Quarterly Report (10-q)

Date : 10/22/2019 @ 4:49PM
Source : Edgar (US Regulatory)
Stock : Sherwin Williams (SHW)
Quote : 572.5  0.0 (0.00%) @ 12:02PM

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Period Ended September 30, 2019
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission file number 1-04851
 
THE SHERWIN-WILLIAMS COMPANY
(Exact name of registrant as specified in its charter)
 
Ohio
34-0526850
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
 
101 West Prospect Avenue
 
Cleveland,
Ohio
44115-1075
(Address of principal executive offices)
(Zip Code)
(216) 566-2000
(Registrant’s telephone number including area code)
Title of each class
 
Trading Symbol
 
Name of exchange on which registered
Common Stock, par value of $1.00 per share
 
SHW
 
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
Emerging growth company
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $1.00 Par Value – 92,309,240 shares as of September 30, 2019.




TABLE OF CONTENTS
 









PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Thousands of dollars, except per share data
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net sales
$
4,867,650

 
$
4,731,470

 
$
13,786,371

 
$
13,470,272

Cost of goods sold
2,642,096

 
2,721,066

 
7,644,305

 
7,734,393

Gross profit
2,225,554

 
2,010,404

 
6,142,066

 
5,735,879

Percent to net sales
45.7
%
 
42.5
%
 
44.6
%
 
42.6
%
Selling, general and administrative expenses
1,345,171

 
1,273,066

 
3,920,476

 
3,795,492

Percent to net sales
27.6
%
 
26.9
%
 
28.4
%
 
28.2
%
Other general expense - net
12,032

 
11,526

 
18,696

 
41,495

Amortization
77,548

 
80,077

 
234,400

 
239,019

Interest expense
85,282

 
92,281

 
265,474

 
277,335

Interest and net investment income
(637
)
 
(555
)
 
(1,588
)
 
(2,732
)
California litigation expense
(34,667
)
 
136,333

 
(34,667
)
 
136,333

Other expense (income) - net
30,992

 
1,723

 
54,887

 
(8,688
)
Income before income taxes
709,833

 
415,953

 
1,684,388

 
1,257,625

Income taxes
133,395

 
61,926

 
391,710

 
249,867

Net income
$
576,438

 
$
354,027

 
$
1,292,678

 
$
1,007,758

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share - basic
$
6.28

 
$
3.80

 
$
14.07

 
$
10.82

 
 
 
 
 
 
 
 
Net income per share - diluted
$
6.16

 
$
3.72

 
$
13.82

 
$
10.59

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average shares outstanding - basic
91,823,573

 
93,099,714

 
91,850,565

 
93,121,900

 
 
 
 
 
 
 
 
Average shares and equivalents outstanding - diluted
93,604,260

 
95,135,257

 
93,510,104

 
95,170,768



See notes to condensed consolidated financial statements.

2



THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
Thousands of dollars

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net income
 
$
576,438

 
$
354,027

 
$
1,292,678

 
$
1,007,758

 
 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments (1)
 
(131,867
)
 
(66,366
)
 
(120,561
)
 
(218,662
)
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit adjustments:
 
 
 
 
 
 
 
 
Amounts reclassified from Other comprehensive loss (2)
 
(389
)
 
(492
)
 
(1,122
)
 
(557
)
 
 
(389
)
 
(492
)
 
(1,122
)
 
(557
)
 
 
 
 
 
 
 
 
 
Unrealized net gains on cash flow hedges:
 
 
 
 
 
 
 
 
Amounts reclassified from Other comprehensive loss (3)
 
(4,172
)
 
(1,289
)
 
(7,250
)
 
(4,187
)
 
 
(4,172
)
 
(1,289
)
 
(7,250
)
 
(4,187
)
 
 
 
 
 
 
 
 
 
Total
 
(136,428
)
 
(68,147
)
 
(128,933
)
 
(223,406
)
 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
440,010

 
$
285,880

 
$
1,163,745

 
$
784,352



(1) The three months ended September 30, 2019 includes unrealized gains of $13,881, net of taxes of $(4,572), related to the net investment hedge. The nine months ended September 30, 2019 includes unrealized gains of $8,946, net of taxes of $(2,946), related to the net investment hedge.

(2) Net of taxes of $150 and $(220) in the three months ended September 30, 2019 and 2018, respectively. Net of taxes of $433 and $285 in the nine months ended September 30, 2019 and 2018, respectively.

(3) Net of taxes of $1,488 and $791 in the three months ended September 30, 2019 and 2018, respectively. Net of taxes of $2,503 and $1,986 in the nine months ended September 30, 2019 and 2018, respectively.




See notes to condensed consolidated financial statements.


3



THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars
 
September 30,
2019
 
December 31,
2018
 
September 30,
2018
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
189,645

 
$
155,505

 
$
181,511

Accounts receivable, less allowance
2,479,043

 
2,018,768

 
2,584,280

Inventories:
 
 
 
 
 
Finished goods
1,474,835

 
1,426,366

 
1,369,689

Work in process and raw materials
350,134

 
388,909

 
432,729

 
1,824,969

 
1,815,275

 
1,802,418

Other current assets
414,082

 
354,939

 
410,913

Total current assets
4,907,739

 
4,344,487

 
4,979,122

Property, plant and equipment:
 
 
 
 
 
Land
239,446

 
244,608

 
249,787

Buildings
1,006,718

 
979,140

 
955,203

Machinery and equipment
2,837,377

 
2,668,492

 
2,623,884

Construction in progress
179,516

 
147,931

 
143,955

 
4,263,057

 
4,040,171

 
3,972,829

Less allowances for depreciation
2,464,756

 
2,263,332

 
2,206,475

 
1,798,301

 
1,776,839

 
1,766,354

Goodwill
6,958,681

 
6,956,702

 
6,963,198

Intangible assets
4,889,275

 
5,201,579

 
5,289,986

Operating lease right-of-use assets
1,659,010

 


 


