Company Quick10K Filing
Quick10K
Sherwin-Williams
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$421.52 94 $39,470
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-01-31 Earnings, Exhibits
8-K 2019-01-15 Earnings, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-10-17 Amend Bylaw, Exhibits
8-K 2018-09-06 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-07-26 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-07-24 Earnings, Exhibits
8-K 2018-07-19 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-04-24 Earnings, Exhibits
8-K 2018-04-18 Shareholder Vote
8-K 2018-02-27 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-01-25 Earnings, Exhibits
8-K 2018-01-17 Officers
8-K 2018-01-01 Officers, Exhibits
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GMS GMS
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SHW 2018-09-30
Part I. Financial Information
Item 1. Financial Statements
Note 1-Basis of Presentation
Note 2-Recently Issued Accounting Pronouncements
Note 3-Revenue
Note 4-Acquisitions
Note 5-Shareholders' Equity
Note 6-Product Warranties
Note 7-Exit or Disposal Activities
Note 8-Health Care, Pension and Other Benefits
Note 9-Other Long-Term Liabilities
Note 10 - Litigation
Note 11-Other
Note 12-Income Taxes
Note 13-Net Income per Common Share
Note 14-Reportable Segment Information
Note 15-Fair Value Measurements
Note 16-Debt
Note 17-Non-Traded Investments
Item 2. Management's Discussion And
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 5. Other Information.
Item 6. Exhibits.
EX-4.2 shw-2018930x10qxexh42.htm
EX-4.4 shw-2018930x10qxexh44.htm
EX-4.6 shw-2018930x10qxexh46.htm
EX-31.A shw-2018930x10qxexh31a.htm
EX-31.B shw-2018930x10qxexh31b.htm
EX-32.A shw-2018930x10qxexh32a.htm
EX-32.B shw-2018930x10qxexh32b.htm

Sherwin-Williams Earnings 2018-09-30

SHW 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 shw-2018930_10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the Period Ended September 30, 2018
or
o
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)
 
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  x    No  o

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  x    No  o

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
x
 
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
o
 
Smaller reporting company
o
 
 
 
 
 
Emerging growth company
o
 
 
 

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. o  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
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 – 93,626,317 shares as of September 30, 2018.




TABLE OF CONTENTS
 
 
 
 
 
 
 
EX-4.1
 
EX-4.2
 
EX-4.3
 
EX-4.4
 
EX-4.5
 
EX-4.6
 
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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net sales
$
4,731,470

 
$
4,507,020

 
$
13,470,272

 
$
11,004,224

Cost of goods sold
2,721,066

 
2,605,193

 
7,734,393

 
6,024,727

Gross profit
2,010,404

 
1,901,827

 
5,735,879

 
4,979,497

Percent to net sales
42.5
%
 
42.2
%
 
42.6
%
 
45.3
%
Selling, general and administrative expenses
1,273,066

 
1,307,402

 
3,795,492

 
3,472,202

Percent to net sales
26.9
%
 
29.0
%
 
28.2
%
 
31.6
%
Other general expense - net
11,526

 
4,109

 
41,495

 
6,160

Amortization
80,077

 
83,711

 
239,019

 
118,799

Interest expense
92,281

 
91,593

 
277,335

 
174,017

Interest and net investment income
(555
)
 
(2,448
)
 
(2,732
)
 
(6,819
)
California litigation expense
136,333

 
 
 
136,333

 
 
Other expense (income) - net
1,723

 
(10,262
)
 
(8,688
)
 
(28,192
)
Income from continuing operations before income taxes
415,953

 
427,722

 
1,257,625

 
1,243,330

Income taxes
61,926

 
111,116

 
249,867

 
326,921

Net income from continuing operations
354,027

 
316,606

 
1,007,758

 
916,409

 
 
 
 
 
 
 
 
Loss from discontinued operations (see Note 4)


 


 


 


Income taxes


 


 


 
41,540

Net loss from discontinued operations

 

 

 
(41,540
)
 
 
 
 
 
 
 
 
Net income
$
354,027

 
$
316,606

 
$
1,007,758

 
$
874,869

 
 
 
 
 
 
 
 
Basic net income per common share
 
 
 
 
 
 
 
Continuing operations
$
3.80

 
$
3.40

 
$
10.82

 
$
9.88

Discontinued operations

 

 

 
(.45
)
Net income per common share
$
3.80

 
$
3.40

 
$
10.82

 
$
9.43

 
 
 
 
 
 
 
 
Diluted net income per common share
 
 
 
 
 
 
 
Continuing operations
$
3.72

 
$
3.33

 
$
10.59

 
$
9.67

Discontinued operations

 

 

 
(.44
)
Net income per common share
$
3.72

 
$
3.33

 
$
10.59

 
$
9.23

 
 
 
 
 
 
 
 
Average shares outstanding - basic
93,099,714

 
92,988,118

 
93,121,900

 
92,793,275

Average shares and equivalents outstanding - diluted
95,135,257

 
95,207,884

 
95,170,768

 
94,817,669

See notes to condensed consolidated financial statements.

2



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

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net income
 
$
354,027

 
$
316,606

 
$
1,007,758

 
$
874,869

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(66,366
)
 
68,024

 
(218,662
)
 
119,274

 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit adjustments:
 
 
 
 
 
 
 
 
Amounts reclassified from Other
comprehensive (loss) income(1)
 
(492
)
 
409

 
(557
)
 
794

 
 
(492
)
 
409

 
(557
)
 
794

 
 
 
 
 
 
 
 
 
Unrealized net gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
 
Amounts recognized in Other comprehensive
(loss) income(2)
 


 
643

 


 
1,513

Amounts reclassified from Other
comprehensive (loss) income(3)
 


 
(852
)
 
(2,320
)
 
(844
)
 
 

 
(209
)
 
(2,320
)
 
669

 
 
 
 
 
 
 
 
 
Unrealized net gains on cash flow hedges:
 
 
 
 
 
 
 
 
Amounts recognized in Other comprehensive
(loss) income(4)
 


 


 


 
(30,754
)
Amounts reclassified from Other
comprehensive (loss) income(5)
 
(1,289
)
 
(1,289
)
 
(4,187
)
 
(1,933
)
 
 
(1,289
)
 
(1,289
)
 
(4,187
)
 
(32,687
)
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income
 
(68,147
)
 
66,935

 
(225,726
)
 
88,050

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
285,880

 
$
383,541

 
$
782,032

 
$
962,919



(1) Net of taxes of $(220) and $(104) in the three months ended September 30, 2018 and 2017, respectively. Net of taxes of $285 and $(299) in the nine months ended September 30, 2018 and 2017, respectively.

