NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended
June 30, 2017
and
2016
NOTE 1—BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
There have been no significant changes in critical accounting policies since
December 31, 2016
. Accounting estimates were revised as necessary during the first
six months
of
2017
based on new information and changes in facts and circumstances. Certain amounts in the
2016
condensed consolidated financial statements have been reclassified to conform to the
2017
presentation. See Note 14 for information on the changes in the Company's reportable segments.
The Company primarily uses the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs are subject to the final year-end LIFO inventory valuation. In addition, interim inventory levels include management’s estimates of annual inventory losses due to shrinkage and other factors. The final year-end valuation of inventory is based on a cycle count program or an annual physical inventory count performed during the third and fourth quarters. For further information on inventory valuations and other matters, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended
December 31, 2016
.
The consolidated results for the
three and six months ended
June 30, 2017
are not necessarily indicative of the results to be expected for the year ending
December 31, 2017
.
NOTE 2—IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2017, the Company adopted the Accounting Standard Update (ASU) No. 2015-17, "Balance Sheet Classification of Deferred Taxes," which eliminates the requirement for separate presentation of current and non-current portions of deferred tax. Subsequent to adoption, all deferred tax assets and deferred tax liabilities are presented as non-current on the balance sheet. The changes have been applied prospectively as permitted by the ASU and prior years have not been restated. The adoption of this ASU does not have a material effect on the Company's results of operations, financial condition or liquidity.
In March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs." The standard requires the service component of pension and other postretirement benefit expense to be presented in the same income statement lines as other employee compensation costs, however, the other components will be presented outside of operating income. In addition, only the service cost component will be eligible for capitalization in assets. The standard is effective starting in 2018, with early adoption permitted. Retrospective application is required for the guidance on the income statement presentation. Prospective application is required for the guidance on the cost capitalization in assets. The Company is in the process of evaluating the impact of the standard.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” This standard simplifies the accounting for goodwill impairment by eliminating the Step 2 requirement to calculate the implied fair value of goodwill. Instead, if a reporting unit's carrying amount exceeds its fair value, an impairment charge will be recorded based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard will be applied prospectively and is effective for impairment tests performed after December 15, 2019, with early adoption permitted. The standard is not expected to have a material effect on the Company's results of operations, financial condition or liquidity.
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which consists of a comprehensive lease accounting standard. Under the new standard, assets and liabilities arising from most leases will be recognized on the balance sheet. Leases will be classified as either operating or financing, and the lease classification will determine whether expense is recognized on a straight line basis (operating leases) or based on an effective interest method (financing leases). The new standard is effective for interim and annual periods starting in 2019. A modified retrospective transition approach is required with certain practical
expedients available. The Company has made significant progress with its assessment process, and anticipates this standard will have a material impact on its consolidated balance sheet. While the Company continues to assess all potential impacts of the standard, it currently believes the most significant impact relates to recording lease assets and related liabilities on the balance sheet for its retail operations in The Americas Group.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends the guidance for certain aspects of recognition, measurement and disclosure of financial instruments. The standard is effective for interim and annual periods starting in 2018, and early adoption is not permitted. Although the Company continues to assess the potential impacts of the standard, it currently believes that the main impact will be that changes in fair value of marketable securities currently classified as available-for-sale will be recognized in earnings rather than in other comprehensive income. The standard is not expected to have a material effect on the Company's results of operations, financial condition or liquidity.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which consists of a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard is effective for interim and annual periods beginning after December 15, 2017. The Company has made significant progress with its assessment process. In addition, the Company is currently developing plans for enhancements to its information systems and internal controls in response to the new rule requirements. Although the Company previously disclosed that it planned to adopt the standard using the full retrospective method of adoption, due to the recent acquisition of The Valspar Corporation (Valspar) (see Note 3), the Company now expects to adopt the standard using the modified retrospective method. The Company is in the process of evaluating the impact on the results of operations, financial condition, liquidity and disclosures. In addition to expanded disclosures regarding revenue, this pronouncement may impact timing of recognition in some arrangements with variable consideration or contracts for the sale of goods or services.
NOTE 3
—
ACQUISITIONS
On June 1, 2017, the Company completed the acquisition of Valspar at
$113
per share in an all cash transaction for a total purchase price of
$8.9 billion
, net of divestiture proceeds of
$431.0 million
. As previously disclosed, on April 11, 2017, the Company and Valspar entered into a definitive agreement with Axalta Coating Systems Ltd. to divest the assets related to Valspar's North American industrial wood coatings business. The divestiture was also completed on June 1, 2017, and is reported as a discontinued operation with
no
pre-tax gain or loss but includes the tax expense effect of this separate transaction. Proceeds of
$431.0 million
were received for the divested assets sold. The divestiture resulted in a tax provision of
$41.5 million
, which reduced basic and diluted net income per common share for the
three and six months ended
June 30, 2017
by
$.45
and
$.44
, respectively. The Valspar acquisition expands the Company's diversified array of brands and technologies, expands its global platform and adds new capabilities in its packaging and coil segments.
The preliminary allocation of the fair value of the Valspar acquisition is summarized in the table below. Allocations are based on the acquisition method of accounting and in-process third-party valuation appraisals. The allocation of the fair value will be finalized within the allowable measurement period.
|
|
|
|
|
(Millions of dollars)
|
|
|
|
Cash
|
$
|
127.8
|
|
Accounts receivable
|
817.5
|
|
Inventories
|
695.5
|
|
Indefinite-lived trademarks
|
1,140.0
|
|
Finite-lived intangible assets
|
4,629.8
|
|
Goodwill
|
6,067.7
|
|
Property, plant and equipment
|
824.8
|
|
All other assets
|
253.6
|
|
Accounts payable
|
(553.2
|
)
|
Long-term debt
|
(1,603.7
|
)
|
Deferred taxes
|
(2,461.9
|
)
|
All other liabilities
|
(1,003.8
|
)
|
Total
|
$
|
8,934.1
|
|
Total, net of cash
|
$
|
8,806.3
|
|
Finite-lived intangible assets include customer relationships of
$3.0 billion
and intellectual property and technology of
$1.6 billion
, which are being amortized over weighted average amortization periods ranging from
15
to
22
years. Based on the preliminary purchase accounting, goodwill of
$4.6 billion
and
$1.5 billion
was recognized in the Performance Coatings Group and the Consumer Brands Group, respectively, and relates primarily to expected synergies.
The Company's Net sales and Income from continuing operations for the three months ended
June 30, 2017
include sales of
$381.0 million
and a profit before tax of
$46.6 million
related to the Valspar acquisition. Net income from continuing operations includes approximately
$23.0 million
of intangibles amortization expense and
$36.3 million
of inventory step-up amortization included in cost of sales. During the
six months
ended
June 30, 2017
and
2016
, the Company incurred transaction and integration related SG&A expense of
$31.6 million
and
$35.6 million
, respectively, and interest expense of
$41.5 million
and
$26.6 million
, respectively, related to the acquisition of Valspar.
