Exhibit



	2018			2017 ⁽¹⁾			2016			2015			2014
Operations
Net sales	$	17,534		$	14,984		$	11,856		$	11,339		$	11,130
Cost of goods sold ^{(2), (3)}	10,116			8,265			5,933			5,780			5,965
Selling, general and administrative expenses ⁽²⁾	5,034			4,798			4,159			3,914			3,823
Amortization	318			207			26			28			30
Interest expense	367			263			154			62			64
Income from continuing operations before income taxes ^{(3), (4)}	1,360			1,469			1,595			1,549			1,258
Net income from continuing operations ^{(3), (5)}	1,109			1,769			1,133			1,054			866
Financial Position
Accounts receivable - net	$	2,019		$	2,105		$	1,231		$	1,114		$	1,131
Inventories ⁽³⁾	1,815			1,742			1,068			1,019			1,034
Working capital - net ⁽³⁾	47			420			798			515			(115		)
Property, plant and equipment - net	1,777			1,877			1,096			1,042			1,021
Total assets ⁽³⁾	19,134			19,900			6,753			5,779			5,699
Long-term debt	8,708			9,886			1,211			1,907			1,116
Total debt	9,344			10,521			1,953			1,950			1,799
Shareholders’ equity ⁽³⁾	3,731			3,648			1,878			868			996
Per Share Information
Average shares outstanding - diluted (thousands)	94,988			94,927			94,488			94,543			98,075
Book value ⁽³⁾	$	40.07		$	38.86		$	20.20		$	9.41		$	10.52
Net income from continuing operations - diluted ^{(3), (6)}	11.67			18.64			11.99			11.15			8.77
Cash dividends	3.44			3.40			3.36			2.68			2.20
Financial Ratios
Return on sales ⁽³⁾	6.3		%	11.8		%	9.6		%	9.3		%	7.8		%
Asset turnover	0.9		x	0.8		x	1.8		x	2.0		x	2.0		x
Return on assets ⁽³⁾	5.8		%	8.9		%	16.8		%	18.2		%	15.2		%
Return on equity ^{(3), (7)}	30.4		%	94.2		%	130.5		%	105.8		%	48.8		%
Dividend payout ratio ⁽⁸⁾	18.5		%	28.4		%	30.1		%	30.6		%	30.3		%
Total debt to capitalization ⁽³⁾	71.5		%	74.3		%	51.0		%	69.2		%	64.4		%
Current ratio	1.0			1.1			1.3			1.2			1.0
Interest coverage ^{(3), (9)}	4.7		x	6.6		x	11.4		x	26.1		x	20.6		x
Net working capital to sales ⁽³⁾	0.3		%	2.8		%	6.7		%	4.5		%	(1.0		)%
Effective income tax rate ⁽¹⁰⁾	18.5		%	25.1		%	29.0		%	32.0		%	31.2		%
General
Earnings before interest, taxes, depreciation and amortization ⁽³⁾	$	2,323		$	2,225		$	1,947		$	1,809		$	1,521
Capital expenditures	251			223			239			234			201
Total technical expenditures (see Note 1)	254			216			153			150			155
Advertising expenditures	358			374			351			338			299
Repairs and maintenance	132			116			100			99			96
Depreciation	278			285			172			170			169
Shareholders of record (total count)	6,244			6,470			6,787			6,987			7,250
Number of employees (total count)	53,368			52,695			42,550			40,706			39,674
Sales per employee (thousands of dollars)	$	329		$	284		$	279		$	279		$	281
Sales per dollar of assets	0.92			0.75			1.76			1.96			1.95

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 4) 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 19, on pages 75 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 2018 as net operating cash was a record $1.944 billion primarily due to improved operating results from all three Reportable Segments. Net working capital decreased $373.0 million at December 31, 2018 compared to 2017 due to a significant increase in other accruals included in current liabilities and a decrease in current assets. Cash and cash equivalents decreased $48.7 million, while Other accruals and the California litigation accrual increased $168.4 million and $136.3 million, respectively. 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. The remaining balance of the Term Loan was paid off in 2018 and the agreement was terminated. 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 $59.7 million in 2018 to a cash source of $1.944 billion from a cash source of $1.884 billion in 2017.

Strong net operating cash provided the funds necessary to invest in new stores and manufacturing and distribution facilities, return cash to shareholders through dividends and treasury stock purchases, and pay down debt.

A voluntary inventory accounting change was made in the fourth quarter of 2018 driven by the Company’s integration activities that impacted the application of last-in, first-out (LIFO) accounting method (Inventory Accounting Change) (See Note 1). As a result of the Inventory Accounting Change in accordance with U.S. generally accepted accounting principles, a retrospective one-time adjustment was made to increase cost of goods sold $58.9 million and related income tax credit $14.6 million which decreased net income $44.3 million and diluted net income per share $.47 for the year ended December 31, 2017. Also, the Inventory Accounting Change increased acquisition-related costs and decreased previously reported segment profit for Performance Coatings and Consumer Brands Groups by $35.7 million and $23.2 million, respectively, for the year ended December 31, 2017. All impacted amounts have been adjusted in this report for the Inventory Accounting Change for the year ended December 31, 2017.

Consolidated net sales increased 17.0 percent in 2018 to $17.534 billion from $14.984 billion in 2017. The increase was due primarily to incremental Valspar sales from the five months ended May 2018 (Incremental Valspar), higher paint sales volume in The Americas Group and selling price increases. Incremental Valspar sales increased net sales 12.4 percent for the year ended December 31, 2018. As a result of the new revenue standard (ASC 606) adopted in the first quarter of 2018, certain advertising support that was previously classified as selling, general and administrative expenses is now classified as a reduction of revenue with no effect on net income. The new revenue standard decreased consolidated net sales less than one percent in 2018. Consolidated gross profit as a percent of consolidated net sales decreased to 42.3 percent in 2018 compared to 44.8 percent in 2017 due primarily to the Acquisition and higher raw material costs, partially offset by price increases. Selling, general and administrative expenses (SG&A) increased $236.1 million in 2018 compared to 2017 and decreased as a percent of consolidated net sales to 28.7 percent in 2018 from 32.0 percent in 2017 primarily due to the impact from Valspar operations. Amortization expense increased $111.3 million to $318.1 million in 2018 versus 2017 due primarily to the Acquisition and related purchase accounting intangible amortization of twelve months in 2018 versus seven months in 2017. Other general expense-net increased $168.3 million in 2018 versus 2017 primarily due to a significant increase in environmental provisions.