(2) Net of taxes of $(394) in the three months ended September 30, 2017. Net of taxes of $(931) in the nine months ended September 30, 2017.

(3) Net of taxes of $523 in the three months ended September 30, 2017. Net of taxes of $760 and $518 in the nine months ended September 30, 2018 and 2017, respectively.

(4) Net of taxes of $18,895 in the nine months ended September 30, 2017.

(5) Net of taxes of $791 and $792 in the three months ended September 30, 2018 and 2017, respectively. Net of taxes of $1,986 and $1,188 in the nine months ended September 30, 2018 and 2017, respectively.


See notes to condensed consolidated financial statements.


3



THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars
 
September 30,
2018
 
December 31,
2017
 
September 30,
2017
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
181,511

 
$
204,213

 
$
207,937

Accounts receivable, less allowance
2,584,280

 
2,104,555

 
2,426,222

Inventories:
 
 
 
 
 
Finished goods
1,428,599

 
1,415,339

 
1,333,798

Work in process and raw materials
432,729

 
386,036

 
370,415

 
1,861,328

 
1,801,375

 
1,704,213

Other current assets
410,913

 
355,697

 
345,532

Total current assets
5,038,032

 
4,465,840

 
4,683,904

Property, plant and equipment:
 
 
 
 
 
Land
249,787

 
254,676

 
252,832

Buildings
955,203

 
962,094

 
992,862

Machinery and equipment
2,623,884

 
2,572,963

 
2,642,019

Construction in progress
143,955

 
177,056

 
149,927

 
3,972,829

 
3,966,789

 
4,037,640

Less allowances for depreciation
2,206,475

 
2,089,674

 
2,142,091

 
1,766,354

 
1,877,115

 
1,895,549

Goodwill
6,963,198

 
6,814,345

 
6,915,028

Intangible assets
5,289,986

 
6,002,361

 
6,471,527

Deferred pension assets
305,979

 
296,743

 
224,330

Other assets
617,147

 
502,023

 
589,319

Total assets
$
19,980,696

 
$
19,958,427

 
$
20,779,657

 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Short-term borrowings
$
650,134

 
$
633,731

 
$
164,133

Accounts payable
2,165,724

 
1,791,552

 
1,832,434

Compensation and taxes withheld
500,248

 
508,166

 
500,977

Accrued taxes
98,632

 
79,901

 
280,854

Current portion of long-term debt
310,561

 
1,179

 
701,419

California litigation accrual
136,333

 


 


Other accruals
980,433

 
972,651

 
891,844

Total current liabilities
4,842,065

 
3,987,180

 
4,371,661

Long-term debt
8,710,831

 
9,885,745

 
10,083,828

Postretirement benefits other than pensions
277,857

 
274,675

 
262,543

Deferred income taxes
1,371,162

 
1,434,196

 
2,611,065

Other long-term liabilities
803,942

 
684,443

 
709,571

Shareholders’ equity:
 
 
 
 
 
Common stock—$1.00 par value:
 
 
 
 
 
93,626,317, 93,883,645 and 93,513,916 shares outstanding
 
 
 
 
 
at September 30, 2018, December 31, 2017 and September 30, 2017, respectively
118,282

 
117,561

 
117,189

Other capital
2,851,983

 
2,723,183

 
2,654,176

Retained earnings
6,270,757

 
5,502,730

 
4,685,313

Treasury stock, at cost
(4,655,587
)
 
(4,266,416
)
 
(4,263,388
)
Cumulative other comprehensive loss
(610,596
)
 
(384,870
)
 
(452,301
)
Total shareholders' equity
3,974,839

 
3,692,188

 
2,740,989

Total liabilities and shareholders’ equity
$
19,980,696

 
$
19,958,427

 
$
20,779,657

See notes to condensed consolidated financial statements.

4



THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars
 
Nine Months Ended
 
September 30,
2018
 
September 30,
2017
OPERATING ACTIVITIES
 
 
 
Net income
$
1,007,758

 
$
874,869

Adjustments to reconcile net income to net operating cash:
 
 
 
Loss from discontinued operations

 
41,540

Depreciation
211,514

 
162,214

Amortization of intangible assets
239,019

 
118,799

Amortization of inventory purchase accounting adjustments

 
114,025

Stock-based compensation expense
53,132

 
59,146

Amortization of credit facility and debt issuance costs
9,512

 
5,969

Provisions for qualified exit costs
13,103

 
32,416

Provisions for environmental-related matters
34,317

 
5,812

Defined benefit pension plans net cost
(3,079
)
 
15,246

Net change in postretirement liability
996

 
(7,422
)
Deferred income taxes
1,484

 

Other
18,967

 
93

Change in working capital accounts - net
(81,600
)
 
(163,513
)
Costs incurred for environmental-related matters
(13,991
)
 
(8,254
)
Costs incurred for qualified exit costs
(19,595
)
 
(26,925
)
Other
(40,322
)
 
34,817

Net operating cash
1,431,215

 
1,258,832

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(166,184
)
 
(143,406
)
Acquisitions of businesses, net of cash acquired and divestiture (see Note 4)

 
(8,810,314
)
Proceeds from sale of assets
38,354

 
39,528

Decrease in other investments
12,552

 
3,499

Net investing cash
(115,278
)
 
(8,910,693
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in short-term borrowings
23,389

 
(113,942
)
Proceeds from long-term debt

 
8,269,930

Payments of long-term debt
(851,977
)
 
(951,253
)
Payments for credit facility and debt issuance costs
(5,135
)
 
(49,022
)
Payments of cash dividends
(242,539
)
 
(239,016
)
Proceeds from stock options exercised
74,285

 
93,791

Treasury stock purchased
(368,334
)
 

Other
44,825

 
(20,434
)
Net financing cash
(1,325,486
)
 
6,990,054

 
 
 
 
Effect of exchange rate changes on cash
(13,153
)
 
(20,049
)
Net decrease in cash and cash equivalents
(22,702
)
 
(681,856
)
Cash and cash equivalents at beginning of year
204,213

 
889,793

Cash and cash equivalents at end of period
$
181,511

 
$
207,937

 
 
 
 
Income taxes paid
$
236,586

 
$
403,495

Interest paid
245,734

 
88,776


See notes to condensed consolidated financial statements.