Deferred pension assets
33,468

 
270,664

 
305,979

Other assets
617,865

 
584,008

 
617,147

Total assets
$
20,864,339

 
$
19,134,279

 
$
19,921,786

 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term borrowings
$
435,699

 
$
328,403

 
$
650,134

Accounts payable
2,028,402

 
1,799,424

 
2,165,724

Compensation and taxes withheld
538,932

 
504,547

 
500,248

Accrued taxes
94,966

 
80,766

 
98,632

Current portion of long-term debt
429,569

 
307,191

 
310,561

California litigation accrual
12,000

 
136,333

 
136,333

Current portion of operating lease liabilities
364,379

 


 


Other accruals
961,843

 
1,141,083

 
980,433

Total current liabilities
4,865,790

 
4,297,747

 
4,842,065

Long-term debt
8,043,030

 
8,708,057

 
8,710,831

Postretirement benefits other than pensions
260,968

 
257,621

 
277,857

Deferred income taxes
1,096,854

 
1,130,872

 
1,356,566

Long-term operating lease liabilities
1,352,246

 


 


Other long-term liabilities
1,222,591

 
1,009,237

 
803,942

Shareholders’ equity:
 
 
 
 
 
Common stock—$1.00 par value:
 
 
 
 
 
92,309,240, 93,116,762 and 93,626,317 shares outstanding
 
 
 
 
 
at September 30, 2019, December 31, 2018 and September 30, 2018, respectively
119,245

 
118,373

 
118,282

Other capital
3,079,342

 
2,896,448

 
2,851,983

Retained earnings
7,224,292

 
6,246,548

 
6,226,443

Treasury stock, at cost
(5,632,812
)
 
(4,900,690
)
 
(4,655,587
)
Cumulative other comprehensive loss
(767,207
)
 
(629,934
)
 
(610,596
)
Total shareholders' equity
4,022,860

 
3,730,745

 
3,930,525

Total liabilities and shareholders’ equity
$
20,864,339

 
$
19,134,279

 
$
19,921,786



See notes to condensed consolidated financial statements.

4



THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
 
Nine Months Ended
 
September 30,
2019
 
September 30,
2018
OPERATING ACTIVITIES
 
 
 
Net income
$
1,292,678

 
$
1,007,758

Adjustments to reconcile net income to net operating cash:
 
 
 
Depreciation
194,957

 
211,514

Amortization of intangible assets
234,400

 
239,019

Stock-based compensation expense
70,895

 
53,132

Loss on extinguishment of debt
14,754

 


Amortization of credit facility and debt issuance costs
7,311

 
9,512

Provisions for qualified exit costs
6,057

 
13,103

Provisions for environmental-related matters
17,874

 
34,317

Defined benefit pension plans net cost
40,364

 
(3,079
)
Net change in postretirement liability
672

 
996

Deferred income taxes
(43,399
)
 
1,484

Other
(23,500
)
 
18,967

Change in working capital accounts - net
(247,136
)
 
(81,600
)
Costs incurred for environmental-related matters
(20,023
)
 
(13,991
)
Costs incurred for qualified exit costs
(7,431
)
 
(19,595
)
Other
122,934

 
(40,322
)
Net operating cash
1,661,407

 
1,431,215

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(224,825
)
 
(166,184
)
Acquisitions of businesses, net of cash acquired
(72,636
)
 


Proceeds from sale of assets
6,916

 
38,354

Decrease in other investments
2,024

 
12,552

Net investing cash
(288,521
)
 
(115,278
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Net increase in short-term borrowings
109,022

 
23,389

Proceeds from long-term debt
1,332,810

 

Payments of long-term debt
(1,875,688
)
 
(851,977
)
Payments for credit facility and debt issuance costs
(12,969
)
 
(5,135
)
Payments of cash dividends
(314,859
)
 
(242,539
)
Proceeds from stock options exercised
111,155

 
74,285

Treasury stock purchased
(577,777
)
 
(368,334
)
Proceeds from real estate financing transactions
7,948

 
88,581

Other
(121,315
)
 
(43,756
)
Net financing cash
(1,341,673
)
 
(1,325,486
)
 
 
 
 
Effect of exchange rate changes on cash
2,927

 
(13,153
)
Net increase (decrease) in cash and cash equivalents
34,140

 
(22,702
)
Cash and cash equivalents at beginning of year
155,505

 
204,213

Cash and cash equivalents at end of period
$
189,645

 
$
181,511

 
 
 
 
Income taxes paid
$
310,106

 
$
236,586

Interest paid
246,849

 
245,734





See notes to condensed consolidated financial statements.

5



THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended September 30, 2019 and 2018
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, 2018, except as described in Note 2. Accounting estimates were revised as necessary during the first nine months of 2019 based on new information and changes in facts and circumstances. Certain amounts in the 2018 condensed consolidated financial statements have been reclassified to conform to the 2019 presentation.
The Company primarily uses the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs are subject to the final year-end LIFO inventory valuation. In addition, interim inventory levels include management’s estimates of annual inventory losses due to shrinkage and other factors. 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, 2018.
During the third quarter of 2019, the Company completed the acquisition of a domestic packaging company and a European coatings company for an aggregate purchase price of $79.7 million, including amounts withheld as security for certain representations, warranties and obligations of the sellers. These acquisitions support the growth of the Performance Coatings Group by providing new technologies and an expanded global platform. Both acquisitions have been accounted for as business combinations. The preliminary purchase price allocations will be finalized within the allowable measurement period. The results of operations of both companies have been included in the consolidated financial statements since the date of acquisition.
The consolidated results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.
NOTE 2—RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted in 2019
Effective January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2016-02, "Leases" (ASC 842). ASC 842 consists of a comprehensive lease accounting standard requiring most leases to be recognized on the balance sheet and significant new disclosures. The Company adopted ASC 842 using the modified retrospective optional transition method. Therefore, the standard was applied starting January 1, 2019 and prior periods were not restated. The adoption of ASC 842 did not result in a material cumulative-effect adjustment to the opening balance of retained earnings.
The Company applied the package of practical expedients permitted under the ASC 842 transition guidance. As a result, the Company did not reassess the identification, classification and initial direct costs of leases commencing before the effective date. The Company also applied the practical expedient to not separate lease and non-lease components to all new leases as well as leases commencing before the effective date.
As a result of the adoption of ASC 842, right-of-use assets, current liabilities and non-current liabilities related to operating leases of $1.7 billion, $.4 billion and $1.4 billion, respectively, were recognized on the balance sheet at September 30, 2019. In addition, the adoption of ASC 842 resulted in a transition adjustment reducing the opening balance of retained earnings by $8.4 million at January 1, 2019. The adoption of ASC 842 did not have a material impact on the Company's results of operations, cash flows or debt covenants. See Note 17 for additional information.
Effective January 1, 2019, the Company adopted ASU 2018-02, "Reclassification of Certain Income Tax Effects from Accumulated Other Comprehensive Income." This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. As a result of this standard, the Company recorded an $8.3 million reclassification from cumulative other comprehensive loss to retained earnings. See Note 4.