The following pro forma information presents consolidated financial information as if Valspar had been acquired at the beginning of 2016. Pro forma adjustments have been made to exclude Valspar's North American industrial wood coatings business results and certain transaction and integration costs from all periods presented. Interest expense has been adjusted as though total debt outstanding at June 30, 2017 had been outstanding at January 1, 2016. Each quarter presented includes intangible amortization expense of approximately
$68.9 million
resulting from the preliminary purchase accounting. The full
$108.8 million
of inventory step-up amortization resulting from the preliminary purchase accounting asset step-up has been included in the first quarter of 2016 to reflect the pro forma transaction date of January 1, 2016, and thus the inventory step-up amortization of
$36.3 million
recorded in the second quarter of 2017 has been excluded. The unaudited pro forma consolidated financial information does not necessarily reflect the actual results that would have occurred had the acquisition taken place on January 1, 2016, nor is it it meant to be indicative of future results of operations of the combined companies under the ownership and operation of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars except per share data)
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
$
|
4,439,801
|
|
|
$
|
4,315,822
|
|
|
$
|
8,148,329
|
|
|
$
|
7,794,545
|
|
Net income from continuing operations
|
402,503
|
|
|
402,810
|
|
|
600,970
|
|
|
477,581
|
|
Net income per common share from
continuing operations:
|
|
|
|
|
|
|
|
Basic
|
$
|
4.34
|
|
|
$
|
4.39
|
|
|
$
|
6.48
|
|
|
$
|
5.21
|
|
Diluted
|
$
|
4.24
|
|
|
$
|
4.25
|
|
|
$
|
6.35
|
|
|
$
|
5.06
|
|
NOTE 4—DIVIDENDS
Dividends paid on common stock for each of the first
two
quarters of
2017
and
2016
were
$.85
per common share and
$.84
per common share, respectively.
NOTE 5—CHANGES IN CUMULATIVE OTHER COMPREHENSIVE LOSS
The following tables summarize the changes in Cumulative other comprehensive loss for the
six months
ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Foreign Currency Translation Adjustments
|
|
Pension and Other Postretirement Benefit Adjustments
|
|
Unrealized Net Gains on Available-for-Sale Securities
|
|
Unrealized Net Gains (Losses) on Cash Flow Hedges
|
|
Total Cumulative Other Comprehensive (Loss) Income
|
Balance at December 31, 2016
|
$
|
(501,277
|
)
|
|
$
|
(125,096
|
)
|
|
$
|
1,015
|
|
|
$
|
85,007
|
|
|
$
|
(540,351
|
)
|
Amounts recognized in Other comprehensive loss
(1)
|
51,250
|
|
|
|
|
870
|
|
|
(30,754
|
)
|
|
21,366
|
|
Amounts reclassified from Other comprehensive loss
(2)
|
|
|
|
385
|
|
|
8
|
|
|
(644
|
)
|
|
(251
|
)
|
Net change
|
51,250
|
|
|
385
|
|
|
878
|
|
|
(31,398
|
)
|
|
21,115
|
|
Balance at June 30, 2017
|
$
|
(450,027
|
)
|
|
$
|
(124,711
|
)
|
|
$
|
1,893
|
|
|
$
|
53,609
|
|
|
$
|
(519,236
|
)
|
(1)
Net of taxes of
$(537)
for unrealized net
gains
on available-for-sale securities and
$18,895
for unrealized net
losses
on cash flow hedges.
(2)
Net of taxes of
$(195)
for pension and other postretirement benefit adjustments,
$(5)
for realized
losses
on the sale of available-for-sale securities and
$396
for realized
gains
on cash flow hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Foreign Currency Translation Adjustments
|
|
Pension and Other Postretirement Benefit Adjustments
|
|
Unrealized Net (Losses) Gains on Available-for-Sale Securities
|
|
Unrealized Net Losses on Cash Flow Hedges
|
|
Total Cumulative Other Comprehensive (Loss) Income
|
Balance at December 31, 2015
|
$
|
(482,629
|
)
|
|
$
|
(104,346
|
)
|
|
$
|
(120
|
)
|
|
|
|
$
|
(587,095
|
)
|
Amounts recognized in Other comprehensive loss
(3)
|
31,935
|
|
|
|
|
455
|
|
|
$
|
(107,948
|
)
|
|
(75,558
|
)
|
Amounts reclassified from Other comprehensive loss
(4)
|
|
|
439
|
|
|
125
|
|
|
|
|
564
|
|
Net change
|
31,935
|
|
|
439
|
|
|
580
|
|
|
(107,948
|
)
|
|
(74,994
|
)
|
Balance at June 30, 2016
|
$
|
(450,694
|
)
|
|
$
|
(103,907
|
)
|
|
$
|
460
|
|
|
$
|
(107,948
|
)
|
|
$
|
(662,089
|
)
|
(3)
Net of taxes of
$(282)
for unrealized net gains on available-for-sale securities and
$66,721
for unrealized net losses on cash flow hedges.
(4)
Net of taxes of
$(45)
for pension and other postretirement benefit adjustments and
$(78)
for realized losses on the sale of available-for-sale securities.
NOTE 6—PRODUCT WARRANTIES
Changes in the Company’s accrual for product warranty claims during the first
six months
of
2017
and
2016
, including customer satisfaction settlements, were as follows:
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
2017
|
|
2016
|
Balance at January 1
|
$
|
34,419
|
|
|
$
|
31,878
|
|
Charges to expense
|
16,434
|
|
|
15,763
|
|
Settlements
|
(16,698
|
)
|
|
(14,755
|
)
|
Acquisition
|
110,461
|
|
|
|
Balance at June 30
|
$
|
144,616
|
|
|
$
|
32,886
|
|
Warranty accruals of
$110.5 million
were acquired in connection with the Valspar acquisition. This amount includes warranties for certain products under extended furniture protection plans. In the U.S., revenue related to furniture protection plans is deferred and recognized over the contract life.
For further details on the Company’s accrual for product warranty claims, see Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
NOTE 7—EXIT OR DISPOSAL ACTIVITIES
Liabilities associated with exit or disposal activities are recognized as incurred in accordance with the Exit or Disposal Cost Obligations Topic of the ASC. Qualified exit costs primarily include post-closure rent expenses, incremental post-closure costs and costs of employee terminations. Adjustments may be made to liabilities accrued for qualified exit costs if information becomes available upon which more accurate amounts can be reasonably estimated. Concurrently, property, plant and equipment is tested for impairment in accordance with the Property, Plant and Equipment Topic of the ASC, and if impairment exists, the carrying value of the related assets is reduced to estimated fair value. Additional impairment may be recorded for subsequent revisions in estimated fair value.