5



THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods ended September 30, 2018 and 2017
NOTE 1—BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
There have been no significant changes in critical accounting policies since December 31, 2017, except as described in Note 2. Accounting estimates were revised as necessary during the first nine months of 2018 based on new information and changes in facts and circumstances. Certain amounts in the 2017 condensed consolidated financial statements have been reclassified to conform to the 2018 presentation. See Note 2.
The Company primarily uses the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs are subject to the final year-end LIFO inventory valuation. In addition, interim inventory levels include management’s estimates of annual inventory losses due to shrinkage and other factors. For further information on inventory valuations and other matters, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2017.
The consolidated results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018.
NOTE 2—RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted in 2018
Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers," and all the related amendments (Accounting Standards Codification (ASC) 606). ASC 606 consists of a comprehensive revenue recognition standard, which requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled. The Company adopted the standard using the modified retrospective method and applied it to all contracts. Under the modified retrospective method, the comparative periods are not restated.
The only significant change that resulted from the new revenue standard was that certain advertising support that was previously classified as Selling, general and administrative expenses is now classified as a reduction of revenue. This reclassification had no effect on Net income, and therefore, there was no adjustment to the opening balance of retained earnings. During the nine months ended September 30, 2018, this change resulted in $87.2 million within Consumer Brands Group being recorded as a reduction of Net sales rather than in Selling, general and administrative expenses. The Company does not expect the adoption of the new revenue standard to have a material impact on its Net income on an ongoing basis. Refer to Note 3 for additional information.
Effective January 1, 2018, the Company adopted ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs." The standard requires the service component of pension and other postretirement benefit expense to be presented in the same income statement lines as other employee compensation costs, and the other components to be presented outside of operating income. The guidance on the presentation of components of pension and other postretirement benefit expense was adopted retrospectively, as required, and the practical expedient allowing estimates for comparative periods using the information previously disclosed in the pension and other postretirement benefit plan note was elected. The following table summarizes the impact of the standard for the nine months ended September 30, 2018 and 2017.

6



(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
September 30, 2018
 
Nine Months Ended September 30, 2017
 
 
Impact of ASU 2017-07
 
As Reported
 
As Previously Reported (Without Adoption of ASU 2017-07)
 
Reclass for ASU 2017-07
 
As Reported in 2018
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
$
2,270

 
$
7,734,393

 
$
6,021,752

 
$
2,975

 
$
6,024,727

Selling, general and administrative expenses
 
9,079

 
3,795,492

 
3,461,788

 
10,414

 
3,472,202

Other expense (income) - net
 
(11,349
)
 
(8,688
)
 
(14,803
)
 
(13,389
)
 
(28,192
)
 
 
 
 
 
 
 
 
 
 
 
Effective January 1, 2018, the Company adopted ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends the guidance for certain aspects of recognition, measurement and disclosure of financial instruments. As a result of this standard, changes in fair value of available-for-sale marketable securities that were previously recognized in other comprehensive income are now recognized in earnings. In addition, in accordance with the guidance, the Company reclassified its opening unrealized gains balance of $2.3 million to Retained earnings. The adoption of this standard did not have a significant impact on the Company's results of operations, financial condition or liquidity.
Not Yet Adopted
In February 2018, the FASB issued ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This ASU allows a reclassification from accumulated other comprehensive income to retained earnings stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. The Company is evaluating the potential impact of the standard.
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which consists of a comprehensive lease accounting standard. Under the new standard, assets and liabilities arising from most leases will be recognized on the balance sheet. Leases will be classified as either operating or financing, and the lease classification will determine whether expense is recognized on a straight-line basis (operating leases) or based on an effective interest method (financing leases). The new standard is effective for interim and annual periods starting in 2019. A modified retrospective transition approach is required with certain practical expedients available. In July 2018, the FASB issued ASU No. 2018-11, "Leases: Targeted Improvements," which provides an optional transition method that allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has made significant progress with its assessment process and anticipates this standard will have a material impact on its consolidated balance sheet. While the Company continues to assess all potential impacts of the standard, it currently believes the most significant impact relates to recording lease assets and related liabilities on the balance sheet for its retail operations in The Americas Group. The Company plans to use the optional transition method and apply the lease standard as of January 1, 2019 and does not anticipate a material cumulative-effect adjustment to the opening balance of retained earnings.
NOTE 3REVENUE
The Company manufactures and sells paint, stains, supplies, equipment and floor covering through Company-owned stores, branded and private label products through retailers, and a broad range of industrial coatings directly to global manufacturing customers through company-operated branches. A large portion of the Company’s revenue is recognized at a point in time and made to customers who are not engaged in a long-term supply agreement or any form of contract with the Company. These sales are paid for at the time of sale in cash, credit card, or may be on account with the vast majority of customers having terms between 30 and 60 days, not to exceed one year. Many customers who purchase on account take advantage of early payment discounts offered by paying within 30 days of being invoiced. The Company estimates variable consideration or performs a constraint analysis for these sales on the basis of both historical information and current trends to estimate the expected amount of discounts to which customers are likely to be entitled.
The remaining revenue is governed by long-term supply agreements and related purchase orders (“contracts”) 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

7



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 14 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, 2018
$
2,104,555

 
$
33,031

 
$
135,150

 
$
208,909

 
$
8,745

Balance at September 30, 2018
2,584,280

 
59,872

 
172,912

 
245,803

 
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 6. Amounts reclassified during the quarter from deferred liabilities to Revenue were not material. The Company records a right of return liability within each of its operations to accrue for expected customer returns. Historical actual returns are used to estimate future returns as a percentage of current sales. Obligations for returns and refunds were not material individually or in the aggregate.


