NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended
March 31, 2018
and
2017
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, 2017
, except as described in Note 2. Accounting estimates were revised as necessary during the first
three months
of
2018
based on new information and changes in facts and circumstances. Certain amounts in the
2017
condensed consolidated financial statements have been reclassified to conform to the
2018
presentation. See Note 2.
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. 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, 2017
.
The consolidated results for the
three months ended
March 31, 2018
are not necessarily indicative of the results to be expected for the year ending
December 31, 2018
.
NOTE 2—RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted in 2018
Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers," and all the related amendments (Accounting Standards Codification (ASC) 606). ASC 606 consists of a comprehensive revenue recognition standard, which requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled. The Company adopted the standard using the modified retrospective method and applied it to all contracts. Under the modified retrospective method, the comparative periods are not restated.
The only significant change that resulted from the new revenue standard was that certain advertising support that was previously classified as Selling, general and administrative expenses is now classified as a reduction of revenue. This reclassification had no effect on Net income, and therefore, there was no adjustment to the opening balance of retained earnings. During the
three months
ended
March 31, 2018
, this change resulted in
$13.4 million
within Consumer Brands Group being recorded as a reduction of Net sales rather than in Selling, general and administrative expenses. The Company does not expect the adoption of the new revenue standard
to have a material impact on its Net income on an ongoing basis. Refer to Note 3 for additional information.
Effective January 1, 2018, the Company adopted 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, and the other components to be presented outside of operating income. The guidance on the presentation of components of pension and other postretirement benefit expense was adopted retrospectively, as required, and the practical expedient allowing estimates for comparative periods using the information previously disclosed in the pension and other postretirement benefit plan note was elected. The following table summarizes the impact of the standard for the three months ended March 31, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2018
|
|
Three Months Ended March 31, 2017
|
|
|
Impact of ASU 2017-07
|
|
As Reported
|
|
As Previously Reported (Without Adoption of ASU 2017-07)
|
|
Reclass for ASU 2017-07
|
|
Reclass of Amortization to Stand-Alone Caption (Unrelated to ASU 2017-07)
|
|
As Reported in 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
709
|
|
|
$
|
2,278,159
|
|
|
$
|
1,418,247
|
|
|
$
|
221
|
|
|
$
|
(134
|
)
|
|
$
|
1,418,334
|
|
Selling, general and administrative expenses
|
|
2,835
|
|
|
1,214,565
|
|
|
1,016,211
|
|
|
846
|
|
|
(6,036
|
)
|
|
1,011,021
|
|
Other expense (income) - net
|
|
(3,544
|
)
|
|
(9,272
|
)
|
|
(4,367
|
)
|
|
(1,067
|
)
|
|
|
|
(5,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective January 1, 2018, the Company adopted 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. As a result of this standard, changes in fair value of available-for-sale marketable securities that were previously recognized in other comprehensive income are now recognized in earnings. In addition, in accordance with the guidance, the Company reclassified its opening unrealized gains balance of
$2.3 million
to Retained earnings. The adoption of this standard did not have a significant impact on the Company's results of operations, financial condition or liquidity.
Not Yet Adopted
In February 2018, the FASB issued ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This ASU allows a reclassification from accumulated other comprehensive income to retained earnings stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. The Company is evaluating the impact of the standard.
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.
NOTE 3
—
REVENUE
The Company manufactures and sells paint, stains, supplies, equipment and floor covering through Company-owned stores, branded and private label products through retailers, and a broad range of industrial coatings directly to global manufacturing customers through company-operated branches. A large portion of the Company’s revenue is recognized at a point in time and made to customers who are not engaged in a long-term supply agreement or any form of contract with the Company. These sales are paid for at the time of sale in cash, credit card, or may be on account with the vast majority of customers having terms between 30 and 60 days, not to exceed one year. Many customers who purchase on account take advantage of early payment discounts offered by paying within 30 days of being invoiced. The Company estimates variable consideration or performs a constraint analysis for these sales on the basis of both historical information and current trends to estimate the expected amount of discounts to which customers are likely to be entitled.
The remaining revenue is governed by long-term supply agreements and related purchase orders (“contracts”) which specify shipping terms and aspects of the transaction price including rebates, discounts and other sales incentives, such as advertising support. Contracts are at standalone pricing. The performance obligation in these contracts is determined by each of the individual purchase orders and the respective stated quantities, with revenue being recognized at a point in time when obligations under the terms of the agreement are satisfied. This generally occurs with the transfer of control of our products to the customer. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
Refer to Note 15 for the Company's disaggregation of Net sales by reportable segment. As the reportable segments are aligned by similar economic factors, trends and customers, this disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The Company has made payments or credits for rebates or incentives at the beginning of a long-term contract where future revenue is expected and before satisfaction of performance obligations. Under these circumstances, the Company recognizes a contract asset and amortizes these prepayments over the expected benefit life of the long-term contract typically on a straight-line basis. Management judgment is required when estimating sales-based variable consideration, determining whether it is constrained, measuring obligations for returns, refunds, and determining amortization periods for prepayments.