In the
six months
ended
June 30, 2017
,
four
stores in The Americas Group and
two
branches in the Performance Coatings Group were closed due to lower demand or redundancy. Due to the Valspar acquisition, the Company has acquired exit or disposal cost reserve accruals and recorded severance and related cost provisions in the month of June.
The following table summarizes the activity and remaining liabilities associated with qualified exit costs at
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
Exit Plan
|
|
Balance at December 31, 2016
|
|
Acquired Balances
|
|
Provisions in Cost of Goods Sold or SG&A
|
|
Actual Expenditures Charged to Accrual
|
|
Balance at June 30, 2017
|
Administrative segment acquisition-related restructuring in 2017:
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
|
|
|
|
$
|
9,883
|
|
|
$
|
(3,761
|
)
|
|
$
|
6,122
|
|
Consumer Brands Group facilities shutdown in 2016:
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
$
|
907
|
|
|
$
|
4
|
|
|
2,823
|
|
|
(3,632
|
)
|
|
102
|
|
Performance Coatings Group stores shutdown in 2016:
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
136
|
|
|
2,271
|
|
|
8
|
|
|
(296
|
)
|
|
2,119
|
|
Other qualified exit costs
|
|
269
|
|
|
5
|
|
|
94
|
|
|
(143
|
)
|
|
225
|
|
The Americas Group stores shutdown in 2015:
|
|
|
|
|
|
|
|
|
|
|
Other qualified exit costs
|
|
195
|
|
|
|
|
10
|
|
|
(205
|
)
|
|
|
Consumer Brands Group facilities shutdown in 2015:
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
|
|
632
|
|
|
|
|
(3
|
)
|
|
629
|
|
Other qualified exit costs
|
|
|
|
629
|
|
|
|
|
(3
|
)
|
|
626
|
|
Performance Coatings Group stores shutdown in 2015:
|
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
|
|
396
|
|
|
10
|
|
|
|
|
406
|
|
Other qualified exit costs
|
|
433
|
|
|
427
|
|
|
|
|
(405
|
)
|
|
455
|
|
Severance and other qualified exit costs for facilities shutdown prior to 2015
|
|
1,908
|
|
|
92
|
|
|
|
|
(456
|
)
|
|
1,544
|
|
Totals
|
|
$
|
3,848
|
|
|
$
|
4,456
|
|
|
$
|
12,828
|
|
|
$
|
(8,904
|
)
|
|
$
|
12,228
|
|
For further details on the Company’s exit or disposal activities, see Note 5 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
NOTE 8
—
HEALTH CARE, PENSION AND OTHER BENEFITS
Shown below are the components of the Company’s net periodic benefit cost (credit) for domestic defined benefit pension plans, foreign defined benefit pension plans and postretirement benefits other than pensions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Domestic Defined
Benefit Pension Plans
|
|
Foreign Defined
Benefit Pension Plans
|
|
Postretirement
Benefits Other than
Pensions
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Three Months Ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
5,459
|
|
|
$
|
5,489
|
|
|
$
|
2,287
|
|
|
$
|
1,198
|
|
|
$
|
471
|
|
|
$
|
561
|
|
Interest cost
|
7,191
|
|
|
6,643
|
|
|
1,864
|
|
|
2,081
|
|
|
2,593
|
|
|
2,753
|
|
Expected return on assets
|
(11,299
|
)
|
|
(12,567
|
)
|
|
(2,008
|
)
|
|
(1,846
|
)
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
340
|
|
|
301
|
|
|
|
|
|
|
(1,645
|
)
|
|
(1,645
|
)
|
Actuarial loss (gain)
|
1,662
|
|
|
1,153
|
|
|
(97
|
)
|
|
504
|
|
|
5
|
|
|
|
Settlement gain
|
|
|
|
|
|
|
|
|
(9,332
|
)
|
|
|
Net periodic benefit cost
|
$
|
3,353
|
|
|
$
|
1,019
|
|
|
$
|
2,046
|
|
|
$
|
1,937
|
|
|
$
|
(7,908
|
)
|
|
$
|
1,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (credit):
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
10,772
|
|
|
$
|
10,978
|
|
|
$
|
4,205
|
|
|
$
|
2,539
|
|
|
$
|
1,014
|
|
|
$
|
1,122
|
|
Interest cost
|
13,601
|
|
|
13,286
|
|
|
3,502
|
|
|
4,161
|
|
|
5,236
|
|
|
5,505
|
|
Expected return on assets
|
(21,608
|
)
|
|
(25,134
|
)
|
|
(3,772
|
)
|
|
(3,692
|
)
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
681
|
|
|
602
|
|
|
|
|
|
|
(3,290
|
)
|
|
(3,290
|
)
|
Actuarial loss (gain)
|
3,323
|
|
|
2,305
|
|
|
(150
|
)
|
|
865
|
|
|
16
|
|
|
|
Settlement (gain) loss
|
|
|
|
|
|
|
|
4,038
|
|
|
(9,332
|
)
|
|
|
Net periodic benefit cost (credit)
|
$
|
6,769
|
|
|
$
|
2,037
|
|
|
$
|
3,785
|
|
|
$
|
7,911
|
|
|
$
|
(6,356
|
)
|
|
$
|
3,337
|
|
The Company acquired new benefit plans in each category above as a result of the Valspar acquisition. The costs (credits) for these plans for the month of June 2017 are included in the tables above and are not significant. The settlement gain recognized in the second quarter of 2017 relates to the termination of a life insurance benefit plan. The settlement loss recognized in the first quarter of 2016 relates to the wind up of an acquired Canada plan. For further details on the Company’s health care, pension and other benefits, see Note 6 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
NOTE 9—OTHER LONG-TERM LIABILITIES
The Company initially provides for estimated costs of environmental-related activities relating to its past operations and third party sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs are determined based on currently available facts regarding each site. If the best estimate of costs can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is provided. At
June 30, 2017
, the unaccrued maximum of the estimated range of possible outcomes is
$86.1 million
higher than the minimum.
The Company continuously assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to any given site, the volumetric contribution which may be attributed to the Company relative to that attributed to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site.
Included in Other long-term liabilities at
June 30, 2017
and
2016
were accruals for extended environmental-related activities of
$160.2 million
and
$143.0 million
, respectively. Estimated costs of current investigation and remediation activities of
$30.4
million
and
$22.5 million
are included in Other accruals at
June 30, 2017
and
2016
, respectively. Other accruals in the second quarter of 2017 increased
$10.5 million
due to
environmental-related liabilities the Company assumed as a part of the preliminary opening balance sheet of Valspar and is subject to measurement period adjustments.