8



NOTE 4ACQUISITIONS
On June 1, 2017, the Company completed the acquisition of The Valspar Corporation (Valspar) at $113 per share in an all cash transaction for a total purchase price of $8.9 billion, net of divestiture proceeds of $431.0 million (Acquisition). On April 11, 2017, the Company and Valspar entered into a definitive agreement with Axalta Coating Systems Ltd. to divest the assets related to Valspar's North American industrial wood coatings business. The divestiture was also completed on June 1, 2017, and is reported as a discontinued operation with no pre-tax gain or loss but includes the tax expense effect of this separate transaction. Proceeds of $431.0 million were received for the divested assets sold. The divestiture resulted in a tax provision of $41.5 million, which reduced basic and diluted net income per common share for the nine months ended September 30, 2017 by $.45 and $.44, respectively. The Acquisition expanded the Company's diversified array of brands and technologies, expanded its global platform and added new capabilities in its packaging and coil businesses. See Note 2 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 for additional information.
The preliminary and final allocation of the fair value of the Acquisition is summarized in the following table. The allocation of the fair value is based on the acquisition method of accounting and third-party valuation appraisals.
(Millions of dollars)
 
 
 
 
 
 
 
 
Preliminary Allocation
 (as reported at March 31, 2018)
 
Measurement Period Adjustments
 
Final Allocation
(as reported at June 30, 2018)
 
 
 
 
 
 
 
Cash
 
$
129.1

 
$

 
$
129.1

Accounts receivable
 
817.5

 

 
817.5

Inventories
 
684.4

 

 
684.4

Indefinite-lived trademarks
 
775.9

 
(161.6
)
 
614.3

Finite-lived intangible assets
 
5,071.8

 
(148.9
)
 
4,922.9

Goodwill
 
5,654.4

 
234.4

 
5,888.8

Property, plant and equipment
 
841.0

 
(0.3
)
 
840.7

All other assets
 
231.3

 
3.8

 
235.1

Accounts payable
 
(553.2
)
 

 
(553.2
)
Long-term debt
 
(1,603.5
)
 

 
(1,603.5
)
Deferred taxes
 
(2,015.3
)
 
99.4

 
(1,915.9
)
All other liabilities
 
(1,094.0
)
 
(26.8
)
 
(1,120.8
)
Total
 
$
8,939.4

 
$

 
$
8,939.4

Total, net of cash
 
$
8,810.3

 
$

 
$
8,810.3

Finite-lived intangible assets include customer relationships of $3.2 billion and intellectual property and technology of $1.7 billion, which are being amortized over weighted average amortization periods ranging from 15 to 20 years. The measurement period adjustments for finite-lived intangible assets resulted in a $7.7 million reduction of amortization expense in the second quarter of 2018 that related to prior periods ($5.4 million for the year ended December 31, 2017 and $2.3 million for the three months ended March 31, 2018). Goodwill of $2.0 billion, $1.1 billion, and $2.8 billion was recorded in The Americas Group, Consumer Brands Group, and Performance Coatings Group, respectively, and relates primarily to expected synergies.
The results of operations for Valspar are included in the Company's consolidated financial statements from the date of acquisition. Net income for the three and nine months ended September 30, 2018 included Acquisition-related costs and purchase accounting amortization impacts of $111.7 million and $346.9 million, respectively, and Acquisition-related interest expense of $66.6 million and $204.4 million, respectively. Net income from continuing operations for the three and nine months ended September 30, 2017 included Acquisition-related costs of $192.5 million and $286.5 million, respectively, and Acquisition-related interest expense of $70.8 million and $112.2 million, respectively.
The following pro forma information presents consolidated financial information as if Valspar had been acquired at the beginning of 2016. Pro forma adjustments have been made to exclude Valspar's divested North American industrial wood coatings business results. Interest expense has been adjusted as though total debt related to the Acquisition had been outstanding at January 1, 2016. Amortization of acquired intangibles and fixed asset and inventory step-ups has been adjusted as though the amortization period started January 1, 2016. The unaudited pro forma consolidated financial information does not necessarily

9



reflect the actual results that would have occurred had the Acquisition taken place on January 1, 2016, nor is it meant to be indicative of future results of operations of the combined companies under the ownership and operation of the Company.
(Thousands of dollars except per share data)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2017
Net sales
$
4,507,020

 
$
12,655,349

Net income from continuing operations
370,915

 
907,069

Net income per common share from
continuing operations:
 
 
 
Basic
$
3.99

 
$
9.78

Diluted
$
3.90

 
$
9.57

NOTE 5—SHAREHOLDERS' EQUITY
Dividends paid on common stock during each of the first three quarters of 2018 and 2017 were $.86 per common share
and $.85 per common share, respectively.
The following tables summarize the changes in the components of Shareholders' Equity for the three months ended September 30, 2018 and 2017.
(Thousands of dollars except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Other
Capital
 
Retained Earnings
 
Treasury
Stock
 
Cumulative Other Comprehensive Loss
 
Total
Balance at June 30, 2018
$
117,964

 
$
2,795,196

 
$
5,997,628

 
$
(4,621,250
)
 
$
(542,449
)
 
$
3,747,089

Net income

 

 
354,027

 

 

 
354,027

Other comprehensive loss

 

 

 

 
(68,147
)
 
(68,147
)
Treasury stock purchased

 

 

 
(34,179
)
 

 
(34,179
)
Stock-based compensation activity
318

 
56,904

 

 
(158
)
 

 
57,064

Other adjustments

 
(117
)
 

 

 

 
(117
)
Cash dividends

 

 
(80,898
)
 

 

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

 
$
2,851,983

 
$
6,270,757

 
$
(4,655,587
)
 
$
(610,596
)
 
$
3,974,839

(Thousands of dollars except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Other
Capital
 
Retained Earnings
 
Treasury
Stock
 
Cumulative Other Comprehensive Loss
 
Total
Balance at June 30, 2017
$
117,071

 
$
2,606,757

 
$
4,448,788

 
$
(4,262,120
)
 
$
(519,236
)
 
$
2,391,260

Net income
 
 
 
 
316,606

 
 
 
 
 
316,606

Other comprehensive income
 
 
 
 
 
 
 
 
66,935

 
66,935

Stock-based compensation activity
118

 
47,419

 
 
 
(1,267
)
 
 
 
46,270

Other adjustments
 
 

 
1

 
(1
)
 
 
 

Cash dividends
 
 
 
 
(80,082
)
 
 
 
 
 
(80,082
)
Balance at September 30, 2017
$
117,189

 
$
2,654,176

 
$
4,685,313

 
$
(4,263,388
)
 
$
(452,301
)
 
$
2,740,989



10



The following tables summarize the changes in the components of Shareholders' equity for the nine months ended September 30, 2018 and 2017.
(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

 
$
5,502,730

 
$
(4,266,416
)
 
$
(384,870
)
 
$
3,692,188

Net income
 
 
 
 
1,007,758

 
 
 
 
 
1,007,758

Other comprehensive loss
 
 
 
 
 
 
 
 
(225,726
)
 
(225,726
)
Adjustment to initially apply ASU 2016-01
 
 
 
 
2,320

 
 
 
 
 
2,320

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

 
126,659

 
 
 
(20,837
)
 
 
 
106,543

Other adjustments
 
 
2,141

 
488

 
 
 
 
 
2,629

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

 
$
2,851,983

 
$
6,270,757

 
$
(4,655,587
)
 