6



The adoption of this standard did not have a significant impact on the Company's results of operations, financial condition or liquidity.
Effective January 1, 2019, the Company adopted ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities." This standard better aligns hedging activities and financial reporting for hedging relationships. It eliminates the requirement to separately measure and report hedge ineffectiveness and reduces the complexity of applying certain aspects of hedge accounting. There were no outstanding hedges as of the adoption date. The prospective adoption of this standard did not have a significant impact on the Company's results of operations, financial condition or liquidity. The disclosures required by this standard are included in Note 16.
Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In addition, new disclosures are required. The ASU is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the potential impact of the standard.
NOTE 3REVENUE
The Company manufactures and sells paint, stains, supplies, equipment and floor covering through Company-operated 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 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”) that 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 13 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 receivable and current and long-term contract assets and liabilities are summarized in the following table.

7



(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
Accounts Receivable, Less Allowance
 
Contract
Assets
(Current)
 
Contract
Assets
(Long-Term)
 
Contract Liabilities (Current)
 
Contract Liabilities (Long-Term)
Balance at December 31, 2018
$
2,018,768

 
$
56,598

 
$
213,954

 
$
272,857

 
$
8,745

Balance at September 30, 2019
2,479,043

 
60,545

 
184,686

 
224,916

 
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. 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 5. Amounts recognized 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—SHAREHOLDERS' EQUITY
Dividends paid on common stock during each of the first three quarters of 2019 and 2018 were $1.13 per share and $.86 per share, respectively. During the nine months ended September 30, 2019, 725,147 stock options were exercised at a weighted average price per share of $153.29. In addition, 156,983 restricted stock units vested during this period.
The following tables summarize the changes in the components of shareholders' equity for the three months ended September 30, 2019 and 2018.
(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Other
Capital
 
Retained Earnings
 
Treasury
Stock
 
Cumulative Other Comprehensive Loss
 
Total
Balance at June 30, 2019
$
118,936

 
$
3,010,662

 
$
6,752,956

 
$
(5,504,293
)
 
$
(630,779
)
 
$
3,747,482

Net income

 

 
576,438

 

 

 
576,438

Other comprehensive loss

 

 

 

 
(136,428
)
 
(136,428
)
Treasury stock purchased

 

 

 
(127,270
)
 

 
(127,270
)
Stock-based compensation activity
309

 
68,553

 

 
(1,249
)
 

 
67,613

Other adjustments

 
127

 

 

 

 
127

Cash dividends

 

 
(105,102
)
 

 

 
(105,102
)
Balance at September 30, 2019
$
119,245

 
$
3,079,342

 
$
7,224,292

 
$
(5,632,812
)
 
$
(767,207
)
 
$
4,022,860

(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Other
Capital
 
Retained Earnings
 
Treasury
Stock
 
Cumulative Other Comprehensive Loss
 
Total
Balance at June 30, 2018
$
117,964

 
$
2,795,196

 
$
5,953,313

 
$
(4,621,250
)
 
$
(542,449
)
 
$
3,702,774

Net income
 
 
 
 
354,027

 
 
 
 
 
354,027

Other comprehensive loss
 
 
 
 
 
 
 
 
(68,147
)
 
(68,147
)
Treasury stock purchased
 
 
 
 
 
 
(34,179
)
 
 
 
(34,179
)
Stock-based compensation activity
318

 
56,904

 
 
 
(158
)
 
 
 
57,064

Other adjustments
 
 
(117
)
 
1

 

 
 
 
(116
)
Cash dividends
 
 
 
 
(80,898
)
 
 
 
 
 
(80,898
)
Balance at September 30, 2018
$
118,282

 
$
2,851,983

 
$
6,226,443

 
$
(4,655,587
)
 
$
(610,596
)
 
$
3,930,525


8



The following tables summarize the changes in the components of Shareholders' equity for the nine months ended September 30, 2019 and 2018.
(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Other
Capital
 
Retained Earnings
 
Treasury
Stock
 
Cumulative Other Comprehensive Loss
 
Total
Balance at December 31, 2018
$
118,373

 
$
2,896,448

 
$
6,246,548

 
$
(4,900,690
)
 
$
(629,934
)
 
$
3,730,745

Net income
 
 
 
 
1,292,678

 
 
 
 
 
1,292,678

Other comprehensive loss
 
 
 
 
 
 
 
 
(128,933
)
 
(128,933
)
Adjustment to initially adopt ASU 2016-02
 
 
 
 
(8,415
)
 
 
 
 
 
(8,415
)
Adjustment to initially adopt ASU 2018-02
 
 
 
 
8,340

 
 
 
(8,340
)
 

Treasury stock purchased
 
 
 
 
 
 
(577,777
)
 
 
 
(577,777
)
Treasury stock transferred from defined benefit pension plan
 
 
 
 
 
 
(131,781
)
 
 
 
(131,781
)
Stock-based compensation activity
872

 
181,039

 
 
 
(22,564
)
 
 
 
159,347

Other adjustments
 
 
1,855

 

 
 
 
 
 
1,855

Cash dividends
 
 
 
 
(314,859
)
 
 
 
 
 
(314,859
)
Balance at September 30, 2019
$
119,245

 
$
3,079,342

 
$
7,224,292

 
$
(5,632,812
)
 
$
(767,207
)
 
$
4,022,860

(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Other
Capital
 
Retained Earnings
 
Treasury
Stock
 
Cumulative Other Comprehensive Loss
 
Total
Balance at December 31, 2017
$
117,561

 
$
2,723,183

 
$
5,458,416

 
$
(4,266,416
)
 
$
(384,870
)
 
