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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 June 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 – 92,256,348 shares as of June 30, 2019.




TABLE OF CONTENTS
 
 
2
23
33
34
 
 
 
35
36
37
38
39
 
 
40
EX-10.1
 
EX-31(a)
 
EX-31(b)
 
EX-32(a)
 
EX-32(b)
 
EX-101 INSTANCE DOCUMENT
 
EX-101 SCHEMA DOCUMENT
 
EX-101 PRESENTATION LINKBASE DOCUMENT
 
EX-101 CALCULATION LINKBASE DOCUMENT
 
EX-101 LABEL LINKBASE DOCUMENT
 
EX-101 DEFINITION LINKBASE DOCUMENT
 









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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net sales
$
4,877,860

 
$
4,773,796

 
$
8,918,721

 
$
8,738,802

Cost of goods sold
2,696,425

 
2,735,168

 
5,002,209

 
5,013,327

Gross profit
2,181,435

 
2,038,628

 
3,916,512

 
3,725,475

Percent to net sales
44.7
%
 
42.7
%
 
43.9
%
 
42.6
%
Selling, general and administrative expenses
1,331,288

 
1,307,861

 
2,575,305

 
2,522,426

Percent to net sales
27.3
%
 
27.4
%
 
28.9
%
 
28.9
%
Other general expense - net
7,122

 
26,979

 
6,664

 
29,969

Amortization
78,081

 
73,893

 
156,852

 
158,942

Interest expense
89,198

 
93,507

 
180,192

 
185,054

Interest and net investment income
(541
)
 
(559
)
 
(951
)
 
(2,177
)
Other expense (income) - net
586

 
(1,139
)
 
23,895

 
(10,411
)
Income before income taxes
675,701

 
538,086

 
974,555

 
841,672

Income taxes
204,698

 
134,482

 
258,315

 
187,941

Net income
$
471,003

 
$
403,604

 
$
716,240

 
$
653,731

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share - basic
$
5.13

 
$
4.34

 
$
7.80

 
$
7.02

 
 
 
 
 
 
 
 
Net income per share - diluted
$
5.03

 
$
4.25

 
$
7.65

 
$
6.86

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average shares outstanding - basic
91,775,295

 
92,926,421

 
91,864,062

 
93,132,993

 
 
 
 
 
 
 
 
Average shares and equivalents outstanding - diluted
93,561,725

 
94,884,187

 
93,566,627

 
95,258,956



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
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net income
 
$
471,003

 
$
403,604

 
$
716,240

 
$
653,731

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments (1)
 
3,335

 
(205,028
)
 
11,306

 
(152,296
)
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit adjustments:
 
 
 
 
 
 
 
 
Amounts reclassified from Other
comprehensive income (2)
 
(373
)
 
144

 
(733
)
 
(65
)
 
 
(373
)
 
144

 
(733
)
 
(65
)
 
 
 
 
 
 
 
 
 
Unrealized net gains on cash flow hedges:
 
 
 
 
 
 
 
 
Amounts reclassified from Other
comprehensive income (3)
 
(1,548
)
 
(1,910
)
 
(3,078
)
 
(2,898
)
 
 
(1,548
)
 
(1,910
)
 
(3,078
)
 
(2,898
)
 
 
 
 
 
 
 
 
 
Total
 
1,414

 
(206,794
)
 
7,495

 
(155,259
)
 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
472,417

 
$
196,810

 
$
723,735

 
$
498,472



(1) The three and six months ended June 30, 2019 includes unrealized losses of $4,935, net of taxes of $1,626, related to the net investment hedge.

(2) Net of taxes of $135 and $415 in the three months ended June 30, 2019 and 2018, respectively. Net of taxes of $283 and $505 in the six months ended June 30, 2019 and 2018, respectively.