$
(610,596
)
 
$
3,974,839

(Thousands of dollars except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Other
Capital
 
Retained Earnings
 
Treasury
Stock
 
Cumulative Other Comprehensive Loss
 
Total
Balance at December 31, 2016
$
116,563

 
$
2,488,564

 
$
4,049,497

 
$
(4,235,832
)
 
$
(540,351
)
 
$
1,878,441

Net income

 

 
874,869

 

 

 
874,869

Other comprehensive income
 
 
 
 
 
 
 
 
88,050

 
88,050

Stock-based compensation activity
626

 
165,612

 
 
 
(27,531
)
 
 
 
138,707

Other adjustments
 
 

 
(37
)
 
(25
)
 
 
 
(62
)
Cash dividends
 
 
 
 
(239,016
)
 
 
 
 
 
(239,016
)
Balance at September 30, 2017
$
117,189

 
$
2,654,176

 
$
4,685,313

 
$
(4,263,388
)
 
$
(452,301
)
 
$
2,740,989

NOTE 6—PRODUCT WARRANTIES
Changes in the Company’s accrual for product warranty claims during the first nine months of 2018 and 2017, including customer satisfaction settlements, were as follows:
 
(Thousands of dollars)
 
 
 
 
2018
 
2017
Balance at January 1
$
151,425

 
$
34,419

Charges to expense
22,148

 
27,802

Settlements
(39,933
)
 
(41,408
)
Acquisition, divestiture and other adjustments
(66,236
)
 
107,321

Balance at September 30
$
67,404

 
$
128,134


Warranty accruals acquired in connection with the Acquisition include warranties for certain products under extended furniture protection plans. In the U.S., revenue related to furniture protection plans is deferred and recognized over the life of the contract. The furniture protection plan business was divested during the third quarter ended September 30, 2018 for an immaterial amount that approximated net book value.
For further details on the Company’s accrual for product warranty claims, see Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.


11



NOTE 7—EXIT OR DISPOSAL ACTIVITIES
Liabilities associated with exit or disposal activities are recognized as incurred in accordance with the Exit or Disposal Cost Obligations Topic of the ASC. Qualified exit costs primarily include post-closure rent expenses, incremental post-closure costs and costs of employee terminations. Adjustments may be made to liabilities accrued for qualified exit costs if information becomes available upon which more accurate amounts can be reasonably estimated. Concurrently, property, plant and equipment is tested for impairment in accordance with the Property, Plant and Equipment Topic of the ASC, and if impairment exists, the carrying value of the related assets is reduced to estimated fair value. Additional impairment may be recorded for subsequent revisions in estimated fair value.
In the nine months ended September 30, 2018, twelve stores in The Americas Group and nine branches in the Performance Coatings Group were closed due to lower demand or redundancy. The Company continues to evaluate all legacy operations in response to the Acquisition in order to optimize restructured operations. These Acquisition-related restructuring charges to date are recorded in the Administrative segment as presented in the table below. The following table summarizes the activity and remaining liabilities associated with qualified exit costs at September 30, 2018:
(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
Provisions
 
 Actual
 
 
 
 
Balance at
 
in Cost of
 
Expenditures
 
Balance at
 
 
December 31,
 
Goods Sold
 
Charged to
 
September 30,
Exit Plan
 
2017
 
or SG&A
 
Accrual
 
2018
Administrative segment Acquisition-related restructuring:
 
 
 
 
 
 
 
 
Severance and related costs
 
$
6,019

 
$
10,842

 
$
(15,311
)
 
$
1,550

Other qualified exit costs
 
5,541

 

 
(2,864
)
 
2,677

Performance Coatings Group facilities shutdown in 2018:
 
 
 
 
 
 
 
 
Severance and related costs
 

 
13

 
(1
)
 
12

Other qualified exit costs
 

 
1,587

 
(114
)
 
1,473

Performance Coatings Group branches shutdown in 2017:
 
 
 
 
 
 
 
 
Severance and related costs
 
14

 
291

 
(183
)
 
122

Other qualified exit costs
 
121

 
370

 
(229
)
 
262

Consumer Brands Group facilities shutdown in 2016:
 
 
 
 
 
 
 
 
Severance and related costs
 
21

 

 
(21
)
 

Performance Coatings Group branches shutdown in 2016:
 
 
 
 
 
 
 
 
Other qualified exit costs
 
111

 

 
(61
)
 
50

Severance and other qualified exit costs for facilities shutdown prior to 2016
 
1,558

 


 
(811
)
 
747

Totals
 
$
13,385

 
$
13,103


$
(19,595
)
 
$
6,893

For further details on the Company’s exit or disposal activities, see Note 5 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.



12



NOTE 8HEALTH CARE, PENSION AND OTHER BENEFITS
Shown below are the components of the Company’s net periodic benefit (credit) cost for domestic defined benefit pension plans, foreign defined benefit pension plans and postretirement benefits other than pensions:
 
(Thousands of dollars)
Domestic Defined
Benefit Pension Plans
 
Foreign Defined
Benefit Pension Plans
 
Postretirement
Benefits Other than
Pensions
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Three Months Ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit (credit) cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
1,158

 
$
5,356

 
$
2,016

 
$
2,050

 
$
499

 
$
524

Interest cost
8,541

 
8,734

 
2,352

 
2,242

 
2,545

 
2,755

Expected return on assets
(14,383
)
 
(13,351
)
 
(2,685
)
 
(2,488
)
 

 

Recognition of:
 
 
 
 
 
 
 
 
 
 
 
  Unrecognized prior service cost
407

 
341

 


 


 
(1,643
)
 
(1,645
)
Unrecognized actuarial loss


 
1,334

 
383

 
474

 
581

 
8

Net periodic benefit (credit) cost
$
(4,277
)
 
$
2,414

 
$
2,066

 
$
2,278

 
$
1,982

 
$
1,642

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30:
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit (credit) cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
6,673

 
$
16,128

 
$
6,048

 
$
6,255

 
$
1,496

 
$
1,538

Interest cost
25,233

 
22,335

 
7,055

 
5,744

 
7,634

 
7,991

Expected return on assets
(43,199
)
 
(34,959
)
 
(8,055
)
 
(6,260
)
 

 

Recognition of:
 
 
 
 
 
 
 
 
 
 
 
  Unrecognized prior service cost
1,192

 
1,022

 


 


 
(4,927
)
 
(4,935
)
Unrecognized actuarial loss


 
4,657

 
1,149

 
324

 
1,744

 
24

Ongoing pension (credit) cost
(10,101
)
 