Three
of the Company’s currently and formerly owned manufacturing sites account for the majority of the accrual for environmental-related activities and the unaccrued maximum of the estimated range of possible outcomes at
June 30, 2017
. At
June 30, 2017
,
$149.9 million
, or
78.6 percent
of the total accrual, related directly to these
three
sites. In the aggregate unaccrued maximum of
$86.1 million
at
June 30, 2017
,
$70.5 million
, or
81.8 percent
, related to the
three
manufacturing sites. While environmental investigations and remedial actions are in different stages at these sites, additional investigations, remedial actions and monitoring will likely be required at each site.
Management cannot presently estimate the ultimate potential loss contingencies related to these sites or other less significant sites until such time as a substantial portion of the investigation at the sites is completed and remedial action plans are developed. In the event any future loss contingency significantly exceeds the current amount accrued, the recording of the ultimate liability may result in a material impact on net income for the annual or interim period during which the additional costs are accrued. Management does not believe that any potential liability ultimately attributed to the Company for its environmental-related matters will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time during which environmental investigation and remediation takes place. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.
Management expects these contingent environmental-related liabilities to be resolved over an extended period of time. Management is unable to provide a more specific time frame due to the indefinite amount of time to conduct investigation activities at any site, the indefinite amount of time to obtain environmental agency approval, as necessary, with respect to investigation and remediation activities, and the indefinite amount of time necessary to conduct remediation activities.
For further details on the Company’s Other long-term liabilities, see Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
NOTE 10 – LITIGATION
In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, the Company accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and the amount of any such loss cannot be reasonably estimated, any potential liability ultimately determined to be attributable to the Company may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. In those cases where no accrual is recorded or exposure to loss exists in excess of the amount accrued, the Contingencies Topic of the ASC requires disclosure of the contingency when there is a reasonable possibility that a loss or additional loss may have been incurred.
Lead pigment and lead-based paint litigation.
The Company’s past operations included the manufacture and sale of lead pigments and lead-based paints. The Company, along with other companies, is and has been a defendant in a number of legal proceedings, including individual personal injury actions, purported class actions, and actions brought by various counties, cities, school districts and other government-related entities, arising from the manufacture and sale of lead pigments and lead-based paints. The plaintiffs’ claims have been based upon various legal theories, including negligence, strict liability, breach of warranty, negligent misrepresentations and omissions, fraudulent misrepresentations and omissions, concert of action, civil conspiracy, violations of unfair trade practice and consumer protection laws, enterprise liability, market share liability, public nuisance, unjust enrichment and other theories. The plaintiffs seek various damages and relief, including personal injury and property damage, costs relating to the detection and abatement of lead-based paint from buildings, costs associated with a public education campaign, medical monitoring costs and others. The Company has also been a defendant in legal proceedings arising from the manufacture and sale of non-lead-based paints that seek recovery based upon various legal theories, including the failure to adequately warn of potential exposure to lead during surface preparation when using non-lead-based paint on surfaces previously painted with lead-based paint. The Company believes that the litigation brought to date is without merit or subject to meritorious defenses and is vigorously defending such litigation. The Company has not settled any material lead
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. On July 14, 2017, the Sixth District Court of Appeal scheduled the date for oral argument on the appeal for August 24, 2017. The Company expects the Sixth District Court of Appeal to issue its ruling within 90 days following oral argument. The Company believes that the judgment conflicts with established principles of law and is unsupported by the evidence. The Company has had a favorable history with respect to lead pigment and lead-based paint litigation, particularly other public nuisance litigation, and accordingly, the Company believes that it is not probable that a loss has occurred and it is not possible to estimate the range of potential loss with respect to the case.
Litigation seeking damages from alleged personal injury
.
The Company and other companies are defendants in a number of legal proceedings seeking monetary damages and other relief from alleged personal injuries. These proceedings include claims by children allegedly injured from ingestion of lead pigment or lead-containing paint and claims for damages allegedly incurred by the children’s parents or guardians. These proceedings generally seek compensatory and punitive damages, and seek other relief including medical monitoring costs. These proceedings include purported claims by individuals, groups of individuals and class actions.
The plaintiff in Thomas v. Lead Industries Association, et al., initiated an action in state court against the Company, other alleged former lead pigment manufacturers and the Lead Industries Association in September 1999. The claims against the Company and the other defendants included strict liability, negligence, negligent misrepresentation and omissions, fraudulent misrepresentation and omissions, concert of action, civil conspiracy and enterprise liability. Implicit within these claims is the theory of “risk contribution” liability (Wisconsin’s theory which is similar to market share liability, except that liability can be joint and several) due to the plaintiff’s inability to identify the manufacturer of any product that allegedly injured the plaintiff. The case ultimately proceeded to trial and, on November 5, 2007, the jury returned a defense verdict, finding that the plaintiff had ingested white lead carbonate, but was not brain damaged or injured as a result. The plaintiff appealed and, on December 16, 2010, the Wisconsin Court of Appeals affirmed the final judgment in favor of the Company and other defendants.
Wisconsin is the only jurisdiction to date to apply a theory of liability with respect to alleged personal injury (i.e., risk contribution/market share liability) that does not require the plaintiff to identify the manufacturer of the product that allegedly injured the plaintiff in the lead pigment and lead-based paint litigation. Although the risk contribution liability theory was applied during the Thomas trial, the constitutionality of this theory as applied to the lead pigment cases has not been judicially determined by the Wisconsin state courts. However, in an unrelated action filed in the United States District Court for the Eastern District of Wisconsin, Gibson v. American Cyanamid, et al., on November 15, 2010, the District Court held that Wisconsin’s risk contribution theory as applied in that case violated the defendants’ right to substantive due process and is unconstitutionally retroactive. The District Court's decision in Gibson v. American Cyanamid, et al., was appealed by the plaintiff to the United States Court of Appeals for the Seventh Circuit. On July 24, 2014, the United States Court of Appeals for the Seventh Circuit reversed the judgment and remanded the case back to the District Court for further proceedings. On January 16, 2015, the defendants filed a petition for certiorari in the United States Supreme Court seeking that Court's review of the Seventh Circuit's decision, and on May 18, 2015, the United States Supreme Court denied the defendants' petition. The case is currently pending in the District Court.
Three
cases also currently pending in the United States District Court for the Eastern District of Wisconsin (Ravon Owens v. American Cyanamid, et al., Cesar Sifuentes v. American Cyanamid, et al., and Glenn Burton, Jr. v. American Cyanamid, et al.) are being prepared for trial, although no trial dates have been set by the District Court.
