NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended
March 31, 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
three 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
.
The consolidated results for the
three months ended
March 31, 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) No. 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.
The adoption of ASC 842 resulted in the recognition of 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, at
March 31, 2019
. In addition, the adoption of ASC 842 resulted in a transition adjustment reducing the opening balance of retained earnings by
$8.4 million
. 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
16
for additional information.
Effective January 1, 2019, the Company adopted ASU No. 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
. 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 June 2016, the FASB issued ASU No. 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 3
—
REVENUE
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2019
|
$
|
2,018,768
|
|
|
$
|
56,598
|
|
|
$
|
213,954
|
|
|
$
|
272,857
|
|
|
$
|
8,745
|
|
Balance at March 31, 2019
|
2,339,551
|
|
|
64,657
|
|
|
205,070
|
|
|
203,848
|
|
|
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 the first quarter of
2019
and
2018
were
$1.13
per share and
$.86
per share, respectively.
The following tables summarize the changes in the components of shareholders' equity for the three months ended
March 31, 2019
and
2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
245,237
|
|
|
|
|
|
|
245,237
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
6,081
|
|
|
6,081
|
|
Adjustment to initially apply ASU 2016-02
|
|
|
|
|
(8,415
|
)
|
|
|
|
|
|
(8,415
|
)
|
Adjustment to initially apply ASU 2018-02
|
|
|
|
|
8,340
|
|
|
|
|
(8,340
|
)
|
|
—
|
|
Treasury stock purchased
|
|
|
|
|
|
|
(305,146
|
)
|
|
|
|
(305,146
|
)
|
Treasury stock transferred from defined benefit pension plan
|
|
|
|
|
|
|
(131,781
|
)
|
|
|
|
(131,781
|
)
|
Stock-based compensation activity
|
299
|
|
|
47,561
|
|
|
|
|
(21,270
|
)
|
|
|
|
26,590
|
|
Other adjustments
|
|
|
1,512
|
|
|
|
|
|
|
|
|
1,512
|
|
Cash dividends
|
|
|
|
|
(104,762
|
)
|
|
|
|
|
|
(104,762
|
)
|
Balance at March 31, 2019
|
$
|
118,672
|
|
|
$
|
2,945,521
|
|
|
$
|
6,386,948
|
|
|
$
|
(5,358,887
|
)
|
|
$
|
(632,193
|
)
|
|
$
|
3,460,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
250,127
|
|
|
|
|
|
|
250,127
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
51,535
|
|
|
51,535
|
|
Adjustment to initially apply ASU 2016-01
|
|
|
|
|
2,320
|
|
|
|
|
(2,320
|
)
|
|
—
|
|
Treasury stock purchased
|
|
|
|
|
|
|
(241,148
|
)
|
|
|
|
(241,148
|
)
|
Stock-based compensation activity
|
314
|
|
|
35,821
|
|
|
|
|
(20,454
|
)
|
|
|
|
15,681
|
|
Other adjustments
|
|
|
2,202
|
|
|
488
|
|
|
|
|
|
|
2,690
|
|
Cash dividends
|
|
|
|
|
(81,028
|
)
|
|
|
|
|
|
(81,028
|
)
|
Balance at March 31, 2018
|
$
|
117,875
|
|
|
$
|
2,761,206
|
|
|
$
|
5,630,323
|
|
|
$
|
(4,528,018
|
)
|
|
$
|
(335,655
|
)
|
|
$
|
3,645,731
|
|
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.
NOTE 5—PRODUCT WARRANTIES
Changes in the Company’s accrual for product warranty claims during the first
three 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
|
6,460
|
|
|
6,437
|
|
Settlements
|
(6,667
|
)
|
|
(4,488
|
)
|
Balance at March 31
|
$
|
56,860
|
|
|
$
|
153,374
|
|
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
. The furniture protection plan business divestiture in the third quarter of 2018 caused the large decrease in the product warranty claims accrual.
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
three months
ended
March 31, 2019
,
two
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 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
March 31, 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
|
949
|
|
|
3,799
|
|
Actual expenditures charged to accrual
|
(437
|
)
|
|
(8,084
|
)
|
Balance at March 31
|
$
|
7,564
|
|
|
$
|
9,100
|
|
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
.