$
3,647,874

Net income

 

 
1,007,758

 

 

 
1,007,758

Other comprehensive loss
 
 
 
 
 
 
 
 
(223,406
)
 
(223,406
)
Adjustment to initially adopt ASU 2016-01
 
 
 
 
2,320

 
 
 
(2,320
)
 

Treasury stock purchased
 
 
 
 
 
 
(368,334
)
 
 
 
(368,334
)
Stock-based compensation activity
721

 
126,659

 
 
 
(20,837
)
 
 
 
106,543

Other adjustments
 
 
2,141

 
488

 

 
 
 
2,629

Cash dividends
 
 
 
 
(242,539
)
 
 
 
 
 
(242,539
)
Balance at September 30, 2018
$
118,282

 
$
2,851,983

 
$
6,226,443

 
$
(4,655,587
)
 
$
(610,596
)
 
$
3,930,525


The treasury stock transferred from defined benefit pension plan relates to the termination of the Company's domestic defined benefit pension plan as described in Note 7. See Note 2 for information on ASU 2018-02.

9



NOTE 5—PRODUCT WARRANTIES
Changes in the Company’s accrual for product warranty claims during the first nine months of 2019 and 2018, including customer satisfaction settlements, were as follows:
(Thousands of dollars)
 
 
 
 
2019
 
2018
Balance at January 1
$
57,067

 
$
151,425

Charges to expense
24,123

 
22,148

Settlements
(28,054
)
 
(39,933
)
Acquisition, divestiture and other adjustments


 
(66,236
)
Balance at September 30
$
53,136

 
$
67,404


The decrease in the accrual for product warranty claims in the nine months ended September 30, 2018 was primarily due to the divestiture of the furniture protection plan business in the third quarter of 2018. 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, 2018.
NOTE 6—EXIT OR DISPOSAL ACTIVITIES
Liabilities associated with exit or disposal activities are recognized as incurred in accordance with the Exit or Disposal Cost Obligations Topic of the ASC. Qualified exit costs primarily include post-closure rent expenses, incremental post-closure costs and costs of employee terminations. Adjustments may be made to liabilities accrued for qualified exit costs if information becomes available upon which more accurate amounts can be reasonably estimated. Concurrently, property, plant and equipment is tested for impairment in accordance with the Property, Plant and Equipment Topic of the ASC, and if impairment exists, the carrying value of the related assets is reduced to estimated fair value. Additional impairment may be recorded for subsequent revisions in estimated fair value.
In the nine months ended September 30, 2019, twenty-one stores in The Americas Group and three 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 Valspar acquisition in order to optimize restructured operations. These acquisition-related restructuring charges to date are recorded in the Administrative segment. The following table summarizes the activity and remaining liabilities associated with qualified exit costs at September 30, 2019 and 2018. The provisions and expenditures relate primarily to acquisition-related restructuring.
(Thousands of dollars)
 
 
 
 
2019
 
2018
Balance at January 1
$
7,052

 
$
13,385

Provisions in Cost of goods sold or SG&A
6,057

 
13,103

Actual expenditures charged to accrual
(7,431
)
 
(19,595
)
Balance at September 30
$
5,678


$
6,893


For further details on the Company’s exit or disposal activities, see Note 6 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

10



NOTE 7HEALTH 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
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Three Months Ended September 30:
 
 
 
 
 
 
 
 
 
 
 
  Net periodic benefit cost (credit):
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
759

 
$
1,158

 
$
1,488

 
$
2,016

 
$
362

 
$
499

Interest cost
1,232

 
8,541

 
2,387

 
2,352

 
2,800

 
2,545

Expected return on assets
(1,325
)
 
(14,383
)
 
(2,788
)
 
(2,685
)
 

 

Recognition of:
 
 
 
 
 
 
 
 
 
 
 
Unrecognized prior service cost (credit)
349

 
407

 


 


 
(1,249
)
 
(1,643
)
 Unrecognized actuarial loss


 


 
228

 
383

 
133

 
581

Net periodic benefit cost (credit)
$
1,015

 
$
(4,277
)
 
$
1,315

 
$
2,066

 
$
2,046

 
$
1,982

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30:
 
 
 
 
 
 
 
 
 
 
 
  Net periodic benefit cost (credit):
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
2,624

 
$
6,673

 
$
4,468

 
$
6,048

 
$
1,085

 
$
1,496

Interest cost
3,629

 
25,233

 
7,099

 
7,055

 
8,401

 
7,634

Expected return on assets
(3,989
)
 
(43,199
)
 
(7,669
)
 
(8,055
)
 

 

Recognition of:
 
 
 
 
 
 
 
 
 
 
 
Unrecognized prior service cost (credit)
1,048

 
1,192

 


 


 
(3,748
)
 
(4,927
)
Unrecognized actuarial loss


 


 
744

 
1,149

 
401

 
1,744

Ongoing pension cost (credit)
3,312

 
(10,101
)
 
4,642

 
6,197

 
6,139

 
5,947

Curtailment expense


 
825

 


 


 

 


Settlement expense
32,410

 


 


 


 


 


Net periodic benefit cost (credit)
$
35,722

 
$
(9,276
)
 
$
4,642

 
$
6,197

 
$
6,139

 
$
5,947


Service cost is recorded in Cost of goods sold and Selling, general and administrative expenses. All other components are recorded in Other expense (income) - net.
During the first quarter of 2019, the Company purchased annuity contracts to settle the remaining liabilities of the domestic defined benefit pension plan that was terminated in 2018 (Terminated Plan). The annuity contract purchase resulted in a settlement charge of $32.4 million in the first quarter of 2019. The remaining surplus of the Terminated Plan will be used, as prescribed in the applicable regulations, to fund future Company contributions to a qualified replacement pension plan, which is the current domestic defined contribution plan (Qualified Replacement Plan). During the first quarter of 2019, the Company transferred $201.8 million of the surplus to a suspense account held within a trust for the Qualified Replacement Plan. This amount included $131.8 million of Company stock (300,000 shares). The shares are treated as treasury stock in accordance with ASC 715. The remainder of the surplus related to the Terminated Plan will be transferred to the Qualified Replacement Plan suspense account after the final expenses associated with the wind-up of the Terminated Plan have been settled.
For further details on the Company’s health care, pension and other benefits, see Note 7 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
NOTE 8—OTHER LONG-TERM LIABILITIES
The operations of the Company, like those of other companies in its industry, are subject to various domestic and foreign environmental laws and regulations. These laws and regulations not only govern current operations and products, but also impose potential liability on the Company for past operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and the industry in the future. Management believes that the Company conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance.

