NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended
September 30, 2016
and
2015
NOTE 1—BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Except for the adoption of ASU No. 2016-09 (see Note 11), there have been no significant changes in critical accounting policies since
December 31, 2015
. Accounting estimates were revised as necessary during the first
nine months
of
2016
based on new information and changes in facts and circumstances. Certain amounts in the
2015
condensed consolidated financial statements have been reclassified to conform to the
2016
presentation.
The Company primarily uses the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs are subject to the final year-end LIFO inventory valuation. In addition, interim inventory levels include management’s estimates of annual inventory losses due to shrinkage and other factors. The final year-end valuation of inventory is based on an annual physical inventory count performed during the fourth quarter. For further information on inventory valuations and other matters, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended
December 31, 2015
.
The consolidated results for the
three and nine months ended
September 30, 2016
are not necessarily indicative of the results to be expected for the year ending
December 31, 2016
.
NOTE 2—IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During the second quarter of 2016, the Company early adopted, as permitted, ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies various provisions related to how share-based payments are accounted for and presented in the financial statements. Excess tax benefits for share-based payments are no longer recognized in other capital on the balance sheet and now will be recognized in the income tax provision on the income statement. In addition, excess tax benefits for share-based payments are now included in Net operating cash rather than Net financing cash. The changes have been applied prospectively in accordance with the ASU and prior periods have not been adjusted. Refer to Note 11 for additional information.
Effective January 1, 2016, the Company adopted the Financial Accounting Standards Board (FASB) issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires companies to present debt issuance costs associated with a debt liability as a deduction from the carrying amount of that debt liability on the balance sheet rather than being capitalized as an asset. The adoption of this ASU did not have a material effect on the Company's results of operations, financial condition or liquidity.
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which consists of a comprehensive lease accounting standard. Under the new standard, assets and liabilities arising from most leases will be recognized on the balance sheet. Leases will be classified as either operating or financing, and the lease classification will determine whether expense is recognized on a straight line basis (operating leases) or based on an effective interest method (financing leases). The new standard is effective for interim and annual periods beginning after December 15, 2018. A modified retrospective transition approach is required with certain practical expedients available. The Company is currently in the process of evaluating the impact of this standard.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends the guidance for certain aspects of recognition, measurement and disclosure of financial instruments. The standard is effective for interim and annual periods beginning after December 31, 2017, and early adoption is not permitted. The Company is in the process of evaluating the impact of the standard.
In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes," which eliminates the requirement for separate presentation of current and non-current portions of deferred tax. All deferred tax assets and deferred tax liabilities will be presented as non-current on the balance sheet. The standard is effective for interim and annual periods
beginning after December 15, 2016. Either retrospective or prospective presentation can be used. The Company will adopt ASU No. 2015-17 as required. The ASU will not have a material effect on the Company's results of operations, financial condition or liquidity.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which consists of a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The issuance of ASU No. 2015-14 in August 2015 delays the effective date of the standard to interim and annual periods beginning after December 15, 2017. Either full retrospective adoption or modified retrospective adoption is permitted. The Company is in the process of evaluating the impact of the standard.
NOTE 3—DIVIDENDS
Dividends paid on common stock during each of the first
three
quarters of
2016
and
2015
were
$.84
per common share and
$.67
per common share, respectively.
NOTE 4—CHANGES IN CUMULATIVE OTHER COMPREHENSIVE LOSS
The following tables summarize the changes in Cumulative other comprehensive loss for the
nine months
ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Foreign Currency Translation Adjustments
|
|
Pension and Other Postretirement Benefit Adjustments
|
|
Unrealized Net (Losses) Gains on Available-for-Sale Securities
|
|
Unrealized Net Losses on Cash Flow Hedges
|
|
Total Cumulative Other Comprehensive (Loss) Income
|
|
Balance at December 31, 2015
|
$
|
(482,629
|
)
|
|
$
|
(104,346
|
)
|
|
$
|
(120
|
)
|
|
|
|
$
|
(587,095
|
)
|
|
Amounts recognized in Other comprehensive loss
(1)
|
24,702
|
|
|
|
|
822
|
|
|
$
|
(97,223
|
)
|
|
(71,699
|
)
|
|
Amounts reclassified from Other comprehensive loss
(2)
|
|
|
|
474
|
|
|
99
|
|
|
|
|
573
|
|
|
Net change
|
24,702
|
|
|
474
|
|
|
921
|
|
|
(97,223
|
)
|
|
(71,126
|
)
|
|
Balance at September 30, 2016
|
$
|
(457,927
|
)
|
|
$
|
(103,872
|
)
|
|
$
|
801
|
|
|
$
|
(97,223
|
)
|
|
$
|
(658,221
|
)
|
(1)
Net of taxes of
$(509)
for unrealized net
gains
on available-for-sale securities and
$60,093
for unrealized net
losses
on cash flow hedges.
(2)
Net of taxes of
$10
for pension and other postretirement benefit adjustments and
$(61)
for realized
losses
on the sale of available-for-sale securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Foreign Currency Translation Adjustments
|
|
Pension and Other Postretirement Benefit Adjustments
|
|
Unrealized Net (Losses) Gains on Available-for-Sale Securities
|
|
Total Cumulative Other Comprehensive (Loss) Income
|
|
Balance at December 31, 2014
|
$
|
(354,384
|
)
|
|
$
|
(118,167
|
)
|
|
$
|
593
|
|
|
$
|
(471,958
|
)
|
|
Amounts recognized in Other comprehensive loss
(3)
|
(98,120
|
)
|
|
|
|
(1,557
|
)
|
|
(99,677
|
)
|
|
Amounts reclassified from Other comprehensive loss
(4)
|
|
|
1,734
|
|
|
484
|
|
|
2,218
|
|
|
Net change
|
(98,120
|
)
|
|
1,734
|
|
|
(1,073
|
)
|
|
(97,459
|
)
|
|
Balance at September 30, 2015
|
$
|
(452,504
|
)
|
|
$
|
(116,433
|
)
|
|
$
|
(480
|
)
|
|
$
|
(569,417
|
)
|
(3)
Net of taxes of
$966
for unrealized net losses on available-for-sale securities.
(4)
Net of taxes of
$(593)
for pension and other postretirement benefit adjustments and
$(303)
for realized losses on the sale of available-for-sale securities.
