contingent rentals based on sales in excess of specified minimums. Contingent rentals included in rent expense were $63,300 , $58,865 and $55,890 in 2017 , 2016 and 2015 , respectively. Rental income, as lessor, from real estate leasing activities and sublease rental income for all years presented was not significant. The following schedule summarizes the future minimum lease payments under noncancellable operating leases having initial or remaining terms in excess of one year at December 31, 2017 :
2018
$
391,009

2019
347,321

2020
298,505

2021
237,999

2022
178,014

Later years
402,680

Total minimum lease payments
$
1,855,528

 
NOTE 18 – REPORTABLE SEGMENT INFORMATION
The Company reports its segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources in accordance with the Segment Reporting Topic of the ASC. Upon completion of the Acquisition in the second quarter of 2017 , the Company made important changes to its organizational and reporting structure that resulted in establishing three reportable operating segments: The Americas Group, Consumer Brands Group and Performance Coatings Group (individually, a Reportable Segment and collectively, the Reportable Segments). Prior period segment reporting has been adjusted to reflect the updated reportable segments. Factors considered in determining the three Reportable Segments of the Company include the nature of business activities, the management structure directly accountable to the Company’s chief operating decision maker (CODM) for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors. The Company reports all other business activities and immaterial operating segments that are not reportable in the Administrative segment. See pages 8 through 15 of this report for more information about the Reportable Segments.
The Company’s CODM has been identified as the Chief Executive Officer because he has final authority over performance assessment and resource allocation decisions. Because of the diverse operations of the Company, the CODM regularly receives discrete financial information about each Reportable Segment as well as a significant amount of additional financial information about certain divisions, business

74  

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

units or subsidiaries of the Company. The CODM uses all such financial information for performance assessment and resource allocation decisions. The CODM evaluates the performance of and allocates resources to the Reportable Segments based on segment profit or loss and cash generated from operations. The accounting policies of the Reportable Segments are the same as those described in Note 1 of this report.
The 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 consisted of 4,620 company-operated specialty paint stores in the United States, Canada, Latin America and the Caribbean region at December 31, 2017 . Each store in this segment is engaged in servicing the needs of architectural and industrial paint contractors and do-it-yourself homeowners. The Americas Group company-owned stores market and sell Sherwin-Williams ® and other controlled brand architectural paint and coatings, protective and marine products, OEM product finishes and related products. The majority of these products are produced by manufacturing facilities in the Consumer Brands Group. In addition, each store sells select purchased associated products. 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 Americas Group meets regional customer demands through developing, licensing, manufacturing, distributing and selling a variety of architectural paints, coatings and related products in North and South America. The loss of any single customer would not have a material adverse effect on the business of this segment. At December 31, 2017 , The Americas Group consisted of operations from subsidiaries in 9 foreign countries. During 2017 , this segment opened 101 net new stores, consisting of 114 new stores opened ( 76 in the United States, 15 in Canada, 1 in Curacao, 14 in South America and 8 in Mexico) and 13 stores closed ( 4 in the United States, 1 in Canada, 6 in South America and 2 in Mexico). In 2016 and 2015 , this segment opened 142 and 98 net new stores, respectively. A map on the cover flap of this report shows the number of paint stores and their geographic location. The CODM uses discrete financial information about The Americas Group, supplemented with information by geographic region, product type and customer type, to assess performance of and allocate resources to The Americas Group as a whole. In accordance with ASC 280-10-50-9, The Americas Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment.
The Consumer 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. Approximately 59.47% of the total sales of the Consumer Brands Group in 2017 were intersegment transfers of products primarily sold through The Americas Group. At December 31, 2017 , the Consumer Brands Group consisted of operations in the United States and subsidiaries in 6 foreign countries. Sales and marketing of certain controlled brand and private labeled products is performed by a direct sales staff. The products distributed through third-party customers are intended for resale to the ultimate end-user of the product. The Consumer Brands Group had sales to certain customers that, individually, may be a significant portion of the sales of the segment. However, the loss of any single customer would not have a material adverse effect on the overall profitability of the segment. This segment incurred most of the Company’s capital expenditures related to ongoing environmental compliance measures at sites currently in operation. The CODM uses discrete financial information about the Consumer Brands Group, supplemented with information by product type and customer type, to assess performance of and allocate resources to the Consumer Brands Group as a whole. In accordance with ASC 280-10-50-9, the Consumer Brands Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment.
The Performance Coatings Group 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. This segment licenses certain technology and trade names worldwide. Sherwin-Williams ® and other controlled brand products are distributed through The Americas Group and this segment’s 290 company-operated branches and by a direct sales staff and outside sales representatives to retailers, dealers, jobbers, licensees and other third-party distributors. The