The majority of variable consideration in the Company’s contracts include a form of volume rebate, discounts, and other incentives, where the customer receives a retrospective percentage rebate based on the amount of their purchases. In these situations, the rebates are accrued as a fixed percentage of sales and recorded as a reduction of net sales until paid to the customer per the terms of the supply agreement. Forms of variable consideration such as tiered rebates, whereby a customer receives a retrospective price decrease dependent on the volume of their purchases, are calculated using a forecasted percentage to determine the most likely amount to accrue. Management creates a baseline calculation using historical sales and then utilizing forecast information, estimates the anticipated sales volume each quarter to calculate the expected reduction to sales. The remainder of the transaction price is fixed as agreed upon with the customer, limiting estimation of revenues including constraints.
The Company’s accounts receivables and current and long-term contract assets and liabilities are summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable, Less Allowance
|
|
Contract
Assets
(Current)
|
|
Contract
Assets
(Long-Term)
|
|
Contract Liabilities (Current)
|
|
Contract Liabilities (Long-Term)
|
Balance at January 1, 2018
|
$
|
2,104,555
|
|
|
$
|
33,031
|
|
|
$
|
135,150
|
|
|
$
|
208,909
|
|
|
$
|
8,745
|
|
Balance at March 31, 2018
|
$
|
2,326,411
|
|
|
$
|
34,316
|
|
|
$
|
135,581
|
|
|
$
|
153,037
|
|
|
$
|
8,745
|
|
The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment.
Provisions for estimated returns are established and the expected costs continue to be recognized as contra-revenue per ASC 606 when the products are sold. With the exception of furniture protection plan sales, the Company only offers an assurance type warranty on products sold, and there is no material service to the customer beyond fixing defects that existed at the time of sale and no warranties are sold separately. Warranty liabilities are excluded from the table above and discussed in Note 7. Amounts reclassified during the quarter from deferred liabilities to Revenue were not material. The Company records a right of return liability within each of its operations to accrue for expected customer returns. Historical actual returns are used to estimate future returns as a percentage of current sales. Obligations for returns and refunds were not material individually or in the aggregate.
NOTE 4
—
ACQUISITIONS
On June 1, 2017, the Company completed the acquisition of The Valspar Corporation (Valspar) at
$113
per share in an all cash transaction for a total purchase price of
$8.9 billion
, net of divestiture proceeds of
$431.0 million
(Acquisition). The Acquisition expanded the Company's diversified array of brands and technologies, expanded its global platform and added new capabilities in its packaging and coil businesses. See Note 2 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
for additional information.
The preliminary allocation of the fair value of the Acquisition is summarized in the following table. Allocations are based on the acquisition method of accounting and in-process third-party valuation appraisals. The allocation of the fair value will be finalized within the allowable measurement period. There were no material purchase accounting adjustments during the
first quarter
of
2018
.
|
|
|
|
|
(Millions of dollars)
|
|
|
|
Cash
|
$
|
129.1
|
|
Accounts receivable
|
817.5
|
|
Inventories
|
684.4
|
|
Indefinite-lived trademarks
|
775.9
|
|
Finite-lived intangible assets
|
5,071.8
|
|
Goodwill
|
5,654.4
|
|
Property, plant and equipment
|
841.0
|
|
All other assets
|
231.3
|
|
Accounts payable
|
(553.2
|
)
|
Long-term debt
|
(1,603.5
|
)
|
Deferred taxes
|
(2,015.3
|
)
|
All other liabilities
|
(1,094.0
|
)
|
Total
|
$
|
8,939.4
|
|
Total, net of cash
|
$
|
8,810.3
|
|
Finite-lived intangible assets include customer relationships of
$3.3 billion
and intellectual property and technology of
$1.8 billion
, which are being amortized over weighted average amortization periods ranging from
15
to
20
years. Based on the preliminary purchase accounting, goodwill of
$2.3 billion
,
$1.9 billion
and
$1.5 billion
was recorded in The Americas Group, Performance Coatings Group and Consumer Brands Group, respectively, and relates primarily to expected synergies.
The Company's Net sales and Net income for the
three months
ended
March 31, 2018
included sales of
$1.067 billion
and a profit before tax of
$80.7 million
related to the Acquisition. Net income for the
three months ended
March 31, 2018
included Acquisition-related costs and purchase accounting amortization impacts of
$119.8 million
and Acquisition-related interest expense of
$68.6 million
. Net income for the
three months ended
March 31, 2017
included Acquisition-related costs and Acquisition-related interest expense of
$8.0 million
and
$5.0 million
, respectively.