11



The Company is involved with environmental investigation and remediation activities at some of its currently and formerly owned sites (including sites which were previously owned and/or operated by businesses acquired by the Company). In addition, the Company, together with other parties, has been designated a potentially responsible party under federal and state environmental protection laws for the investigation and remediation of environmental contamination and hazardous waste at a number of third-party sites, primarily Superfund sites. In general, these laws provide that potentially responsible parties may be held jointly and severally liable for investigation and remediation costs regardless of fault. The Company may be similarly designated with respect to additional third-party sites in the future.
The Company initially provides for estimated costs of environmental-related activities relating to its past operations and third-party sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs, which are not discounted, are determined based on currently available facts regarding each site. If the reasonably estimable costs can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is provided.
The Company continuously assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. At September 30, 2019 and 2018, the Company had accruals reported on the Company's balance sheet as other long-term liabilities of $321.8 million and $209.9 million, respectively. Estimated costs of current investigation and remediation activities of $51.0 million and $27.0 million are included in other accruals at September 30, 2019 and 2018, respectively.
Actual costs incurred may vary from the accrued estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to any given site, the volumetric contribution which may be attributed to the Company relative to that attributed to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site. If the Company's future loss contingency is ultimately determined to be at the unaccrued maximum of the estimated range of possible outcomes for every site for which costs can be reasonably estimated, the Company's accrual for environmental-related activities would be $116.4 million higher than the minimum accruals at September 30, 2019. Additionally, costs for environmental-related activities may not be reasonably estimable at early stages of investigation and therefore would not be included in the unaccrued maximum amount.
Four of the Company’s currently and formerly owned manufacturing sites ("Major Sites") account for the majority of the accrual for environmental-related activities and the unaccrued maximum of the estimated range of possible outcomes at September 30, 2019. At September 30, 2019, $322.2 million, or 86.4% of the total accrual, related directly to the Major Sites. In the aggregate unaccrued maximum of $116.4 million at September 30, 2019, $92.7 million, or 79.7%, related to the Major Sites. The significant cost components of this liability continue to be related to remedy implementation, regulatory agency interaction, project management and other costs. While different for each specific environmental situation, these components generally each account for approximately 85%, 10%, and 5%, respectively, of the accrued amount and those percentages are subject to change over time. 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.
The largest and most complex of the Major Sites is the Gibbsboro, New Jersey site ("Gibbsboro") which comprises the substantial majority of the environmental-related accrual. Gibbsboro, a former manufacturing plant, and related facilities, which ceased operations in 1978, has had various facilities included on the National Priorities List since 1999. This location has soil, waterbodies, and groundwater contamination related to the historic operations of the facility. Gibbsboro has been divided by the Environmental Protection Agency ("EPA") into six operable units ("OUs") based on location and characteristics, whose investigation and remediation efforts are likely to occur over an extended period of time. Each of the OUs are in various phases of investigation and remediation with the EPA that provide enough information to reasonably estimate cost ranges and record environmental-related accruals. The most significant assumptions underlying the reliability and precision of remediation cost estimates for the Gibbsboro site are the types and extent of contamination.
Excluding the four Major Sites making up the majority of the accrual, no sites are individually material to the total accrual balance. There are multiple, future events yet to occur, including further remedy selection and design, remedy implementation and execution, and securing applicable governmental agency approvals, all of which have the potential to contribute to the uncertainty surrounding these future events. As these events occur and to the extent that the cost estimates of the environmental remediation change, the existing reserve will be adjusted.


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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. Unasserted claims could have a material effect on the Company's loss contingency as more information becomes available over time. At September 30, 2019, the Company did not have material loss contingency accruals related to unasserted claims. Management does not expect that a material portion of unrecognized loss contingencies will be recoverable through insurance, indemnification agreements or other sources. 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. Moreover, 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 length 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 indeterminate amount of time to conduct investigation activities at any site, the indeterminate amount of time to obtain environmental agency approval, as necessary, with respect to investigation and remediation activities, and the indeterminate amount of time necessary to conduct remediation activities.
The Asset Retirement and Environmental Obligations Topic of the ASC requires a liability to be recognized for the fair value of a conditional asset retirement obligation if a settlement date and fair value can be reasonably estimated. The Company recognizes a liability for any conditional asset retirement obligation when sufficient information is available to reasonably estimate a settlement date to determine the fair value of such a liability. The Company has identified certain conditional asset retirement obligations at various current and closed manufacturing, distribution and store facilities. These obligations relate primarily to asbestos abatement, hazardous waste Resource Conservation and Recovery Act (RCRA) closures, well abandonment, transformers and used oil disposals and underground storage tank closures. Using investigative, remediation and disposal methods that are currently available to the Company, the estimated costs of these obligations were accrued and are not significant. The recording of additional liabilities for future conditional asset retirement obligations may result in a material impact on net income for the annual or interim period during which the costs are accrued. Management does not believe that any potential liability ultimately attributed to the Company for its conditional asset retirement obligations will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time over which sufficient information may become available regarding the closure or modification of any one or group of the Company’s facilities. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.
NOTE 9—LITIGATION
In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, the Company accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and the amount of any such loss cannot be reasonably estimated, any potential liability ultimately determined to be attributable to the Company may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. In those cases where no accrual is recorded or exposure to loss exists in 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

13



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 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. The Company will continue to vigorously defend against any additional lead pigment and lead-based paint litigation that may be filed, including utilizing all avenues of appeal, if necessary.
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. Except with respect to the litigation in California discussed below, the Company has not accrued any amounts for such litigation because the Company does not believe it is probable that a loss has occurred, and the Company believes it is not possible to estimate the range of potential losses as 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 or any such liability is higher than any amount currently accrued for 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; the County of Santa Clara, California, and other public entities in the State of California; and Lehigh and Montgomery Counties in Pennsylvania. Except for the Santa Clara County, California proceeding and the pending Pennsylvania proceedings, all of these legal proceedings have been concluded in favor of the Company and other defendants at various stages in the proceedings.
Santa Clara County, California Proceeding. 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, as well as the Cities of Oakland and San Diego and the City and County of San Francisco (individually, a Prosecuting Jurisdiction). 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.