75

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

Performance Coatings Group had sales to certain customers that, individually, may be a significant portion of the sales of the segment. However, the loss of any single customer would not have a material adverse effect on the overall profitability of the segment. During 2017 , this segment opened 4 new branches and closed 2 branches for a net increase of 2 branches. At December 31, 2017 , the Performance Coatings Group consisted of operations in the United States and subsidiaries in 44 foreign countries. The CODM uses discrete financial information about the Performance Coatings Group reportable segment, supplemented with information about geographic divisions, business units and subsidiaries, to assess performance of and allocate resources to the Performance Coatings Group as a whole. In accordance with ASC 280-10-50-9, the Performance Coatings Group as a whole is considered the operating segment, and because it meets the criteria in ASC 280-10-50-10, it is also considered a Reportable Segment. A map on the cover flap of this report shows the number of branches and their geographic locations.
The Administrative segment includes the administrative expenses of the Company’s corporate headquarters site. Also included in the Administrative segment is interest expense, interest and investment income, certain expenses related to closed facilities and environmental-related matters, and other expenses which are not directly associated with the Reportable Segments. The Administrative segment does not include any significant foreign operations. Also included in the Administrative segment is 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 represents external leasing revenue of excess headquarters space or leasing of facilities no longer used by the Company in its primary businesses. Material gains and losses from the sale of property are infrequent and not a significant operating factor in determining the performance of the Administrative segment.
 
Net external sales of all consolidated foreign subsidiaries were $2,959,785 , $1,722,246 and $1,788,955 for 2017 , 2016 and 2015 , respectively. Long-lived assets consisted of Property, plant and equipment, Goodwill, Intangible assets, Deferred pension assets and Other assets. The aggregate total of long-lived assets for the Company was $15,492,586 , $3,125,222 and, $3,132,981 at December 31, 2017 , 2016 and 2015 , respectively. Long-lived assets of consolidated foreign subsidiaries totaled $3,691,035 , $477,889 and $497,528 at December 31, 2017 , 2016 and 2015 , respectively.
Total Assets of the Company were $19,958,427 , $6,752,521 and $5,778,937 at December 31, 2017 , 2016 and 2015 , respectively. Total assets of consolidated foreign subsidiaries were $5,253,995 , $1,233,666 and $1,172,064 , which represented 26.3 percent , 18.3 percent and 20.3 percent of the Company’s total assets at December 31, 2017 , 2016 and 2015 , respectively. The increase in net external sales and long-lived assets was primarily due to the Acquisition. Domestic operations accounted for the remaining net external sales and long-lived assets. No single geographic area outside the United States was significant relative to consolidated net external sales 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 years presented.
In the reportable segment financial information that follows, Segment profit was total net sales and intersegment transfers less operating costs and expenses. Identifiable assets were those directly identified with each reportable segment. The Administrative segment assets consisted primarily of cash and cash equivalents, investments, deferred pension assets and headquarters property, plant and equipment. The margin for each reportable segment was based upon total net sales and intersegment transfers. Domestic intersegment transfers were primarily accounted for at the approximate fully absorbed manufactured cost, based on normal capacity volumes, plus customary distribution costs for paint products. Non-paint domestic and all international intersegment transfers were accounted for at values comparable to normal unaffiliated customer sales. All intersegment transfers are eliminated within the Administrative segment.