The following pro forma information presents consolidated financial information as if Valspar had been acquired at the beginning of 2017. Pro forma adjustments have been made to exclude Valspar's divested North American industrial wood coatings business results and certain transaction and integration costs from all periods presented. Interest expense has been adjusted as though total debt related to the Acquisition had been outstanding at January 1, 2017. Amortization of acquired intangibles and fixed asset step-ups has been adjusted as though the amortization period started January 1, 2017. The
$54.9 million
amortization of inventory cost increases resulting from the preliminary purchase accounting has been included in 2017 to reflect the pro forma transaction date of January 1, 2017. The unaudited pro forma consolidated financial information does not necessarily reflect the actual results that would have occurred had the Acquisition taken place on January 1, 2017, nor is 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
March 31,
|
|
2018
|
|
2017
|
Net sales
|
$
|
3,965,006
|
|
|
$
|
3,708,528
|
|
Net income
|
280,110
|
|
|
124,536
|
|
Net income per common share:
|
|
|
|
Basic
|
$
|
3.00
|
|
|
$
|
1.35
|
|
Diluted
|
$
|
2.93
|
|
|
$
|
1.32
|
|
NOTE 5—DIVIDENDS
Dividends paid on common stock during the first quarter of
2018
and
2017
were
$.86
per common share and
$.85
per common share, respectively.
NOTE 6—CHANGES IN CUMULATIVE OTHER COMPREHENSIVE LOSS
The following tables summarize the changes in Cumulative other comprehensive loss for the
three months
ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Foreign Currency Translation Adjustments
|
|
Pension and Other Postretirement Benefit Adjustments
|
|
Unrealized Net Gains on Available-for-Sale Securities
|
|
Unrealized Net Gains on Cash Flow Hedges
|
|
Total Cumulative Other Comprehensive (Loss) Income
|
Balance at December 31, 2017
|
$
|
(353,346
|
)
|
|
$
|
(84,863
|
)
|
|
$
|
2,320
|
|
|
$
|
51,019
|
|
|
$
|
(384,870
|
)
|
Amounts recognized in Other comprehensive loss
|
52,732
|
|
|
|
|
|
|
|
|
52,732
|
|
Amounts reclassified from Other comprehensive loss
(1)
|
|
|
|
(209
|
)
|
|
(2,320
|
)
|
|
(988
|
)
|
|
(3,517
|
)
|
Net change
|
52,732
|
|
|
(209
|
)
|
|
(2,320
|
)
|
|
(988
|
)
|
|
49,215
|
|
Balance at March 31, 2018
|
$
|
(300,614
|
)
|
|
$
|
(85,072
|
)
|
|
$
|
—
|
|
|
$
|
50,031
|
|
|
$
|
(335,655
|
)
|
(1)
Net of taxes of
$90
for pension and other postretirement benefit adjustments,
$760
for realized
gains
on the sale of available-for-sale securities and
$1,047
for realized
gains
on cash flow hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
(2)
|
20,778
|
|
|
|
|
630
|
|
|
(30,754
|
)
|
|
(9,346
|
)
|
Amounts reclassified from Other comprehensive loss
(3)
|
|
|
279
|
|
|
5
|
|
|
|
|
284
|
|
Net change
|
20,778
|
|
|
279
|
|
|
635
|
|
|
(30,754
|
)
|
|
(9,062
|
)
|
Balance at March 31, 2017
|
$
|
(480,499
|
)
|
|
$
|
(124,817
|
)
|
|
$
|
1,650
|
|
|
$
|
54,253
|
|
|
$
|
(549,413
|
)
|
(2)
Net of taxes of
$(389)
for unrealized net gains on available-for-sale securities and
$18,895
for unrealized net losses on cash flow hedges.
(3)
Net of taxes of
$(142)
for pension and other postretirement benefit adjustments and
$(3)
for realized losses on the sale of available-for-sale securities.
NOTE 7—PRODUCT WARRANTIES
Changes in the Company’s accrual for product warranty claims during the first
three months
of
2018
and
2017
, including customer satisfaction settlements, were as follows:
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
2018
|
|
2017
|
Balance at January 1
|
$
|
151,425
|
|
|
$
|
34,419
|
|
Charges to expense
|
6,437
|
|
|
6,076
|
|
Settlements
|
(4,488
|
)
|
|
(7,508
|
)
|
Balance at March 31
|
$
|
153,374
|
|
|
$
|
32,987
|
|
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, 2017
.
NOTE 8—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
three months
ended
March 31, 2018
,
ten
stores in The Americas Group and
two
branches in the Performance Coatings Group were closed due to lower demand or redundancy. The Company continues to evaluate all legacy operations in response to the Acquisition in order to optimize restructured operations. These Acquisition-related restructuring charges to date are recorded in the Administrative segment as presented in the table below. The following table summarizes the activity and remaining liabilities associated with qualified exit costs at
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions
|
|
Actual
|
|
|
|
|
Balance at
|
|
in Cost of
|
|
Expenditures
|
|
Balance at
|
|
|
December 31,
|
|
Goods Sold
|
|
Charged to
|
|
March 31,
|
Exit Plan
|
|
2017
|
|
or SG&A
|
|
Accrual
|
|
2018
|
Administrative segment Acquisition-related restructuring in 2017:
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
$
|
6,019
|
|
|
$
|
3,789
|
|
|
$
|
(5,883
|
)
|
|
$
|
3,925
|
|
Other qualified exit costs
|
|
5,541
|
|
|
—
|
|
|
(1,831
|
)
|
|
3,710
|
|
Performance Coatings Group stores shutdown in 2017:
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
14
|
|
|
—
|
|
|
(12
|
)
|
|
2
|
|
Other qualified exit costs
|
|
121
|
|
|
—
|
|
|
(17
|
)
|
|
104
|
|
Consumer Brands Group facilities shutdown in 2016:
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
21
|
|
|
10
|
|
|
—
|
|
|
31
|
|
Performance Coatings Group stores shutdown in 2016:
|
|
|
|
|
|
|
|
|
Other qualified exit costs
|
|
111
|
|
|
—
|
|
|
(21
|
)
|
|
90
|
|
Severance and other qualified exit costs for facilities shutdown prior to 2016
|
|
1,558
|
|
|
—
|
|
|
(320
|
)
|
|
1,238
|
|
Totals
|
|
$
|
13,385
|
|
|
$
|
3,799
|
|
|
$
|
(8,084
|
)
|
|
$
|
9,100
|
|
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, 2017
.