Interest expense increased $103.3 million in 2018 versus 2017 primarily due to higher average annual debt levels related to the Acquisition. The California litigation expense recorded in 2018 was $136.3 million. The effective income tax rate for 2018 was 18.5 percent. 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. See Note 15 on pages 71 through 73 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 share by $.44 per share. See Notes 1 and 15 for more information. Diluted net income per share for 2018 decreased to $11.67 per share from $18.20 per share for 2017. Diluted net income per share in 2018 included per share charges for acquisition-related costs of $4.15 and other non-operating expenses totaling $2.71. Other non-operating expenses included environmental provisions of $1.32, California litigation of $1.09 and pension plan settlement expense of $.30 per share. Currency translation rate changes decreased diluted net income per share in the year by $.21 per share. Diluted net income per share in 2017 included a one-time benefit of $7.04 per share from Deferred income tax reductions, a one-time charge of $.44 per share for discontinued operations and a charge of $3.47 per share for acquisition-related costs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation and fair presentation of the consolidated financial statements, accompanying notes and related financial information included in this report are the responsibility of management. The consolidated financial statements, accompanying notes and related financial information included in this report have been prepared in accordance with U.S. generally accepted accounting principles. The consolidated financial statements contain certain amounts that were based upon management’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances. Management considered the impact of the uncertain economic environment and utilized certain outside sources of economic information when developing the basis for their estimates and assumptions. The impact of the global economic conditions on the estimates and assumptions used by management was believed to be reasonable under the circumstances. Management used assumptions based on historical results, considering the current economic trends, and other assumptions to form the basis for determining appropriate carrying values of assets and liabilities that were not readily available from other sources. Actual results could differ from those estimates. Also, materially different amounts may result under materially different conditions, materially different economic trends or from using materially different assumptions. However, management believes that any materially different amounts resulting from materially different conditions or material changes in facts or

circumstances are 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 45 through 49, 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 28 of this report. See Note 1, on page 45 of this report, for more information on non-traded investments.

Accounts Receivable

Accounts receivable were recorded at the time of credit sales net of provisions for sales returns and allowances. All provisions for allowances for doubtful collection of accounts are included in Selling, general and administrative expenses and were based on management’s best judgment and assessment, including an analysis of historical bad debts, a review of the aging of Accounts receivable and a review of the current creditworthiness of customers. Management recorded allowances for such accounts which were believed to be uncollectible, including amounts for the resolution of potential credit and other collection issues such as disputed invoices, customer satisfaction claims and pricing discrepancies.

However, depending on how such potential issues 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, 2018, 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 LIFO method based on inventory quantities and costs determined during the fourth quarter. Inventory quantities were adjusted during the fourth quarter as a result of annual physical inventory counts taken at all locations. If inventories accounted for on the LIFO method are reduced on a year-over-year basis, then liquidation of certain quantities carried at costs prevailing in prior years occurs. Management recorded the best estimate of net realizable value for obsolete and discontinued inventories based on historical experience and current trends through reductions to inventory cost by recording a provision included in Cost of goods sold. Where management estimated that the reasonable market value was below cost or determined that future demand was lower than current inventory levels, based on historical experience, current and projected market demand, current and projected volume trends and other relevant current and projected factors associated with the current economic conditions, a reduction in inventory cost to estimated net realizable value was made. See Note 3, on page 51 of this report, for more information regarding the impact of the LIFO inventory valuation.

Purchase Accounting, Goodwill and Intangible Assets

In accordance with the Business Combinations Topic of the ASC, the Company used the purchase method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed were recognized as Goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. In addition to using management estimates and negotiated amounts, the Company used a variety of information sources to determine the estimated fair values of acquired assets and liabilities including: third-party appraisals for the estimated value and lives of identifiable intangible assets and property, plant and equipment; third-party actuaries for the estimated obligations of defined benefit pension plans and similar benefit obligations; and legal counsel or other experts to assess the obligations associated with legal, environmental and other contingent liabilities. The business and technical judgment of management was used in determining which intangible assets

have indefinite lives and in determining the 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 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, 2018, the date of the annual impairment test. The annual impairment review performed as of October 1, 2018 did not result in any of the reporting units having impairment or deemed at risk for impairment.

In accordance with the Goodwill and Other Intangibles Topic of the ASC, management tests indefinite-lived intangible assets for impairment at the asset level, as determined by appropriate asset valuations at acquisition. Management utilizes the royalty savings method and valuation model to determine the estimated fair value for each indefinite-lived intangible asset or trademark. In this method, management estimates the royalty savings arising from the ownership of the intangible asset. The key assumptions used in estimating the royalty savings for impairment testing include discount rates, royalty rates, growth rates, sales projections and terminal value rates. Discount rates used are similar to the rates developed by the WACC methodology considering any differences in Company-specific risk factors between reporting units and trademarks. Royalty rates are established by management and valuation experts and periodically substantiated by valuation experts. Operational management, considering industry and Company-specific historical and projected data, develops growth rates and sales projections for each significant trademark. Terminal value rate determination follows common methodology of capturing the present value of perpetual sales estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. The royalty savings valuation methodology and calculations used in 2018 impairment testing are consistent with prior years. The annual impairment review performed as of October 1, 2018 did not result in an impairment.

The discounted cash flow and royalty savings valuation methodologies require management to make certain assumptions based upon information available at the time the valuations are performed. Actual results could differ from these assumptions. Management believes the assumptions used are reflective of what a market participant would have used in calculating fair value considering the current economic conditions. See Note 5, on pages 52 through 53 of this report, for a discussion of goodwill and intangible assets and the impairment tests performed in accordance with the Goodwill and Other Intangibles Topic of the ASC.

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

Property, plant and equipment was stated on the basis of cost and depreciated principally on a straight-line basis using industry standards and historical experience to estimate useful lives. In accordance with the Property, Plant and Equipment Topic of the ASC, if events or changes in circumstances indicated that the carrying value of long-lived assets may not be recoverable or the useful life had changed, impairment tests were performed or the useful life was adjusted. Undiscounted future cash flows were used to calculate the recoverable value of long-lived assets to determine if such assets were impaired. Where impairment was identified, management determined fair values under the Fair Value Topic of the ASC. If the usefulness of an asset was determined to be impaired, then management estimated a new useful life based on the period of time for projected uses of the asset. Fair value approaches and changes in useful life required management to make certain assumptions based upon information available at the time the valuation or determination was performed. Actual results could differ from these assumptions. Management believes the assumptions used are reflective of what a market participant would have used in calculating fair value or useful life considering the current economic conditions. All tested long-lived assets or groups of long-lived assets had undiscounted cash flows that were substantially in excess of their carrying value. See Notes 5 and 6, on pages 52 through 55 of this report, for a discussion of the reductions in carrying value or useful life of long-lived assets in accordance with the Property, Plant and Equipment Topic of the ASC.

Exit or Disposal Activities

Management is continually re-evaluating the Company’s operating facilities against its long-term strategic goals. Liabilities associated with exit or disposal activities are recognized as incurred in accordance with the Exit or Disposal Cost Obligations Topic of the ASC and property, plant and equipment is tested for impairment in accordance with the Property, Plant and Equipment Topic of the ASC. Provisions for qualified exit costs are made at the time a facility is no longer operational, include amounts estimated by management and primarily include post-closure rent expenses or costs to terminate the contract before the end of its term and costs of employee terminations. Adjustments may be made to liabilities accrued for qualified exit costs if information 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 6, on pages 53 through 55 of this report, for information concerning impairment of property, plant and equipment and accrued qualified exit costs.

Other Liabilities

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

Defined Benefit Pension and Other Postretirement Benefit Plans

To determine the Company’s ultimate obligation under its defined benefit pension plans and postretirement benefit plans other than pensions, management must estimate the future cost of benefits and attribute that cost to the time period during which each covered employee works. To determine the obligations of such benefit plans, management uses actuaries to calculate such amounts using key assumptions such as discount rates, inflation, long-term investment returns, mortality, employee turnover, rate of compensation increases and medical and prescription drug costs. Management reviews all of these assumptions on an ongoing basis to ensure that the most current information available is being considered. An increase or decrease in the assumptions or economic events outside management’s control could have a direct impact on the Company’s results of operations or financial condition.