76  

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


(millions of dollars)
2017
 
The Americas Group
 
Consumer Brands
Group
 
Performance Coatings Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
9,117

 
$
2,155

 
$
3,706

 
$
6

 
$
14,984

Intersegment transfers
6

 
3,162

 
22

 
(3,190
)
 

Total net sales and
intersegment transfers
$
9,123

 
$
5,317

 
$
3,728

 
$
(3,184
)
 
$
14,984

Segment profit
$
1,769

 
$
226

 
$
299

 

 
$
2,294

Interest expense
 
 
 
 
 
 
$
(263
)
 
(263
)
Administrative expenses and other
 
 
 
 
 
 
(503
)
 
(503
)
Income from continuing operations before income taxes
$
1,769

 
$
226

 
$
299

 
$
(766
)
 
$
1,528

Reportable segment margins
19.4
%
 
4.3
%
 
8.0
%
 
 
 
 
Identifiable assets
$
4,359

 
$
5,839

 
$
8,300

 
$
1,460

 
$
19,958

Capital expenditures
69

 
95

 
37

 
22

 
223

Depreciation
75

 
92

 
69

 
49

 
285

 
 
 
 
 
 
 
 
 
 
 
2016
 
The Americas Group
 
Consumer Brands
Group
 
Performance Coatings Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
8,377

 
$
1,528

 
$
1,946

 
$
5

 
$
11,856

Intersegment transfers
39

 
2,775

 
15

 
(2,829
)
 
 
Total net sales and
intersegment transfers
$
8,416

 
$
4,303

 
$
1,961

 
$
(2,824
)
 
$
11,856

Segment profit
$
1,606

 
$
301

 
$
257

 
 
 
$
2,164

Interest expense
 
 
 
 
 
 
$
(154
)
 
(154
)
Administrative expenses and other
 
 
 
 
 
 
(415
)
 
(415
)
Income from continuing operations before income taxes
$
1,606

 
$
301

 
$
257

 
$
(569
)
 
$
1,595

Reportable segment margins
19.1
%
 
7.0
%
 
13.1
%
 
 
 
 
Identifiable assets
$
2,148

 
$
2,005

 
$
818

 
$
1,782

 
$
6,753

Capital expenditures
100

 
99

 
19

 
$
21

 
239

Depreciation
76

 
47

 
20

 
$
29

 
172

 
 
 
 
 
 
 
 
 
 
 
2015
 
The Americas Group
 
Consumer Brands
Group
 
Performance Coatings Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
7,840

 
$
1,578

 
$
1,916

 
$
5

 
$
11,339

Intersegment transfers
40

 
2,736

 
5

 
(2,781
)
 

Total net sales and
intersegment transfers
$
7,880

 
$
4,314

 
$
1,921

 
$
(2,776
)
 
$
11,339

Segment profit
$
1,452

 
$
309

 
$
202

 
 
 
$
1,963

Interest expense
 
 
 
 
 
 
$
(62
)
 
(62
)
Administrative expenses and other
 
 
 
 
 
 
(352
)
 
(352
)
Income from continuing operations before income taxes
$
1,452

 
$
309

 
$
202

 
$
(414
)
 
$
1,549

Reportable segment margins
18.4
%
 
7.2
%
 
10.5
%
 
 
 
 
Identifiable assets
$
2,037

 
$
1,925

 
$
814

 
$
1,003

 
$
5,779

Capital expenditures
132

 
60

 
21

 
21

 
234

Depreciation
72

 
47

 
25

 
26

 
170



77


CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Letter to Shareholders” and elsewhere in this report constitute “forward-looking statements” within the meaning of 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: (a) general business conditions, strengths of retail and manufacturing economies and the growth in the coatings industry; (b) 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; (c) changes in raw material and energy supplies and pricing; (d) changes in our relationships with customers and suppliers; (e) our ability to successfully integrate past and future acquisitions into our existing operations, including Valspar, as well as the performance of the businesses acquired; (f) risks
 
inherent in the achievement of anticipated cost synergies resulting from the Acquisition and the timing thereof; (g) competitive factors, including pricing pressures and product innovation and quality; (h) our ability to attain cost savings from productivity initiatives; (i) 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; (j) the achievement of growth in foreign markets, such as Asia, Europe and South America; (k) increasingly stringent domestic and foreign governmental regulations, including those affecting health, safety and the environment; (l) inherent uncertainties involved in assessing our potential liability for environmental-related activities; (m) 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); (n) 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 (o) adverse weather conditions and natural disasters.
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.