NOTE 9
—
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
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Three Months Ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
4,357
|
|
|
$
|
5,313
|
|
|
$
|
2,016
|
|
|
$
|
1,918
|
|
|
$
|
498
|
|
|
$
|
543
|
|
Interest cost
|
8,152
|
|
|
6,410
|
|
|
2,352
|
|
|
1,638
|
|
|
2,545
|
|
|
2,643
|
|
Expected return on assets
|
(14,434
|
)
|
|
(10,309
|
)
|
|
(2,685
|
)
|
|
(1,764
|
)
|
|
|
|
|
Recognition of:
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost
|
379
|
|
|
341
|
|
|
—
|
|
|
|
|
|
(1,642
|
)
|
|
(1,645
|
)
|
Unrecognized actuarial loss
|
|
|
|
1,661
|
|
|
383
|
|
|
(53
|
)
|
|
581
|
|
|
11
|
|
Ongoing pension (credit) cost
|
(1,546
|
)
|
|
3,416
|
|
|
2,066
|
|
|
1,739
|
|
|
1,982
|
|
|
1,552
|
|
Curtailment expense
|
825
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net pension costs (credits)
|
$
|
(721
|
)
|
|
$
|
3,416
|
|
|
$
|
2,066
|
|
|
$
|
1,739
|
|
|
$
|
1,982
|
|
|
$
|
1,552
|
|
Service cost is recorded in Cost of goods sold and Selling, general and administrative expenses. All other components are recorded in
Other income - net
. See Note 2 for information on the adoption of ASU No. 2017-07.
During the first quarter of 2018, the Company's domestic defined benefit plan was split into two separate overfunded plans: one that will continue to operate (Ongoing Plan) and one that will be terminated (Terminating Plan). The Company provided notice to participants of the Terminating Plan of the intent to terminate the plan and applied for a determination letter. The Terminating Plan was frozen as of March 31, 2018, which resulted in a curtailment expense. During the second quarter of 2018, the Terminating Plan was terminated. The Company has begun the process of winding up the Terminating Plan, which will include settling plan liabilities by offering lump sum distributions to plan participants or purchasing annuity contracts for those who either do not elect lump sums or are already receiving benefit payments. The Company's settlement obligation will depend on the nature of participant settlements and the prevailing market conditions.
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, 2017
.
NOTE 10—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
March 31, 2018
, the unaccrued maximum of the estimated range of possible outcomes is
$98.5 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
March 31, 2018
and
2017
were accruals for extended environmental-related activities of
$177.8 million
and
$161.6 million
, respectively. Estimated costs of current investigation and remediation activities of
$27.0 million
and
$20.0 million
are included in Other accruals at
March 31, 2018
and
2017
, respectively.
Four
of the Company’s currently and formerly owned manufacturing sites account for the majority of the accrual for environmental-related activities and the unaccrued maximum of the estimated range of possible outcomes at
March 31, 2018
. At
March 31, 2018
,
$160.9 million
, or
78.6 percent
of the total accrual, related directly to these
four
sites. In the aggregate unaccrued maximum of
$98.5 million
at
March 31, 2018
,
$77.4 million
, or
78.6 percent
, related to the
four
manufacturing sites. While environmental investigations and remedial actions are in different stages at these sites, additional investigations, remedial actions and monitoring will likely be required at each site.
Management cannot presently estimate the ultimate potential loss contingencies related to these sites or other less significant sites until such time as a substantial portion of the investigation at the sites is completed and remedial action plans are developed. In the event any future loss contingency significantly exceeds the current amount accrued, the recording of the ultimate liability may result in a material impact on net income for the annual or interim period during which the additional costs are accrued. Management does not believe that any potential liability ultimately attributed to the Company for its environmental-related matters will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time during which environmental investigation and remediation takes place. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.
Management expects these contingent environmental-related liabilities to be resolved over an extended period of time. Management is unable to provide a more specific time frame due to the indefinite amount of time to conduct investigation activities at any site, the indefinite amount of time to obtain environmental agency approval, as necessary, with respect to investigation and remediation activities, and the indefinite amount of time necessary to conduct remediation activities.
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, 2017
.