NOTE 5—PRODUCT WARRANTIES
Changes in the Company’s accrual for product warranty claims during the first
nine months
of
2016
and
2015
, including customer satisfaction settlements, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
|
2016
|
|
2015
|
|
Balance at January 1
|
$
|
31,878
|
|
|
$
|
27,723
|
|
|
Charges to expense
|
25,391
|
|
|
28,021
|
|
|
Settlements
|
(25,330
|
)
|
|
(27,182
|
)
|
|
Balance at September 30
|
$
|
31,939
|
|
|
$
|
28,562
|
|
For further details on the Company’s accrual for product warranty claims, see Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
NOTE 6—EXIT OR DISPOSAL ACTIVITIES
Liabilities associated with exit or disposal activities are recognized as incurred in accordance with the Exit or Disposal Cost Obligations Topic of the ASC. Qualified exit costs primarily include post-closure rent expenses, incremental post-closure costs and costs of employee terminations. Adjustments may be made to liabilities accrued for qualified exit costs if information becomes available upon which more accurate amounts can be reasonably estimated. Concurrently, property, plant and equipment is tested for impairment in accordance with the Property, Plant and Equipment Topic of the ASC, and if impairment exists, the carrying value of the related assets is reduced to estimated fair value. Additional impairment may be recorded for subsequent revisions in estimated fair value.
In the
nine months
ended
September 30, 2016
,
fourteen
stores in the Paint Stores Group,
eight
branches in the Global Finishes Group and
one
facility in the Consumer Group were closed due to lower demand or redundancy.
The following table summarizes the activity and remaining liabilities associated with qualified exit costs at
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
Exit Plan
|
|
Balance at December 31, 2015
|
|
Provisions in Cost of goods sold or SG&A
|
|
Actual expenditures charged to accrual
|
|
Balance at September 30, 2016
|
|
Consumer Group facilities shutdown in 2016:
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
|
|
$
|
115
|
|
|
$
|
(115
|
)
|
|
|
|
Global Finishes Group stores shutdown in 2016:
|
|
|
|
|
|
|
|
|
|
Other qualified exit costs
|
|
|
|
178
|
|
|
(23
|
)
|
|
$
|
155
|
|
|
Paint Stores Group stores shutdown in 2015:
|
|
|
|
|
|
|
|
|
|
Other qualified exit costs
|
|
$
|
12
|
|
|
293
|
|
|
(305
|
)
|
|
|
|
Global Finishes Group exit of a business in 2015:
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
1,096
|
|
|
|
|
(598
|
)
|
|
498
|
|
|
Other qualified exit costs
|
|
2,750
|
|
|
525
|
|
|
(2,413
|
)
|
|
862
|
|
|
Paint Stores Group stores shutdown in 2014:
|
|
|
|
|
|
|
|
|
|
Other qualified exit costs
|
|
184
|
|
|
|
|
(63
|
)
|
|
121
|
|
|
Consumer Group facilities shutdown in 2014:
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
445
|
|
|
|
|
(43
|
)
|
|
402
|
|
|
Other qualified exit costs
|
|
52
|
|
|
|
|
(39
|
)
|
|
13
|
|
|
Global Finishes Group exit of business in 2014:
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
430
|
|
|
|
|
|
(430
|
)
|
|
|
|
Other qualified exit costs
|
|
353
|
|
|
430
|
|
|
(561
|
)
|
|
222
|
|
|
Other qualified exit costs for facilities shutdown prior to 2014
|
|
1,755
|
|
|
|
|
(484
|
)
|
|
1,271
|
|
|
Totals
|
|
$
|
7,077
|
|
|
$
|
1,541
|
|
|
$
|
(5,074
|
)
|
|
$
|
3,544
|
|
For further details on the Company’s exit or disposal activities, see Note 5 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
NOTE 7
—
HEALTH CARE, PENSION AND OTHER BENEFITS
Shown below are the components of the Company’s net periodic benefit cost (credit) for domestic defined benefit pension plans, foreign defined benefit pension plans and postretirement benefits other than pensions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Domestic Defined
Benefit Pension Plans
|
|
Foreign Defined
Benefit Pension Plans
|
|
Postretirement
Benefits Other than
Pensions
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Three Months Ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (credit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
5,741
|
|
|
$
|
5,754
|
|
|
$
|
955
|
|
|
$
|
1,326
|
|
|
$
|
562
|
|
|
$
|
621
|
|
|
Interest cost
|
6,587
|
|
|
6,236
|
|
|
1,788
|
|
|
2,271
|
|
|
2,752
|
|
|
2,795
|
|
|
Expected return on assets
|
(12,514
|
)
|
|
(13,023
|
)
|
|
(1,581
|
)
|
|
(2,431
|
)
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
302
|
|
|
327
|
|
|
|
|
|
|
(1,645
|
)
|
|
(1,132
|
)
|
|
Actuarial loss
|
1,094
|
|
|
844
|
|
|
230
|
|
|
485
|
|
|
|
|
253
|
|
|
Net periodic benefit cost (credit)
|
$
|
1,210
|
|
|
$
|
138
|
|
|
$
|
1,392
|
|
|
$
|
1,651
|
|
|
$
|
1,669
|
|
|
$
|
2,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (credit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
16,719
|
|
|
$
|
17,263
|
|
|
$
|
3,494
|
|
|
$
|
3,976
|
|
|
$
|
1,684
|
|
|
$
|
1,863
|
|
|
Interest cost
|
19,873
|
|
|
18,710
|
|
|
5,949
|
|
|
6,813
|
|
|
8,257
|
|
|
8,386
|
|
|
Expected return on assets
|
(37,648
|
)
|
|
(39,071
|
)
|
|
(5,273
|
)
|
|
(7,292
|
)
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
904
|
|
|
982
|
|
|
|
|
|
|
(4,935
|
)
|
|
(3,396
|
)
|
|
Actuarial loss
|
3,399
|
|
|
2,530
|
|
|
1,095
|
|
|
1,454
|
|
|
|
|
759
|
|
|
Settlement costs
|
|
|
|
|
4,038
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (credit)
|
$
|
3,247
|
|
|
$
|
414
|
|
|
$
|
9,303
|
|
|
$
|
4,951
|
|
|
$
|
5,006
|
|
|
$
|
7,612
|
|
The settlement charge recognized in the first quarter of 2016 relates to the wind up of an acquired Canada plan. For further details on the Company’s health care, pension and other benefits, see Note 6 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
NOTE 8—OTHER LONG-TERM LIABILITIES
The Company initially provides for estimated costs of environmental-related activities relating to its past operations and third party sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs are determined based on currently available facts regarding each site. If the best estimate of costs can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is provided. At
September 30, 2016
, the unaccrued maximum of the estimated range of possible outcomes is
$81.5 million
higher than the minimum.