NOTE 7
—
HEALTH CARE, PENSION AND OTHER BENEFITS
Shown below are the components of the Company’s net periodic benefit cost (credit) for domestic defined benefit pension plans, foreign defined benefit pension plans and postretirement benefits other than pensions:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 March 31:
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (credit):
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
933
|
|
|
$
|
4,357
|
|
|
$
|
1,490
|
|
|
$
|
2,016
|
|
|
$
|
361
|
|
|
$
|
498
|
|
Interest cost
|
1,198
|
|
|
8,152
|
|
|
2,356
|
|
|
2,352
|
|
|
2,800
|
|
|
2,545
|
|
Expected return on assets
|
(1,332
|
)
|
|
(14,434
|
)
|
|
(2,440
|
)
|
|
(2,685
|
)
|
|
|
|
|
Recognition of:
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost (credit)
|
349
|
|
|
379
|
|
|
|
|
|
|
|
|
(1,249
|
)
|
|
(1,642
|
)
|
Unrecognized actuarial loss
|
|
|
|
|
|
|
258
|
|
|
383
|
|
|
134
|
|
|
581
|
|
Ongoing pension cost (credit)
|
1,148
|
|
|
(1,546
|
)
|
|
1,664
|
|
|
2,066
|
|
|
2,046
|
|
|
1,982
|
|
Curtailment expense
|
|
|
|
825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement expense
|
32,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (credit)
|
$
|
33,558
|
|
|
$
|
(721
|
)
|
|
$
|
1,664
|
|
|
$
|
2,066
|
|
|
$
|
2,046
|
|
|
$
|
1,982
|
|
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 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, 2019
, the unaccrued maximum of the estimated range of possible outcomes is
$116.4 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 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.
Included in other long-term liabilities at
March 31, 2019
and
2018
were accruals for extended environmental-related activities of
$319.0 million
and
$177.8 million
, respectively. Estimated costs of current investigation and remediation activities of
$51.0 million
and
$27.0 million
are included in other accruals at
March 31, 2019
and
2018
, 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, 2019
. At
March 31, 2019
,
$323.4 million
, or
87.4%
of the total accrual, related directly to these
four
sites. In the aggregate unaccrued maximum of
$116.4 million
at
March 31, 2019
,
$92.8 million
, or
79.7%
, 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
9
to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
NOTE 9 – LITIGATION
In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, the Company accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and the amount of any such loss cannot be reasonably estimated, any potential liability ultimately determined to be attributable to the Company may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. In those cases where no accrual is recorded or exposure to loss exists in excess of the amount accrued, the Contingencies Topic of the ASC requires disclosure of the contingency when there is a reasonable possibility that a loss or additional loss may have been incurred.
Lead pigment and lead-based paint litigation.
The Company’s past operations included the manufacture and sale of lead pigments and lead-based paints. The Company, along with other companies, is and has been a defendant in a number of legal proceedings, including individual personal injury actions, purported class actions, and actions brought by various counties, cities, school districts and other government-related entities, arising from the manufacture and sale of lead pigments and lead-based paints. The plaintiffs’ claims have been based upon various legal theories, including negligence, strict liability, breach of warranty, negligent misrepresentations and omissions, fraudulent misrepresentations and omissions, concert of action, civil conspiracy, violations of unfair trade practice and consumer protection laws, enterprise liability, market share liability, public nuisance, unjust enrichment and other theories. The plaintiffs seek various damages and relief, including personal injury and property damage, costs relating to the detection and abatement of lead-based paint from buildings, costs associated with a public education campaign, medical monitoring costs and others. The Company has also been a defendant in legal proceedings arising from the manufacture and sale of non-lead-based paints that seek recovery based upon various legal theories, including the failure to adequately warn of potential exposure to lead during surface preparation when using non-lead-based paint on surfaces previously painted with lead-based paint. The Company believes that the litigation brought to date is without merit or subject to meritorious defenses and is vigorously defending such litigation. The Company has not settled any material lead pigment or lead-based paint litigation. The Company expects that additional lead pigment and lead-based paint litigation may be filed against the Company in the future asserting similar or different legal theories and seeking similar or different types of damages and relief.