In accordance with the Retirement Benefits Topic of the ASC, the Company recognizes each plan’s funded status as an asset for overfunded plans and as a liability for unfunded or underfunded plans. Actuarial gains and losses and prior service costs are recognized and recorded in Cumulative other comprehensive loss, a component of Shareholders’ equity. The

amounts recorded in Cumulative other comprehensive loss will continue to be modified as actuarial assumptions and service costs change, and all such amounts will be amortized to expense over a period of years through the net pension and net periodic benefit costs.

Pension costs for 2019 are expected to decrease significantly due to pension settlement lump sum activity in 2018 and annuity contract purchases planned for 2019. The annuity contract purchases in 2019 are expected to result in a settlement charge of approximately $30 million to $40 million in the first quarter of 2019. The Company will use any remaining overfunded cash surplus balances to fund future company contributions to a replacement defined contribution plan. Postretirement benefit plan costs for 2019 are expected to be approximately the same as 2018 due to similar actuarial assumptions being applied. See Note 7, on pages 55 through 60 of this report, for information concerning the Company’s defined benefit pension plans and postretirement benefit plans other than pensions.

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 45 of this report, for the carrying amounts and fair values of the Company’s long-term debt, and Note 8, 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 28 and Note 9, 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 10 on pages 63 through 67 of this report for information concerning litigation.

Income Taxes

The Company estimated income taxes in each jurisdiction that it operated. This involved estimating taxable earnings, specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets and possible exposures related to future tax audits. To the extent these estimates change, adjustments to deferred and accrued income taxes will be made in the period in which the changes occur.

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, 2018, 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.

During the second quarter of 2018, the Company made purchase accounting adjustments related to the Acquisition which resulted in the reversal of income tax benefits related to the remeasurement of U.S. deferred tax liabilities. No other material adjustments were made under SAB No. 118 for the 2018 tax year. The Company has completed its analysis of the Tax Act in the fourth quarter and the accounting under the Tax Act has been finalized. See Note 15, on pages 71 through 73 of this report, for more information.

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 13, on pages 68 and 70 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 probable 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 2 on page 49 for information on the new revenue standard.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

Overview

On June 1, 2017, the Company completed the Acquisition for a total purchase price of $8.939 billion. On May 16, 2017, the Company issued $6.000 billion of senior notes (New Notes) in a public offering. The net proceeds from the issuance of the New Notes were used to fund the Acquisition. In April 2016, the Company entered into a $7.300 billion bridge credit agreement (Bridge Loan) and a $2.000 billion term loan credit agreement (Term Loan) as committed financing for the Acquisition. On June 1, 2017, the Company terminated the agreement for the Bridge Loan and borrowed the full $2.000 billion on the Term Loan. The Company continues to maintain sufficient short-term borrowing capacity at reasonable rates, and the Company has sufficient cash on hand and total available borrowing capacity to fund its current operating needs.

The Acquisition significantly affected the Company's financial condition, liquidity and cash flow. See Note 4 for a table detailing the final opening balance sheet. Net working capital decreased $373.0 million at December 31, 2018 compared to 2017 due to a significant increase in other accruals included in current liabilities and a decrease in current assets. Total debt at December 31, 2018 decreased $1.177 billion to $9.344 billion from $10.521 billion at December 31, 2017 and decreased as a percentage of total capitalization to 71.5 percent from 74.3 percent the prior year. At December 31, 2018, the Company had remaining short-term borrowing ability of $3.209 billion.

Net Working Capital

Total current assets less Total current liabilities (net working capital) decreased $373.0 million to a surplus of $46.7 million at December 31, 2018 from a surplus of $419.8 million at December 31, 2017. The net working capital decrease is due to a significant increase in other accruals included in current liabilities and a decrease in current assets. Accounts payable increased $7.9 million and other accruals increased $168.4 million both due to timing of payments. The California litigation accrual of $136.3 million was recorded in 2018. Cash and cash equivalents decreased $48.7 million and Short-term borrowings decreased $305.3 million resulting from the 1.35% senior notes becoming due in 2019 while the current portion of long-term debt increased $306.0 million. Accounts receivable decreased $85.8 million and inventories increased $72.8 million primarily due to increased cost. As a result of the net effect of these changes, the Company’s current ratio decreased to 1.01 at December 31, 2018 from 1.11 at December 31, 2017. Accounts receivable as a percent of Net sales decreased to 11.5 percent in 2018 from 14.0 percent in 2017. Accounts receivable days outstanding remained unchanged at 61 days in 2018 and 2017. In 2018, provisions for allowance for doubtful collection of accounts decreased $7.1 million, or 13.4 percent. Inventories as a percent of Net sales decreased to 10.4 percent in 2018 from 11.6 percent in 2017 primarily due to tighter inventory management. Inventory days outstanding increased to 81 days in 2018 versus 78 days in 2017. The Company has sufficient total available borrowing capacity to fund its current operating needs.

Goodwill and Intangible Assets

Goodwill, which represents the excess of cost over the fair value of net assets acquired in purchase business combinations, increased $142.4 million in 2018 due to final purchase accounting measurement period adjustments for the Acquisition of $213.6 million partially offset by foreign currency translation rate fluctuations of $71.2 million. Intangible assets decreased $800.8 million in 2018 primarily due to final purchase accounting measurement period adjustments for the Acquisition of $310.5 million, amortization of finite-lived intangible assets of $318.1 million and foreign currency translation rate fluctuations of $173.4 million. Acquired finite-lived intangible assets included customer relationships and intellectual property. Costs related to designing, developing, obtaining and implementing internal use software are capitalized and amortized in accordance with the Goodwill and Other Intangibles Topic of the ASC. See Note 5, on pages 52 through 53 of this report, for a description of goodwill, identifiable intangible assets and asset impairments recorded in accordance with the Goodwill and Other Intangibles Topic of the ASC and summaries of the remaining carrying values of goodwill and intangible assets.

Deferred Pension and Other Assets

Deferred pension assets of $270.7 million at December 31, 2018 represent the excess of the fair value of assets over the actuarially determined projected benefit obligations, primarily of the domestic salaried defined benefit pension plan. The decrease in Deferred pension assets during 2018 of $26.1 million from $296.7 million last year was primarily due to actual returns on plan assets being lower than expected returns. In accordance with the accounting prescribed by the Retirement Benefits Topic of the ASC, the decrease in the value of the Deferred pension assets is offset in Cumulative other comprehensive loss and is amortized as a component of Net pension costs over a defined period of pension service. See Note 7, 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 $82.0 million to $584.0 million at December 31, 2018 due primarily to increases in customer contract assets.

Property, Plant and Equipment

Net property, plant and equipment decreased $100.3 million to $1.777 billion at December 31, 2018 due primarily to depreciation expense of $278.2 million and sale or disposition of assets with remaining net book value of $99.0 million partially offset by capital expenditures of $251.0 million, and currency translation and other adjustments of $25.9 million. Capital expenditures during 2018 in The Americas Group were primarily attributable to the opening of new paint stores and renovation and improvements in existing stores. In the Consumer Brands Group, capital expenditures during 2018 were primarily attributable to improvements and normal equipment replacements in manufacturing and distribution facilities. Capital expenditures in the Performance Coatings Group were primarily attributable to improvements in existing manufacturing and distribution facilities. The Administrative Segment incurred capital expenditures primarily for information systems hardware. In 2019, the Company expects to spend more than 2018 for capital expenditures. The predominant share of the capital expenditures in 2019 is expected to be for various productivity improvement and maintenance projects at existing manufacturing, distribution and research and development facilities, new store openings and new or upgraded information systems hardware. The Company does not anticipate the need for any specific long-term external financing to support these capital expenditures.