(3) Net of taxes of $510 and $148 in the three months ended June 30, 2019 and 2018, respectively. Net of taxes $1,015 of $1,195 and in the six months ended June 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
 
June 30,
2019
 
December 31,
2018
 
June 30,
2018
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
145,577

 
$
155,505

 
$
154,973

Accounts receivable, less allowance
2,659,051

 
2,018,768

 
2,625,066

Inventories:
 
 
 
 
 
Finished goods
1,531,950

 
1,426,366

 
1,384,628

Work in process and raw materials
362,915

 
388,909

 
431,113

 
1,894,865

 
1,815,275

 
1,815,741

Other current assets
390,471

 
354,939

 
382,515

Total current assets
5,089,964

 
4,344,487

 
4,978,295

Property, plant and equipment:
 
 
 
 
 
Land
243,966

 
244,608

 
245,247

Buildings
1,010,422

 
979,140

 
919,212

Machinery and equipment
2,816,065

 
2,668,492

 
2,589,790

Construction in progress
136,630

 
147,931

 
143,393

 
4,207,083

 
4,040,171

 
3,897,642

Less allowances for depreciation
2,433,497

 
2,263,332

 
2,121,264

 
1,773,586

 
1,776,839

 
1,776,378

Goodwill
6,961,787

 
6,956,702

 
6,994,206

Intangible assets
5,043,692

 
5,201,579

 
5,463,518

Operating lease right-of-use assets
1,667,517

 


 


Deferred pension assets
34,812

 
270,664

 
301,664

Other assets
614,778

 
584,008

 
581,761

Total assets
$
21,186,136

 
$
19,134,279

 
$
20,095,822

 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term borrowings
$
808,800

 
$
328,403

 
$
650,718

Accounts payable
2,067,854

 
1,799,424

 
2,049,123

Compensation and taxes withheld
418,272

 
504,547

 
405,762

Accrued taxes
154,619

 
80,766

 
173,022

Current portion of long-term debt
1,437,812

 
307,191

 
1,179

California litigation accrual
136,333

 
136,333

 


Current portion of operating lease liabilities
361,676

 


 


Other accruals
957,274

 
1,141,083

 
910,283

Total current liabilities
6,342,640

 
4,297,747

 
4,190,087

Long-term debt
7,209,481

 
8,708,057

 
9,722,918

Postretirement benefits other than pensions
259,852

 
257,621

 
276,796

Deferred income taxes
1,114,740

 
1,130,872

 
1,365,775

Long-term operating lease liabilities
1,362,218

 


 


Other long-term liabilities
1,149,723

 
1,009,237

 
837,472

Shareholders’ equity:
 
 
 
 
 
Common stock—$1.00 par value:
 
 
 
 
 
92,256,348, 93,116,762 and 93,381,022 shares outstanding
 
 
 
 
 
at June 30, 2019, December 31, 2018 and June 30, 2018, respectively
118,936

 
118,373

 
117,964

Other capital
3,010,662

 
2,896,448

 
2,795,196

Retained earnings
6,752,956

 
6,246,548

 
5,953,313

Treasury stock, at cost
(5,504,293
)
 
(4,900,690
)
 
(4,621,250
)
Cumulative other comprehensive loss
(630,779
)
 
(629,934
)
 
(542,449
)
Total shareholders' equity
3,747,482

 
3,730,745

 
3,702,774

Total liabilities and shareholders’ equity
$
21,186,136

 
$
19,134,279

 
$
20,095,822



See notes to condensed consolidated financial statements.

4



THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
 
Six Months Ended
 
June 30,
2019
 
June 30,
2018
OPERATING ACTIVITIES
 
 
 
Net income
$
716,240

 
$
653,731

Adjustments to reconcile net income to net operating cash:
 
 
 
Depreciation
129,748

 
144,133

Amortization of intangible assets
156,852

 
158,942

Stock-based compensation expense
47,660

 
36,776

Amortization of credit facility and debt issuance costs
4,348

 
5,513

Provisions for qualified exit costs
3,611

 
9,941

Provisions for environmental-related matters
7,272

 
32,018

Defined benefit pension plans net cost
38,034

 
(868
)
Net change in postretirement liability
672

 
996

Deferred income taxes
(30,215
)
 
27,455

Other
4,424

 
(9,995
)
Change in working capital accounts - net
(418,327
)
 
(471,675
)
Costs incurred for environmental-related matters
(11,100
)
 
(8,473
)
Costs incurred for qualified exit costs
(3,402
)
 
(14,325
)
Other
112,184

 
14,927

Net operating cash
758,001

 
579,096

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(127,879
)
 
(101,826
)
Proceeds from sale of assets
2,750

 
14,354

Increase in other investments
(52,115
)
 