NOTE 11 – 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, with the exception of the public nuisance litigation in California discussed below, the Company does not believe that it is probable that a loss has occurred, and it is not possible to estimate the range of potential losses as there is no prior history of a loss of this nature and there is no substantive information upon which an estimate could be based. In addition, any potential liability that may result from any changes to legislation and regulations cannot reasonably be estimated. In the event any significant liability is determined to be attributable to the Company relating to such litigation, the recording of the liability may result in a material impact on net income for the annual or interim period during which such liability is accrued. Additionally, due to the uncertainties associated with the amount of any such liability and/or the nature of any other remedy which may be imposed in such litigation, any potential liability determined to be attributable to the Company arising out of such litigation may have a material adverse effect on the Company’s results of operations, liquidity or financial condition. An estimate of the potential impact on the Company’s results of operations, liquidity or financial condition cannot be made due to the aforementioned uncertainties.
Public nuisance claim litigation
.
The Company and other companies are or were defendants in legal proceedings seeking recovery based on public nuisance liability theories, among other theories, brought by the State of Rhode Island, the City of St. Louis, Missouri, various cities and counties in the State of New Jersey, various cities in the State of Ohio and the State of Ohio, the City of Chicago, Illinois, the City of Milwaukee, Wisconsin and the County of Santa Clara, California and other public entities in the State of California. Except for the Santa Clara County, California proceeding, all of these legal proceedings have been concluded in favor of the Company and other defendants at various stages in the proceedings.
The proceedings initiated by the State of Rhode Island included
two
jury trials. At the conclusion of the second trial, the jury returned a verdict finding that (i) the cumulative presence of lead pigment in paints and coatings on buildings in the State of Rhode Island constitutes a public nuisance, (ii) the Company, along with
two
other defendants, caused or substantially contributed to the creation of the public nuisance and (iii) the Company and
two
other defendants should be ordered to abate the public nuisance. The Company and
two
other defendants appealed and, on July 1, 2008, the Rhode Island Supreme Court, among other determinations, reversed the judgment of abatement with respect to the Company and
two
other defendants. The Rhode Island Supreme Court’s decision reversed the public nuisance liability judgment against the Company on the basis that the complaint failed to state a public nuisance claim as a matter of law.
The Santa Clara County, California proceeding was initiated in March 2000 in the Superior Court of the State of California, County of Santa Clara. In the original complaint, the plaintiffs asserted various claims including fraud and concealment, strict product liability/failure to warn, strict product liability/design defect, negligence, negligent breach of a special duty, public nuisance, private nuisance, and violations of California’s Business and Professions Code. A number of the asserted claims were resolved in favor of the defendants through pre-trial proceedings. The named plaintiffs in the Fourth Amended Complaint, filed on March 16, 2011, are the Counties of Santa Clara, Alameda, Los Angeles, Monterey, San Mateo, Solano and Ventura, the Cities of Oakland and San Diego and the City and County of San Francisco. The Fourth Amended Complaint asserted a sole claim for public nuisance, alleging that the presence of lead pigments for use in paint and coatings in, on and around residences in the plaintiffs’ jurisdictions constitutes a public nuisance. The plaintiffs sought the abatement of the alleged public nuisance that exists within the plaintiffs’ jurisdictions. A trial commenced on July 15, 2013 and ended on August 22, 2013. The court entered final judgment on January 27, 2014, finding in favor of the plaintiffs and against the Company and
two
other defendants (ConAgra Grocery Products Company and NL Industries, Inc.). The final judgment held the Company jointly and severally liable with the other
two
defendants to pay
$1.15 billion
into a fund to abate the public nuisance. The Company strongly disagrees with the judgment.
On February 18, 2014, the Company filed a motion for new trial and a motion to vacate the judgment. The court denied these motions on March 24, 2014. On March 28, 2014, the Company filed a notice of appeal to the Sixth District Court of Appeal for the State of California. The filing of the notice of appeal effects an automatic stay of the judgment without the requirement to post a bond. Oral argument before the Sixth District Court of Appeal was held on August 24, 2017. On November 14, 2017, the Sixth District Court of Appeal entered its decision, which affirmed the trial court’s judgment of liability with respect to
residences built before 1951 and reversed and vacated the trial court’s judgment with respect to residences built after 1950. The Sixth District Court of Appeal directed the trial court to: (i) recalculate the amount of the abatement fund to limit the fund to the amount necessary to cover the cost of inspecting and remediating pre-1951 residences; and (ii) hold an evidentiary hearing to appoint a suitable receiver. On November 29, 2017, the Company and the two other defendants filed separate Petitions for Rehearing, which the Sixth District Court of Appeal denied on December 6, 2017. The Sixth District Court of Appeal’s decision became final on December 14, 2017. On December 22, 2017, the Company and the two other defendants submitted separate Petitions for Review to the California Supreme Court. On February 14, 2018, the California Supreme Court issued an order denying the Petitions for Review. The Company believes that the judgment conflicts with established principles of law and is unsupported by the evidence. The Company intends to file a Petition for Writ of Certiorari with the Supreme Court of the United States seeking discretionary review. The Company also may file a motion to stay the Santa Clara County, California proceeding while the Petition for Writ of Certiorari is pending.