9,183

 
6,197

 
6,063

 
5,947

 
4,618

Settlements and curtailments
825

 


 


 


 


 
(9,332
)
Net periodic benefit (credit) cost
$
(9,276
)
 
$
9,183

 
$
6,197

 
$
6,063

 
$
5,947

 
$
(4,714
)
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. See Note 2 for information on the adoption of ASU No. 2017-07.
During the first quarter of 2018, the Company's domestic defined benefit plan was split into two separate overfunded plans: one that will continue to operate (Ongoing Plan) and one that will be terminated (Terminating Plan). The Terminating Plan was frozen as of March 31, 2018, which resulted in a curtailment expense. During the second quarter of 2018, the Terminating Plan was terminated. The Company expects to settle the related liabilities through a combination of (i) lump sum payments to eligible participants who elect to receive them and (ii) the purchase of annuity contracts for participants who either do not elect lump sums or are already receiving benefit payments. The lump sum payments are expected to be paid in December 2018, and the annuity contracts are expected to be purchased in 2019. The Company's settlement obligation will depend on the nature of participant settlements and the prevailing market conditions. The Company currently expects the total settlement charge to be between $41 million and $61 million, with approximately $20 million to be recognized during the fourth quarter of 2018 and the remainder to be recognized in 2019. It is possible the Company could ultimately incur settlement charges outside of this estimated range as a result of unforeseen changes in prevailing market conditions. The Company will use any remaining overfunded cash surplus balances to fund replacement plan contributions.
The settlement gain recognized in the nine months ended September 30, 2017 relates to the termination of a life insurance benefit plan during the second quarter of 2017.
For further details on the Company’s health care, pension and other benefits, see Note 6 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.


13



NOTE 9—OTHER LONG-TERM LIABILITIES
The Company initially provides for estimated costs of environmental-related activities relating to its past operations and third party sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs are determined based on currently available facts regarding each site. If the best estimate of costs can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is provided. At September 30, 2018, the unaccrued maximum of the estimated range of possible outcomes is $99.6 million higher than the minimum.
The Company continuously assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to any given site, the volumetric contribution which may be attributed to the Company relative to that attributed to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site.
Included in Other long-term liabilities at September 30, 2018 and 2017 were accruals for extended environmental-related activities of $209.9 million and $162.9 million, respectively. Estimated costs of current investigation and remediation activities of $27.0 million and $32.6 million are included in Other accruals at September 30, 2018 and 2017, respectively.
Four of the Company’s currently and formerly owned manufacturing sites account for the majority of the accrual for environmental-related activities and the unaccrued maximum of the estimated range of possible outcomes at September 30, 2018. At September 30, 2018, $188.2 million, or 79.4 percent of the total accrual, related directly to these four sites. In the aggregate unaccrued maximum of $99.6 million at September 30, 2018, $82.2 million, or 82.5 percent, related to the four manufacturing sites. While environmental investigations and remedial actions are in different stages at these sites, additional investigations, remedial actions and monitoring will likely be required at each site.
Management cannot presently estimate the ultimate potential loss contingencies related to these sites or other less significant sites until such time as a substantial portion of the investigation at the sites is completed and remedial action plans are developed. In the event any future loss contingency significantly exceeds the current amount accrued, the recording of the ultimate liability may result in a material impact on net income for the annual or interim period during which the additional costs are accrued. Management does not believe that any potential liability ultimately attributed to the Company for its environmental-related matters will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time during which environmental investigation and remediation takes place. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.
Management expects these contingent environmental-related liabilities to be resolved over an extended period of time. Management is unable to provide a more specific time frame due to the indefinite amount of time to conduct investigation activities at any site, the indefinite amount of time to obtain environmental agency approval, as necessary, with respect to investigation and remediation activities, and the indefinite amount of time necessary to conduct remediation activities.
For further details on the Company’s Other long-term liabilities, see Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
NOTE 10 – LITIGATION
In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, the Company accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and the amount of any such loss cannot be reasonably estimated, any potential liability ultimately determined to be attributable to the Company may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. In those cases where no accrual is recorded or

14



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, 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 and the County of Santa Clara, California and other public entities in the State of California. Except for the Santa Clara County, California proceeding, all of these legal proceedings have been concluded in favor of the Company and other defendants at various stages in the proceedings.
The proceedings initiated by the State of Rhode Island included two jury trials. At the conclusion of the second trial, the jury returned a verdict finding that (i) the cumulative presence of lead pigment in paints and coatings on buildings in the State of Rhode Island constitutes a public nuisance, (ii) the Company, along with two other defendants, caused or substantially contributed to the creation of the public nuisance and (iii) the Company and two other defendants should be ordered to abate the public nuisance. The Company and two other defendants appealed and, on July 1, 2008, the Rhode Island Supreme Court, among other determinations, reversed the judgment of abatement with respect to the Company and two other defendants. The Rhode Island Supreme Court’s decision reversed the public nuisance liability judgment against the Company on the basis that the complaint failed to state a public nuisance claim as a matter of law.

15



The Santa Clara County, California proceeding was initiated in March 2000 in the Superior Court of the State of California, County of Santa Clara. In the original complaint, the plaintiffs asserted various claims including fraud and concealment, strict product liability/failure to warn, strict product liability/design defect, negligence, negligent breach of a special duty, public nuisance, private nuisance, and violations of California’s Business and Professions Code. A number of the asserted claims were resolved in favor of the defendants through pre-trial proceedings. The named plaintiffs in the Fourth Amended Complaint, filed on March 16, 2011, are the Counties of Santa Clara, Alameda, Los Angeles, Monterey, San Mateo, Solano and Ventura, the Cities of Oakland and San Diego and the City and County of San Francisco. The Fourth Amended Complaint asserted a sole claim for public nuisance, alleging that the presence of lead pigments for use in paint and coatings in, on and around residences in the plaintiffs’ jurisdictions constitutes a public nuisance. The plaintiffs sought the abatement of the alleged public nuisance that exists within the plaintiffs’ jurisdictions. A trial commenced on July 15, 2013 and ended on August 22, 2013. The court entered final judgment on January 27, 2014, finding in favor of the plaintiffs and against the Company and two other defendants (ConAgra Grocery Products Company and NL Industries, Inc.). The final judgment held the Company jointly and severally liable with the other two defendants to pay $1.15 billion into a fund to abate the public nuisance. The Company strongly disagrees with the judgment.
On February 18, 2014, the Company filed a motion for new trial and a motion to vacate the judgment. The court denied these motions on March 24, 2014. On March 28, 2014, the Company filed a notice of appeal to the Sixth District Court of Appeal for the State of California. 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 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. 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.
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 has accrued $136.3 million as of September 30, 2018 for this litigation, which is 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.
Litigation seeking damages from alleged personal injury. The Company and other companies are defendants in a number of legal proceedings seeking monetary damages and other relief from alleged personal injuries. These proceedings include claims by children allegedly injured from ingestion of lead pigment or lead-containing paint and claims for damages allegedly incurred by the children’s parents or guardians. These proceedings generally seek compensatory and punitive damages, and seek other relief including medical monitoring costs. These proceedings include purported claims by individuals, groups of individuals and class actions.
The plaintiff in Thomas v. Lead Industries Association, et al., initiated an action in state court against the Company, other alleged former lead pigment manufacturers and the Lead Industries Association in September 1999. The claims against the Company and the other defendants included strict liability, negligence, negligent misrepresentation and omissions, fraudulent