(19,511
)
Net investing cash
(177,244
)
 
(106,983
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Net increase in short-term borrowings
480,692

 
23,985

Payments of long-term debt
(360,863
)
 
(151,794
)
Payments for credit facility and debt issuance costs


 
(113
)
Payments of cash dividends
(209,757
)
 
(161,641
)
Proceeds from stock options exercised
65,527

 
33,419

Treasury stock purchased
(450,507
)
 
(334,155
)
Proceeds from real estate financing transactions
8,736

 
88,581

Other
(118,426
)
 
(14,995
)
Net financing cash
(584,598
)
 
(516,713
)
 
 
 
 
Effect of exchange rate changes on cash
(6,087
)
 
(4,640
)
Net decrease in cash and cash equivalents
(9,928
)
 
(49,240
)
Cash and cash equivalents at beginning of year
155,505

 
204,213

Cash and cash equivalents at end of period
$
145,577

 
$
154,973

 
 
 
 
Income taxes paid
$
123,832

 
$
95,181

Interest paid
180,461

 
185,065





See notes to condensed consolidated financial statements.

5



THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended June 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 six 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 and six months ended June 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 June 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. 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

6



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 June 30, 2019
2,659,051

 
62,428

 
195,923

 
236,724

 
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 two quarters 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 June 30, 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 March 31, 2019
$
118,672

 
$
2,945,521

 
$
6,386,948

 
$
(5,358,887
)
 
$
(632,193
)
 
$
3,460,061

Net income

 

 
471,003

 

 

 
471,003

Other comprehensive income

 

 

 

 
1,414

 
1,414

Treasury stock purchased

 

 

 
(145,361
)
 

 
(145,361
)
Stock-based compensation activity
264

 
64,925

 

 
(45
)
 

 
65,144

Other adjustments

 
216

 

 

 

 
216

Cash dividends

 

 
(104,995
)
 

 

 
(104,995
)
Balance at June 30, 2019
$
118,936

 
$
3,010,662

 
$
6,752,956

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


(Thousands of dollars, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Other
Capital
 
Retained Earnings
 
Treasury
Stock
 
Cumulative Other Comprehensive Loss
 
Total
Balance at March 31, 2018
$
117,875

 
$
2,761,206

 
$
5,630,323

 
$
(4,528,018
)
 
$
(335,655
)
 
$
3,645,731

Net income
 
 
 
 
403,604

 
 
 
 
 
403,604

Other comprehensive loss
 
 
 
 
 
 
 
 
(206,794
)
 
(206,794
)
Treasury stock purchased
 
 
 
 
 
 
(93,007
)
 
 
 
(93,007
)
Stock-based compensation activity
89

 
33,934

 
 
 
(225
)
 
 
 
33,798

Other adjustments
 
 
56

 
(1
)
 

 
 
 
55

Cash dividends
 
 
 
 
(80,613
)
 
 
 
 
 
(80,613
)
Balance at June 30, 2018
$
117,964

 
$
2,795,196

 
$
5,953,313

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


8








The following tables summarize the changes in the components of Shareholders' equity for the six months ended June 30, 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
 
 
 
 
716,240

 
 
 
 
 
716,240

Other comprehensive income
 
 
 
 
 
 
 
 
7,495

 
7,495

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
 
 
 
 
 
 
(450,507
)
 
 
 
(450,507
)
Treasury stock transferred from defined benefit pension plan

 
 
 
 
 
 
(131,781
)
 
 
 
(131,781
)
Stock-based compensation activity
563

 
112,486

 
 
 
(21,315
)
 
 
 
91,734

Other adjustments
 
 
1,728

 

 
 
 
 
 
1,728

Cash dividends
 
 
 
 
(209,757
)
 
 
 
 
 
(209,757
)
Balance at June 30, 2019
$
118,936

 
$
3,010,662

 
$
6,752,956

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


(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

 

 
653,731

 

 

 
653,731

Other comprehensive loss
 
 
 
 
 
 
 
 
(155,259
)
 
(155,259
)
Adjustment to initially adopt ASU 2016-01
 
 
 
 
2,320

 
 
 
(2,320
)
 

Treasury stock purchased
 
 
 
 
 
 
(334,155
)
 