78  


SHAREHOLDER INFORMATION

Annual Meeting
The annual meeting of shareholders
will be held in the Landmark
Conference Center, 927 Midland
Building, 101 W. Prospect Avenue,
Cleveland, Ohio on Wednesday,
April 18, 2018 at 9:00 A.M.,
local time.

Headquarters
101 W. Prospect Avenue
Cleveland, Ohio 44115-1075
(216) 566-2000
www.sherwin.com

Investor Relations
Robert J. Wells
Senior Vice President - Corporate
Communications and Public Affairs
The Sherwin-Williams Company
101 W. Prospect Avenue
Cleveland, Ohio 44115-1075
 
Independent Registered
Public Accounting Firm
Ernst & Young LLP
Cleveland, Ohio

Stock Trading
Sherwin-Williams Common Stock—
Symbol, SHW—is traded on the
New York Stock Exchange.

Dividend Reinvestment Program
A dividend reinvestment program is
available to shareholders of common
stock. For information, contact
Equiniti Trust Company.

Form 10-K
The Company’s Annual Report on
Form 10-K, filed with the Securities
and Exchange Commission, is
available without charge. To obtain
a copy, contact Investor Relations.
 
Transfer Agent & Registrar
Our transfer agent, EQ Shareowner Services (formerly Wells Fargo Shareowner Services), maintains the records for our registered shareholders and can help with a wide variety of shareholder related services, including the direct deposit of dividends and online access to your account. Contact:
EQ Shareowner Services
P.O. Box 64874
St. Paul, MN 55164-0874
www.shareowneronline.com
1-800-468-9716 Toll-free
651-450-4064 outside the United States




COMMON STOCK TRADING STATISTICS
 
2017
 
2016
 
2015
 
2014
 
2013
High
$
414.34

 
$
312.10

 
$
292.44

 
$
266.25

 
$
195.32

Low
274.54

 
239.35

 
218.94

 
174.29

 
153.94

Close December 31
410.04

 
268.74

 
259.60

 
263.04

 
183.50

Shareholders of record
6,488

 
6,787

 
6,996

 
7,250

 
7,555

Shares traded (thousands)
154,970

 
212,100

 
195,560

 
152,913

 
186,854



QUARTERLY STOCK PRICES AND DIVIDENDS
2017
 
2016
Quarter
 
High
 
Low
 
Dividend
 
Quarter
 
High
 
Low
 
Dividend
1st
 
$
315.36

 
$
274.54

 
$
.850

 
1st
 
$
288.69

 
$
239.35

 
$
.840

2nd
 
361.03

 
308.35

 
.850

 
2nd
 
300.12

 
280.32

 
.840

3rd
 
359.72

 
328.97

 
.850

 
3rd
 
312.10

 
273.53

 
.840

4th
 
414.34

 
359.43

 
.850

 
4th
 
277.88

 
240.63

 
.840



79


CORPORATE OFFICERS AND
OPERATING MANAGEMENT

Corporate Officers
 
Operating Management
 
 
 
 
 
 
 
John G. Morikis, 54*
 
Joel D. Baxter, 57*
 
Karl J. Jorgenrud, 41
Chairman, President and
 
President & General Manager
 
President & General Manager
Chief Executive Officer
 
Global Supply Chain Division
 
Protective & Marine Division
 
 
Consumer Brands Group
 
Performance Coatings Group
Allen J. Mistysyn, 49*
 
 
 
 
Senior Vice President - Finance
 
Justin T. Binns, 42
 
Dennis H. Karnstein, 51
and Chief Financial Officer
 
President & General Manager
 
President & General Manager
 
 
Eastern Division
 
Industrial Wood Coatings Division
Jane M. Cronin, 50*
 
The Americas Group
 
Performance Coatings Group
Senior Vice President -
 
 
 
 
Corporate Controller
 
Lee B. Diamond, 48
 
Robert F. Lynch, 57
 
 
President & General Manager
 
President & General Manager
Mary L. Garceau, 45*
 
Canada Division
 
Retail - North America
Senior Vice President, General
 
The Americas Group
 
Consumer Brands Group
Counsel and Secretary
 
 
 
 
 
 
Aaron M. Erter, 44*
 
David B. Sewell, 49*
Thomas P. Gilligan, 57*
 
President
 
President
Senior Vice President -
 
Consumer Brands Group
 
Performance Coatings Group
Human Resources
 
 
 