The Company continuously assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to any given site, the volumetric contribution which may be attributed to the Company relative to that attributed to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site.
Included in Other long-term liabilities at
September 30, 2016
and
2015
were accruals for extended environmental-related activities of
$143.9 million
and
$126.4 million
, respectively. Estimated costs of current investigation and remediation activities of
$22.5 million
and
$16.9 million
are included in Other accruals at
September 30, 2016
and
2015
, respectively.
Three
of the Company’s currently and formerly owned manufacturing sites account for the majority of the accrual for environmental-related activities and the unaccrued maximum of the estimated range of possible outcomes at
September 30,
2016
. At
September 30, 2016
,
$127.9 million
, or
76.9 percent
of the total accrual, related directly to these
three
sites. In the aggregate unaccrued maximum of
$81.5 million
at
September 30, 2016
,
$60.9 million
, or
74.8 percent
, related to the
three
manufacturing sites. While environmental investigations and remedial actions are in different stages at these sites, additional investigations, remedial actions and monitoring will likely be required at each site.
Management cannot presently estimate the ultimate potential loss contingencies related to these sites or other less significant sites until such time as a substantial portion of the investigation at the sites is completed and remedial action plans are developed. In the event any future loss contingency significantly exceeds the current amount accrued, the recording of the ultimate liability may result in a material impact on net income for the annual or interim period during which the additional costs are accrued. Management does not believe that any potential liability ultimately attributed to the Company for its environmental-related matters will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time during which environmental investigation and remediation takes place. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.
Management expects these contingent environmental-related liabilities to be resolved over an extended period of time. Management is unable to provide a more specific time frame due to the indefinite amount of time to conduct investigation activities at any site, the indefinite amount of time to obtain environmental agency approval, as necessary, with respect to investigation and remediation activities, and the indefinite amount of time necessary to conduct remediation activities.
For further details on the Company’s Other long-term liabilities, see Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
NOTE 9 – LITIGATION
In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, the Company accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and the amount of any such loss cannot be reasonably estimated, any potential liability ultimately determined to be attributable to the Company may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. In those cases where no accrual is recorded or exposure to loss exists in excess of the amount accrued, the Contingencies Topic of the ASC requires disclosure of the contingency when there is a reasonable possibility that a loss or additional loss may have been incurred.
Lead pigment and lead-based paint litigation.
The Company’s past operations included the manufacture and sale of lead pigments and lead-based paints. The Company, along with other companies, is and has been a defendant in a number of legal proceedings, including individual personal injury actions, purported class actions, and actions brought by various counties, cities, school districts and other government-related entities, arising from the manufacture and sale of lead pigments and lead-based paints. The plaintiffs’ claims have been based upon various legal theories, including negligence, strict liability, breach of warranty, negligent misrepresentations and omissions, fraudulent misrepresentations and omissions, concert of action, civil conspiracy, violations of unfair trade practice and consumer protection laws, enterprise liability, market share liability, public nuisance, unjust enrichment and other theories. The plaintiffs seek various damages and relief, including personal injury and property damage, costs relating to the detection and abatement of lead-based paint from buildings, costs associated with a public education campaign, medical monitoring costs and others. The Company has also been a defendant in legal proceedings arising from the manufacture and sale of non-lead-based paints that seek recovery based upon various legal theories, including the failure to adequately warn of potential exposure to lead during surface preparation when using non-lead-based paint on surfaces previously painted with lead-based paint. The Company believes that the litigation brought to date is without merit or subject to meritorious defenses and is vigorously defending such litigation. The Company has not settled any material lead pigment or lead-based paint litigation. The Company expects that additional lead pigment and lead-based paint litigation may be filed against the Company in the future asserting similar or different legal theories and seeking similar or different types of damages and relief.
Notwithstanding the Company’s views on the merits, litigation is inherently subject to many uncertainties, and the Company ultimately may not prevail. Adverse court rulings or determinations of liability, among other factors, could affect the lead
pigment and lead-based paint litigation against the Company and encourage an increase in the number and nature of future claims and proceedings. In addition, from time to time, various legislation and administrative regulations have been enacted, promulgated or proposed to impose obligations on present and former manufacturers of lead pigments and lead-based paints respecting asserted health concerns associated with such products or to overturn the effect of court decisions in which the Company and other manufacturers have been successful.
Due to the uncertainties involved, management is unable to predict the outcome of the lead pigment and lead-based paint litigation, the number or nature of possible future claims and proceedings or the effect that any legislation and/or administrative regulations may have on the litigation or against the Company. In addition, management cannot reasonably determine the scope or amount of the potential costs and liabilities related to such litigation, or resulting from any such legislation and regulations. The Company has not accrued any amounts for such litigation. With respect to such litigation, including the public nuisance litigation, the Company does not believe that it is probable that a loss has occurred, and it is not possible to estimate the range of potential losses as there is no prior history of a loss of this nature and there is no substantive information upon which an estimate could be based. In addition, any potential liability that may result from any changes to legislation and regulations cannot reasonably be estimated. In the event any significant liability is determined to be attributable to the Company relating to such litigation, the recording of the liability may result in a material impact on net income for the annual or interim period during which such liability is accrued. Additionally, due to the uncertainties associated with the amount of any such liability and/or the nature of any other remedy which may be imposed in such litigation, any potential liability determined to be attributable to the Company arising out of such litigation may have a material adverse effect on the Company’s results of operations, liquidity or financial condition. An estimate of the potential impact on the Company’s results of operations, liquidity or financial condition cannot be made due to the aforementioned uncertainties.
Public nuisance claim litigation
.
The Company and other companies are or were defendants in legal proceedings seeking recovery based on public nuisance liability theories, among other theories, brought by the State of Rhode Island, the City of St. Louis, Missouri, various cities and counties in the State of New Jersey, various cities in the State of Ohio and the State of Ohio, the City of Chicago, Illinois, the City of Milwaukee, Wisconsin and the County of Santa Clara, California and other public entities in the State of California. Except for the Santa Clara County, California proceeding, all of these legal proceedings have been concluded in favor of the Company and other defendants at various stages in the proceedings.