In Yasmine Clark v. The Sherwin-Williams Company, et al., the Wisconsin Circuit Court, Milwaukee County, on March 25, 2014, held that the application to a pending case of Section 895.046 of the Wisconsin Statutes (which clarifies the application of the risk contribution theory) is unconstitutional as a violation of the plaintiff’s right to due process of law under the Wisconsin Constitution. On August 21, 2014, the Wisconsin Court of Appeals granted defendants' petition to hear the issue as an interlocutory appeal. On September 29, 2015, the Wisconsin Court of Appeals certified the appeal to the Wisconsin Supreme Court for its determination. Oral argument before the Wisconsin Supreme Court occurred on April 5, 2016. On April 15, 2016, the Wisconsin Supreme Court published its decision, deciding in a 3 to 3 split decision to remand the case back to the Wisconsin Court of Appeals for its consideration. The Wisconsin Court of Appeals dismissed the appeal on September 20, 2016 and remanded the case back to the Wisconsin Circuit Court for further proceedings. On April 18, 2017, the parties entered into a stipulation and order of dismissal without prejudice. On April 26, 2017, the Wisconsin Circuit Court dismissed the case without prejudice.
Insurance coverage litigation
.
The Company and its liability insurers, including certain underwriters at Lloyd’s of London, initiated legal proceedings against each other to primarily determine, among other things, whether the costs and liabilities associated with the abatement of lead pigment are covered under certain insurance policies issued to the Company. The Company’s action, filed on March 3, 2006 in the Common Pleas Court, Cuyahoga County, Ohio, is currently stayed and inactive. The liability insurers’ action, which was filed on February 23, 2006 in the Supreme Court of the State of New York, County of New York, has been dismissed. An ultimate loss in the insurance coverage litigation would mean that insurance
proceeds could be unavailable under the policies at issue to mitigate any ultimate abatement related costs and liabilities. The Company has not recorded any assets related to these insurance policies or otherwise assumed that proceeds from these insurance policies would be received in estimating any contingent liability accrual. Therefore, an ultimate loss in the insurance coverage litigation without a determination of liability against the Company in the lead pigment or lead-based paint litigation will have no impact on the Company’s results of operation, liquidity or financial condition. As previously stated, however, the Company has not accrued any amounts for the lead pigment or lead-based paint litigation and any significant liability ultimately determined to be attributable to the Company relating to such litigation may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued.
NOTE 11—OTHER
Other general expense - net
Included in
Other general expense - net
were the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Provisions for environmental matters - net
|
$
|
1,110
|
|
|
$
|
2,507
|
|
|
$
|
1,629
|
|
|
$
|
20,536
|
|
Loss (gain) on sale or disposition of assets
|
665
|
|
|
226
|
|
|
422
|
|
|
(249
|
)
|
Total
|
$
|
1,775
|
|
|
$
|
2,733
|
|
|
$
|
2,051
|
|
|
$
|
20,287
|
|
Provisions for environmental matters - net represent site-specific increases or decreases to environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Environmental-related accruals are not recorded net of insurance proceeds in accordance with the Offsetting Subtopic of the Balance Sheet Topic of the ASC. See Note 9 for further details on the Company’s environmental-related activities.
The
loss (gain)
on disposition of assets represents net realized
losses (gains)
associated with the sale or disposal of fixed assets previously used in the conduct of the primary business of the Company.
Other (income) expense - net
Included in
Other (income) expense - net
were the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Dividend and royalty income
|
$
|
(1,198
|
)
|
|
$
|
(999
|
)
|
|
$
|
(3,042
|
)
|
|
$
|
(2,165
|
)
|
Net expense from banking activities
|
2,513
|
|
|
2,108
|
|
|
4,985
|
|
|
4,371
|
|
Foreign currency transaction related losses (gains)
|
976
|
|
|
1,819
|
|
|
(2,610
|
)
|
|
3,509
|
|
Other income
|
(5,937
|
)
|
|
(5,450
|
)
|
|
(10,897
|
)
|
|
(10,330
|
)
|
Other expense
|
1,876
|
|
|
2,470
|
|
|
5,427
|
|
|
4,789
|
|
Total
|
$
|
(1,770
|
)
|
|
$
|
(52
|
)
|
|
$
|
(6,137
|
)
|
|
$
|
174
|
|
Foreign currency transaction related losses (gains)
represent net realized
losses (gains)
on U.S. dollar-denominated liabilities of foreign subsidiaries and net realized and unrealized
losses (gains)
from foreign currency option and forward contracts. There were
no
material foreign currency option and forward contracts outstanding at
June 30, 2017
and
2016
.
Other income and Other expense included items of revenue, gains, expenses and losses that were unrelated to the primary business purpose of the Company. There were no other items within the other income or other expense caption that were individually significant.
NOTE 12—INCOME TAXES
The effective tax rate for income from continuing operations was
29.1 percent
and
26.5 percent
for the
second quarter
and first
six months
of
2017
, respectively, compared to
29.9 percent
and
28.1 percent
for the
second quarter
and first
six months
of
2016
, respectively. The Company recorded an income tax provision of
$41.5 million
in the second quarter of 2017 related to the divestiture of Valspar's North American industrial wood coatings business, which is reported as a discontinued operation. See Note 3.
Excluding the impact of share-based payments, the effective tax rate was
32.7 percent
for both the
second quarter
and first
six months
of
2017
compared to
32.1 percent
for both the
second quarter
and
first
six months
of
2016
.
During the second quarter of 2017, the Company recorded a preliminary deferred income tax liability of approximately
$2.4 billion
based on the preliminary purchase price accounting for Valspar and is subject to measurement period adjustments.
At
December 31, 2016
, the Company had
$32.8 million
in unrecognized tax benefits, the recognition of which would have an effect of
$27.7 million
on the effective tax rate. Included in the balance of unrecognized tax benefits at
December 31, 2016
was
$2.6 million
related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised primarily of items related to federal audits of partnership investments and expiring statutes in federal, foreign and state jurisdictions. In the second quarter of 2017, the Company acquired
$19.9 million
of unrecognized tax benefits as a part of the preliminary opening balance sheet of Valspar and is subject to measurement period adjustments.
The Company classifies all income tax related interest and penalties as income tax expense. At
December 31, 2016
, the Company had accrued
$9.3 million
for the potential payment of income tax interest and penalties.
There were
no
significant changes to any of the balances of unrecognized tax benefits at
December 31, 2016
during the first
six months
of
2017
with the exception of the unrecognized tax benefits recorded as a part of the acquisition of Valspar.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The IRS is currently auditing refund claims that the Company filed for the 2010, 2011 and 2012 tax years and the 2014 and 2015 tax years of a Valspar subsidiary. During the second quarter of 2017, the IRS informed the Company that it will commence an audit of the 2014 and 2015 tax years by the end of 2017. As of
June 30, 2017
, the federal statute of limitations has not expired for the 2013, 2014 and 2015 tax years.
As of
June 30, 2017
, the Company is subject to non-U.S. income tax examinations for the tax years of 2010 through 2016. In addition, the Company is subject to state and local income tax examinations for the tax years 2003 through 2016.