 
 
(334,155
)
Stock-based compensation activity
403

 
69,755

 
 
 
(20,679
)
 
 
 
49,479

Other adjustments
 
 
2,258

 
487

 

 
 
 
2,745

Cash dividends
 
 
 
 
(161,641
)
 
 
 
 
 
(161,641
)
Balance at June 30, 2018
$
117,964

 
$
2,795,196

 
$
5,953,313

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



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 six 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
16,093

 
14,639

Settlements
(15,542
)
 
(8,185
)
Acquisition, divestiture and other adjustments


 
(15,309
)
Balance at June 30
$
57,618

 
$
142,570




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 decrease in the accrual for product warranty claims at June 30, 2019 was primarily due to the divestiture of the furniture protection plan business in the third quarter of 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 six months ended June 30, 2019, thirteen 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 June 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
3,611

 
9,941

Actual expenditures charged to accrual
(3,402
)
 
(14,325
)
Balance at June 30
$
7,261


$
9,001


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 June 30:
 
 
 
 
 
 
 
 
 
 
 
  Net periodic benefit cost (credit):
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
932

 
$
1,158

 
$
1,490

 
$
2,016

 
$
362

 
$
499

Interest cost
1,199

 
8,540

 
2,356

 
2,351

 
2,801

 
2,544

Expected return on assets
(1,332
)
 
(14,382
)
 
(2,441
)
 
(2,685
)
 

 

Recognition of:
 
 
 
 
 
 
 
 
 
 
 
Unrecognized prior service cost (credit)
350

 
406

 


 


 
(1,250
)
 
(1,642
)
 Unrecognized actuarial loss


 


 
258

 
383

 
134

 
582

Net periodic benefit cost (credit)
$
1,149

 
$
(4,278
)
 
$
1,663

 
$
2,065

 
$
2,047

 
$
1,983

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
  Net periodic benefit cost (credit):
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
1,865

 
$
5,515

 
$
2,980

 
$
4,032

 
$
723

 
$
997

Interest cost
2,397

 
16,692

 
4,712

 
4,703

 
5,601

 
5,089

Expected return on assets
(2,664
)
 
(28,816
)
 
(4,881
)
 
(5,370
)
 

 

Recognition of:
 
 
 
 
 
 
 
 
 
 
 
Unrecognized prior service cost (credit)
699

 
785

 


 


 
(2,499
)
 
(3,284
)
Unrecognized actuarial loss


 


 
516

 
766

 
268

 
1,163

Ongoing pension cost (credit)
2,297

 
(5,824
)
 
3,327

 
4,131

 
4,093

 
3,965

Curtailment expense


 
825

 


 


 

 


Settlement expense
32,410

 


 


 


 


 


Net periodic benefit cost (credit)
$
34,707

 
$
(4,999
)
 
$
3,327

 
$
4,131

 
$
4,093

 
$
3,965


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 June 30, 2019, the unaccrued maximum of the estimated range of possible outcomes is $117.7 million higher than the minimum.

11



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 June 30, 2019 and 2018 were accruals for extended environmental-related activities of $319.7 million and $215.1 million, respectively. Estimated costs of current investigation and remediation activities of $51.0 million and $27.0 million are included in other accruals at June 30, 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 June 30, 2019. At June 30, 2019, $319.1 million, or 86.1% of the total accrual, related directly to these four sites. In the aggregate unaccrued maximum of $117.7 million at June 30, 2019, $92.8 million, or 78.8%, 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

12



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 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.

13



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 June 24, 2019, the Company, ConAgra and NL Industries reached an agreement in principle with the plaintiffs to resolve the litigation. The agreement in principle requires approval by the trial court and the elected body of each Prosecuting Jurisdiction, as well as appropriate corporate approvals. The agreement would result in a judgment dismissing the Company and the other two defendants with prejudice and a mutual release of all claims and contribution rights in exchange for certain payments of money over time by the Company and the other two defendants to the plaintiffs. 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.
In 2018, the Company accrued $136.3 million for this litigation, which was approximately one-third of the amount of the abatement fund. It is possible the Company may again change the amount accrued for this litigation based on the facts and circumstances.
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 filed a notice of appeal with the United States Court of Appeals for the Third Circuit. 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.