Notwithstanding the Company’s views on the merits, litigation is inherently subject to many uncertainties, and the Company ultimately may not prevail. Adverse court rulings or determinations of liability, among other factors, could affect the lead pigment and lead-based paint litigation against the Company and encourage an increase in the number and nature of future claims and proceedings. In addition, from time to time, various legislation and administrative regulations have been enacted, promulgated or proposed to impose obligations on present and former manufacturers of lead pigments and lead-based paints respecting asserted health concerns associated with such products or to overturn the effect of court decisions in which the Company and other manufacturers have been successful.
Due to the uncertainties involved, management is unable to predict the outcome of the lead pigment and lead-based paint litigation, the number or nature of possible future claims and proceedings or the effect that any legislation and/or administrative regulations may have on the litigation or against the Company. In addition, management cannot reasonably determine the scope or amount of the potential costs and liabilities related to such litigation, or resulting from any such legislation and regulations. 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. 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. 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 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 has 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 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.
The trial court has selected a receiver for the abatement fund, but the terms of an order appointing the receiver have not been determined. The trial court has stayed the entry of judgment pending the decision of the Sixth District Court of Appeal on NL Industries' petition for writ of mandate, but otherwise has ruled that, within
sixty days
of entry of judgment, the Company, ConAgra and NL Industries shall pay into the abatement fund all amounts due.
Although the Company believes it is probable that a loss has occurred, the ultimate amount of such loss and the timing of any payments remains uncertain and could change in the future due to the numerous possible outcomes and uncertainties, including, but not limited to, (i) the final amount of the abatement fund that will be paid, particularly because participation in the abatement program by eligible homeowners is voluntary and it is uncertain what percentage of eligible homeowners will participate or how claims will be administered, and (ii) the portion of the abatement fund for which the Company, the two other defendants and others are determined to be responsible. However, the Company accrued
$136.3 million
for this litigation in 2018, which is approximately one-third of the amount of the abatement fund. It is possible that the Company may change the amount accrued for this litigation based on the facts and circumstances. 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 liability is higher than any amount currently accrued for 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.
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 have opposed. 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 has filed a motion to dismiss the Complaint, which is pending.
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 has 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 and set a trial date for May 6, 2019. The parties are preparing for trial.
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 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.
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. 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 (income) expense - net
Included in
Other general (income) expense - net
were the following:
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
Provisions for environmental matters - net
|
$
|
592
|
|
|
$
|
765
|
|
(Gain) loss on sale or disposition of assets
|
(1,050
|
)
|
|
2,225
|
|
Total
|
$
|
(458
|
)
|
|
$
|
2,990
|
|
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
(gain) loss
on sale or disposition of assets represents net realized
(gains) losses
associated with the sale or disposal of fixed assets previously used in the conduct of the primary business of the Company.
Other expense (income) - net
Included in
Other expense (income) - net
were the following:
|
|
|
|
|
|
|
|
|
(Thousands of dollars)
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
Dividend and royalty income
|
$
|
(4,766
|
)
|
|
$
|
(1,451
|
)
|
Net expense from banking activities
|
2,668
|
|
|
2,236
|
|
Foreign currency transaction related gains
|
(2,106
|
)
|
|
(2,462
|
)
|
Domestic pension plan settlement expense
|
32,410
|
|
|
|
|
Miscellaneous pension expense (income)
|
2,074
|
|
|
(3,544
|
)
|
Other income
|
(8,958
|
)
|
|
(7,109
|
)
|
Other expense
|
1,987
|
|
|
3,058
|
|
Total
|
$
|
23,309
|
|
|
$
|
(9,272
|
)
|
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, 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 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
17.9%
for the
first quarter
of
2019
compared to
17.6%
for the
first quarter
of
2018
. The
increase
in the effective tax rate for the
first quarter
of
2019
compared to
2018
was primarily due to tax benefits related to research and development credit refund requests that were claimed in the first quarter of 2018 that were not available in the first quarter of 2019.
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. 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. There were no significant changes to any of the balances of unrecognized tax benefits at December 31, 2018 during the first three months of 2019.
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.