 
 
 
Monty J. Griffin, 57
 
Samuel W. Shoemaker, 56
Sean P. Hennessy, 60*
 
President & General Manager
 
President & General Manager
Senior Vice President - Corporate
 
South Western Division
 
Global Packaging, Coil, and Coatings
Planning, Development and
 
The Americas Group
 
Resins & Colorants Division
Administration
 
 
 
Performance Coatings Group
 
 
Thomas C. Hablitzel, 55
 
 
Robert J. Wells, 60*
 
President & General Manager
 
Todd A. Stephenson, 48
Senior Vice President - Corporate
 
Automotive Finishes Division
 
President & General Manager
Communications and Public Affairs
 
Performance Coatings Group
 
Mid Western Division
 
 
 
 
The Americas Group
Lawrence J. Boron, 59
 
Peter J. Ippolito, 53*
 
 
Vice President - Taxes and
 
President
 
Todd V. Wipf, 53
Assistant Secretary
 
The Americas Group
 
President & General Manager
 
 
 
 
Southeastern Division
John D. Hullibarger, 37
 
Bruce G. Irussi, 57
 
The Americas Group
Vice President - Corporate Audit
 
President & General Manager
 
 
and Loss Prevention
 
General Industrial Coatings Division
 
 
 
 
Performance Coatings Group
 
 
Jeffrey J. Miklich, 43
 
 
 
 
Vice President and Treasurer
 
 
 
 
 
 
 
 
 
Stephen J. Perisutti, 55
 
 
 
 
Vice President, Deputy General
 
 
 
 
Counsel and Assistant Secretary
 
 
 
 
 
 
 
 
 
Bryan J. Young, 42
 
 
 
 
Vice President - Corporate
 
 
 
 
Strategy & Development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Executive Officer as defined by the Securities Exchange Act of 1934


80  


SW2017ARINSIDEBACKCOVER.JPG



SW2017ARBACKCOVER.JPG



EXHIBIT 21

The Sherwin-Williams Company
Subsidiaries

Domestic


Subsidiary
State of
 
Incorporation
 
 
Acquire Sourcing, LLC
DE
Comex North America, Inc.
DE
Contract Transportation Systems Co.
DE
CTS National Corporation
DE
Omega Specialty Products & Services LLC
OH
Plasti-Kote Co., Inc.
OH
Sherwin-Williams Realty Holdings, Inc.
IL
SWIMC LLC
DE
The Sherwin-Williams Acceptance Corporation
NV
The Sherwin-Williams Headquarters Company
OH
The Sherwin-Williams Manufacturing Company
OH
The Sherwin-Williams US Licensing Company
DE
Valspar Specialty Paints, LLC
DE
        

Foreign


Subsidiary
Country of
 
Incorporation
 
 
Compania Sherwin-Williams, S.A. de C.V.
Mexico
Deep Pride Limited
Ireland
Dongguan Lilly Paint Industries Ltd
China
EPS B.V.
Netherlands
EPS Polidrox Industria e Comercio de Resinas Ltda
Brazil
EPS (Shanghai) Trading Co., Ltd.
China
Geocel Limited
UK
Guangdong Valspar Paints Manufacturing Co Ltd.
China
Guangdong Yuegang Dadi Paints Company Limited
China
Guardsman Australia Pty Limited
Australia
Guardsman Industries Limited
UK
Invercolor Bologna Srl
Italy
Invercolor Ltd
UK
Invercolor Roma Srl
Italy
Invercolor Torino Srl
Italy