16



misrepresentation and omissions, concert of action, civil conspiracy and enterprise liability. Implicit within these claims is the theory of “risk contribution” liability (Wisconsin’s theory which is similar to market share liability, except that liability can be joint and several) due to the plaintiff’s inability to identify the manufacturer of any product that allegedly injured the plaintiff. The case ultimately proceeded to trial and, on November 5, 2007, the jury returned a defense verdict, finding that the plaintiff had ingested white lead carbonate, but was not brain damaged or injured as a result. The plaintiff appealed and, on December 16, 2010, the Wisconsin Court of Appeals affirmed the final judgment in favor of the Company and other defendants.
Wisconsin is the only jurisdiction to date to apply a theory of liability with respect to alleged personal injury (i.e., risk contribution/market share liability) that does not require the plaintiff to identify the manufacturer of the product that allegedly injured the plaintiff in the lead pigment and lead-based paint litigation. Although the risk contribution liability theory was applied during the Thomas trial, the constitutionality of this theory as applied to the lead pigment cases has not been judicially determined by the Wisconsin state courts. However, in an unrelated action filed in the United States District Court for the Eastern District of Wisconsin, Gibson v. American Cyanamid, et al., on November 15, 2010, the District Court held that Wisconsin’s risk contribution theory as applied in that case violated the defendants’ right to substantive due process and is unconstitutionally retroactive. The District Court's decision in Gibson v. American Cyanamid, et al., was appealed by the plaintiff to the United States Court of Appeals for the Seventh Circuit. On July 24, 2014, the United States Court of Appeals for the Seventh Circuit reversed the judgment and remanded the case back to the District Court for further proceedings. On January 16, 2015, the defendants filed a petition for certiorari in the United States Supreme Court seeking that Court's review of the Seventh Circuit's decision, and on May 18, 2015, the United States Supreme Court denied the defendants' petition. The case is currently pending in the District Court. Three cases also are pending in the United States District Court for the Eastern District of Wisconsin (Ravon Owens v. American Cyanamid, et al., Cesar Sifuentes v. American Cyanamid, et al., and Glenn Burton, Jr. v. American Cyanamid, et al.) in which the Court has ruled on some dispositive motions and other dispositive motions are currently pending. The Court has not set trial dates in any of these three cases. 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.
Insurance coverage litigation. The Company and its liability insurers, including certain underwriters at Lloyd’s of London, initiated legal proceedings against each other to primarily determine, among other things, whether the costs and liabilities associated with the abatement of lead pigment are covered under certain insurance policies issued to the Company. The Company’s action, filed on March 3, 2006 in the Common Pleas Court, Cuyahoga County, Ohio, is currently stayed and inactive. The liability insurers’ action, which was filed on February 23, 2006 in the Supreme Court of the State of New York, County of New York, has been dismissed. An ultimate loss in the insurance coverage litigation would mean that insurance proceeds could be unavailable under the policies at issue to mitigate any ultimate abatement related costs and liabilities. The Company has not recorded any assets related to these insurance policies or otherwise assumed that proceeds from these insurance policies would be received in estimating any contingent liability accrual. Therefore, an ultimate loss in the insurance coverage litigation without a determination of liability against the Company in the lead pigment or lead-based paint litigation will have no impact on the Company’s results of operation, liquidity or financial condition. As previously stated, however, 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 11—OTHER
Other general expense - net
Included in Other general expense - net were the following:
(Thousands of dollars)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Provisions for environmental matters - net
$
2,299

 
$
4,183

 
$
34,317

 
$
5,812

Loss (gain) on sale or disposition of assets
9,227

 
(74
)
 
7,178

 
348

Total
$
11,526

 
$
4,109

 
$
41,495

 
$
6,160


17



Provisions for environmental matters - net represent site-specific increases or decreases to environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Environmental-related accruals are not recorded net of insurance proceeds in accordance with the Offsetting Subtopic of the Balance Sheet Topic of the ASC. See Note 9 for further details on the Company’s environmental-related activities.
The loss (gain) on 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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Dividend and royalty income
$
(2,995
)
 
$
(3,064
)
 
$
(5,967
)
 
$
(6,106
)
Net expense from banking activities
2,694

 
2,196

 
7,380

 
7,181

Foreign currency transaction related losses (gains)
6,157

 
571

 
9,321

 
(2,039
)
Miscellaneous pension income
(3,902
)
 
(1,596
)
 
(11,349
)
 
(13,389
)
Other income
(7,652
)
 
(12,167
)
 
(21,760
)
 
(23,064
)
Other expense
7,421

 
3,798

 
13,687

 
9,225

Total
$
1,723

 
$
(10,262
)
 
$
(8,688
)
 
$
(28,192
)
Foreign currency transaction related losses (gains) represent net realized losses (gains) on U.S. dollar-denominated liabilities of foreign subsidiaries and net realized and unrealized losses (gains) from foreign currency option and forward contracts. There were no material foreign currency option and forward contracts outstanding at September 30, 2018 and 2017.
Miscellaneous pension income consists of the non-service components of net pension costs (credits). See Note 2 for information on the adoption of ASU No. 2017-07 and Note 8 for the detail of net pension costs (credits).
Other income and Other expense included items of revenue, gains, expenses and losses that were unrelated to the primary business purpose of the Company. There were no other items within the other income or other expense caption that were individually significant.