14



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 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 has filed a motion for judgment in its favor based on public policy factors under Wisconsin law. The Company intends to file 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 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

15



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.
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. 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
June 30,
 
 
Six Months Ended
June 30,
 
2019
 
2018
 
 
2019
 
2018
Provisions for environmental matters - net
$
6,680

 
$
31,253

 
 
$
7,272

 
$
32,018

Loss (gain) on sale or disposition of assets
442

 
(4,274
)
 
 
(608
)
 
(2,049
)
Total
$
7,122

 
$
26,979

 
 
$
6,664

 
$
29,969


Provisions for environmental matters - net represent site-specific increases or decreases to environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Environmental-related accruals are not recorded net of insurance proceeds in accordance with the Offsetting Subtopic of the Balance Sheet Topic of the ASC. See Note 8 for further details on the Company’s environmental-related activities.
The loss (gain) on sale or disposition of assets represents net realized losses (gains) associated with the sale or disposal of fixed assets previously used in the conduct of the primary business of the Company.
Other expense (income) - net
Included in Other expense (income) - net were the following:
 
(Thousands of dollars)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Dividend and royalty income
$
(811
)
 
$
(1,521
)
 
$
(5,577
)
 
$
(2,972
)
Net expense from banking activities
2,683

 
2,450

 
5,351

 
4,686

Foreign currency transaction related (gains) losses
(1,830
)
 
5,626

 
(3,936
)
 
3,164

Domestic pension plan settlement expense


 


 
32,410

 


Miscellaneous pension expense (income)
2,075

 
(3,903
)
 
4,149

 
(7,447
)
Other income
(6,470
)
 
(6,999
)
 
(15,428
)
 
(14,108
)
Other expense
4,939

 
3,208

 
6,926

 
6,266

Total
$
586

 
$
(1,139
)
 
$
23,895

 
$
(10,411
)

Foreign currency transaction related (gains) losses represent net realized (gains) losses on U.S. dollar-denominated liabilities of foreign subsidiaries and net realized and unrealized (gains) losses from foreign currency option and forward contracts. There were no material foreign currency option and forward contracts outstanding at June 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 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 30.3% and 26.5% for the second quarter and first six months of 2019, respectively, compared to 25.0% and 22.3% for the second quarter and first six months of 2018, respectively. The increase in the effective tax rate for the second quarter and first six months of 2019 compared to 2018 was primarily due to an increase to the tax provision of $74.3 million recorded in the first six months 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”). 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 investment 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 the DC Solar investments will no longer be ultimately realizable. The Company's effective tax rate for the second quarter and first six months of 2018 included the reversal of $27.5 million of tax benefits previously recorded related to purchase accounting adjustments made in the second quarter of 2018.
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. Primarily due to the DC Solar investments described above, the Company's balance of unrecognized tax benefits has increased to $189.8 million at June 30, 2019, the recognition of which would have an effect of $182.6 million on the effective tax rate.
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 $28.8 million at June 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. 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. During the second

16



quarter, a refund claim for $1.5 million was received on behalf of Valspar for the 2015 tax year. At June 30, 2019, the federal statute of limitations had not expired for the 2013 through 2018 tax years.
At June 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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Basic
 
 
 
 
 
 
 
Average shares outstanding
91,775,295

 
92,926,421

 
91,864,062

 
93,132,993

Net income
$
471,003

 
$
403,604

 
$
716,240

 
$
653,731

Basic net income per share
$
5.13

 
$
4.34

 
$
7.80

 
$
7.02

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Average shares outstanding
91,775,295

 
92,926,421

 
91,864,062

 
93,132,993

Stock options and other contingently issuable shares (1)
1,733,040

 
1,903,442

 
1,649,069

 
2,064,944

Non-vested restricted stock grants
53,390

 
54,324

 
53,496

 
61,019

Average shares outstanding assuming dilution
93,561,725

 
94,884,187

 
93,566,627

 
95,258,956

Net income
$
471,003

 
$
403,604

 
$
716,240

 
$
653,731

Diluted net income per share
$
5.03

 
$
4.25

 
$
7.65

 
$
6.86



(1) 
There were no stock options and other contingently issuable shares excluded due to their anti-dilutive effect for the three months ended June 30, 2019. Stock options and other contingently issuable shares excludes 17,286 shares due to their anti-dilutive effect for the six months ended June 30, 2019. Stock options and other contingently issuable shares for the three and six months ended June 30, 2018 excludes 52,427 and 26,873 shares, respectively, due to their anti-dilutive effect.