Invercolor Toscana Srl
Italy
Inver East Med S.A.
Greece
Inver France SAS
France
Inver GmbH
Germany
Inver Industrial Coating SRL
Romania
Inver Polska Spółka Z O.O
Poland
Inver Spa
Italy
Isocoat Tintas e Vernizes Ltda
Brazil
Isva Vernici Srl
Italy
Jiangsu Pulanna Coating Co., Ltd.
China
Oy Sherwin-Williams Finland Ab
Finland
Pinturas Condor S.A.
Ecuador
Pinturas Industriales S.A.
Uruguay
Plasti-kote Limited
UK
Productos Quimicos y Pinturas, S.A. de C.V.
Mexico
PT Sherwin-Williams Indonesia
Indonesia
PT Valspar Indonesia
Indonesia
Quest Automotive Products UK Limited
UK
Quetzal Pinturas, S.A. de C.V.
Mexico
Resin Surfaces Limited
UK
Ronseal (Ireland) Limited
Ireland
Sherwin-Williams Argentina I.y C.S.A.
Argentina
Sherwin-Williams Aruba VBA
Aruba
Sherwin-Williams (Australia) Pty. Ltd.
AU
Sherwin-Williams Automotive Mexico S.de R.L.de C.V.
Mexico
Sherwin-Williams Balkan S.R.L.
Romania
Sherwin-Williams Bel
Belarus
Sherwin-Williams (Belize) Limited
Belize
Sherwin-Williams Benelux NV
Belgium
Sherwin-Williams Canada Inc.
Canada
Sherwin-Williams (Caribbean) N.V.
Curacao
Sherwin-Williams Cayman Islands Limited
Grand Cayman
Sherwin-Williams Chile S.A.
Chile
Sherwin-Williams Coatings India Private Limited
India
Sherwin-Williams Coatings S.a r.l.
Luxembourg
Sherwin Williams Colombia S.A.S.
Columbia
Sherwin-Williams Czech Republic spol. s r.o
Czech Republic
Sherwin-Williams Denmark A/S
Denmark
Sherwin-Williams Deutschland GmbH
Germany
Sherwin-Williams Diversified Brands (Australia) Pty Ltd
Australia
Sherwin-Williams Diversified Brands Limited
UK
Sherwin-Williams do Brasil Industria e Comercio Ltda.
Brazil
Sherwin-Williams France Finishes SAS
France
Sherwin-Williams (Ireland) Limited
Ireland
Sherwin-Williams Italy S.r.l.
Italy
Sherwin-Williams Luxembourg Investment Management Company S.a r.l.
Luxembourg





Sherwin-Williams (Malaysia) Sdn. Bhd.
Malaysia
Sherwin-Williams (Nantong) Company Limited
China
Sherwin-Williams Norway AS
Norway
Sherwin-Williams Paints Limited Liability Company
Russia
Sherwin-Williams Peru S.R.L.
Peru
Sherwin-Williams Pinturas de Venezuela S.A.
Venezuela
Sherwin-Williams Poland Sp. z o.o
Poland
Sherwin-Williams Protective & Marine Coatings
UK
Sherwin-Williams (S) Pte. Ltd.
Singapore
Sherwin-Williams Services (Malaysia) Sdn. Bhd.
Malaysia
Sherwin-Williams (Shanghai) Limited
China
Sherwin-Williams (South China) Co., Ltd.
China
Sherwin-Williams Spain Coatings S.L.
Spain
Sherwin-Williams Sweden AB
Sweden
Sherwin-Williams (Thailand) Co., Ltd.
Thailand
Sherwin-Williams Uruguay S.A.
Uruguay
Sherwin-Williams (Vietnam) Limited
Vietnam
Sherwin-Williams (West Indies) Limited
Jamaica
Spanyc Paints Joint Stock Company
Vietnam
SWIPCO – Sherwin Williams do Brasil Propriedade
Brazil
Syntema I Vaggeryd AB
Sweden
Taiwan Valspar Co., Ltd.
Taiwan
The Valspar (Asia) Corporation Limited
Hong Kong
The Valspar (Australia) Corporation Pty. Ltd.
Australia
The Valspar Corporation Limitada
Brazil
The Valspar (Finland) Corporation Oy
Finland
The Valspar (France) Corporation S.A.S.
France
The Valspar (France) Research Corporation SAS
France
The Valspar (Germany) GmbH
Germany
The Valspar (Malaysia) Corporation Sdn Bhd
Malaysia
The Valspar (Nantes) Corporation S.A.S.
France
The Valspar (Singapore) Corporation Pte. Ltd
Singapore
The Valspar (South Africa) Corporation (Pty) Ltd
South Africa
The Valspar (Spain) Corporation S.R.L.
Spain
The Valspar (Switzerland) Corporation AG
Switzerland
The Valspar (Thailand) Corporation Ltd.
Thailand
The Valspar (UK) Corporation Limited
UK
The Valspar (Vietnam) Corporation Ltd.
Vietnam
TOB Becker Acroma Ukraine
Ukraine
UAB Sherwin-Williams Baltic
Lithuania
Valspar Aries Coatings, S. de R.L. de C.V.
Mexico
Valspar Automotive Australia Pty Limited
Australia
Valspar Automotive (UK) Corporation Limited
UK
Valspar B.V.
Netherlands
Valspar Coatings (Guangdong) Co., Ltd.
China
Valspar Coatings (Shanghai) Co. Ltd.
China