18



NOTE 12—INCOME TAXES
The effective tax rate for income from continuing operations was 14.9 percent and 19.9 percent for the third quarter and first nine months of 2018, respectively, compared to 26.0 percent and 26.3 percent for the third quarter and first nine months of 2017, respectively. The decrease in the effective tax rate for the third quarter and first nine months of 2018 compared to 2017 was primarily due to the overall favorable impact of the Tax Cuts and Jobs Act (Tax Act). The Company received favorable tax benefits from the reduction in the corporate domestic income tax rate from 35 percent to 21 percent and a deduction related to foreign-derived intangible income. The Company recorded a favorable tax benefit of $17.4 million when completing its 2017 U.S. income tax return during the third quarter of 2018. The Company also received an income tax benefit relating to an increase in the tax basis of the assets of various foreign subsidiaries in the second quarter of 2018. These benefits were partially offset by a $27.5 million reversal of tax benefits recorded in the fourth quarter of 2017 primarily related to the Tax Act due to purchase accounting adjustments made in the second quarter of 2018 related to the Acquisition. The Tax Act’s elimination of the domestic manufacturing deduction, a reduction in allowable foreign tax credits and a decreased benefit related to international tax rate differences also negatively impacted the effective tax rate for the third quarter and first nine months of 2018.
In accordance with Staff Accounting Bulletin (SAB) No. 118, based on the information available as of December 31, 2017, the Company recorded a provisional reduction of income taxes of $607.9 million as a result of the Tax Act. The Company's deferred tax liabilities were reduced by $560.2 million due to the lower income tax rate. The remaining $47.7 million is the effects of the implementation of the territorial tax system and the remeasurement of U.S. deferred tax liabilities on unremitted foreign earnings. The final impact of the Tax Act may differ from the provisional amounts recorded at December 31, 2017, due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Act. During the second quarter of 2018, the Company made purchase accounting adjustments related to the Acquisition, which resulted in the reversal of $27.5 million of income tax benefits related to the remeasurement of U.S. deferred tax liabilities. There were no significant adjustments made in the third quarter of 2018 related to the Tax Act.
At December 31, 2017, the Company had $59.0 million in unrecognized tax benefits, the recognition of which would have an effect of $49.5 million on the effective tax rate. Included in the balance of unrecognized tax benefits at December 31, 2017 was $5.2 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised primarily of items related to federal audits of partnership investments and expiring statutes in federal, foreign and state jurisdictions. During the first nine months of 2018, the Company added an additional $24.0 million of unrecognized tax benefits primarily due to purchase accounting adjustments related to the Acquisition.
The Company classifies all income tax related interest and penalties as income tax expense. At December 31, 2017, the Company had accrued $14.6 million for the potential payment of income tax interest and penalties. During the first nine months of 2018, the Company added an additional $8.4 million of tax-related interest and penalties, primarily due to purchase accounting adjustments related to the Acquisition.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The IRS is currently auditing the Company's 2014 and 2015 income tax returns, as well as the 2014 and 2015 tax years of a Valspar subsidiary. No significant adjustments have been proposed by the IRS. The IRS and the Joint Committee of Taxation have approved refund claims for the 2010, 2011 and 2012 tax years. The Company will receive approximately $7.5 million of tax and interest related to the refund claims in the first quarter of the 2019 tax year. As of September 30, 2018, the federal statute of limitations has not expired for the 2013, 2014, 2015 and 2016 tax years.
As of September 30, 2018, the Company is subject to non-U.S. income tax examinations for the tax years of 2010 through 2017. In addition, the Company is subject to state and local income tax examinations for the tax years 2005 through 2017.

19



NOTE 13—NET INCOME PER COMMON SHARE

Basic and diluted earnings per share are calculated using the treasury stock method.
(Thousands of dollars except per share data)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Basic
 
 
 
 
 
 
 
Average common shares outstanding
93,099,714

 
92,988,118

 
93,121,900

 
92,793,275

Net income
 
 
 
 
 
 
 
Continuing operations
$
354,027

 
$
316,606

 
$
1,007,758

 
$
916,409

Discontinued operations (1)

 

 

 
(41,540
)
Net income
$
354,027

 
$
316,606

 
$
1,007,758

 
$
874,869

Basic net income per common share
 
 
 
 
 
 
 
Continuing operations
$
3.80

 
$
3.40

 
$
10.82

 
$
9.88

Discontinued operations (1)

 

 

 
(.45
)
Net income per common share
$
3.80

 
$
3.40

 
$
10.82

 
$
9.43

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Average common shares outstanding
93,099,714

 
92,988,118

 
93,121,900

 
92,793,275

Stock options and other contingently issuable shares (2)
1,982,841

 
2,106,912

 
1,990,622

 
1,942,845

Non-vested restricted stock grants
52,702

 
112,854

 
58,246

 
81,549

Average common shares outstanding assuming dilution
95,135,257

 
95,207,884

 
95,170,768

 
94,817,669

Net income
 
 
 
 
 
 
 
Continuing operations
$
354,027

 
$
316,606

 
$
1,007,758

 
$
916,409

Discontinued operations (1)

 

 

 
(41,540
)
Net income
$
354,027

 
$
316,606

 
$
1,007,758

 
$
874,869

Diluted net income per common share
 
 
 
 
 
 
 
Continuing operations
$
3.72

 
$
3.33

 
$
10.59

 
$
9.67

Discontinued operations (1)

 

 

 
(.44
)
Net income per common share
$
3.72

 
$
3.33

 
$
10.59

 
$
9.23


 
(1) 
Relates to the divestiture of Valspar's North American industrial wood coatings business. See Note 4.

(2) 
Stock options and other contingently issuable shares excluded 28,871 shares due to their anti-dilutive effect for the nine months ended September 30, 2018. There were no options excluded due to their anti-dilutive effect for the three months ended September 30, 2018. Stock options and other contingently issuable shares excluded 26,859 shares due to their anti-dilutive effect for the three and nine months ended September 30, 2017.



20



NOTE 14—REPORTABLE SEGMENT INFORMATION
The Company reports its segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources in accordance with the Segment Reporting Topic of the ASC. The Company has determined that it has three reportable operating segments: The Americas Group, Consumer Brands Group and Performance Coatings Group (individually, a Reportable Segment and collectively, the Reportable Segments).
(Thousands of dollars)
Three Months Ended September 30, 2018
 
The Americas
Group
 
Consumer Brands
Group
 
Performance
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
2,665,663

 
$
770,543

 
$
1,294,579

 
$
685

 
$
4,731,470

Intersegment transfers
233

 
936,281

 
4,474

 
(940,988
)
 

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

 
$