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 and 2015 income tax returns. 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
$5.0 million
of tax and interest related to the refund claims. In addition, the IRS is reviewing the refund claim audit for the 2014 tax year of Valspar. Once the review is complete, the IRS will submit the refund request of
$5.4 million
to the Joint Committee of Taxation for approval. A refund claim for
$1.5 million
has been filed on behalf of Valspar for the 2015 tax year. As of
March 31, 2019
, the federal statute of limitations had not expired for the 2013 through
2018
tax years.
As of
March 31, 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
March 31,
|
|
2019
|
|
2018
|
Basic
|
|
|
|
Average shares outstanding
|
91,952,828
|
|
|
93,339,564
|
|
Net income
|
$
|
245,237
|
|
|
$
|
250,127
|
|
Basic net income per share
|
$
|
2.67
|
|
|
$
|
2.68
|
|
|
|
|
|
Diluted
|
|
|
|
Average shares outstanding
|
91,952,828
|
|
|
93,339,564
|
|
Stock options and other contingently issuable shares
(1)
|
1,662,297
|
|
|
2,138,874
|
|
Non-vested restricted stock grants
|
53,603
|
|
|
67,714
|
|
Average shares outstanding assuming dilution
|
93,668,728
|
|
|
95,546,152
|
|
Net income
|
$
|
245,237
|
|
|
$
|
250,127
|
|
Diluted net income per share
|
$
|
2.62
|
|
|
$
|
2.62
|
|
|
|
(1)
|
Stock options and other contingently issuable shares excluded
49,501
shares due to their anti-dilutive effect for the
three months
ended
March 31, 2019
. There were
no
options excluded due to their anti-dilutive effect for the
three
months ended
March 31, 2018
.
|
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 March 31, 2019
|
|
The Americas
Group
|
|
Consumer Brands
Group
|
|
Performance
Coatings
Group
|
|
Administrative
|
|
Consolidated
Totals
|
Net external sales
|
$
|
2,154,853
|
|
|
$
|
654,502
|
|
|
$
|
1,230,798
|
|
|
$
|
708
|
|
|
$
|
4,040,861
|
|
Intersegment transfers
|
6
|
|
|
792,786
|
|
|
28,486
|
|
|
(821,278
|
)
|
|
|
Total net sales and intersegment transfers
|
$
|
2,154,859
|
|
|
$
|
1,447,288
|
|
|
$
|
1,259,284
|
|
|
$
|
(820,570
|
)
|
|
$
|
4,040,861
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
331,088
|
|
|
$
|
87,937
|
|
|
$
|
98,693
|
|
|
|
|
$
|
517,718
|
|
Interest expense
|
|
|
|
|
|
|
$
|
(90,994
|
)
|
|
(90,994
|
)
|
Administrative expenses and other
|
|
|
|
|
|
|
(127,870
|
)
|
|
(127,870
|
)
|
Income before income taxes
|
$
|
331,088
|
|
|
$
|
87,937
|
|
|
$
|
98,693
|
|
|
$
|
(218,864
|
)
|
|
$
|
298,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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 that 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
$886.0 million
and
$919.7 million
for the
first quarter
of
2019
and
2018
, respectively. Long-lived assets of these subsidiaries totaled
$3.268 billion
and
$3.722 billion
at
March 31, 2019
and
March 31, 2018
, respectively. Domestic operations accounted for the remaining net external sales, segment profits and long-lived assets. No single geographic area outside the United States was significant relative to consolidated net external sales, income before taxes or consolidated long-lived assets.
Export sales and sales to any individual customer were each
less than 10% of consolidated sales
during all periods presented.
For further details on the Company's Reportable Segments, see Note
19
to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 2018
.
NOTE 14
—
FAIR VALUE MEASUREMENTS
The Fair Value Measurements and Disclosures Topic of the ASC applies to the Company’s financial and non-financial assets and liabilities. The guidance applies when other standards require or permit the fair value measurement of assets and liabilities. The Company did not have any fair value measurements 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
|
|
2019
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Deferred compensation plan assets
(1)
|
$
|
57,606
|
|
|
$
|
29,313
|
|
|
$
|
28,293
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities
(2)
|
$
|
67,189
|
|
|
$
|
67,189
|
|
|
|
|
|
|
|
(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
$54,369
.