Valspar Coatings (Tianjin) Co., Ltd
China
Valspar D.o.o Beograd
Serbia
Valspar Inc.
Canada
Valspar (India) Coatings Corporation Private Limited
India
Valspar Industries GmbH
Germany
Valspar Industries (Ireland) Ltd.
Ireland
Valspar Industries (Italy) S.r.l.
Italy
Valspar LLC
Russia
Valspar Mexicana, S.A. de C.V.
Mexico
Valspar Paint (Australia) Pty Ltd
Australia
Valspar Paint (NZ) Limited
New Zealand
Valspar Powder Coatings Limited
UK
Valspar Rock Company Limited
Japan
Valspar (Shanghai) Management Co., Ltd.
China
Vantaco Oy
Finland
Valspar (Uruguay) Corporation S.A.
Uruguay
Valspar (WPC) Pty Ltd
Australia
ZAO Sherwin-Williams
Russia





EXHIBIT 23
Consent of Independent Registered Public Accounting Firm and Report on Schedule

Consent

We consent to the incorporation by reference in the following Registration Statements:

Registration Number
Description
333-217457
The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Amended and Restated as of April 19, 2017) Form S-8 Registration Statement
333-218406
The Valspar Corporation Amended and Restated 2015 Omnibus Equity Plan Form S-8 Registration Statement
333-218914
The Sherwin-Williams Company Form S-4 Registration Statement
333-219654
The Sherwin-Williams Company 2005 Deferred Compensation Savings and Pension Equalization Plan, (Amended and Restated Effective as of January 1, 2016) Form S-8 Registration Statement
333-205897

333-166365
The Sherwin-Williams Company Form S-3 Registration Statement

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

of our reports dated February 23, 2018 , with respect to the consolidated financial statements and the effectiveness of internal control over financial reporting of The Sherwin-Williams Company incorporated by reference in this Annual Report (Form 10-K) of The Sherwin-Williams Company for the year ended December 31, 2017, and the financial statement schedule of The Sherwin-Williams Company, included on the follow page, filed with the Securities and Exchange Commission.



Report on Schedule

To the Shareholders and the Board of Directors of The Sherwin-Williams Company

We have audited the consolidated financial statements of The Sherwin-Williams Company (the “Company”) as of December 31, 2017, 2016 and 2015, and for each of the years then ended, and have issued our report thereon dated February 23, 2018 incorporated by reference in this Annual Report (Form 10-K) of the Company from the 2017 Annual Report to Shareholders of the Company. Our audits of the consolidated financial statements included the financial statement schedule listed in Item 15(a) of this Annual Report (Form 10-K) (the “schedule”). This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s schedule based on our audits.

In our opinion, the schedule presents fairly, in all material respects, the information set forth therein when considered in conjunction with the consolidated financial statements.


EYA01A03A01A05.JPG
Cleveland, Ohio
February 23, 2018





EXHIBIT 24(a)

POWER OF ATTORNEY

THE SHERWIN-WILLIAMS COMPANY


KNOW ALL BY THESE PRESENTS, that each of the undersigned directors and/or officers of The Sherwin-Williams Company, an Ohio corporation (the “Company”), hereby constitutes and appoints each of John G. Morikis, Allen J. Mistysyn and Mary L. Garceau, with full power of substitution and resubstitution, as the true and lawful attorney-in-fact or attorneys-in-fact of the undersigned to execute and file with the Securities and Exchange Commission under the Securities Exchange Act of 1934 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 , with any and all amendments, supplements and exhibits thereto, and any and all other documents in connection therewith, with full power and authority to do and perform any and all acts and things necessary, appropriate or desirable to be done in the premises, or in the name, place and stead of the undersigned, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and approving all that said attorneys-in-fact or any of them and any substitute therefor may lawfully do or cause to be done by virtue thereof.