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 2018, the amortization of the unrealized gain reduced interest expense by $8.3 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 4. 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, 2018, the Term Loan had no outstanding principal balance and the agreement was terminated.

In August 2017, the Company entered into a floating rate loan of €225.0 million and a fixed rate loan of €20.0 million. The floating rate loan agreement bears interest at the six-month Euro Interbank Offered Rate plus a margin. The fixed rate loan bears interest at 0.92%. The proceeds will be used for general corporate purposes, including repaying a portion of outstanding short-term borrowings. The loans mature on August 23, 2021.

On July 19, 2018, the Company and three of its wholly-owned subsidiaries, Sherwin-Williams Canada, Inc., Sherwin-Williams Luxembourg S.à r.l and Sherwin-Williams UK Holding Limited (all together with the Company, the Borrowers), entered into a new five-year $2.000 billion credit agreement (New Credit Agreement). The New Credit Agreement may be used for general corporate purposes, including the financing of working capital requirements. The New Credit Agreement replaced a credit agreement dated July 16, 2015, as amended, which was terminated. The New Credit Agreement allows the Company to extend the maturity of the facility with two one-year extension options and the Borrowers to increase the aggregate amount of the facility to $2.750 billion, both of which are subject to the discretion of each lender. In addition, the Borrowers may request letters of credit in an amount of up to $250.0 million. At December 31, 2018, there were no short-term borrowings under the New Credit Agreement. Borrowings outstanding under various other foreign programs were $37.0 million at December 31, 2018 with a weighted average interest rate of 9.3%.

In September 2017, the Company entered into a five-year letter of credit agreement, subsequently amended on multiple dates, with an aggregate availability of $625.0 million at December 31, 2018. On May 6, 2016, the Company entered into a five-year credit agreement, subsequently amended on multiple dates. This 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 $875.0 million at December 31, 2018. Both of these credit agreements are being used for general corporate purposes. At December 31, 2018, there were no borrowings outstanding under these credit agreements. There were $350.0 million borrowings outstanding at December 31, 2017 and no borrowings outstanding at December 31, 2016. There were $291.4 million borrowings outstanding under the Company's domestic commercial paper program at December 31, 2018. There were $274.8 million borrowings outstanding at December 31, 2017 and no borrowings outstanding at December 31, 2016. See Note 8, 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

The Company's domestic defined benefit pension plan for salaried employees was terminated during 2018 and the participants were moved to a replacement defined contribution plan. The Company is in the process of settling the liabilities of the terminated plan through a combination of (i) lump sum payments to eligible participants who elected to receive them and (ii) the purchase of annuity contracts for participants who either did not elect lump sums or were already receiving benefit payments. The lump sum payments were paid in December 2018 and resulted in a settlement charge of $37.6 million in 2018. The annuity contract purchases in 2019 are expected to result in a settlement charge of approximately $30 million to $40 million in the first quarter of 2019. The Company will use any remaining overfunded cash surplus balances to fund future company contributions to a replacement defined contribution plan. The Company's domestic defined benefit pension plan for hourly employees continues to operate.

In accordance with the accounting prescribed by the Retirement Benefits Topic of the ASC, the Company’s total liability for unfunded or underfunded defined benefit pension plans decreased $13.2 million to $80.7 million primarily due to changes in the actuarial assumptions. Postretirement benefits other than pensions decreased $16.2 million to $274.6 million at December 31, 2018 due primarily to changes in the actuarial assumptions.

The assumed discount rate used to determine the projected benefit obligation for domestic defined benefit pension plans was 3.6 percent at December 31, 2018 and 2017. The assumed discount rate used to determine the projected benefit obligation

for foreign defined benefit pension plans increased to 3.0 percent at December 31, 2018 from 2.73 percent at December 31, 2017 primarily due to higher interest rates. The assumed discount rate used to determine the projected benefit obligation for other postretirement benefit obligations increased to 4.2 percent at December 31, 2018 from 3.6 percent at December 31, 2017 for the same reason. The rate of compensation increases used to determine the projected benefit obligations at December 31, 2018 was 3.2 percent for domestic pension plans and 3.7 percent for foreign pension plans, which was comparable to the rates used in the prior year. In deciding on the rate of compensation increases, management considered historical Company increases as well as expectations for future increases. The expected long-term rate of return on assets remained 5.0 percent at December 31, 2018 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 2018, 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 2018 were 5.0 percent and 11.0 percent, respectively, for medical and prescription drug cost increases, both decreasing gradually to 4.5 percent in 2026. In developing the assumed health care cost trend rates, management considered industry data, historical Company experience and expectations for future health care costs.

For 2019 Net pension cost for the ongoing domestic pension plan, the Company will use a discount rate of 4.4 percent, an expected long-term rate of return on assets of 5.0 percent and a rate of compensation increase of 3.2 percent. Lower discount rates and expected long-term rates of return on plan assets will be used for most foreign plans. For 2019 Net periodic benefit costs for postretirement benefits other than pensions, the Company will use a discount rate of 4.2 percent. Net pension cost in 2019 for the ongoing domestic pension plan is expected to be approximately $4.6 million. Net periodic benefit costs for postretirement benefits other than pensions in 2019 is expected to be comparable to 2018 expense. See Note 7, on pages 55 through 60 of this report, for more information on the Company’s obligations and funded status of its defined benefit pension plans and postretirement benefits other than pensions.

Deferred Income Taxes

Deferred income taxes at December 31, 2018 decreased $288.7 million from a year ago primarily due to the final purchase accounting measurement period adjustments for the Acquisition and the impact of amortization of intangible assets and reversal of the associated deferred tax liabilities. See Note 4 on page 51 and Note 15 on pages 71 through 73 of this report for more information.

Other Long-Term Liabilities

Other long-term liabilities increased $324.8 million during 2018 due primarily to net increases of $142.9 million in environmental-related long-term liabilities and a liability of $225.3 million incurred in 2018 resulting from real estate financing lease transactions, partially offset by decreases in other long-term liabilities. See Note 9, on pages 62 through 63 of this report, for further information on Operating Leases.

Environmental-Related Liabilities

The operations of the Company, like those of other companies in the same industry, are subject to various federal, state and local environmental laws and regulations. These laws and regulations not only govern current operations and products, but also impose potential liability on the Company for past operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and the industry in the future. Management

believes that the 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 2018. Management does not expect that such capital expenditures, depreciation and other expenses will be material to the Company’s financial condition, liquidity, cash flow or results of operations in 2019. See Note 9, on pages 62 through 63 of this report, for further information on environmental-related long-term liabilities.

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 2018, 2017 and 2016, including customer satisfaction settlements during the year, were as follows:



	2018			2017			2016
Balance at January 1	$	151,425		$	34,419		$	31,878
Charges to expense	31,706			39,707			38,954
Settlements	(57,843		)	(53,143		)	(36,413		)
Acquisition, divestiture and other adjustments	(68,221		)	130,442
Balance at December 31	$	57,067		$	151,425		$	34,419

Warranty accruals acquired in connection with the Acquisition include warranties for certain products under extended furniture protection plans. The furniture protection plan business was divested during 2018 for an immaterial amount that approximated net book value.