The proceedings initiated by the State of Rhode Island included
two
jury trials. At the conclusion of the second trial, the jury returned a verdict finding that (i) the cumulative presence of lead pigment in paints and coatings on buildings in the State of Rhode Island constitutes a public nuisance, (ii) the Company, along with
two
other defendants, caused or substantially contributed to the creation of the public nuisance and (iii) the Company and
two
other defendants should be ordered to abate the public nuisance. The Company and
two
other defendants appealed and, on July 1, 2008, the Rhode Island Supreme Court, among other determinations, reversed the judgment of abatement with respect to the Company and
two
other defendants. The Rhode Island Supreme Court’s decision reversed the public nuisance liability judgment against the Company on the basis that the complaint failed to state a public nuisance claim as a matter of law.
The Santa Clara County, California proceeding was initiated in March 2000 in the Superior Court of the State of California, County of Santa Clara. In the original complaint, the plaintiffs asserted various claims including fraud and concealment, strict product liability/failure to warn, strict product liability/design defect, negligence, negligent breach of a special duty, public nuisance, private nuisance, and violations of California’s Business and Professions Code. A number of the asserted claims were resolved in favor of the defendants through pre-trial proceedings. The named plaintiffs in the Fourth Amended Complaint, filed on March 16, 2011, are the Counties of Santa Clara, Alameda, Los Angeles, Monterey, San Mateo, Solano and Ventura, the Cities of Oakland and San Diego and the City and County of San Francisco. The Fourth Amended Complaint asserted a sole claim for public nuisance, alleging that the presence of lead pigments for use in paint and coatings in, on and around residences in the plaintiffs’ jurisdictions constitutes a public nuisance. The plaintiffs sought the abatement of the alleged public nuisance that exists within the plaintiffs’ jurisdictions. A trial commenced on July 15, 2013 and ended on August 22, 2013. The court entered final judgment on January 27, 2014, finding in favor of the plaintiffs and against the Company and
two
other defendants (ConAgra Grocery Products Company and NL Industries, Inc.). The final judgment held the Company jointly and severally liable with the other
two
defendants to pay
$1.15 billion
into a fund to abate the public nuisance. The Company strongly disagrees with the judgment. On February 18, 2014, the Company filed a motion for new trial and a motion to vacate the judgment. The court denied these motions on March 24, 2014. On March 28, 2014, the Company filed a notice of appeal to the Sixth District Court of Appeal for the State of California. The filing of the notice of appeal effects an automatic stay of the judgment without the requirement to post a bond. The appeal is fully briefed, and the parties are waiting for the Sixth District Court of Appeal to set a date for oral argument. The date for oral argument is at the discretion of the Sixth District Court of Appeal. The Company expects the Sixth District Court of Appeal to issue its ruling within 90 days following oral argument. The Company believes that the judgment conflicts with established principles of law and is unsupported by the evidence. The Company has had a favorable history with respect to lead pigment and lead-based paint litigation, particularly other public
nuisance litigation, and accordingly, the Company believes that it is not probable that a loss has occurred and it is not possible to estimate the range of potential loss with respect to the case.
Litigation seeking damages from alleged personal injury
.
The Company and other companies are defendants in a number of legal proceedings seeking monetary damages and other relief from alleged personal injuries. These proceedings include claims by children allegedly injured from ingestion of lead pigment or lead-containing paint and claims for damages allegedly incurred by the children’s parents or guardians. These proceedings generally seek compensatory and punitive damages, and seek other relief including medical monitoring costs. These proceedings include purported claims by individuals, groups of individuals and class actions.
The plaintiff in Thomas v. Lead Industries Association, et al., initiated an action in state court against the Company, other alleged former lead pigment manufacturers and the Lead Industries Association in September 1999. The claims against the Company and the other defendants included strict liability, negligence, negligent misrepresentation and omissions, fraudulent misrepresentation and omissions, concert of action, civil conspiracy and enterprise liability. Implicit within these claims is the theory of “risk contribution” liability (Wisconsin’s theory which is similar to market share liability, except that liability can be joint and several) due to the plaintiff’s inability to identify the manufacturer of any product that allegedly injured the plaintiff. The case ultimately proceeded to trial and, on November 5, 2007, the jury returned a defense verdict, finding that the plaintiff had ingested white lead carbonate, but was not brain damaged or injured as a result. The plaintiff appealed and, on December 16, 2010, the Wisconsin Court of Appeals affirmed the final judgment in favor of the Company and other defendants.
Wisconsin is the only jurisdiction to date to apply a theory of liability with respect to alleged personal injury (i.e., risk contribution/market share liability) that does not require the plaintiff to identify the manufacturer of the product that allegedly injured the plaintiff in the lead pigment and lead-based paint litigation. Although the risk contribution liability theory was applied during the Thomas trial, the constitutionality of this theory as applied to the lead pigment cases has not been judicially determined by the Wisconsin state courts. However, in an unrelated action filed in the United States District Court for the Eastern District of Wisconsin, Gibson v. American Cyanamid, et al., on November 15, 2010, the District Court held that Wisconsin’s risk contribution theory as applied in that case violated the defendants’ right to substantive due process and is unconstitutionally retroactive. The District Court's decision in Gibson v. American Cyanamid, et al., was appealed by the plaintiff to the United States Court of Appeals for the Seventh Circuit. On July 24, 2014, the United States Court of Appeals for the Seventh Circuit reversed the judgment and remanded the case back to the District Court for further proceedings. On January 16, 2015, the defendants filed a petition for certiorari in the United States Supreme Court seeking that Court's review of the Seventh Circuit's decision, and on May 18, 2015, the United States Supreme Court denied the defendants' petition. The case is currently pending in the District Court. Also, in Yasmine Clark v. The Sherwin-Williams Company, et al., the Wisconsin Circuit Court, Milwaukee County, on March 25, 2014, held that the application to a pending case of Section 895.046 of the Wisconsin Statutes (which clarifies the application of the risk contribution theory) is unconstitutional as a violation of the plaintiff’s right to due process of law under the Wisconsin Constitution. On August 21, 2014, the Wisconsin Court of Appeals granted defendants' petition to hear the issue as an interlocutory appeal. On September 29, 2015, the Wisconsin Court of Appeals certified the appeal to the Wisconsin Supreme Court for its determination. Oral argument before the Wisconsin Supreme Court occurred on April 5, 2016. On April 15, 2016, the Wisconsin Supreme Court published its decision, deciding in a 3 to 3 split decision to remand the case back to the Wisconsin Court of Appeals for its consideration. The Wisconsin Court of Appeals dismissed the appeal on September 20, 2016 and remanded the case back to the Wisconsin Circuit Court for further proceedings.
Insurance coverage litigation
.