Although the Company believes it is probable that a loss has occurred, the Company has concluded that it is not possible to reasonably estimate the range of potential loss due to the numerous possible outcomes and uncertainties, including, but not limited to, (i) the final amount of the abatement fund necessary to cover the cost of inspecting and remediating pre-1951 residences, as recalculated by the trial court, and (ii) the portion of the abatement fund for which the Company, the two other defendants and others are determined to be responsible. If the Company concludes that it is possible to reasonably estimate the range of potential loss once more definitive information becomes available, the Company will recognize the loss and disclose such information. Because of joint and several liability, it is possible the Company could ultimately be liable for the total amount of the abatement fund. In the event any significant liability is determined to be attributable to the Company relating to such litigation, the recording of any liability may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued.
Litigation seeking damages from alleged personal injury
.
The Company and other companies are defendants in a number of legal proceedings seeking monetary damages and other relief from alleged personal injuries. These proceedings include claims by children allegedly injured from ingestion of lead pigment or lead-containing paint and claims for damages allegedly incurred by the children’s parents or guardians. These proceedings generally seek compensatory and punitive damages, and seek other relief including medical monitoring costs. These proceedings include purported claims by individuals, groups of individuals and class actions.
The plaintiff in Thomas v. Lead Industries Association, et al., initiated an action in state court against the Company, other alleged former lead pigment manufacturers and the Lead Industries Association in September 1999. The claims against the Company and the other defendants included strict liability, negligence, negligent misrepresentation and omissions, fraudulent misrepresentation and omissions, concert of action, civil conspiracy and enterprise liability. Implicit within these claims is the theory of “risk contribution” liability (Wisconsin’s theory which is similar to market share liability, except that liability can be joint and several) due to the plaintiff’s inability to identify the manufacturer of any product that allegedly injured the plaintiff. The case ultimately proceeded to trial and, on November 5, 2007, the jury returned a defense verdict, finding that the plaintiff had ingested white lead carbonate, but was not brain damaged or injured as a result. The plaintiff appealed and, on December 16, 2010, the Wisconsin Court of Appeals affirmed the final judgment in favor of the Company and other defendants.
Wisconsin is the only jurisdiction to date to apply a theory of liability with respect to alleged personal injury (i.e., risk contribution/market share liability) that does not require the plaintiff to identify the manufacturer of the product that allegedly injured the plaintiff in the lead pigment and lead-based paint litigation. Although the risk contribution liability theory was applied during the Thomas trial, the constitutionality of this theory as applied to the lead pigment cases has not been judicially determined by the Wisconsin state courts. However, in an unrelated action filed in the United States District Court for the Eastern District of Wisconsin, Gibson v. American Cyanamid, et al., on November 15, 2010, the District Court held that Wisconsin’s risk contribution theory as applied in that case violated the defendants’ right to substantive due process and is unconstitutionally retroactive. The District Court's decision in Gibson v. American Cyanamid, et al., was appealed by the plaintiff to the United States Court of Appeals for the Seventh Circuit. On July 24, 2014, the United States Court of Appeals for the Seventh Circuit reversed the judgment and remanded the case back to the District Court for further proceedings. On January 16, 2015, the defendants filed a petition for certiorari in the United States Supreme Court seeking that Court's review of the Seventh Circuit's decision, and on May 18, 2015, the United States Supreme Court denied the defendants' petition. The case is currently pending in the District Court.
Three
cases also are pending in the United States District Court for the Eastern District of Wisconsin (Ravon Owens v. American Cyanamid, et al., Cesar Sifuentes v. American Cyanamid, et al., and Glenn Burton, Jr. v. American Cyanamid, et al.) in which dispositive motions have been filed and are currently pending. No trial dates have been set by the District Court. In Maniya Allen, et al. v. American Cyanamid, et al., also pending in the United States District Court for the Eastern District of Wisconsin, cases involving six of the 161 plaintiffs have been selected for discovery, although no trial dates have been set by the District Court. In Dijonae Trammell, et al. v. American Cyanamid, et al., also pending in the
United States District Court for the Eastern District of Wisconsin, discovery for one of the three plaintiffs has been consolidated with the six Allen cases referenced above, although no trial date has been set by the District Court.
Insurance coverage litigation
.
The Company and its liability insurers, including certain underwriters at Lloyd’s of London, initiated legal proceedings against each other to primarily determine, among other things, whether the costs and liabilities associated with the abatement of lead pigment are covered under certain insurance policies issued to the Company. The Company’s action, filed on March 3, 2006 in the Common Pleas Court, Cuyahoga County, Ohio, is currently stayed and inactive. The liability insurers’ action, which was filed on February 23, 2006 in the Supreme Court of the State of New York, County of New York, has been dismissed. An ultimate loss in the insurance coverage litigation would mean that insurance proceeds could be unavailable under the policies at issue to mitigate any ultimate abatement related costs and liabilities. The Company has not recorded any assets related to these insurance policies or otherwise assumed that proceeds from these insurance policies would be received in estimating any contingent liability accrual. Therefore, an ultimate loss in the insurance coverage litigation without a determination of liability against the Company in the lead pigment or lead-based paint litigation will have no impact on the Company’s results of operation, liquidity or financial condition. As previously stated, however, the Company has not accrued any amounts for the lead pigment or lead-based paint litigation and any significant liability ultimately determined to be attributable to the Company relating to such litigation may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued.