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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. 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. On July 16, 2018, the Company filed a Petition for Writ of Certiorari with the Supreme Court of the United States seeking discretionary review. On October 15, 2018, the Supreme Court of the United States denied the Company's Petition for Writ of Certiorari.
On April 17, 2018, the parties filed their briefs with the trial court regarding the recalculation of the amount of the abatement fund. The plaintiffs proposed $730.0 million as the amount of the abatement fund, and the Company and the other two defendants jointly proposed a maximum amount of no more than $409.1 million. On August 17, 2018, the trial court held a hearing regarding the recalculation of the amount of the abatement fund. On September 4, 2018, the trial court ruled that the amount of the abatement fund is $409.1 million. On March 8, 2019, the trial court approved a setoff of $8.0 million to the abatement fund reducing the abatement fund to $401.1 million.
On May 17, 2018, NL Industries filed a Motion for Good Faith Settlement, which the Company and ConAgra opposed. The trial court held a hearing on NL Industries’ Motion for Good Faith Settlement on July 12, 2018 and subsequently denied NL Industries' Motion. NL Industries filed a petition for writ of mandate with the Sixth District Court of Appeal seeking to obtain immediate appellate review and reversal of the denial of its motion. On June 20, 2019, the Sixth District Court of Appeal denied the petition for writ of mandate.
On April 8, 2019, the plaintiffs filed a motion to recover attorneys’ fees and litigation costs from the abatement fund. On May 10, 2019, the trial court issued a tentative ruling denying the plaintiffs’ motion for fees and costs.
On July 17, 2019, the Company, ConAgra and NL Industries reached an agreement in principle with the plaintiffs to resolve the litigation. The agreement provides for a mutual release of all pending and related future claims and contribution rights in exchange for certain payments of money over time by the Company and the other two defendants to the plaintiffs. More specifically, the agreement provides that, in full and final satisfaction of any and all claims of the plaintiffs, the Company and the other two defendants collectively shall pay a total of $305.0 million, with the Company and the other two defendants each paying approximately $101.7 million as follows: (i) an initial payment of $25.0 million within sixty days after the entry of a dismissal order and judgment; (ii) subsequent annual payments of $12.0 million one year after the initial payment and for a period of four years thereafter; and (iii) a final payment of approximately $16.7 million on the sixth anniversary of the initial payment. Should NL Industries fail to make any of its payments required under the agreement, the Company has agreed to backstop and pay on behalf of NL Industries a maximum amount of $15.0 million. To implement the agreement, the Company and the other two defendants filed a joint motion to dismiss with prejudice and a motion to stay all proceedings, pending the trial court’s approval of the agreement. On July 24, 2019, the trial court approved the agreement, discharged the receiver, and granted a judgment of dismissal with prejudice in favor of the Company and the other two defendants. The Company made its initial payment of $25.0 million to the plaintiffs on September 23, 2019.
The Company accrued $136.3 million for this litigation in the third quarter of 2018. During the third quarter of 2019, the Company reduced its accrual by $59.6 million as a result of the final court approved agreement to resolve the litigation and the initial payment of $25.0 million to the plaintiffs in accordance with the agreement. The next payment of $12.0 million is due within twelve months and is included in current liabilities, while the remaining $64.7 million is included in other long-term liabilities.
Pennsylvania Proceedings. Two proceedings in Pennsylvania were initiated in October 2018. The County of Montgomery, Pennsylvania filed a Complaint against the Company and several other former lead-based paint and lead pigment manufacturers in the Court of Common Pleas of Montgomery County, Pennsylvania. The County of Lehigh, Pennsylvania also filed a Complaint against the Company and several other former lead-based paint and lead pigment manufacturers in the Court of Common Pleas of Lehigh County, Pennsylvania. The Company removed both actions to the United States District Court for the Eastern District of Pennsylvania on November 28, 2018. The plaintiffs filed a motion for remand in each action on January 7, 2019, which the defendants opposed. The federal trial court remanded each action on June 5, 2019. The defendants asked the federal court to stay the order of remand pending appeal, which the federal court granted on June 27, 2019, and the defendants

15



filed a notice of appeal with the United States Court of Appeals for the Third Circuit. On August 12, 2019, the defendants filed their opening brief with the Third Circuit, to which the plaintiffs filed their opposition brief on September 11, 2019, and the defendants filed their reply brief on October 2, 2019.
In both actions, the counties request declaratory relief establishing the existence of a public nuisance and the defendants' contribution to it, the abatement of an ongoing public nuisance arising from the presence of lead-based paint in housing throughout the applicable county, an injunction against future illicit conduct, and the costs of litigation and attorneys' fees.
In October 2018, the Company filed a Complaint in the United States District Court for the Eastern District of Pennsylvania against the Pennsylvania Counties of Delaware, Erie and York seeking injunctive and declaratory relief to prevent the violation of the Company's rights under the First Amendment and Due Process Clause of the U.S. Constitution. The Company voluntarily dismissed defendant Erie County on November 9, 2018 and defendant York County on November 21, 2018. Defendant Delaware County filed a motion to dismiss the Complaint, which the federal trial court granted on October 4, 2019. The Company intends to appeal the federal trial court’s dismissal.
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 Wisconsin 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.
The United States District Court for the Eastern District of Wisconsin consolidated three cases (Ravon Owens v. American Cyanamid, et al., Cesar Sifuentes v. American Cyanamid, et al., and Glenn Burton, Jr. v. American Cyanamid, et al.) for purposes of trial. A trial commenced on May 6, 2019 and ended on May 31, 2019, with a jury verdict for the three plaintiffs in the amount of $2.0 million each for a total of $6.0 million against the Company and two other defendants (Armstrong Containers Inc. and E.I. du Pont de Nemours). The Company filed a motion for judgment in its favor based on public policy factors under Wisconsin law. On September 20, 2019, the trial court denied the motion and entered judgment in favor of the plaintiffs. On October 18, 2019, the Company filed post-trial motions for judgment as a matter of law and for a new trial. If the post-trial motions are denied, the Company intends to appeal the jury verdict.
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 146 plaintiffs were selected for discovery. 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 was consolidated with the six Allen cases referenced above. The parties have selected four of the cases to