The Company and its liability insurers, including certain underwriters at Lloyd’s of London, initiated legal proceedings against each other to primarily determine, among other things, whether the costs and liabilities associated with the abatement of lead pigment are covered under certain insurance policies issued to the Company. The Company’s action, filed on March 3, 2006 in the Common Pleas Court, Cuyahoga County, Ohio, is currently stayed and inactive. The liability insurers’ action, which was filed on February 23, 2006 in the Supreme Court of the State of New York, County of New York, has been dismissed. An ultimate loss in the insurance coverage litigation would mean that insurance proceeds could be unavailable under the policies at issue to mitigate any ultimate abatement related costs and liabilities. The Company has not recorded any assets related to these insurance policies or otherwise assumed that proceeds from these insurance policies would be received in estimating any contingent liability accrual. Therefore, an ultimate loss in the insurance coverage litigation without a determination of liability against the Company in the lead pigment or lead-based paint litigation will have no impact on the Company’s results of operation, liquidity or financial condition. As previously stated, however, the Company has not accrued any amounts for the lead pigment or lead-based paint litigation and any significant liability ultimately determined to be attributable to the Company relating to such litigation may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued.
Litigation related to Consorcio Comex.
As previously disclosed, the Company entered into a definitive Stock Purchase Agreement (as subsequently amended and restated, the “Purchase Agreement”), with Avisep, S.A. de C.V. (“Avisep”) and Bevisep, S.A. de C.V. (“Bevisep”) to, among other things, acquire the Mexico business of Consorcio Comex, S.A. de C.V. (the "Acquisition"). Under the terms of the Purchase Agreement, either the Company or Avisep and Bevisep had the right to terminate the Purchase Agreement in the event that the closing of the Acquisition did not occur on or prior to March 31, 2014 and such party was not in material breach of the Purchase Agreement.
On April 3, 2014, the Company sent notice to Avisep and Bevisep that the Company was terminating the Purchase Agreement. On April 3, 2014, the Company filed a complaint for declaratory judgment in the Supreme Court of the State of New York, New York County, requesting the court to declare that the Company had used commercially reasonable efforts as required under the Purchase Agreement and has not breached the Purchase Agreement. On August 7, 2014, the case was removed by Avisep and Bevisep to the United States District Court for the Southern District of New York. On September 24, 2014, Avisep and Bevisep filed a motion to dismiss the case, including for lack of personal jurisdiction. Oral argument on the motion to dismiss before the District Court occurred on January 27, 2016. On January 29, 2016, the District Court entered a judgment dismissing the case without prejudice for lack of personal jurisdiction. On April 11, 2014, Avisep and Bevisep initiated an arbitration proceeding against the Company in the International Court of Arbitration contending that the Company breached the Purchase Agreement by terminating the Purchase Agreement and not utilizing commercially reasonable efforts under the Purchase Agreement, which allegedly caused Avisep and Bevisep to incur damages. On June 1, 2015, Avisep and Bevisep filed their statement of claim in the arbitration alleging damages of approximately
$85 million
. On August 31, 2015, the Company filed its memorial in support of its statement of defense in the arbitration. A hearing on the merits before an arbitration tribunal commenced on April 11, 2016 and ended on April 19, 2016. On June 27, 2016, the arbitration tribunal issued its final award finding that the Company did not breach its duty to act in good faith under the Purchase Agreement, did not breach the Purchase Agreement by failing to use commercially reasonable efforts under the Purchase Agreement, and did not wrongfully terminate the Purchase Agreement. In addition, the arbitration tribunal found that the Company breached the Purchase Agreement by filing the complaint for declaratory judgment in the Supreme Court of the State of New York and ordered the Company to pay Avisep’s and Bevisep’s costs of defending such action in the amount of
$0.5 million
, plus interest. The parties were ordered to share the costs of the arbitration and be responsible for their own costs, including attorneys’ fees and expenses.
NOTE 10—OTHER
Other general expense - net
Included in
Other general expense - net
were the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Provisions for environmental matters - net
|
$
|
683
|
|
|
$
|
7,128
|
|
|
$
|
21,219
|
|
|
$
|
18,688
|
|
|
Loss (gain) on disposition of assets
|
130
|
|
|
1,989
|
|
|
(119
|
)
|
|
(1,273
|
)
|
|
Total
|
$
|
813
|
|
|
$
|
9,117
|
|
|
$
|
21,100
|
|
|
$
|
17,415
|
|
Provisions for environmental matters - net represent site-specific increases or decreases to environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Environmental-related accruals are not recorded net of insurance proceeds in accordance with the Offsetting Subtopic of the Balance Sheet Topic of the ASC. See Note 8 for further details on the Company’s environmental-related activities.
The
loss (gain)
on disposition of assets represents net realized
losses (gains)
associated with the disposal of fixed assets previously used in the conduct of the primary business of the Company.
Other (income) expense - net
Included in
Other (income) expense - net
were the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Dividend and royalty income
|
$
|
(1,346
|
)
|
|
$
|
(313
|
)
|
|
$
|
(3,511
|
)
|
|
$
|
(2,433
|
)
|
|
Net expense from banking activities
|
2,161
|
|
|
3,223
|
|
|
6,532
|
|
|
8,387
|
|
|
Foreign currency transaction related losses
|
3,779
|
|
|
4,100
|
|
|
7,288
|
|
|
6,960
|
|
|
Other income
|
(7,920
|
)
|
|
(4,682
|
)
|
|
(18,250
|
)
|
|
(15,022
|
)
|
|
Other expense
|
2,601
|
|
|
1,733
|
|
|
7,390
|
|
|
6,601
|
|
|
Total
|
$
|
(725
|
)
|
|
$
|
4,061
|
|
|
$
|
(551
|
)
|
|
$
|
4,493
|
|
Foreign currency transaction related losses
represent net realized
losses
on U.S. dollar-denominated liabilities of foreign subsidiaries and net realized and unrealized
losses
from foreign currency option and forward contracts. There were
no
material foreign currency option and forward contracts outstanding at
September 30, 2016
and
2015
.
Other income and Other expense included items of revenue, gains, expenses and losses that were unrelated to the primary business purpose of the Company. There were no other items within the other income or other expense caption that were individually significant.
NOTE 11—INCOME TAXES
The effective tax rate was
27.8 percent
and
28.0 percent
for the
third quarter
and first
nine months
of
2016
, respectively, compared to
32.0 percent
and
31.6 percent
for the
third quarter
and first
nine months
of
2015
, respectively. The decrease in the effective tax rate for the third quarter and first nine months of 2016 compared to 2015 was primarily due to the Company's adoption of ASU No. 2016-09.