NOTE 12—OTHER
Other general expense - net
Included in
Other general expense - net
were the following:
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
Provisions for environmental matters - net
|
$
|
765
|
|
|
$
|
519
|
|
Loss (gain) on sale or disposition of assets
|
2,225
|
|
|
(243
|
)
|
Total
|
$
|
2,990
|
|
|
$
|
276
|
|
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 10 for further details on the Company’s environmental-related activities.
The
loss (gain)
on sale or 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 - net
Included in
Other income - net
were the following:
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
Dividend and royalty income
|
$
|
(1,451
|
)
|
|
$
|
(1,844
|
)
|
Net expense from banking activities
|
2,236
|
|
|
2,472
|
|
Foreign currency transaction related gains
|
(2,462
|
)
|
|
(3,586
|
)
|
Miscellaneous pension income
|
(3,544
|
)
|
|
(1,067
|
)
|
Other income
|
(7,109
|
)
|
|
(4,960
|
)
|
Other expense
|
3,058
|
|
|
3,551
|
|
Total
|
$
|
(9,272
|
)
|
|
$
|
(5,434
|
)
|
Foreign currency transaction related gains
represent net realized
gains
on U.S. dollar-denominated liabilities of foreign subsidiaries and net realized and unrealized
gains
from foreign currency option and forward contracts. There were
no
material foreign currency option and forward contracts outstanding at
March 31, 2018
and
2017
.
Miscellaneous pension income
consists of the non-service components of net pension costs (credits). See Note 2 for information on the adoption of ASU No. 2017-07 and Note 9 for the detail of net pension costs (credits).
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 13—INCOME TAXES
The effective tax rate was
17.6 percent
for the
first quarter
of
2018
compared to
22.0 percent
for the
first quarter
of
2017
. The decrease in the effective tax rate for the first quarter of
2018
compared to the first quarter of
2017
was primarily due to the overall favorable impact of the Tax Cuts and Jobs Act (Tax Act). The Company received favorable tax benefits from the reduction in the corporate domestic income tax rate from
35 percent
to
21 percent
and a deduction related to foreign-derived intangible income. These benefits were partially offset by the Tax Act’s elimination of the domestic manufacturing deduction, a reduction in allowable foreign tax credits and a decreased benefit related to international tax rate differences.
In accordance with Staff Accounting Bulletin (SAB) No. 118, based on the information available as of
December 31, 2017
, the Company recorded a provisional reduction of income taxes of
$607.9 million
as a result of the Tax Act. The Company's deferred tax liabilities were reduced by
$560.2 million
due to the lower income tax rate. The remaining
$47.7 million
is the effects of the implementation of the territorial tax system and the remeasurement of U.S. deferred tax liabilities on unremitted foreign earnings. The final impact of the Tax Act may differ from the provisional amounts recorded at
December 31, 2017
, due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Act. There were no significant changes to any of the balances recorded at
December 31, 2017
as a result of the Tax Act during the first three months of
2018
.
At
December 31, 2017
, the Company had
$59.0 million
in unrecognized tax benefits, the recognition of which would have an effect of
$49.5 million
on the effective tax rate. Included in the balance of unrecognized tax benefits at
December 31, 2017
was
$5.2 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. The Company acquired
$18.9 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, 2017
, the Company had accrued
$14.6 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, 2017
during the first
three months
of
2018
.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The IRS is currently auditing the Company's 2014 and 2015 income tax returns, as well as the 2014 and 2015 tax years of a Valspar subsidiary. No significant adjustments have been proposed by the IRS. The IRS and the Joint Committee of Taxation have approved refund claims for the 2010, 2011 and 2012 tax years. The Company will receive approximately
$7.5 million
of tax and interest related to the refund claims by the end of the
2018
tax year. As of
March 31, 2018
, the federal statute of limitations has not expired for the 2013, 2014, 2015 and
2016
tax years.
As of
March 31, 2018
, the Company is subject to non-U.S. income tax examinations for the tax years of 2010 through
2017
. In addition, the Company is subject to state and local income tax examinations for the tax years 2005 through
2017
.
NOTE 14—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
March 31,
|
|
2018
|
|
2017
|
Basic
|
|
|
|
Average common shares outstanding
|
93,339,564
|
|
|
92,550,559
|
|
Net income
|
$
|
250,127
|
|
|
$
|
239,152
|
|
Basic net income per common share
|
$
|
2.68
|
|
|
$
|
2.58
|
|
|
|
|
|
Diluted
|
|
|
|
Average common shares outstanding
|
93,339,564
|
|
|
92,550,559
|
|
Stock options and other contingently issuable shares
(1)
|
2,138,874
|
|
|
1,931,574
|
|
Non-vested restricted stock grants
|
67,714
|
|
|
59,726
|
|
Average common shares outstanding assuming dilution
|
95,546,152
|
|
|
94,541,859
|
|
Net income
|
$
|
250,127
|
|
|
$
|
239,152
|
|
Diluted net income per common share
|
$
|
2.62
|
|
|
$
|
2.53
|
|
|
|
(1)
|
Stock options and other contingently issuable shares for the
three months ended
March 31, 2017
excludes
40,074
shares due to their anti-dilutive effect
. There were
no
stock options and other contingently issuable shares excluded
due to their anti-dilutive effect for the
three months ended
March 31, 2018
.