16



proceed to expert discovery and to prepare for trial. No dates for expert discovery, pretrial dispositive motions or trial have been set by the District Court in the Allen and Trammell cases.
Other lead-based paint and lead pigment litigation. In Mary Lewis v. Lead Industries Association, et al. pending in the Circuit Court of Cook County, Illinois, parents seek to recover the cost of their children’s blood lead testing against the Company and three other defendants that made (or whose alleged corporate predecessors made) white lead pigments. The Circuit Court has certified a statewide class and a Chicago subclass of parents or legal guardians of children who lived in high-risk zip codes identified by the Illinois Department of Health and who were screened for lead toxicity between August 1995 and February 2008. Excluded from the class are those parents or guardians who have incurred no expense, liability or obligation to pay for the cost of their children’s blood lead testing. In 2017, the Company and other defendants moved for summary judgment on the grounds that the three named plaintiffs have not paid and have no obligation or liability to pay for their children’s blood lead testing because Medicaid paid for the children of two plaintiffs and private insurance paid for the third plaintiff without any evidence of a co-pay or deductible. The Circuit Court granted the motion, but on September 7, 2018, the Appellate Court reversed with respect to the two plaintiffs for whom Medicaid paid for their children’s testing. Defendants filed a petition with the Supreme Court of Illinois for discretionary review. By order entered January 31, 2019, that court has allowed defendants’ petition for leave to appeal. The defendants filed their opening brief in the Supreme Court of Illinois on April 11, 2019, to which the plaintiffs filed a response brief on June 17, 2019. The defendants filed their reply brief on July 15, 2019. On August 7, 2019, the Supreme Court of Illinois entered an order stating oral argument will be scheduled in due course.
Insurance coverage litigation. The Company and its liability insurers, including certain underwriters at Lloyd’s of London, initiated legal proceedings against each other to 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, previously was stayed and inactive. On January 9, 2019, the Company filed an unopposed motion to lift the stay with the trial court, which was granted, allowing the case to proceed. On June 28, 2019, the Company and its liability insurers each filed separate motions for summary judgment seeking various forms of relief. Oral argument regarding those motions is scheduled to occur on October 24, 2019. 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, except with respect to the litigation in California discussed above, 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 10—OTHER
Other general expense - net
Included in Other general expense - net were the following:
(Thousands of dollars)
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
2019
 
2018
 
 
2019
 
2018
Provisions for environmental matters - net
$
10,602

 
$
2,299

 
 
$
17,874

 
$
34,317

Loss on sale or disposition of assets
1,430

 
9,227

 
 
822

 
7,178

Total
$
12,032

 
$
11,526

 
 
$
18,696

 
$
41,495


Provisions for environmental matters - net represent site-specific increases or decreases to environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Environmental-related accruals are not recorded net of insurance proceeds in accordance with the Offsetting Subtopic of the Balance Sheet Topic of the ASC. See Note 8 for further details on the Company’s environmental-related activities.
The loss on sale or disposition of assets represents net realized losses associated with the sale or disposal of fixed assets previously used in the conduct of the primary business of the Company.

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Other expense (income) - net
Included in Other expense (income) - net were the following:
(Thousands of dollars)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Dividend and royalty income
$
(2,253
)
 
$
(2,995
)
 
$
(7,830
)
 
$
(5,967
)
Loss on extinguishment of debt (see Note 15)
14,754

 


 
14,754

 


Expense from banking activities
2,622

 
2,694

 
7,973

 
7,380

Foreign currency transaction related losses
16,394

 
6,157

 
12,458

 
9,321

Domestic pension plan settlement expense


 


 
32,410

 


Miscellaneous pension expense (income)
1,767

 
(3,902
)
 
5,916

 
(11,349
)
Other income
(5,957
)
 
(7,652
)
 
(21,385
)
 
(21,760
)
Other expense
3,665

 
7,421

 
10,591

 
13,687

Total
$
30,992

 
$
1,723

 
$
54,887

 
$
(8,688
)

Foreign currency transaction related losses represent net realized losses on U.S. dollar-denominated liabilities of foreign subsidiaries and net realized and unrealized losses from foreign currency option and forward contracts. There were no material foreign currency option and forward contracts outstanding at September 30, 2019 and 2018.
Miscellaneous pension expense (income) consists of the non-service components of net pension costs (credits). See Note 7 for information on Miscellaneous pension expense (income) and the Domestic pension plan settlement expense.
Other income and Other expense included items of revenue, gains, expenses and losses that were unrelated to the primary business purpose of the Company. There were no other items within the Other income or Other expense caption that were individually significant.
NOTE 11—INCOME TAXES
The effective tax rate was 18.8% and 23.3% for the third quarter and first nine months of 2019, respectively, compared to 14.9% and 19.9% for the third quarter and first nine months of 2018, respectively. The increase in the effective tax rate for the third quarter of 2019 compared to 2018 was primarily due increased income before taxes in the third quarter of 2019 compared to 2018 and the non-recurrence of favorable tax benefits recognized by the Company in the third quarter of 2018 when completing its 2017 U.S. income tax return. The increase in the effective tax rate for the first nine months of 2019 compared to 2018 was primarily due to an increase to the tax provision of $74.3 million recorded in the second quarter of 2019 related to the reversal of net tax benefits recognized in previous tax years from federal renewable energy tax credit funds with DC Solar Solutions, Inc. and certain of its affiliates (“DC Solar”). During 2011 and 2013 through 2017, the Company invested in legal entities ("Funds") that purchased mobile solar generators from DC Solar. In December 2018, the Company became aware of an ongoing investigation by federal authorities, which included the seizure of DC Solar's assets. The Company promptly initiated an investigation. Based on information available during the first quarter of 2019, it did not appear reasonably possible that a material loss had occurred as the Company believed its specific investments in the funds were not materially affected. The Company’s investigation continued during the second quarter of 2019, and based on additional information revealed during the course of the investigation, the Company determined that it is more likely than not that the tax benefits expected to be received by the Company related to its investments in the Funds will no longer be ultimately realizable. The facts relating to Company investments in the Funds continue to be developed and there are, and will continue to be, material differences in facts relevant to each Fund, as well as to funds owned by other investors. The ultimate tax results relating to the Company's investments continue to be uncertain. The Company’s management will continue to use its best judgment based upon the facts and circumstances related to the Company's investments in the Funds when determining the scope and timing of disclosures. The Company continues to participate with other fund investors to gather facts and obtain expert advice in assessing its tax position in these investments.