Shareholders’ Equity

Shareholders’ equity increased $82.9 million to $3.731 billion at December 31, 2018 from $3.648 billion last year primarily due to an increase in retained earnings of $788.1 million and an increase in Other capital of $173.3 million, partially offset by purchase of Treasury stock and Treasury stock received from stock option exercises totaling $634.3 million and an increase in Cumulative other comprehensive loss of $245.1 million. Retained earnings increased $788.1 million during 2018 due to net income of $1.109 billion partially offset by $322.9 million in cash dividends paid. The increase in Other capital of $173.3 million was due primarily to the recognition of stock-based compensation expense and stock option exercises. The increase in Cumulative other comprehensive loss of $245.1 million was due primarily to unfavorable foreign currency translation effects of $254.3 million and $6.2 million reduction in the unrealized gain on the interest rate locks, partially offset by $17.8 million in net actuarial loss and prior service costs of defined benefit pension and other postretirement benefit plans net of amortization.

The Company purchased 1.525 million shares of its common stock for treasury during 2018. 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, 2018 to purchase 10.13 million shares of its common stock.

The Company's 2018 annual cash dividend of $3.44 per share represented 18.9 percent of 2017 diluted net income per share. The 2018 annual dividend represented the fortieth consecutive year of dividend payments since the dividend was suspended in 1978. At a meeting held on February 13, 2019, the Board of Directors increased the quarterly cash dividend to $1.13 per share. This quarterly dividend, if approved in each of the remaining quarters of 2019, would result in an annual dividend for 2019 of $4.52 per share or a 38.7 percent payout of 2018 diluted net income per share. See the Statements of Consolidated Shareholders’ Equity, on page 44 of this report, and Notes 11, 12 and 13, on pages 67 through 70 of this report, for more information concerning Shareholders’ equity.

Cash Flow

Net operating cash increased $59.7 million in 2018 to a cash source of $1.944 billion from a cash source of $1.884 billion in 2017 due primarily to increased cash generated by changes in working capital and favorable changes in non-cash items when compared to 2017, partially offset by a reduction in net income of $619.2 million. Net operating cash decreased as a percent to sales to 11.1 percent in 2018 compared to 12.6 percent in 2017. During 2018, strong net operating cash continued to provide the funds necessary to pay down total net debt, invest in new stores and manufacturing and distribution facilities, and return cash to shareholders through treasury stock purchases and dividends paid. Net investing cash usage decreased $8.796 billion to a usage of $251.6 million in 2018 from a usage of $9.047 billion in 2017 due primarily to cash paid for the Acquisition of $8.810 billion and decreases in cash used for other investments of $22.5 million, partially offset by increased capital expenditures of $28.2 million and decreased proceeds from sale of assets of $8.9 million. Net financing cash usage increased $8.261 billion to a usage of $1.747 billion in 2018 from a source of $6.514 billion in 2017 due primarily to decreased proceeds from long-term debt of $8.275 billion, decreased net short-term borrowings of $657.3 million, treasury stock purchases in 2018 of $613.3 million and decreased proceeds from stock options exercised of $52.8 million, partially offset by decreased payments of long-term debt of $1.000 billion and proceeds from real estate financing transactions in 2018 of $225.3 million. In 2018, the Company used Net operating cash and Cash and cash equivalents on hand to spend $251.0 million in capital additions and improvements, make treasury stock purchases of $613.3 million, pay $322.9 million in cash dividends to its shareholders of common stock and pay down long-term debt $852.6 million and short-term borrowings $300.9 million.

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)	2018			2017			2016
Net operating cash	$	1,943,700		$	1,883,968		$	1,308,572
Capital expenditures	(250,957		)	(222,767		)	(239,026		)
Cash dividends	(322,934		)	(319,029		)	(312,082		)
Free cash flow	$	1,369,809		$	1,342,172		$	757,464

Litigation

See page 24 of this report and Note 10 on pages 63 through 67 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 forward contracts with maturity dates of less than twelve months in 2018, 2017 and 2016, primarily to hedge against value changes in foreign currency. There were no material foreign currency forward contracts outstanding at December 31, 2018, 2017 and 2016. 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 14 on pages 46 and 71 of this report.

Financial Covenant

Certain borrowings contain a consolidated leverage covenant. The covenant states the Company’s leverage ratio is not to exceed 4.75 to 1.00. The leverage ratio is defined as the ratio of total indebtedness (the sum of Short-term borrowings, Current portion of long-term debt and Long-term debt) at the reporting date to consolidated “Earnings Before Interest, Taxes, Depreciation and Amortization” (EBITDA) for the 12-month period ended on the same date. Refer to the “Results of Operations” caption below for a reconciliation of EBITDA to Net income. At December 31, 2018, the Company was in

compliance with the covenant. The Company’s Notes, Debentures and revolving credit agreement contain various default and cross-default provisions. In the event of default under any one of these arrangements, acceleration of the maturity of any one or more of these borrowings may result. See Note 8 on pages 61 through 62 of this report.

Employee Stock Ownership Plan (ESOP)

Participants in the Company’s ESOP are allowed to contribute up to the lesser of twenty percent of their annual compensation or the maximum dollar amount allowed under the Internal Revenue Code. The Company matches six percent of eligible employee contributions. The Company’s matching contributions to the ESOP charged to operations were $104.7 million in 2018 compared to $90.7 million in 2017. At December 31, 2018, there were 9,353,926 shares of the Company’s common stock being held by the ESOP, representing 10.0 percent of the total number of voting shares outstanding. See Note 12, on page 68 of this report, for more information concerning the Company’s ESOP.

RESULTS OF OPERATIONS - 2018 vs. 2017

Shown below are net sales and segment profit and the percentage change for the current period by segment for 2018 and 2017:



	Year Ended December 31,
(thousands of dollars)	2018			2017			Change
Net Sales:
The Americas Group	$	9,625,139		$	9,117,279		5.6	%
Consumer Brands Group	2,739,053			2,154,729			27.1	%
Performance Coatings Group	5,166,380			3,706,134			39.4	%
Administrative	3,921			5,646			-30.6	%
Net sales	$	17,534,493		$	14,983,788		17.0	%

	Year Ended December 31,
(thousands of dollars)	2018			2017			Change
Income Before Income Taxes:
The Americas Group	$	1,898,403		$	1,769,466		7.3	%
Consumer Brands Group	261,068			202,813			28.7	%
Performance Coatings Group	452,089			262,782			72.0	%
Administrative	(1,251,910		)	(765,751		)	-63.5	%
Income before income taxes	$	1,359,650		$	1,469,310		-7.5	%

Consolidated net sales for 2018 increased due primarily to Incremental Valspar, higher paint sales volume in The Americas Group and selling price increases. Incremental Valspar sales increased net sales 12.4 percent for the year ended December 31, 2018. As a result of the new revenue standard (ASC 606) adopted in the first quarter of 2018, certain advertising support that was previously classified as selling, general and administrative expenses is now classified as a reduction of revenue with no effect on net income. The new revenue standard decreased consolidated net sales less than 1 percent in the year and quarter. Currency translation rate changes decreased 2018 consolidated net sales by 0.6 percent. Net sales of all consolidated foreign subsidiaries increased 36.1 percent to $4.028 billion for 2018 versus $2.960 billion for 2017 due primarily to Incremental Valspar sales. Net sales of all operations other than consolidated foreign subsidiaries increased 12.3 percent to $13.507 billion for 2018 versus $12.024 billion for 2017.