As disclosed in Note 2, during the second quarter of 2016, the Company adopted ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting.” Therefore, effective January 1, 2016, excess tax benefits for share-based payments are recognized in the income tax provision rather than in additional paid-in capital. The impact on the Company's financial statements for the
three and nine months ended
September 30, 2016
is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2016
|
|
September 30, 2016
|
|
Decrease in Other capital
|
$
|
11,322
|
|
|
$
|
41,025
|
|
|
Decrease in Income taxes and increase in Net income
|
$
|
11,322
|
|
|
$
|
41,025
|
|
|
Increase in Average shares and equivalents outstanding - diluted
|
667,822
|
|
|
602,877
|
|
|
Increase in Basic net income per common share
|
$
|
0.12
|
|
|
$
|
0.45
|
|
|
Increase in Diluted net income per common share
|
$
|
0.09
|
|
|
$
|
0.37
|
|
At
December 31, 2015
, the Company had
$33.9 million
in unrecognized tax benefits, the recognition of which would have an effect of
$30.0 million
on the current provision for income taxes. Included in the balance of unrecognized tax benefits at
December 31, 2015
was
$3.5 million
related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised primarily of items related to federal audits of partnership investments and expiring statutes in foreign and state jurisdictions.
The Company classifies all income tax related interest and penalties as income tax expense. At
December 31, 2015
, the Company had accrued
$8.6 million
for the potential payment of income tax interest and penalties.
There were
no
significant changes to any of the balances of unrecognized tax benefits at
December 31, 2015
during the first
nine months
of
2016
.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. As of
September 30, 2016
, there were no examinations being conducted by the IRS, however, the statute of limitations has not expired for the 2013, 2014 and 2015 tax years.
As of
September 30, 2016
, the Company is subject to non-U.S. income tax examinations for the tax years of 2008 through 2015. In addition, the Company is subject to state and local income tax examinations for the tax years 2005 through 2015.
NOTE 12—NET INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars except per share data)
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Basic
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
91,992,854
|
|
|
92,196,458
|
|
|
91,752,482
|
|
|
92,398,962
|
|
|
Net income
|
$
|
386,733
|
|
|
$
|
374,491
|
|
|
$
|
929,673
|
|
|
$
|
855,832
|
|
|
Basic net income per common share
|
$
|
4.20
|
|
|
$
|
4.06
|
|
|
$
|
10.13
|
|
|
$
|
9.26
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
91,992,854
|
|
|
92,196,458
|
|
|
91,752,482
|
|
|
92,398,962
|
|
|
Stock options and other contingently issuable shares
(1)
|
2,218,617
|
|
|
1,698,414
|
|
|
2,109,359
|
|
|
1,864,371
|
|
|
Non-vested restricted stock grants
|
560,336
|
|
|
538,203
|
|
|
559,349
|
|
|
513,054
|
|
|
Average common shares outstanding assuming dilution
|
94,771,807
|
|
|
94,433,075
|
|
|
94,421,190
|
|
|
94,776,387
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
386,733
|
|
|
$
|
374,491
|
|
|
$
|
929,673
|
|
|
$
|
855,832
|
|
|
Diluted net income per common share
|
$
|
4.08
|
|
|
$
|
3.97
|
|
|
$
|
9.85
|
|
|
$
|
9.03
|
|
|
|
|
|
(1)
|
Stock options and other contingently issuable shares for the three and
nine months
ended
September 30, 2016
excluded
32,633
and
63,310
shares, respectively, due to their anti-dilutive effect
. Stock options and other contingently issuable shares
for the three and
nine months
ended
September 30, 2015
excluded
34,473
and
31,615
shares, respectively, due to their anti-dilutive effect .
|
Prior to 2016, the Company used the
two
-class method of calculating basic and diluted earnings per share as time-based restricted shares were considered a separate class of participating securities since they received non-forfeitable dividends. The time-based restricted shares represented less than
1%
of outstanding shares, and therefore the difference between basic and diluted earnings per share under the two-class method and treasury stock method was not significant. Starting in 2016, there will be no additional grants of time-based restricted shares. Accordingly, 2016 basic and diluted earnings per share are calculated using the treasury stock method, and the 2015 calculations are presented under the treasury stock method for comparability.
See Note 11 for the impact of the adoption of ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" on basic and diluted net income per common share.
NOTE 13—REPORTABLE SEGMENT INFORMATION
The Company reports segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources in accordance with the Segment Disclosures Topic of the ASC. The Company has determined that it has
four
reportable operating segments: Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group (individually, a "Reportable Segment" and collectively, the “Reportable Segments”).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Three Months Ended September 30, 2016
|
|
|
Paint Stores
Group
|
|
Consumer
Group
|
|
Global
Finishes
Group
|
|
Latin America
Coatings
Group
|
|
Administrative
|
|
Consolidated
Totals
|
|
Net external sales
|
$
|
2,227,891
|
|
|
$
|
412,901
|
|
|
$
|
480,743
|
|
|
$
|
156,637
|
|
|
$
|
1,290
|
|
|
$
|
3,279,462
|
|
|
Intersegment transfers
|
|
|
760,594
|
|
|
2,954
|
|
|
10,348
|
|
|
(773,896
|
)
|
|
|
|
Total net sales and intersegment transfers
|
$
|
2,227,891
|
|
|
$
|
1,173,495
|
|
|
$
|
483,697
|
|
|
$
|
166,985
|
|
|
$
|
(772,606
|
)
|
|
$
|
3,279,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
518,309
|
|
|
$
|
92,047
|
|
|
$
|
63,169
|
|
|
$
|
974
|
|
|
|
|
$
|
674,499
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
$
|
(44,100
|
)
|
|