NOTE 13—NET INCOME PER COMMON SHARE
Basic and diluted earnings per share are calculated using the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars except per share data)
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Basic
|
|
|
|
|
|
|
|
Average common shares outstanding
|
92,841,148
|
|
|
91,788,734
|
|
|
92,695,853
|
|
|
91,632,297
|
|
Net income
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
360,651
|
|
|
$
|
378,064
|
|
|
$
|
599,803
|
|
|
$
|
542,940
|
|
Discontinued operations
(2)
|
(41,540
|
)
|
|
—
|
|
|
(41,540
|
)
|
|
—
|
|
Net income
|
$
|
319,111
|
|
|
$
|
378,064
|
|
|
$
|
558,263
|
|
|
$
|
542,940
|
|
Basic net income per common share
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
3.89
|
|
|
$
|
4.12
|
|
|
$
|
6.47
|
|
|
$
|
5.93
|
|
Discontinued operations
(2)
|
(0.45
|
)
|
|
—
|
|
|
(0.45
|
)
|
|
—
|
|
Net income per common share
|
$
|
3.44
|
|
|
$
|
4.12
|
|
|
$
|
6.02
|
|
|
$
|
5.93
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
Average common shares outstanding
|
92,841,148
|
|
|
91,788,734
|
|
|
92,695,853
|
|
|
91,632,297
|
|
Stock options and other contingently issuable shares
(1)
|
2,055,422
|
|
|
2,318,192
|
|
|
1,935,690
|
|
|
2,114,844
|
|
Non-vested restricted stock grants
|
72,066
|
|
|
562,825
|
|
|
65,896
|
|
|
558,856
|
|
Average common shares outstanding assuming dilution
|
94,968,636
|
|
|
94,669,751
|
|
|
94,697,439
|
|
|
94,305,997
|
|
Net income
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
360,651
|
|
|
$
|
378,064
|
|
|
$
|
599,803
|
|
|
$
|
542,940
|
|
Discontinued operations
(2)
|
(41,540
|
)
|
|
—
|
|
|
(41,540
|
)
|
|
—
|
|
Net income
|
$
|
319,111
|
|
|
$
|
378,064
|
|
|
$
|
558,263
|
|
|
$
|
542,940
|
|
Diluted net income per common share
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
3.80
|
|
|
$
|
3.99
|
|
|
$
|
6.34
|
|
|
$
|
5.76
|
|
Discontinued operations
(2)
|
(0.44
|
)
|
|
—
|
|
|
(0.44
|
)
|
|
—
|
|
Net income per common share
|
$
|
3.36
|
|
|
$
|
3.99
|
|
|
$
|
5.90
|
|
|
$
|
5.76
|
|
|
|
(1)
|
Stock options and other contingently issuable shares excludes
16,013
and
47,273
shares due to their anti-dilutive effect for the
three and six months ended
June 30, 2016
.
There are
no
shares excluded for the
three and six months ended
June 30, 2017
.
|
|
|
(2)
|
Relates to the divestiture of Valspar's North American industrial wood coatings business. See Note 3.
|
NOTE 14—REPORTABLE SEGMENT INFORMATION
The Company reports segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources in accordance with the Segment Disclosures Topic of the ASC. Upon completion of the Valspar acquisition in the second quarter of 2017 (see Note 3), the Company made important changes to its organizational and reporting structure that resulted in establishing
three
new reportable segments. The Americas Group reportable segment includes the Company's previous Paint Stores Group and Latin America Coatings Group, along with a specialty retail business of Valspar. The Americas Group operates stores in the United States, Canada, Latin America, and the Caribbean islands servicing the needs of architectural and industrial painting contractors and do-it-yourself homeowners. The Americas Group sells a variety of architectural paints, coatings and related products through dedicated dealers, home centers, distributors, hardware stores and other retailers throughout Latin America. The Consumer Brands Group reportable segment includes the Company's previous Consumer Group along with Valspar's previous Consumer Paints segment, excluding Valspar's automotive refinishes products business. The Consumer Brands Group supplies a broad portfolio of branded and private-label architectural paints, stains, varnishes, industrial products, wood finishes products, wood preservatives, applicators, corrosion inhibitors, aerosols, caulks and adhesives to retailers and distributors throughout North America, as well as in Australia, China and Europe. The Consumer Brands Group also supports the Company's other businesses around the world with new product research and development, manufacturing, distribution and logistics. The Performance Coatings Group
reportable segment includes the Company's previous Global Finishes Group and Valspar's previous Coatings Group segment. The Performance Coatings Group also includes Valspar's automotive refinishes products business, which was previously reported under Valspar's Consumer Paints segment. Valspar’s North American industrial wood coatings business, which was previously reported under the Valspar's Coatings Group segment, was divested. The Performance Coatings Group develops and sells industrial coatings for wood finishing and general industrial (metal and plastic) applications, automotive refinish, protective and marine coatings, coil coatings, packaging coatings and performance-based resins and colorants worldwide. In addition, a specialty coatings business previously in the Company's Consumer Group is now included in the Performance Coatings Group. Prior period segment reporting has been adjusted to reflect the updated reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Three Months Ended June 30, 2017
|
|
The Americas
Group
|
|
Consumer Brands
Group
|
|
Performance
Coatings
Group
|
|
Administrative
|
|
Consolidated
Totals
|
Net external sales
|
$
|
2,437,655
|
|
|
$
|
536,441
|
|
|
$
|
761,094
|
|
|
$
|
627
|
|
|
$
|
3,735,817
|
|
Intersegment transfers
|
2,020
|
|
|
864,337
|
|
|
7,231
|
|
|
(873,588
|
)
|
|
|
Total net sales and intersegment transfers
|
$
|
2,439,675
|
|
|
$
|
1,400,778
|
|
|
$
|
768,325
|
|
|
$
|
(872,961
|
)
|
|
$
|
3,735,817
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
532,687
|
|
|
$
|
76,064
|
|
|
$
|
62,345
|
|
|
|
|
$
|
671,096
|
|
Interest expense
|
|
|
|
|
|
|
$
|
(56,729
|
)
|
|
(56,729
|
)
|
Administrative expenses and other
|
|
|
|
|
|
|
(105,364
|
)
|
|
(105,364
|
)
|
Income from continuing operations
before income taxes *
|
$
|
532,687
|
|
|
$
|
76,064
|
|
|
$
|
62,345
|
|
|
$
|
(162,093
|
)
|
|
$
|
509,003
|
|
* Income from continuing operations before income taxes for the Consumer Brands Group and Performance Coatings Group includes inventory step-up amortization of