Net sales in The Americas Group increased due primarily to higher architectural paint sales volume across most end market segments and selling price increases. Net sales from stores in U.S. and Canada open for more than twelve calendar months increased 5.1 percent in the year and 2.9 percent in the quarter over last year's comparable periods. Currency translation rate changes reduced net sales by 1.0 percent compared to 2017. During 2018, The Americas Group opened 91 new stores and closed 15 redundant locations for a net increase of 76 stores, increasing the total number of stores in operation at December 31, 2018 to 4,696 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 5.4 percent for the year over 2017. 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 2018 primarily due to Incremental Valspar sales, selling price increases and a new customer program, partially offset by lower volume sales to some of the Group’s retail customers and the impact of adopting ASC 606. Incremental Valspar sales increased Group net sales 26.9 percent in the year. The adoption of ASC 606 reduced Group net sales by 4.8 percent. In 2019, the Consumer Brands Group plans to continue promotions of new and existing products and expand its customer base and product assortment at existing customers.

The Performance Coatings Group’s net sales in 2018 increased due primarily to Incremental Valspar sales and selling price increases. Incremental Valspar sales increased Group net sales 34.3 percent in the year. Currency translation rate changes

decreased net sales 0.1 percent compared to 2017. In 2018, the Performance Coatings Group opened 3 new branches and closed 11 locations decreasing the total from 290 to 282 branches open in the United States, Canada, Mexico, South America, Europe and Asia at year-end. In 2019, the Performance Coatings Group plans to continue expanding its worldwide presence and improving its customer base.

Net sales in the Administrative segment, which primarily consists 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 2018.

Consolidated gross profit increased $699.8 million in 2018 due primarily to Incremental Valspar sales, higher paint sales volume, reduced impacts of purchasing accounting costs on cost of sales, and selling price increases, partially offset by raw material cost increases and incremental supply chain costs for load-in demand of a new customer program. Consolidated gross profit as a percent to net sales decreased to 42.3 percent from 44.8 percent in 2017 due primarily to a full year of Valspar sales, raw material cost increases, incremental supply chain costs for load-in demand of a new customer program and the impact of adopting ASC 606, partially offset by higher paint sales volume, reduced impacts of purchasing accounting costs on cost of sales, and selling price increases. The Americas Group’s gross profit for 2018 increased $225.0 million compared to 2017 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 $132.4 million due primarily to Incremental Valspar sales, reduced impacts of purchasing accounting costs on cost of sales, and selling price increases, partially offset by raw material cost increases and incremental supply chain costs for load-in demand of a new customer program. The Consumer Brands Group’s gross profit margins declined primarily due to raw material cost increases and incremental supply chain costs for load-in demand of a new customer program and the impact of adopting ASC 606, partially offset by reduced impacts of purchasing accounting costs on cost of sales, and selling price increases. The Performance Coatings Group’s gross profit for 2018 increased $390.7 million due primarily to Incremental Valspar sales, reduced impacts of purchasing accounting costs on cost of sales, and selling price increases, partially offset by raw material cost increases. The Performance Coatings Group’s gross profit margins declined primarily due to raw material cost increases, partially offset by reduced impacts of purchasing accounting costs on cost of sales, and selling price increases. Acquisition-related purchase accounting impacts were lower in 2018 in cost of sales for the

Consumer Brands and Performance Coatings Groups by $54.8 million and $68.2 million, respectively, versus 2017.

SG&A increased by $236.1 million due primarily to the inclusion of Incremental Valspar SG&A, increased expenses to support higher sales levels and net new store openings, partially offset by realized administrative and selling synergies from the Acquisition and the adoption of ASC 606. SG&A decreased as a percent of sales to 28.7 percent in 2018 from 32.0 percent in 2017 primarily due to realized administrative and selling synergies from the Acquisition, improved expense control and the adoption of ASC 606, partially offset by increased expenses to support higher sales levels and net new store openings. In The Americas Group, SG&A increased $92.6 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 $32.1 million for the year primarily due to the inclusion of Incremental Valspar SG&A and increased expenses to support higher sales levels, partially offset by realized administrative and selling synergies from the Acquisition and adoption of ASC 606. The Performance Coatings Group’s SG&A increased by $126.5 million for the year primarily due to the inclusion of Incremental Valspar SG&A and increased expenses to support higher sales levels, partially offset by realized administrative and selling synergies from the Acquisition. The Administrative segment’s SG&A decreased $15.1 million primarily due to decreased Acquisition-related costs and realized administrative synergies from the Acquisition, partially offset by Incremental Valspar SG&A.

Amortization and impairment expenses in total increased $109.3 million in 2018 primarily due to a full year of amortization of Acquisition-related intangibles. Amortization of Acquisition-related intangibles increased by $72.1 million and $34.9 million for the Performance Coatings and Consumer Brands Groups, respectively.

The California litigation charge of $136.3 million was recorded in the third quarter 2018. See Note 10, on page 63 to 67 of this report, for more information concerning Litigation.

Other general expense - net increased $168.3 million in 2018 compared to 2017. The increase was mainly caused by an increase of $164.3 million of expense in the Administrative segment, primarily due to an increase in provisions for environmental matters of $160.8 million and a year-over-year increase in gain on sale of assets of $3.5 million. The Company reached a series of agreements with the Environmental Protection Agency for remediation plans with cost estimates at one of the Company's four major sites which required significant environmental provisions be recorded during 2018. See Note 9, on page 62 and 63 of this report, for more information concerning Other long-term liabilities and environmental matters. See Note 14, on page 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, 2018 which did not result in any impairment. The impairment tests in 2017, resulted in a $2.0 million impairment of trademarks recorded in The Americas Group. See Note 5, on pages 52 and 53 of this report, for more information concerning the impairment of intangible assets.

Interest expense increased $103.3 million in 2018 primarily due to higher average debt levels related to the Acquisition.

Other expense (income) - net had an unfavorable change by $52.8 million of expense in 2018 compared to 2017. This change was mainly due to a pension plan settlement expense of $37.6 million recorded in 2018 in the Administrative segment and was a result of elected lump sum cash payouts to defined benefit plan participants. In addition, foreign currency related transaction losses increased $7.1 million in 2018, 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, 2018. Note 7, on page 55 to 60 of this report, for more information concerning Pension information. See Note 14 on page 70 of this report for more information concerning Other expense (income) - net.

Consolidated Income before income taxes in 2018 decreased $109.7 million resulting from an increase of $236.1 million in SG&A, Other general expense - net increase of $168.3 million, the 2018 California litigation charge of $136.3 million, an increase of $109.3 million in amortization and impairment expenses in total, an increase of $103.3 million in interest expense, and increased Other expense (income) - net of $52.8 million, partially offset by an increase of $699.8 million in gross profit. Income before income taxes increased $128.9 million, $189.3 million and $58.3 million in The Americas, Performance Coating, and Consumer Brands Groups, respectively, when compared to 2017. The Administrative segment expenses decreased Income before income taxes $486.2 million more than in 2017 resulting primarily from increased Acquisition-related expenses, increased Interest expense, and non-operating charges for environmental provisions, California litigation, and pension settlement charges.