(44,100
|
)
|
|
Administrative expenses and other
|
|
|
|
|
|
|
|
|
(94,779
|
)
|
|
(94,779
|
)
|
|
Income before income taxes
|
$
|
518,309
|
|
|
$
|
92,047
|
|
|
$
|
63,169
|
|
|
$
|
974
|
|
|
$
|
(138,879
|
)
|
|
$
|
535,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
|
Paint Stores
Group
|
|
Consumer
Group
|
|
Global
Finishes
Group
|
|
Latin America
Coatings
Group
|
|
Administrative
|
|
Consolidated
Totals
|
|
Net external sales
|
$
|
2,087,263
|
|
|
$
|
421,633
|
|
|
$
|
486,133
|
|
|
$
|
156,019
|
|
|
$
|
1,237
|
|
|
$
|
3,152,285
|
|
|
Intersegment transfers
|
|
|
760,376
|
|
|
682
|
|
|
10,041
|
|
|
(771,099
|
)
|
|
|
|
Total net sales and intersegment transfers
|
$
|
2,087,263
|
|
|
$
|
1,182,009
|
|
|
$
|
486,815
|
|
|
$
|
166,060
|
|
|
$
|
(769,862
|
)
|
|
$
|
3,152,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
507,411
|
|
|
$
|
88,273
|
|
|
$
|
55,133
|
|
|
$
|
2,145
|
|
|
|
|
$
|
652,962
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
$
|
(16,995
|
)
|
|
(16,995
|
)
|
|
Administrative expenses and other
|
|
|
|
|
|
|
|
|
(85,245
|
)
|
|
(85,245
|
)
|
|
Income before income taxes
|
$
|
507,411
|
|
|
$
|
88,273
|
|
|
$
|
55,133
|
|
|
$
|
2,145
|
|
|
$
|
(102,240
|
)
|
|
$
|
550,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
Paint Stores
Group
|
|
Consumer
Group
|
|
Global
Finishes
Group
|
|
Latin America
Coatings
Group
|
|
Administrative
|
|
Consolidated
Totals
|
|
Net external sales
|
$
|
5,951,457
|
|
|
$
|
1,268,502
|
|
|
$
|
1,434,065
|
|
|
$
|
415,131
|
|
|
$
|
3,856
|
|
|
$
|
9,073,011
|
|
|
Intersegment transfers
|
|
|
2,138,180
|
|
|
10,935
|
|
|
29,001
|
|
|
(2,178,116
|
)
|
|
|
|
Total net sales and intersegment transfers
|
$
|
5,951,457
|
|
|
$
|
3,406,682
|
|
|
$
|
1,445,000
|
|
|
$
|
444,132
|
|
|
$
|
(2,174,260
|
)
|
|
$
|
9,073,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
1,280,833
|
|
|
$
|
264,306
|
|
|
$
|
176,990
|
|
|
$
|
(9,597
|
)
|
|
|
|
$
|
1,712,532
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
$
|
(110,710
|
)
|
|
(110,710
|
)
|
|
Administrative expenses and other
|
|
|
|
|
|
|
|
|
(310,623
|
)
|
|
(310,623
|
)
|
|
Income before income taxes
|
$
|
1,280,833
|
|
|
$
|
264,306
|
|
|
$
|
176,990
|
|
|
$
|
(9,597
|
)
|
|
$
|
(421,333
|
)
|
|
$
|
1,291,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
|
Paint Stores
Group
|
|
Consumer
Group
|
|
Global
Finishes
Group
|
|
Latin America
Coatings
Group
|
|
Administrative
|
|
Consolidated
Totals
|
|
Net external sales
|
$
|
5,533,753
|
|
|
$
|
1,263,365
|
|
|
$
|
1,461,456
|
|
|
$
|
472,318
|
|
|
$
|
3,816
|
|
|
$
|
8,734,708
|
|
|
Intersegment transfers
|
|
|
2,136,577
|
|
|
3,643
|
|
|
30,594
|
|
|
(2,170,814
|
)
|
|
|
|
Total net sales and intersegment transfers
|
$
|
5,533,753
|
|
|
$
|
3,399,942
|
|
|
$
|
1,465,099
|
|
|
$
|
502,912
|
|
|
$
|
(2,166,998
|
)
|
|
$
|
8,734,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
1,117,368
|
|
|
$
|
257,926
|
|
|
$
|
151,301
|
|
|
$
|
15,676
|
|
|
|
|
$
|
1,542,271
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
$
|
(42,231
|
)
|
|
(42,231
|
)
|
|
Administrative expenses and other
|
|
|
|
|
|
|
|
|
(248,295
|
)
|
|
(248,295
|
)
|
|
Income before income taxes
|
$
|
1,117,368
|
|
|
$
|
257,926
|
|
|
$
|
151,301
|
|
|
$
|
15,676
|
|
|
$
|
(290,526
|
)
|
|
$
|
1,251,745
|
|
In the reportable segment financial information, Segment profit was total net sales and intersegment transfers less operating costs and expenses. Domestic intersegment transfers were accounted for at the approximate fully absorbed manufactured cost,
based on normal capacity volumes, plus customary distribution costs. International intersegment transfers were accounted for at values comparable to normal unaffiliated customer sales. The Administrative segment includes the administrative expenses of the Company’s corporate headquarters site. Also included in the Administrative segment was interest expense, interest and investment income, certain expenses related to closed facilities and environmental-related matters, and other expenses which were not directly associated with the Reportable Segments. The Administrative segment did not include any significant foreign operations. Also included in the Administrative segment was a real estate management unit that is responsible for the ownership, management and leasing of non-retail properties held primarily for use by the Company, including the Company’s headquarters site, and disposal of idle facilities. Sales of this segment represented external leasing revenue of excess headquarters space or leasing of facilities no longer used by the Company in its primary businesses. Gains and losses from the sale of property were not a significant operating factor in determining the performance of the Administrative segment.
Net external sales and segment profit of all consolidated foreign subsidiaries were
$439.6 million
and
$19.6 million
, respectively, for the
third quarter
of
2016
, and
$441.2 million
and
$14.3 million
, respectively, for the
third quarter
of
2015
. Net external sales and segment profit of these subsidiaries were
$1.295 billion
and
$46.8 million
, respectively, for the first
nine months
of
2016
and
$1.374 billion
and
$55.0 million
, respectively, for the first
nine months
of
2015
.
Long-lived assets of these subsidiaries totaled
$504.4 million
and
$491.6 million
at
September 30, 2016
and
September 30, 2015
, respectively. Domestic operations accounted for the remaining net external sales, segment profits and long-lived assets. No single geographic area outside the United States was significant relative to consolidated net external sales, income before taxes, or consolidated long-lived assets.
Export sales and sales to any individual customer were each
less than 10 percent of consolidated sales to unaffiliated customers
during all periods presented.