$14.5 million
and
$21.8 million
, respectively, and intangibles amortization of
$5.7 million
and
$17.2 million
, respectively, based on the preliminary purchase accounting. Income from continuing operations before income taxes for the Administrative segment includes
$26.6 million
of acquisition-related expenses included in SG&A.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
The Americas
Group
|
|
Consumer Brands
Group
|
|
Performance
Coatings
Group
|
|
Administrative
|
|
Consolidated
Totals
|
Net external sales
|
$
|
2,241,566
|
|
|
$
|
462,473
|
|
|
$
|
514,198
|
|
|
$
|
1,288
|
|
|
$
|
3,219,525
|
|
Intersegment transfers
|
9,960
|
|
|
763,956
|
|
|
6,025
|
|
|
(779,941
|
)
|
|
|
Total net sales and intersegment transfers
|
$
|
2,251,526
|
|
|
$
|
1,226,429
|
|
|
$
|
520,223
|
|
|
$
|
(778,653
|
)
|
|
$
|
3,219,525
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
499,347
|
|
|
$
|
103,157
|
|
|
$
|
70,377
|
|
|
|
|
$
|
672,881
|
|
Interest expense
|
|
|
|
|
|
|
$
|
(40,878
|
)
|
|
(40,878
|
)
|
Administrative expenses and other
|
|
|
|
|
|
|
(92,789
|
)
|
|
(92,789
|
)
|
Income from continuing operations
before income taxes
|
$
|
499,347
|
|
|
$
|
103,157
|
|
|
$
|
70,377
|
|
|
$
|
(133,667
|
)
|
|
$
|
539,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
The Americas
Group
|
|
Consumer Brands
Group
|
|
Performance
Coatings
Group
|
|
Administrative
|
|
Consolidated
Totals
|
Net external sales
|
$
|
4,389,401
|
|
|
$
|
859,807
|
|
|
$
|
1,245,548
|
|
|
$
|
2,448
|
|
|
$
|
6,497,204
|
|
Intersegment transfers
|
4,361
|
|
|
1,560,175
|
|
|
11,031
|
|
|
(1,575,567
|
)
|
|
|
Total net sales and intersegment transfers
|
$
|
4,393,762
|
|
|
$
|
2,419,982
|
|
|
$
|
1,256,579
|
|
|
$
|
(1,573,119
|
)
|
|
$
|
6,497,204
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
837,911
|
|
|
$
|
131,978
|
|
|
$
|
119,457
|
|
|
|
|
$
|
1,089,346
|
|
Interest expense
|
|
|
|
|
|
|
$
|
(82,424
|
)
|
|
(82,424
|
)
|
Administrative expenses and other
|
|
|
|
|
|
|
(191,314
|
)
|
|
(191,314
|
)
|
Income from continuing operations
before income taxes **
|
$
|
837,911
|
|
|
$
|
131,978
|
|
|
$
|
119,457
|
|
|
$
|
(273,738
|
)
|
|
$
|
815,608
|
|
** Income from continuing operations before income taxes for the Consumer Brands Group and Performance Coatings Group includes inventory step-up amortization of
$14.5 million
and
$21.8 million
, respectively, and intangibles amortization of
$5.7 million
and
$17.2 million
, respectively, based on the preliminary purchase accounting. Income from continuing operations before income taxes for the Administrative segment includes
$31.6 million
of acquisition-related expenses included in SG&A.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
The Americas
Group
|
|
Consumer Brands
Group
|
|
Performance
Coatings
Group
|
|
Administrative
|
|
Consolidated
Totals
|
Net external sales
|
$
|
3,982,060
|
|
|
$
|
827,093
|
|
|
$
|
981,830
|
|
|
$
|
2,566
|
|
|
$
|
5,793,549
|
|
Intersegment transfers
|
18,653
|
|
|
1,377,586
|
|
|
7,981
|
|
|
(1,404,220
|
)
|
|
|
Total net sales and intersegment transfers
|
$
|
4,000,713
|
|
|
$
|
2,204,679
|
|
|
$
|
989,811
|
|
|
$
|
(1,401,654
|
)
|
|
$
|
5,793,549
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
751,953
|
|
|
$
|
163,030
|
|
|
$
|
123,050
|
|
|
|
|
$
|
1,038,033
|
|
Interest expense
|
|
|
|
|
|
|
$
|
(66,610
|
)
|
|
(66,610
|
)
|
Administrative expenses and other
|
|
|
|
|
|
|
(215,844
|
)
|
|
(215,844
|
)
|
Income from continuing operations
before income taxes
|
$
|
751,953
|
|
|
$
|
163,030
|
|
|
$
|
123,050
|
|
|
$
|
(282,454
|
)
|
|
$
|
755,579
|
|
In the reportable segment financial information, Segment profit was total net sales and intersegment transfers less operating costs and expenses. Domestic intersegment transfers were accounted for at the approximate fully absorbed manufactured cost, based on normal capacity volumes, plus customary distribution costs. International intersegment transfers were accounted for at values comparable to normal unaffiliated customer sales. The Administrative segment includes the administrative expenses of the Company’s corporate headquarters site. Also included in the Administrative segment was interest expense, interest and investment income, certain expenses related to closed facilities and environmental-related matters, and other expenses which were not directly associated with the reportable segments. The Administrative segment did not include any significant foreign operations. Also included in the Administrative segment was a real estate management unit that is responsible for the ownership, management and leasing of non-retail properties held primarily for use by the Company, including the Company’s headquarters site, and disposal of idle facilities. Sales of this segment represented external leasing revenue of excess headquarters space or leasing of facilities no longer used by the Company in its primary businesses. Gains and losses from the sale of property were not a significant operating factor in determining the performance of the Administrative segment.
As of June 30, 2017, identifiable assets for The Americas Group, Consumer Brands Group, Performance Coatings Group and Administrative segments were
$2.262 billion
,
$5.739 billion
,
$11.239 billion
and
$1.477 billion
, respectively. These amounts include preliminary purchase accounting adjustments for Goodwill and Intangibles. The allocation of the fair value will be finalized within the allowable measurement period. As of June 30, 2016, identifiable assets for The Americas Group, Consumer Brands Group, Performance Coatings Group and Administrative segments were
$2.142 billion
,
$2.328 billion
,
$829.0 million
and
$1.367 billion
, respectively.
Net external sales and segment profit of all consolidated foreign subsidiaries were
$603.3 million
and
$.7 million
, respectively, for the
second quarter
of
2017
, and
$454.5 million
and
$17.1 million
, respectively, for the
second quarter
of
2016
. Net external sales and segment profit of all consolidated foreign subsidiaries were
$1.022 billion
and
$14.5 million
, respectively, for the
six months
of
2017
, and
$855.2 million
and
$27.3 million
, respectively, for the
six months
of
2016
.