The effective income tax rate for 2018 was 18.5 percent. Excluding the income tax benefit of $668.8 million from the Deferred income tax reductions, the effective income tax rate for income from continuing operations was 25.1 percent for 2017. 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 share by $.44 per share. Diluted net income per share for 2018 decreased to $11.67 per share from $18.20 per share for 2017. Diluted net income per share in 2018

included per share charges for acquisition-related costs of $4.15 and other non-operating expenses totaling $2.71. Other non-operating expenses included environmental provisions of $1.32, California litigation of $1.09 and pension plan settlement expense of $.30 per share, respectively. Currency translation rate changes decreased diluted net income per share in the year by $.21 per share. Diluted net income per share in 2017 included a one-time benefit of $7.04 per share from Deferred income tax reductions, a one-time charge of $.44 per share for discontinued operations and a charge of $3.47 per share for acquisition-related costs.

Management considers a measurement that is not in accordance with U.S. generally accepted accounting principles a useful measurement of the operational profitability of the Company. Some investment professionals also utilize such a measurement as an indicator of the value of profits and cash that are generated strictly from operating activities, putting aside working capital and certain other balance sheet changes. For this measurement, management increases Net income for significant non-operating and non-cash expense items to arrive at an amount known as EBITDA. The reader is cautioned that the following value for EBITDA should not be compared to other entities unknowingly. EBITDA should not be considered an alternative to Net income or Net operating cash as an indicator 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)	2018		2017			2016
Net income from continuing operations	$	1,108,746	$	1,769,488		$	1,132,703
Interest Expense	366,734		263,471			154,088
Income Taxes	250,904		(300,178		)	462,530
Depreciation	278,169		284,997			172,074
Amortization	318,112		206,764			25,404
EBITDA from continuing operations	$	2,322,665	$	2,224,542		$	1,946,799

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	202,813			301,041			-32.6	%
Performance Coatings Group	262,782			257,187			2.2	%
Administrative	(765,751		)	(568,301		)	-34.7	%
Income before income taxes	$	1,469,310		$	1,595,233		-7.9	%

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 $797.5 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 44.8 percent from 49.9 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 $122.0 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 $387.0 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 $72.4 million and $74.9 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.

SG&A increased by $657.4 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 32.0 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 33.7 percent and 34.4 percent in 2017 and 2016, respectively. In The Americas Group, SG&A increased $147.1 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 $171.9 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 $254.1 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 $84.4 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 14, on page 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 5, on pages 52 and 53 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 $20.9 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 14 on page 70 of this report for more information concerning Other (income) expense - net.

Consolidated Income before income taxes in 2017 decreased $125.9 million resulting from an increase of $657.4 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 $797.5 million in gross profit. Income before income taxes increased $164.2 million in The Americas Group and $5.6 million in the Performance Coatings Group, but decreased $98.2 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 20.4 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 51.8 percent to $18.2 per share for 2017 from $11.99 per share in 2016. Diluted net income per common share from continuing operations was $18.64 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 $3.47 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.



	Year Ended December 31,
	2018			2017			2016

Net sales	$	17,534,493		$	14,983,788		$	11,855,602
Cost of goods sold ^{(1), (2)}	10,115,931			8,264,988			5,934,344
Gross profit ^{(1), (2)}	7,418,562			6,718,800			5,921,258
Percent to net sales ^{(1), (2)}	42.3		%	44.8		%	49.9		%
Selling, general and administrative expenses ⁽²⁾	5,033,780			4,797,641			4,140,260
Percent to net sales	28.7		%	32.0		%	34.9		%
Other general expense - net	189,122			20,865			12,368
Amortization	318,112			206,764			25,404
Impairment of goodwill and trademarks				2,022			10,688
Interest expense	366,734			263,471			154,088
Interest and net investment income	(5,286		)	(8,571		)	(4,960		)
California litigation expense	136,333
Other expense (income) - net ⁽²⁾	20,117			(32,702		)	(11,823		)

Income from continuing operations before income taxes ⁽¹⁾	1,359,650			1,469,310			1,595,233
Income tax expense (credit) ⁽¹⁾	250,904			(300,178		)	462,530

Net income from continuing operations ⁽¹⁾	1,108,746			1,769,488			1,132,703


Loss from discontinued operations
Income taxes				41,540
Net loss from discontinued operations	—			(41,540		)	—

Net income ⁽¹⁾	$	1,108,746		$	1,727,948		$	1,132,703

Basic net income per share:
Continuing operations ⁽¹⁾	$	11.92		$	19.04		$	12.33
Discontinued operations				(.44		)
Net income per share ⁽¹⁾	$	11.92		$	18.60		$	12.33

Diluted net income per share
Continuing operations ⁽¹⁾	$	11.67		$	18.64		$	11.99
Discontinued operations				(.44		)
Net income per share ⁽¹⁾	$	11.67		$	18.20		$	11.99



	December 31,
	2018			2017			2016
Assets
Current assets:
Cash and cash equivalents	$	155,505		$	204,213		$	889,793
Accounts receivable, less allowance	2,018,768			2,104,555			1,230,987
Inventories:
Finished goods ⁽¹⁾	1,426,366			1,356,429			898,627
Work in process and raw materials	388,909			386,036			169,699
	1,815,275			1,742,465			1,068,326
Deferred income taxes							57,162
Other current assets	354,939			355,697			381,030
Total current assets	4,344,487			4,406,930			3,627,298
Property, plant and equipment:
Land	244,608			254,676			115,555
Buildings	979,140			962,094			714,815
Machinery and equipment	2,668,492			2,572,963			2,153,437
Construction in progress	147,931			177,056			117,126
	4,040,171			3,966,789			3,100,933
Less allowances for depreciation	2,263,332			2,089,674			2,005,045
	1,776,839			1,877,115			1,095,888
Goodwill	6,956,702			6,814,345			1,126,892
Intangible assets	5,201,579			6,002,361			255,010
Deferred pension assets	270,664			296,743			225,529
Other assets	584,008			502,023			421,904
Total Assets ⁽¹⁾	$	19,134,279		$	19,899,517		$	6,752,521

Liabilities and Shareholders’ Equity
Current liabilities:
Short-term borrowings	$	328,403		$	633,731		$	40,739
Accounts payable	1,799,424			1,791,552			1,034,608
Compensation and taxes withheld	504,547			508,166			398,045
Accrued taxes	80,766			79,901			76,765
Current portion of long-term debt	307,191			1,179			700,475
California litigation accrual	136,333
Other accruals	1,141,083			972,651			578,547
Total current liabilities	4,297,747			3,987,180			2,829,179
Long-term debt	8,708,057			9,885,745			1,211,326
Postretirement benefits other than pensions	257,621			274,675			250,397
Deferred income taxes ⁽¹⁾	1,130,872			1,419,601			73,833
Other long-term liabilities	1,009,237			684,442			509,345
Shareholders’ equity:
Common stock - $1.00 par value:
93,116,762, 93,883,645 and 93,013,031 shares outstanding
at December 31, 2018, 2017 and 2016, respectively	118,373			117,561			116,563
Other capital	2,896,448			2,723,183			2,488,564
Retained earnings ⁽¹⁾	6,246,548			5,458,416			4,049,497
Treasury stock, at cost	(4,900,690		)	(4,266,416		)	(4,235,832		)
Cumulative other comprehensive loss	(629,934		)	(384,870		)	(540,351		)
Total shareholders’ equity ⁽¹⁾	3,730,745			3,647,874			1,878,441
Total Liabilities and Shareholders’ Equity ⁽¹⁾	$	19,134,279		$	19,899,517		$	6,752,521