18



At December 31, 2018, the Company had $89.5 million in unrecognized tax benefits, the recognition of which would have an effect of $83.0 million on the effective tax rate. Included in the balance of unrecognized tax benefits at December 31, 2018 was $14.5 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. The Company's balance of unrecognized tax benefits increased to $197.2 million at September 30, 2019 , the recognition of which would have an effect of $189.6 million on the effective tax rate. This increase is primarily due to the Company's investments in the Funds described above.
The Company classifies all income tax related interest and penalties as income tax expense. At December 31, 2018, the Company had accrued $24.8 million for the potential payment of income tax interest and penalties. This amount has increased to $29.0 million at September 30, 2019.
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 2013, 2014, 2015 and 2016 income tax returns. No significant adjustments have been proposed by the IRS. At September 30, 2019, the federal statute of limitations had not expired for the 2013 through 2018 tax years.
At September 30, 2019, the Company is subject to non-U.S. income tax examinations for the tax years of 2010 through 2018. In addition, the Company is subject to state and local income tax examinations for the tax years 1998 through 2018.
NOTE 12—NET INCOME PER SHARE
Basic and diluted earnings per share are calculated using the treasury stock method.
(Thousands of dollars except per share data)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Basic
 
 
 
 
 
 
 
Average shares outstanding
91,823,573

 
93,099,714

 
91,850,565

 
93,121,900

Net income
$
576,438

 
$
354,027

 
$
1,292,678

 
$
1,007,758

Basic net income per share
$
6.28

 
$
3.80

 
$
14.07

 
$
10.82

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Average shares outstanding
91,823,573

 
93,099,714

 
91,850,565

 
93,121,900

Stock options and other contingently issuable shares (1)
1,742,298

 
1,982,841

 
1,611,078

 
1,990,622

Non-vested restricted stock grants
38,389

 
52,702

 
48,461

 
58,246

Average shares outstanding assuming dilution
93,604,260

 
95,135,257

 
93,510,104

 
95,170,768

Net income
$
576,438

 
$
354,027

 
$
1,292,678

 
$
1,007,758

Diluted net income per share
$
6.16

 
$
3.72

 
$
13.82

 
$
10.59

(1) 
There were no stock options and other contingently issuable shares excluded due to their anti-dilutive effect for the three months ended September 30, 2019. Stock options and other contingently issuable shares for the nine months ended September 30, 2019 excludes 9,853 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 September 30, 2018. Stock options and other contingently issuable shares for the nine months ended September 30, 2018 excludes 28,871 shares due to their anti-dilutive effect.


19



NOTE 13—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 September 30, 2019
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
2,898,158

 
$
678,473

 
$
1,290,247

 
$
772

 
$
4,867,650

Intersegment transfers
(6
)
 
995,115

 
29,495

 
(1,024,604
)
 

Total net sales and intersegment transfers
$
2,898,152

 
$
1,673,588

 
$
1,319,742

 
$
(1,023,832
)
 
$
4,867,650

 
 
 
 
 
 
 
 
 
 
Segment profit
$
663,671

 
$
114,891

 
$
137,432

 

 
$
915,994

California litigation expense adjustment

 

 

 
$
34,667

 
34,667

Interest expense

 

 

 
(85,282
)
 
(85,282
)
Administrative expenses and other

 

 

 
(155,546
)
 
(155,546
)
Income before income taxes
$
663,671

 
$
114,891

 
$
137,432

 
$
(206,161
)
 
$
709,833


(Thousands of dollars)
Three Months Ended September 30, 2018
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
2,665,663

 
$
770,543

 
$
1,294,579

 
$
685

 
$
4,731,470

Intersegment transfers
233

 
936,281

 
4,474

 
(940,988
)
 

Total net sales and intersegment transfers
$
2,665,896

 
$
1,706,824

 
$
1,299,053

 
$
(940,303
)
 
$
4,731,470

 
 
 
 
 
 
 
 
 
 
Segment profit
$
577,738

 
$
83,941

 
$
104,868

 

 
$
766,547

California litigation expense
 
 
 
 
 
 
$
(136,333
)
 
(136,333
)
Interest expense

 

 

 
(92,281
)
 
(92,281
)
Administrative expenses and other

 

 

 
(121,980
)
 
(121,980
)
Income before income taxes
$
577,738

 
$
83,941

 
$
104,868

 
$
(350,594
)
 
$
415,953



(Thousands of dollars)
Nine Months Ended September 30, 2019
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
7,809,059

 
$
2,137,447

 
$
3,838,002

 
$
1,863

 
$
13,786,371

Intersegment transfers
1

 
2,768,947

 
88,331

 
(2,857,279
)
 

Total net sales and intersegment transfers
$
7,809,060

 
$
4,906,394

 
$
3,926,333

 
$
(2,855,416
)
 
$
13,786,371

 
 
 
 
 
 
 
 
 
 
Segment profit
$
1,607,143

 
$
343,482

 
$
386,452

 

 
$
2,337,077

California litigation expense adjustment

 

 

 
$
34,667

 
34,667

Interest expense

 

 

 
(265,474
)
 
(265,474
)
Administrative expenses and other

 

 

 
(421,882
)
 
(421,882
)
Income before income taxes
$
1,607,143

 
$
343,482

 
$
386,452

 
$
(652,689
)
 
$
1,684,388



20



(Thousands of dollars)
Nine Months Ended September 30, 2018
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
7,371,135

 
$
2,204,668

 
$
3,891,678

 
$
2,791

 
$
13,470,272

Intersegment transfers
506

 
2,657,614

 
16,888

 
(2,675,008
)
 

Total net sales and intersegment transfers
$
7,371,641