NOTE 14
—
FAIR VALUE MEASUREMENTS
The Fair Value Measurements and Disclosures Topic of the ASC applies to the Company’s financial and non-financial assets and liabilities. The guidance applies when other standards require or permit the fair value measurement of assets and liabilities. It does not expand the use of fair value measurements. The Company did not have any fair value measurements for its non-financial assets and liabilities during the
third quarter
. The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis, categorized using the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
Significant
|
|
|
Fair Value at
|
|
Markets for
|
|
Significant Other
|
|
Unobservable
|
|
|
September 30,
|
|
Identical Assets
|
|
Observable Inputs
|
|
Inputs
|
|
|
2016
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Deferred compensation plan asset
(1)
|
$
|
26,527
|
|
|
$
|
3,413
|
|
|
$
|
23,114
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate lock liability
(2)
|
$
|
157,316
|
|
|
|
|
$
|
157,316
|
|
|
|
|
Deferred compensation plan liability
(3)
|
36,928
|
|
|
$
|
36,928
|
|
|
|
|
|
|
Total liabilities
|
$
|
194,244
|
|
|
$
|
36,928
|
|
|
$
|
157,316
|
|
|
|
|
|
|
|
(1)
|
The deferred compensation plan asset consists of the investment funds maintained for the future payments under the Company’s executive deferred compensation plan, which is structured as a rabbi trust. The investments are marketable securities accounted for under the Debt and Equity Securities Topic of the ASC. The level 1 investments are valued using quoted market prices multiplied by the number of shares. The level 2 investments are valued based on vendor or broker models. The cost basis of the investment funds is
$25,792
.
|
(2)
The interest rate lock liability is measured at the present value of the expected future cash flows using market-based observable inputs. See Note 15.
(3)
The deferred compensation plan liability is the Company’s liability under its executive deferred compensation plan. The liability represents the fair value of the participant shadow accounts, and the value is based on quoted market prices.
NOTE 15
—
DEBT
The table below summarizes the carrying amount and fair value of the Company’s publicly traded debt and non-publicly traded debt in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. The fair values of the Company’s publicly traded debt are based on quoted market prices. The fair values of the Company’s non-traded debt are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The Company’s publicly traded debt and non-traded debt are classified as level 1 and level 2, respectively, in the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
September 30, 2016
|
|
September 30, 2015
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
|
Publicly traded debt
|
$
|
1,907,189
|
|
|
$
|
2,003,093
|
|
|
$
|
1,905,438
|
|
|
$
|
1,958,636
|
|
|
Non-traded debt
|
4,203
|
|
|
3,963
|
|
|
4,851
|
|
|
4,620
|
|
In April 2016, the Company entered into a
$7.3 billion
bridge credit agreement (Bridge Loan) and a
$2.0 billion
term loan credit agreement (Term Loan) as committed financing for the Valspar acquisition as disclosed in Note 17.
No
balances were drawn against these facilities as of
September 30, 2016
. Debt issuance costs of
$65.1 million
related to these facilities were incurred and recorded in Other current assets. Of this amount,
$42.8 million
was amortized and included in Interest expense for
nine months
ended
September 30, 2016
. Periodic fees related to these facilities totaling
$7.1 million
were also included in interest expense for this period.
During the first six months of 2016, in anticipation of a probable issuance of new long-term fixed rate debt within the next twelve months, the Company entered into a series of interest rate lock agreements (collectively, the interest rate locks) on a combined notional amount of
$3.6 billion
. The objective of the interest rate locks is to hedge the variability in the future semi-annual payments on the anticipated debt attributable to changes in the benchmark interest rate (U.S. Treasury) during the hedge periods. The future semi-annual interest payments are exposed to interest rate risk due to changes in the benchmark interest rate from the inception of the hedge to the time of issuance. The interest rate locks were evaluated for hedge accounting treatment and were designated as cash flow hedges. Therefore, the interest rate locks are recognized at fair value on the Consolidated Balance Sheet, and changes in fair value (to the extent effective) are recognized in Cumulative other comprehensive loss. Amounts recognized in Cumulative other comprehensive loss will be reclassified to Interest expense in periods following the settlement of the interest rate locks. The Company will evaluate hedge effectiveness each period until settlement. At
September 30, 2016
, an interest rate lock liability of
$157.3 million
was included in Other accruals, and the related pretax loss of
$157.3 million
was recognized in Cumulative other comprehensive loss.
In May 2016 and subsequently amended, the Company entered into a new
five
-year
$200.0 million
credit agreement. The credit agreement will be used for general corporate purposes. There were
no
borrowings outstanding under this credit agreement at September 30, 2016.
NOTE 16
—
NON-TRADED INVESTMENTS
The Company has invested in the U.S. affordable housing and historic renovation real estate markets. These non-traded investments have been identified as variable interest entities. However, because the Company does not have the power to direct the day-to-day operations of the investments and the risk of loss is limited to the amount of contributed capital, the Company is not considered the primary beneficiary. In accordance with the Consolidation Topic of the ASC, the investments are not consolidated. For affordable housing investments entered into prior to the January 1, 2015 adoption of ASU No. 2014-01, the Company uses the effective yield method to determine the carrying value of the investments. Under the effective yield method, the initial cost of the investments is amortized to income tax expense over the period that the tax credits are recognized. For affordable housing investments entered into on or after the January 1, 2015 adoption of ASU No. 2014-01, the Company uses the proportional amortization method. Under the proportional amortization method, the initial cost of the investments is amortized to income tax expense in proportion to the tax credits and other tax benefits received. The carrying amount of the affordable housing and historic renovation investments, included in Other assets, was
$245.7 million
and
$243.1 million
at
September 30, 2016
and
2015
, respectively. The liability for estimated future capital contributions to the investments was
$189.9 million
and
$187.3 million
at
September 30, 2016
and
2015
, respectively.
NOTE 17
—
ACQUISITIONS
On March 19, 2016, the Company and the Valspar Corporation (Valspar) entered into a definitive agreement under which the Company will acquire Valspar for
$113
per share in an all cash transaction, or a value of approximately
$9.5 billion
and assumption of Valspar debt. The transaction is subject to certain conditions and regulatory approvals. If in connection with obtaining the required regulatory approvals, the parties are required to divest assets of Valspar or the Company representing, in the aggregate, more than
$650 million
in net sales, then the per share consideration will be
$105
in cash. The Company is not required to consummate the acquisition if regulatory authorities require the divestiture of assets of Valspar or the Company representing, in the aggregate, more than
$1.5 billion
. Valspar's architectural coatings assets in Australia are excluded from the calculation of the
$650 million
and/or
$1.5 billion
threshold if such assets are required to be divested. During the
nine months
ended
September 30, 2016
, the Company incurred SG&A and interest expense of
$49.2 million
and
$49.9 million
, respectively, related to the anticipated acquisition of Valspar. See Note 15. The acquisition will expand Sherwin-Williams diversified array of brands and technologies, expand its global platform and add new capabilities in the packaging and coil segments.