	Year Ended December 31,
	2018			2017			2016
Operating Activities
Net income ⁽¹⁾	$	1,108,746		$	1,727,948		$	1,132,703
Adjustments to reconcile net income to net operating cash:
Loss from discontinued operations				41,540
Depreciation	278,169			284,997			172,074
Amortization of intangible assets	318,112			206,764			25,404
Amortization of inventory purchase accounting adjustments ⁽¹⁾				113,833
Impairment of goodwill and trademarks				2,022			10,688
Amortization of credit facility and debt issuance costs	12,133			8,313			63,759
Provisions for environmental-related matters	176,297			15,443			42,932
Provisions for qualified exit costs	14,923			50,503			3,038
Deferred income taxes ⁽¹⁾	(143,378		)	(620,730		)	(68,241		)
Defined benefit pension plans net cost	36,371			18,153			14,851
Stock-based compensation expense	82,588			90,292			72,109
Net decrease in postretirement liability	(15,863		)	(17,865		)	(12,373		)
Decrease in non-traded investments	72,453			65,703			64,689
Loss (gain) on sale or disposition of assets	12,825			5,422			(30,564		)
Other	(13,839		)	1,051			5,334
Change in working capital accounts:
Decrease (increase) in accounts receivable	18,424			(49,850		)	(113,855		)
(Increase) in inventories	(119,510		)	(89,959		)	(52,577		)
Increase (decrease) in accounts payable	113,786			166,687			(118,893		)
Increase (decrease) in accrued taxes	2,717			(20,878		)	(2,159		)
Increase in accrued compensation and taxes withheld	4,640			11,286			60,632
Decrease (increase) in refundable income taxes	20,092			(15,520		)	(1,343		)
Increase in California litigation accrual	136,333
Other	(46,773		)	16,270			56,215
Costs incurred for environmental-related matters	(17,718		)	(13,792		)	(15,178		)
Costs incurred for qualified exit costs	(21,256		)	(45,422		)	(6,267		)
Other	(86,572		)	(68,243		)	5,594
Net operating cash	1,943,700			1,883,968			1,308,572

Investing Activities
Capital expenditures	(250,957		)	(222,767		)	(239,026		)
Acquisitions of businesses, net of cash acquired				(8,810,315		)
Proceeds from sale of assets	38,354			47,246			38,434
Increase in other investments	(39,037		)	(61,526		)	(103,182		)
Net investing cash	(251,640		)	(9,047,362		)	(303,774		)

Financing Activities
Net (decrease) increase in short-term borrowings	(300,942		)	356,320			(899		)
Proceeds from long-term debt				8,275,169			500
Payments of long-term debt	(852,627		)	(1,852,812		)	(1,111		)
Payments for credit facility and debt issuance costs	(5,185		)	(49,376		)	(65,119		)
Payments of cash dividends	(322,934		)	(319,029		)	(312,082		)
Proceeds from stock options exercised	90,745			143,579			86,831
Treasury stock purchased	(613,312		)
Proceeds from real estate financing transactions	225,345
Other	32,257			(39,761		)	(15,473		)
Net financing cash	(1,746,653		)	6,514,090			(307,353		)
Effect of exchange rate changes on cash	5,885			(36,276		)	(13,396		)
Net (decrease) increase in cash and cash equivalents	(48,708		)	(685,580		)	684,049
Cash and cash equivalents at beginning of year	204,213			889,793			205,744
Cash and cash equivalents at end of year	$	155,505		$	204,213		$	889,793
Taxes paid on income	$	292,169		$	419,695		$	477,786
Interest paid on debt	368,045			220,630			153,850



(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	$	9,056,373	$	301,149	$	1,781,380	$	1,650,540	$	5,323,304
Interest on Long-term debt	3,796,353		308,057		542,939		445,129		2,500,228
Operating leases	1,906,527		412,211		676,564		425,329		392,423
Short-term borrowings	328,403		328,403
California litigation accrual	136,333		136,333
Real estate financing transactions	225,914		13,516		27,033		27,958		157,407
Purchase obligations ⁽¹⁾	77,758		77,758
Other contractual obligations ⁽²⁾	285,123		190,884		62,472		19,149		12,618
Total contractual cash obligations	$	15,812,784	$	1,768,311	$	3,090,388	$	2,568,105	$	8,385,980



	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	$	65,622	$	65,622
Surety bonds	86,429		86,429
Total commercial commitments	$	152,051	$	152,051	$	—	$	—	$	—



	Year Ended December 31,
	2018			2017			2016

Net income ⁽¹⁾	$	1,108,746		$	1,727,948		$	1,132,703

Other comprehensive (loss) income, net of tax:

Foreign currency translation adjustments	(254,306		)	147,930			(18,648		)

Pension and other postretirement benefit adjustments:
Amounts recognized in Other
comprehensive (loss) income ⁽²⁾	(13,473		)	47,995			(28,385		)
Amounts reclassified from Other
comprehensive (loss) income ⁽³⁾	31,245			(7,762		)	7,635
	17,772			40,233			(20,750		)

Unrealized net gains on available-for sale securities:
Amounts recognized in Other
comprehensive (loss) income ⁽⁴⁾				2,026			1,046
Amounts reclassified from Other
comprehensive (loss) income ⁽⁵⁾				(720		)	89
	—			1,306			1,135

Unrealized net (losses) gains on cash flow hedges:
Amounts recognized in Other
comprehensive (loss) income ⁽⁶⁾				(30,765		)	85,007
Amounts reclassified from
Other comprehensive (loss) income ⁽⁷⁾	(6,210		)	(3,223		)
	(6,210		)	(33,988		)	85,007

Other comprehensive (loss) income	(242,744		)	155,481			46,744

Comprehensive income ⁽¹⁾	$	866,002		$	1,883,429		$	1,179,447



	Common Stock		Other Capital		Retained Earnings			Treasury Stock			Cumulative Other Comprehensive Loss			Total
Balance at January 1, 2016	$	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 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⁾					1,727,948									1,727,948
Other comprehensive income											155,481			155,481
Stock-based compensation activity	998		232,351					(30,584		)				202,765
Acquired noncontrolling interest			2,268



Financial Summary	18

Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Reports of Management and the Independent Registered Public Accounting Firm	36

Consolidated Financial Statements and Notes	40

Cautionary Statement Regarding Forward-Looking Information	78

Shareholder Information	79

Corporate Officers and Operating Management	80


⁽¹⁾	2017 includes Valspar financial results since June 1, 2017.


⁽²⁾	2017 has been adjusted for the adoption of ASU No. 2017-07. See Note 1.


⁽³⁾	2017 has been adjusted for an inventory accounting change made in 2018. See Note 1.


⁽⁴⁾	2018 includes acquisition-related costs of $484.4 million, environmental expense provisions of $167.6 million, California litigation expense of $136.3 million and pension plan settlement expense of $37.6 million. 2017 includes acquisition-related costs of $488.6 million. 2016 includes acquisition-related costs of $133.6 million.


⁽⁷⁾	Based on net income and shareholders' equity at beginning of year.


⁽⁸⁾	Based on cash dividends per common share and prior year's diluted net income per common share.


⁽⁹⁾	Ratio of income before income taxes and interest expense to interest expense.


⁽¹⁰⁾	Based on income from continuing operations before income taxes. 2017 excludes impact of one-time income tax benefit primarily related to Tax Cuts and Jobs Act.



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


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


⁽²⁾	Relate primarily to estimated future capital contributions to investments in the U.S. affordable housing and historic renovation real estate partnerships and various other contractual obligations.