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

Executed as of this 14 th day of February, 2018.
.
Signature
 
 
 
Title
 
 
 
 
 
  /s/ John G. Morikis
 
 
 
Chairman, President and Chief Executive Officer, Director (Principal Executive Officer)
John G. Morikis
 
 
 
 
 
 
 
 
  /s/ Jane M. Cronin
 
 
 
Senior Vice President – Corporate Controller
(Principal Accounting Officer)
Jane M. Cronin
 
 
 
 
 
 
 
 
  /s/ Allen J. Mistysyn 
 
 
 
Senior Vice President – Finance and Chief
Financial Officer (Principal Financial Officer)
Allen J. Mistysyn
 
 
 
 
 
 
 
 
  /s/ Arthur F. Anton
 
 
 
Director
Arthur F. Anton
 
 
 
 
 
 
 
 
  /s/ David F. Hodnik
 
 
 
Director
David F. Hodnik
 
 
 
 
 
 
 
 
  /s/ Richard J. Kramer
 
 
 
Director
Richard J. Kramer
 
 
 






  /s/ Susan J. Kropf
 
 
 
Director
Susan J. Kropf
 
 
 
 
 
 
 
 
  /s/ Christine A. Poon
 
 
 
Director
Christine A. Poon
 
 
 
 
 
 
 
 
  /s/ John M. Stropki
 
 
 
Director
John M. Stropki
 
 
 
 
 
 
 
 
  /s/ Michael H. Thaman
 
 
 
Director
Michael H. Thaman
 
 
 
 
 
 
 
 
  /s/ Matthew Thornton III
 
 
 
Director
Matthew Thornton III
 
 
 
 
 
 
 
 
  /s/ Steven H. Wunning
 
 
 
Director
Steven H. Wunning
 
 
 





EXHIBIT 24(b)


CERTIFICATE


I, the undersigned, Secretary of The Sherwin-Williams Company (the “Company”), hereby certify that attached hereto is a true and complete copy of a resolution of the Board of Directors of the Company, duly adopted at a meeting held on February 13-14, 2018, and that such resolution is in full force and effect and has not been amended, modified, revoked or rescinded as of the date hereof.

IN WITNESS WHEREOF, I have executed this certificate as of this 14th day of February, 2018.


/s/ Mary L. Garceau             
Mary L. Garceau
Secretary
















































RESOLVED, that the appropriate officers of the Company are each hereby authorized to execute and deliver a power of attorney appointing John G. Morikis, Allen J. Mistysyn and Mary L. Garceau or any of them, with full power of substitution and resubstitution, to act as attorneys-in-fact for the Company and for such officers for the purpose of executing and filing with the Securities and Exchange Commission and any national securities exchange, on behalf of the Company, the Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and any and all amendments, exhibits and other documents in connection therewith, and to take other action deemed necessary and appropriate to effect the filing of such Annual Report on Form 10-K and any and all such amendments, exhibits and other documents in connection therewith.





EXHIBIT 31(a)
CERTIFICATION

I, John G. Morikis, certify that:

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

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

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

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

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

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date:
February 23, 2018
 
/s/ John G. Morikis
 
 
 
John G. Morikis
 
 
 
Chairman, President and Chief Executive Officer








EXHIBIT 31(b)

CERTIFICATION

I, Allen J. Mistysyn, certify that:

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

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

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

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

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

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date:
February 23, 2018
 
/s/ Allen J. Mistysyn
 
 
 
Allen J. Mistysyn
 
 
 
Senior Vice President-Finance and
 
 
 
Chief Financial Officer






EXHIBIT 32(a)


SECTION 1350 CERTIFICATION

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

In connection with the Annual Report on Form 10-K of The Sherwin-Williams Company (the “Company”) for the fiscal year ended December 31, 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:
February 23, 2018
 
/s/ John G. Morikis
 
 
 
John G. Morikis
 
 
 
Chairman, President and
Chief Executive Officer

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






EXHIBIT 32(b)


SECTION 1350 CERTIFICATION

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

In connection with the Annual Report on Form 10-K of The Sherwin-Williams Company (the “Company”) for the fiscal year ended December 31, 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:
February 23, 2018
 
/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.