Long-lived assets of these
subsidiaries totaled
$1.698 billion
and
$506.8 million
at
June 30, 2017
and
June 30, 2016
, respectively. The increase in net external sales and long-lived assets is primarily due to the Valspar acquisition. Domestic operations accounted for the remaining net external sales, segment profits and long-lived assets. No single geographic area outside the United States was significant relative to consolidated net external sales, income before taxes, or consolidated long-lived assets.
Export sales and sales to any individual customer were each
less than 10 percent of consolidated sales to unaffiliated customers
during all periods presented.
NOTE 15
—
FAIR VALUE MEASUREMENTS
The Fair Value Measurements and Disclosures Topic of the ASC applies to the Company’s financial and non-financial assets and liabilities. The guidance applies when other standards require or permit the fair value measurement of assets and liabilities. The Company did not have any fair value measurements unrelated to purchase accounting for its non-financial assets and liabilities during the
second quarter
. Deferred compensation assets and liabilities of
$23,830
were acquired in connection with the Valspar acquisition. See Note 3. The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis, categorized using the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
in Active
|
|
|
|
Significant
|
|
Fair Value at
|
|
Markets for
|
|
Significant Other
|
|
Unobservable
|
|
June 30,
|
|
Identical Assets
|
|
Observable Inputs
|
|
Inputs
|
|
2017
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Deferred compensation plan assets
(1)
|
$
|
53,562
|
|
|
$
|
28,700
|
|
|
$
|
24,862
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities
(2)
|
$
|
64,001
|
|
|
$
|
64,001
|
|
|
|
|
|
|
|
(1)
|
The deferred compensation plan assets consist of the investment funds maintained for the future payments under the Company’s executive deferred compensation plans, which are structured as rabbi trusts. The investments are marketable securities accounted for under the Debt and Equity Securities Topic of the ASC. The level 1 investments are valued using quoted market prices multiplied by the number of shares. The level 2 investments are valued based on vendor or broker models. The cost basis of the investment funds is
$49,638
.
|
(2)
The deferred compensation plan liabilities are the Company’s liabilities under its executive deferred compensation plan. The liabilities represent the fair value of the participant shadow accounts, and the value is based on quoted market prices.
NOTE 16
—
DEBT
The table below summarizes the carrying amount and fair value of the Company’s publicly traded debt and non-publicly traded debt in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. The fair values of the Company’s publicly traded debt are based on quoted market prices. The fair values of the Company’s non-publicly traded debt are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The Company’s publicly traded debt and non-publicly traded debt are classified as level 1 and level 2, respectively, in the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
Publicly traded debt
|
$
|
9,448,274
|
|
|
$
|
9,660,353
|
|
|
$
|
1,906,672
|
|
|
$
|
2,021,174
|
|
Non-publicly traded debt
|
2,004,111
|
|
|
1,863,095
|
|
|
4,724
|
|
|
4,451
|
|
On June 2, 2017 the Company closed its previously announced exchange offers and consent solicitations (collectively, the "Exchange Offer") for the outstanding senior notes of Valspar. Pursuant to the Exchange Offer, the Company issued an aggregate principal amount of approximately
$1.478 billion
(collectively the "Exchange Notes"). The Exchange Notes are
unsecured senior obligations of the Company. The Company did not receive any cash proceeds from the issuance of the Exchange Notes. The Exchange Notes are summarized in the table below.
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
Due Date
|
|
Principal
|
7.250% Senior Notes
|
2019
|
|
$
|
277,176
|
|
4.200% Senior Notes
|
2022
|
|
385,909
|
|
3.300% Senior Notes
|
2025
|
|
235,324
|
|
3.950% Senior Notes
|
2026
|
|
331,342
|
|
4.400% Senior Notes
|
2045
|
|
248,354
|
|
|
|
|
$
|
1,478,105
|
|
On May 16, 2017, the Company issued
$6.0 billion
of senior notes (collectively the "New Notes") in a public offering. The net proceeds from the issuance of the New Notes were used to fund the acquisition of Valspar. The New Notes are summarized in the table below.
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
Due Date
|
|
Principal
|
2.250% Senior Notes
|
2020
|
|
$
|
1,500,000
|
|
2.750% Senior Notes
|
2022
|
|
1,250,000
|
|
3.125% Senior Notes
|
2024
|
|
500,000
|
|
3.450% Senior Notes
|
2027
|
|
1,500,000
|
|
4.500% Senior Notes
|
2047
|
|
1,250,000
|
|
|
|
|
$
|
6,000,000
|
|
As previously disclosed, the interest rate locks entered into in 2016 settled in March 2017 resulting in a pretax gain of
$87.6 million
recognized in Cumulative other comprehensive loss. This gain is being amortized from Cumulative other comprehensive loss to a reduction of interest expense over the terms of the New Notes. For the three months ended
June 30, 2017
, the amortization of the unrealized gain reduced interest expense by
$1.0 million
.
In April 2016, the Company entered into agreements for a
$7.3 billion
Bridge Loan and a
$2.0 billion
Term Loan as committed financing for the Valspar acquisition. See Note 3. On June 1, 2017, the Company terminated the agreement for the Bridge Loan and borrowed the full
$2.0 billion
on the Term Loan. The Term Loan is pre-payable without penalty and carries a
5
year maturity with a variable interest rate of London Interbank Offered Rate plus an additional
1.25%
or approximately
2.36%
interest rate for the month of June 2017.
During the first six months of 2017, the Company amended the
five
-year credit agreement entered into in May 2016 to increase the aggregate availability to
$500.0 million
. The credit agreement will be used for general corporate purposes. There were
no
borrowings outstanding under this credit agreement at June 30, 2017.
NOTE 17
—
NON-TRADED INVESTMENTS
The Company has invested in the U.S. affordable housing and historic renovation real estate markets. These non-traded investments have been identified as variable interest entities. However, because the Company does not have the power to direct the day-to-day operations of the investments and the risk of loss is limited to the amount of contributed capital, the Company is not considered the primary beneficiary. In accordance with the Consolidation Topic of the ASC, the investments are not consolidated. For affordable housing investments entered into prior to the January 1, 2015 adoption of ASU No. 2014-01, the Company uses the effective yield method to determine the carrying value of the investments. Under the effective yield method, the initial cost of the investments is amortized to income tax expense over the period that the tax credits are recognized. For affordable housing investments entered into on or after the January 1, 2015 adoption of ASU No. 2014-01, the Company uses the proportional amortization method. Under the proportional amortization method, the initial cost of the investments is amortized to income tax expense in proportion to the tax credits and other tax benefits received. The carrying amount of the affordable housing and historic renovation investments, included in Other assets, was
$212.1 million
and
$226.3 million
at
June 30, 2017
and
2016
, respectively. The liability for estimated future capital contributions to the investments was
$170.4 million
and
$186.9 million
at
June 30, 2017
and
2016
, respectively.