|
NOTE 15—REPORTABLE SEGMENT INFORMATION
The Company reports its segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources in accordance with the Segment Reporting Topic of the ASC. The Company has determined that it has
three
reportable operating segments: The Americas Group, Consumer Brands Group and Performance Coatings Group (individually, a Reportable Segment and collectively, the Reportable Segments).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Three Months Ended March 31, 2018
|
|
The Americas
Group
|
|
Consumer Brands
Group
|
|
Performance
Coatings
Group
|
|
Administrative
|
|
Consolidated
Totals
|
Net external sales
|
$
|
2,080,415
|
|
|
$
|
656,379
|
|
|
$
|
1,227,775
|
|
|
$
|
437
|
|
|
$
|
3,965,006
|
|
Intersegment transfers
|
53
|
|
|
766,063
|
|
|
5,844
|
|
|
(771,960
|
)
|
|
|
Total net sales and intersegment transfers
|
$
|
2,080,468
|
|
|
$
|
1,422,442
|
|
|
$
|
1,233,619
|
|
|
$
|
(771,523
|
)
|
|
$
|
3,965,006
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
337,392
|
|
|
$
|
74,228
|
|
|
$
|
90,766
|
|
|
|
|
$
|
502,386
|
|
Interest expense
|
|
|
|
|
|
|
$
|
(91,547
|
)
|
|
(91,547
|
)
|
Administrative expenses and other
|
|
|
|
|
|
|
(107,253
|
)
|
|
(107,253
|
)
|
Income before income taxes
|
$
|
337,392
|
|
|
$
|
74,228
|
|
|
$
|
90,766
|
|
|
$
|
(198,800
|
)
|
|
$
|
303,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
The Americas
Group
|
|
Consumer Brands
Group
|
|
Performance
Coatings
Group
|
|
Administrative
|
|
Consolidated
Totals
|
Net external sales
|
$
|
1,951,746
|
|
|
$
|
323,366
|
|
|
$
|
484,454
|
|
|
$
|
1,821
|
|
|
$
|
2,761,387
|
|
Intersegment transfers
|
2,340
|
|
|
695,838
|
|
|
3,799
|
|
|
(701,977
|
)
|
|
|
Total net sales and intersegment transfers
|
$
|
1,954,086
|
|
|
$
|
1,019,204
|
|
|
$
|
488,253
|
|
|
$
|
(700,156
|
)
|
|
$
|
2,761,387
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
305,224
|
|
|
$
|
55,914
|
|
|
$
|
57,112
|
|
|
|
|
$
|
418,250
|
|
Interest expense
|
|
|
|
|
|
|
$
|
(25,695
|
)
|
|
(25,695
|
)
|
Administrative expenses and other
|
|
|
|
|
|
|
(85,950
|
)
|
|
(85,950
|
)
|
Income before income taxes
|
$
|
305,224
|
|
|
$
|
55,914
|
|
|
$
|
57,112
|
|
|
$
|
(111,645
|
)
|
|
$
|
306,605
|
|
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 of all consolidated foreign subsidiaries were
$919.7 million
and
$419.0 million
for the
first quarter
of
2018
and
2017
, respectively. Long-lived assets of these subsidiaries totaled
$3.722 billion
and
$497.1 million
at
March 31, 2018
and
March 31, 2017
, respectively. The increase in net external sales and long-lived assets is primarily due to the 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
during all periods presented.
For further details on the Company's Reportable Segments, see Note 18 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
.
NOTE 16
—
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
first 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
|
|
March 31,
|
|
Identical Assets
|
|
Observable Inputs
|
|
Inputs
|
|
2018
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Deferred compensation plan assets
(1)
|
$
|
61,256
|
|
|
$
|
34,806
|
|
|
$
|
26,450
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities
(2)
|
$
|
70,200
|
|
|
$
|
70,200
|
|
|
|
|
|
|
|
(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
$57,537
.
|
(2)
The deferred compensation plan liabilities are the Company’s liabilities under its deferred compensation plans. The liabilities represent the fair value of the participant shadow accounts, and the value is based on quoted market prices in active markets for identical assets.
NOTE 17
—
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)
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
March 31, 2017
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
Publicly traded debt
|
$
|
8,739,950
|
|
|
$
|
8,670,864
|
|
|
$
|
1,908,209
|
|
|
$
|
1,925,031
|
|
Non-publicly traded debt
|
1,152,246
|
|
|
1,082,658
|
|
|
4,089
|
|
|
3,770
|
|
On February 27, 2018, the Company amended the
five
-year credit agreement entered into in May 2016 to increase it by
$250.0 million
up to an aggregate availability of
$750.0 million
.
NOTE 18
—
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
$189.5 million
and
$197.6 million
at
March 31, 2018
and
2017
, respectively. The liability for estimated future capital contributions to the investments was
$167.0 million
and
$166.0 million
at
March 31, 2018
and
2017
, respectively.