|
(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 15
—
DEBT
The table below summarizes the carrying amount and fair value of the Company’s publicly traded debt and non-publicly traded debt in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. The fair values of the Company’s publicly traded debt are based on quoted market prices. The fair values of the Company’s non-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, 2019
|
|
March 31, 2018
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
Publicly traded debt
|
$
|
8,729,040
|
|
|
$
|
8,683,686
|
|
|
$
|
8,739,950
|
|
|
$
|
8,670,864
|
|
Non-publicly traded debt
|
277,486
|
|
|
268,747
|
|
|
1,152,246
|
|
|
1,082,658
|
|
NOTE 16
—
LEASES
The Company leases retail stores, manufacturing and distribution facilities, office space and equipment under operating lease agreements. Operating lease right-of-use (ROU) assets and lease liabilities are recognized based on the present value of lease payments over the lease term. The majority of the ROU asset and lease liability balances relate to the retail operations of The Americas Group.
Most leases include one or more options to renew. The exercise of lease renewal options is at the Company's discretion and is not reasonably certain at lease commencement. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases relate primarily to common area maintenance, insurance, taxes and utilities associated with the properties. Variable payments for equipment leases relate primarily to hours, miles, or other quantifiable usage factors which are not determinable at the time the lease agreement is entered into by the Company. The Company has made an accounting policy election by class of underlying asset to not apply the recognition requirements of ASC 842 to short-term leases. As a result, certain leases with a term of 12 months or less are not recorded on the balance sheet and expense is recognized on a straight-line basis over the lease term. Most leases do not contain an implicit discount rate. Therefore, the Company’s estimated incremental borrowing rate based on information available at the time of lease inception is used to discount lease payments to present value.
Additional lease information is summarized below:
|
|
|
|
|
|
(Thousands of dollars)
|
|
|
|
Three Months Ended
|
|
|
March 31, 2019
|
|
|
|
|
Operating lease cost
|
$
|
112,105
|
|
|
Short-term lease cost
|
10,103
|
|
|
Variable lease cost
|
17,334
|
|
|
|
|
|
Operating cash outflows from operating leases
|
106,692
|
|
|
|
|
|
Weighted average remaining lease term for operating leases
|
6.1 years
|
|
|
|
|
|
Weighted average discount rate for operating leases
|
4.0
|
%
|
|
The following table reconciles the undiscounted cash flows for each of the first five years and thereafter to the operating lease liabilities recognized on the balance sheet. The reconciliation excludes short-term leases that are not recorded on the balance sheet.
|
|
|
|
|
(Thousands of dollars)
|
|
|
Operating Leases
|
Year Ending December 31,
|
|
2019 (excluding the three months ended March 31, 2019)
|
$
|
320,062
|
|
2020
|
393,077
|
|
2021
|
328,670
|
|
2022
|
265,871
|
|
2023
|
199,120
|
|
Thereafter
|
449,256
|
|
Total lease payments
|
1,956,056
|
|
Amount representing interest
|
(228,162
|
)
|
Present value of operating lease liabilities
|
$
|
1,727,894
|
|
NOTE 17
—
NON-TRADED INVESTMENTS
The Company has invested in the U.S. affordable housing and historic renovation real estate markets. These non-traded investments have been identified as variable interest entities. However, because the Company does not have the power to direct the day-to-day operations of the investments and the risk of loss is limited to the amount of contributed capital, the Company is not considered the primary beneficiary. In accordance with the Consolidation Topic of the ASC, the investments are not consolidated. For affordable housing investments entered into prior to the January 1, 2015 adoption of ASU No. 2014-01, the Company uses the effective yield method to determine the carrying value of the investments. Under the effective yield method, the initial cost of the investments is amortized to income tax expense over the period that the tax credits are recognized. For affordable housing investments entered into on or after the January 1, 2015 adoption of ASU No. 2014-01, the Company uses the proportional amortization method. Under the proportional amortization method, the initial cost of the investments is amortized to income tax expense in proportion to the tax credits and other tax benefits received. The carrying amount of the affordable housing and historic renovation investments, included in other assets, was
$197.4 million
and
$189.5 million
at
March 31, 2019
and
2018
, respectively. The liability for estimated future capital contributions to the investments was
$174.3 million
and
$167.0 million
at
March 31, 2019
and
2018
, respectively.