17



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 June 30, 2019
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
2,756,048

 
$
804,472

 
$
1,316,957

 
$
383

 
$
4,877,860

Intersegment transfers

 
981,046

 
30,350

 
(1,011,396
)
 

Total net sales and intersegment transfers
$
2,756,048

 
$
1,785,518

 
$
1,347,307

 
$
(1,011,013
)
 
$
4,877,860

 
 
 
 
 
 
 
 
 
 
Segment profit
$
612,384

 
$
140,654

 
$
150,327

 

 
$
903,365

Interest expense

 

 

 
$
(89,198
)
 
(89,198
)
Administrative expenses and other

 

 

 
(138,466
)
 
(138,466
)
Income before income taxes
$
612,384

 
$
140,654

 
$
150,327

 
$
(227,664
)
 
$
675,701


 
Three Months Ended June 30, 2018
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
2,625,057

 
$
777,746

 
$
1,369,324

 
$
1,669

 
$
4,773,796

Intersegment transfers
219

 
955,270

 
6,570

 
(962,059
)
 

Total net sales and intersegment transfers
$
2,625,276

 
$
1,733,016

 
$
1,375,894

 
$
(960,390
)
 
$
4,773,796

 
 
 
 
 
 
 
 
 
 
Segment profit
$
569,897

 
$
90,903

 
$
144,194

 

 
$
804,994

Interest expense

 

 

 
$
(93,507
)
 
(93,507
)
Administrative expenses and other

 

 

 
(173,401
)
 
(173,401
)
Income before income taxes
$
569,897

 
$
90,903

 
$
144,194

 
$
(266,908
)
 
$
538,086



 
Six Months Ended June 30, 2019
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
4,910,901

 
$
1,458,974

 
$
2,547,755

 
$
1,091

 
$
8,918,721

Intersegment transfers
6

 
1,773,832

 
58,836

 
(1,832,674
)
 

Total net sales and intersegment transfers
$
4,910,907

 
$
3,232,806

 
$
2,606,591

 
$
(1,831,583
)
 
$
8,918,721

 
 
 
 
 
 
 
 
 
 
Segment profit
$
943,472

 
$
228,591

 
$
249,020

 

 
$
1,421,083

Interest expense

 

 

 
$
(180,192
)
 
(180,192
)
Administrative expenses and other

 

 

 
(266,336
)
 
(266,336
)
Income before income taxes
$
943,472

 
$
228,591

 
$
249,020

 
$
(446,528
)
 
$
974,555



18



 
Six Months Ended June 30, 2018
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
4,705,472

 
$
1,434,125

 
$
2,597,099

 
$
2,106

 
$
8,738,802

Intersegment transfers
273

 
1,721,333

 
12,414

 
(1,734,020
)
 

Total net sales and intersegment transfers
$
4,705,745

 
$
3,155,458

 
$
2,609,513

 
$
(1,731,914
)
 
$
8,738,802

 
 
 
 
 
 
 
 
 
 
Segment profit
$
907,289

 
$
165,131

 
$
234,960

 

 
$
1,307,380

Interest expense

 

 

 
$
(185,054
)
 
(185,054
)
Administrative expenses and other

 

 

 
(280,654
)
 
(280,654
)
Income before income taxes
$
907,289

 
$
165,131

 
$
234,960

 
$
(465,708
)
 
$
841,672



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 $963.1 million and $1.018 billion for the second quarter of 2019 and 2018, respectively. Net external sales of all consolidated foreign subsidiaries were $1.849 billion and $1.938 billion for the six months ended 2019 and 2018, respectively. Long-lived assets of these subsidiaries totaled $3.264 billion and $3.485 billion at June 30, 2019 and June 30, 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.


19



NOTE 14FAIR 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 second 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
 
June 30,
 
Identical Assets
 
Observable Inputs
 
Inputs
 
2019
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets (1)
$
58,475

 
$
30,588

 
$
27,887

 

 
 
 
 
 
 
 
 
Liabilities: