Management expects these contingent environmental-related liabilities to be resolved over an extended period of time. Management is unable to provide a more specific time frame due to the indeterminate amount of time to conduct investigation activities at any site, the indeterminate amount of time to obtain environmental agency approval, as necessary, with respect to investigation and remediation activities, and the indeterminate amount of time necessary to conduct remediation activities.
The Asset Retirement and Environmental Obligations Topic of the ASC requires a liability to be recognized for the fair value of a conditional asset retirement obligation if a settlement date and fair value can be reasonably estimated. The Company recognizes a liability for any conditional asset retirement obligation when sufficient information is available to reasonably estimate a settlement date to determine the fair value of such a liability. The Company has identified certain conditional asset retirement obligations at various current and closed manufacturing, distribution and store facilities. These obligations relate primarily to asbestos abatement, hazardous waste Resource Conservation and Recovery Act (RCRA) closures, well abandonment, transformers and used oil disposals and underground storage tank closures. Using investigative, remediation and disposal methods that are currently available to the Company, the estimated costs of these obligations were accrued and are not significant. The recording of additional liabilities for future conditional asset retirement obligations may result in a material impact on net income for the annual or interim period during which the costs are accrued. Management does not believe that any potential liability ultimately attributed to the Company for its conditional asset retirement obligations will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time over which sufficient information may become available regarding the closure or modification of any one or group of the Company’s facilities. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.
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.
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, dueDue 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.
fund. The plaintiffs proposed $730.0 million astrial court subsequently ruled the amount of the abatement fund and the Company and the other 2 defendants jointly proposed a maximum amount of no more thanto be $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 fundwhich was later reduced to $401.1 million.
The Company accrued $136.3 million for this litigation in the third quarter of 2018. During the third quarter of 2019, the Company reduced its accrual by $59.6 million as a result of the final court approved agreement to resolve the litigation and the initial payment of $25.0 million made to the plaintiffs in accordanceon September 23, 2019. At September 30, 2020 and 2019, the Company had accruals reported on the balance sheet of $64.7 million and $76.7 million, respectively, with the agreement. The next payment of $12.0 million is due within twelve months and is included in current liabilities whileand the remaining $52.7 million and $64.7 million, isrespectively, included in otherOther long-term liabilities.
filed a notice of appeal with the United States Court of Appeals for the Third Circuit. On August 12, 2019, the defendants filed their opening brief withFebruary 26, 2020, the Third Circuit affirmed the trial court's order to whichremand the plaintiffs filed their opposition briefcases to state court. Both cases were ordered to be remanded to state court on September 11, 2019, and the defendants filed their reply brief on October 2, 2019.July 21, 2020.
In both actions, the counties request declaratory relief establishing the existence of a public nuisance and the defendants' contribution to it, the abatement of an ongoing public nuisance arising from the presence of lead-based paint in housing throughout the applicable county, an injunction against future illicit conduct, and the costs of litigation and attorneys' fees.
In October 2018, the Company filed a Complaint in the United States District Court for the Eastern District of Pennsylvania against the Pennsylvania Counties of Delaware, Erie and York seeking injunctive and declaratory relief to prevent the violation of the Company's rights under the First Amendment and Due Process Clause of the U.S. Constitution. The Company voluntarily dismissed defendant Erie County on November 9, 2018 and defendant York County on November 21, 2018. Defendant Delaware County filed a motion to dismiss the Complaint, which the federal trial court granted on October 4, 2019. The Company intends to appealappealed the federal trial court’s dismissal.dismissal on November 1, 2019 to the United States Court of Appeals for the Third Circuit. On July 31, 2020, the Third Circuit affirmed the federal trial court's dismissal of the Complaint.
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.
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 6 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 1 of the 3 plaintiffs was consolidated with the 6 Allen cases referenced above. The parties have selected 4 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 theThe District Court previously issued an order scheduling trial in the Allen4 cases to commence on June 15, 2020, but the trial date was continued due to the COVID-19 pandemic, and Trammell cases.no new trial date has been scheduled.
on March 3, 2006 in the Common Pleas Court, Cuyahoga County, Ohio, previously was stayed and inactive. On January 9, 2019, the Company filed an unopposed motion to lift the stay with the trial court, which was granted, allowing the case to proceed. On June 28, 2019, the Company and its liability insurers each filed separate motions for summary judgment seeking various forms of relief. Oral argument regarding those motions is scheduled to occuroccurred on October 24, 2019.2019 and those motions remain pending before the trial court. 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.
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.
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.
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 significantAs a result of these audits, certain adjustments have been proposed. The Company is evaluating the proposed by the IRS.adjustments and believes that it is adequately reserved for any potential exposure. At September 30, 2019,2020, the federal statute of limitations had not expired for the 2013 through 20182019 tax years.
|
| | | | | | | | | | | | | | | |
| (Thousands of dollars except per share data) | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Basic | | | | | | | |
| Average shares outstanding | 91,823,573 |
| | 93,099,714 |
| | 91,850,565 |
| | 93,121,900 |
|
| Net income | $ | 576,438 |
| | $ | 354,027 |
| | $ | 1,292,678 |
| | $ | 1,007,758 |
|
| Basic net income per share | $ | 6.28 |
| | $ | 3.80 |
| | $ | 14.07 |
| | $ | 10.82 |
|
| | | | | | | | |
| Diluted | | | | | | | |
| Average shares outstanding | 91,823,573 |
| | 93,099,714 |
| | 91,850,565 |
| | 93,121,900 |
|
Stock options and other contingently issuable shares (1) | 1,742,298 |
| | 1,982,841 |
| | 1,611,078 |
| | 1,990,622 |
|
| Non-vested restricted stock grants | 38,389 |
| | 52,702 |
| | 48,461 |
| | 58,246 |
|
| Average shares outstanding assuming dilution | 93,604,260 |
| | 95,135,257 |
| | 93,510,104 |
| | 95,170,768 |
|
| Net income | $ | 576,438 |
| | $ | 354,027 |
| | $ | 1,292,678 |
| | $ | 1,007,758 |
|
| Diluted net income per share | $ | 6.16 |
| | $ | 3.72 |
| | $ | 13.82 |
| | $ | 10.59 |
|
22
| |
(1)
| There were 0 stock options and other contingently issuable shares excluded due to their anti-dilutive effect for the three months ended September 30, 2019. Stock options and other contingently issuable shares for the nine months endedSeptember 30, 2019 excludes 9,853 shares due to their anti-dilutive effect. There were 0 stock options and other contingently issuable shares excluded due to their anti-dilutive effect for the three months ended September 30, 2018. Stock options and other contingently issuable shares for the nine months ended September 30, 2018 excludes 28,871 shares due to their anti-dilutive effect.
|
NOTE 13—17—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 3 reportable operating segments: The Americas Group, Consumer Brands Group and Performance Coatings Group (individually, a Reportable Segment and collectively, the Reportable Segments).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | | | | | | | | |
| | The Americas
Group | | Consumer Brands
Group | | Performance
Coatings
Group | | Administrative | | Consolidated
Totals |
| Net external sales | $ | 2,978.3 | | | $ | 838.1 | | | $ | 1,305.3 | | | $ | 0.5 | | | $ | 5,122.2 | |
| Intersegment transfers | | | 1,024.3 | | | 28.7 | | | (1,053.0) | | | — | |
| Total net sales and intersegment transfers | $ | 2,978.3 | | | $ | 1,862.4 | | | $ | 1,334.0 | | | $ | (1,052.5) | | | $ | 5,122.2 | |
| | | | | | | | | |
| Segment profit | $ | 747.4 | | | $ | 198.3 | | | $ | 155.3 | | | | | $ | 1,101.0 | |
| | | | | | | | | |
| Interest expense | | | | | | | $ | (83.3) | | | (83.3) | |
| Administrative expenses and other | | | | | | | (142.1) | | | (142.1) | |
| Income before income taxes | $ | 747.4 | | | $ | 198.3 | | | $ | 155.3 | | | $ | (225.4) | | | $ | 875.6 | |
| | | | | | | | | | | | | | Three Months Ended September 30, 2019 | |
| (Thousands of dollars) | Three Months Ended September 30, 2019 | |
| | The Americas Group | | Consumer Brands Group | | Performance Coatings Group | | Administrative | | Consolidated Totals | | The Americas
Group | | Consumer Brands
Group | | Performance
Coatings
Group | | Administrative | | Consolidated
Totals |
| Net external sales | $ | 2,898,158 |
| | $ | 678,473 |
| | $ | 1,290,247 |
| | $ | 772 |
| | $ | 4,867,650 |
| Net external sales | $ | 2,898.2 | | | $ | 678.4 | | | $ | 1,290.2 | | | $ | 0.9 | | | $ | 4,867.7 | |
| Intersegment transfers | (6 | ) | | 995,115 |
| | 29,495 |
| | (1,024,604 | ) | |
| Intersegment transfers | | | 995.2 | | | 29.5 | | | (1,024.7) | | | — | |
| Total net sales and intersegment transfers | $ | 2,898,152 |
| | $ | 1,673,588 |
| | $ | 1,319,742 |
| | $ | (1,023,832 | ) | | $ | 4,867,650 |
| Total net sales and intersegment transfers | $ | 2,898.2 | | | $ | 1,673.6 | | | $ | 1,319.7 | | | $ | (1,023.8) | | | $ | 4,867.7 | |
| | | | | | | | | | | |
| Segment profit | $ | 663,671 |
| | $ | 114,891 |
| | $ | 137,432 |
| |
| | $ | 915,994 |
| Segment profit | $ | 663.6 | | | $ | 114.9 | | | $ | 137.5 | | | $ | 916.0 | |
| California litigation expense adjustment |
| |
| |
| | $ | 34,667 |
| | 34,667 |
| |
| California litigation expense | | California litigation expense | | $ | 34.7 | | | 34.7 | |
| Interest expense |
| |
| |
| | (85,282 | ) | | (85,282 | ) | Interest expense | | (85.3) | | | (85.3) | |
| Administrative expenses and other |
| |
| |
| | (155,546 | ) | | (155,546 | ) | Administrative expenses and other | | (155.6) | | | (155.6) | |
| Income before income taxes | $ | 663,671 |
| | $ | 114,891 |
| | $ | 137,432 |
| | $ | (206,161 | ) | | $ | 709,833 |
| Income before income taxes | $ | 663.6 | | | $ | 114.9 | | | $ | 137.5 | | | $ | (206.2) | | | $ | 709.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 | | | | | | | | |
| | The Americas
Group | | Consumer Brands
Group | | Performance
Coatings
Group | | Administrative | | Consolidated
Totals |
| Net external sales | $ | 7,807.5 | | | $ | 2,440.6 | | | $ | 3,622.7 | | | $ | 2.1 | | | $ | 13,872.9 | |
| Intersegment transfers | | | 2,770.0 | | | 105.0 | | | (2,875.0) | | | — | |
| Total net sales and intersegment transfers | $ | 7,807.5 | | | $ | 5,210.6 | | | $ | 3,727.7 | | | $ | (2,872.9) | | | $ | 13,872.9 | |
| | | | | | | | | |
| Segment profit | $ | 1,735.4 | | | $ | 519.2 | | | $ | 366.4 | | | | | $ | 2,621.0 | |
| Interest expense | | | | | | | $ | (257.6) | | | (257.6) | |
| Administrative expenses and other | | | | | | | (348.1) | | | (348.1) | |
| Income before income taxes | $ | 1,735.4 | | | $ | 519.2 | | | $ | 366.4 | | | $ | (605.7) | | | $ | 2,015.3 | |
|
| | | | | | | | | | | | | | | | | | | |
| (Thousands of dollars) | Three Months Ended September 30, 2018 |
| | The Americas Group | | Consumer Brands
Group | | Performance
Coatings
Group | | Administrative | | Consolidated Totals |
| Net external sales | $ | 2,665,663 |
| | $ | 770,543 |
| | $ | 1,294,579 |
| | $ | 685 |
| | $ | 4,731,470 |
|
| Intersegment transfers | 233 |
| | 936,281 |
| | 4,474 |
| | (940,988 | ) | |
|
| Total net sales and intersegment transfers | $ | 2,665,896 |
| | $ | 1,706,824 |
| | $ | 1,299,053 |
| | $ | (940,303 | ) | | $ | 4,731,470 |
|
| | | | | | | | | | |
| Segment profit | $ | 577,738 |
| | $ | 83,941 |
| | $ | 104,868 |
| |
| | $ | 766,547 |
|
| California litigation expense | | | | | | | $ | (136,333 | ) | | (136,333 | ) |
| Interest expense |
| |
| |
| | (92,281 | ) | | (92,281 | ) |
| Administrative expenses and other |
| |
| |
| | (121,980 | ) | | (121,980 | ) |
| Income before income taxes | $ | 577,738 |
| | $ | 83,941 |
| | $ | 104,868 |
| | $ | (350,594 | ) | | $ | 415,953 |
|
23
|
| | | | | | | | | | | | | | | | | | | |
| (Thousands of dollars) | Nine Months Ended September 30, 2019 |
| | The Americas Group | | Consumer Brands
Group | | Performance
Coatings
Group | | Administrative | | Consolidated Totals |
| Net external sales | $ | 7,809,059 |
| | $ | 2,137,447 |
| | $ | 3,838,002 |
| | $ | 1,863 |
| | $ | 13,786,371 |
|
| Intersegment transfers | 1 |
| | 2,768,947 |
| | 88,331 |
| | (2,857,279 | ) | |
|
| Total net sales and intersegment transfers | $ | 7,809,060 |
| | $ | 4,906,394 |
| | $ | 3,926,333 |
| | $ | (2,855,416 | ) | | $ | 13,786,371 |
|
| | | | | | | | | | |
| Segment profit | $ | 1,607,143 |
| | $ | 343,482 |
| | $ | 386,452 |
| |
| | $ | 2,337,077 |
|
| California litigation expense adjustment |
| |
| |
| | $ | 34,667 |
| | 34,667 |
|
| Interest expense |
| |
| |
| | (265,474 | ) | | (265,474 | ) |
| Administrative expenses and other |
| |
| |
| | (421,882 | ) | | (421,882 | ) |
| Income before income taxes | $ | 1,607,143 |
| | $ | 343,482 |
| | $ | 386,452 |
| | $ | (652,689 | ) | | $ | 1,684,388 |
|
|
| | | | | | | | | | | | | | | | | | | |
| (Thousands of dollars) | Nine Months Ended September 30, 2018 |
| | The Americas
Group | | Consumer Brands
Group | | Performance
Coatings
Group | | Administrative | | Consolidated Totals |
| Net external sales | $ | 7,371,135 |
| | $ | 2,204,668 |
| | $ | 3,891,678 |
| | $ | 2,791 |
| | $ | 13,470,272 |
|
| Intersegment transfers | 506 |
| | 2,657,614 |
| | 16,888 |
| | (2,675,008 | ) | |
|
| Total net sales and intersegment transfers | $ | 7,371,641 |
| | $ | 4,862,282 |
| | $ | 3,908,566 |
| | $ | (2,672,217 | ) | | $ | 13,470,272 |
|
| | | | | | | | | | |
| Segment profit | $ | 1,485,027 |
| | $ | 249,072 |
| | $ | 339,828 |
| |
| | $ | 2,073,927 |
|
| California litigation expense | | | | | | | $ | (136,333 | ) | | (136,333 | ) |
| Interest expense |
| |
| |
| | (277,335 | ) | | (277,335 | ) |
| Administrative expenses and other |
| |
| |
| | (402,634 | ) | | (402,634 | ) |
| Income before income taxes | $ | 1,485,027 |
| | $ | 249,072 |
| | $ | 339,828 |
| | $ | (816,302 | ) | | $ | 1,257,625 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | | | | | | | | |
| | The Americas
Group | | Consumer Brands
Group | | Performance
Coatings
Group | | Administrative | | Consolidated
Totals |
| Net external sales | $ | 7,809.1 | | | $ | 2,137.4 | | | $ | 3,838.0 | | | $ | 1.9 | | | $ | 13,786.4 | |
| Intersegment transfers | | | 2,769.0 | | | 88.3 | | | (2,857.3) | | | — | |
| Total net sales and intersegment transfers | $ | 7,809.1 | | | $ | 4,906.4 | | | $ | 3,926.3 | | | $ | (2,855.4) | | | $ | 13,786.4 | |
| | | | | | | | | |
| Segment profit | $ | 1,607.1 | | | $ | 343.5 | | | $ | 386.5 | | | | | $ | 2,337.1 | |
| California litigation expense | | | | | | | $ | 34.7 | | | 34.7 | |
| Interest expense | | | | | | | (265.5) | | | (265.5) | |
| Administrative expenses and other | | | | | | | (421.9) | | | (421.9) | |
| Income before income taxes | $ | 1,607.1 | | | $ | 343.5 | | | $ | 386.5 | | | $ | (652.7) | | | $ | 1,684.4 | |
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 insite and 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 wasoperations of 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. 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. 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. The Administrative segment did not include any significant foreign operations. 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 $918.8$967.6 million and $951.8$918.8 million for the third quarter of 20192020 and 20182019, respectively. Net external sales of all consolidated foreign subsidiaries were $2.768$2.572 billion and $2.890$2.768 billion for the first nine months ended September 30, 2019of 2020 and 2018,2019, respectively. Long-lived assets of these subsidiaries totaled $3.112$3.077 billion and $3.367$3.112 billion at September 30, 20192020 and 2018,2019, respectively. Domestic operations accounted for the remaining net external sales 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.in 2020 and 2019.
For further details on the Company's Reportable Segments, see Note 1921 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.2019.
NOTE 14—FAIR VALUE MEASUREMENTS
The Fair Value Measurements and Disclosures Topic of the ASC applies to the Company’s financial and non-financial assets and liabilities. The guidance applies when other standards require or permit the fair value measurement of assets and liabilities. The Company did not have any fair value measurements for its non-financial assets and liabilities during the third 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 |
| | September 30, | | Identical Assets | | Observable Inputs | | Inputs |
| | 2019 | | (Level 1) | | (Level 2) | | (Level 3) |
| Assets: | | | | | | | |
Deferred compensation plan assets (1) | $ | 56,821 |
| | $ | 27,758 |
| | $ | 29,063 |
| |
|
Net investment hedge asset (2) | 11,892 |
| | | | 11,892 |
| | |
| | $ | 68,713 |
| | $ | 27,758 |
| | $ | 40,955 |
| | |
| | | | | | | | |
| Liabilities: | | | | | | | |
Deferred compensation plan liabilities (3) | $ | 70,421 |
| | $ | 70,421 |
| | | |
|
| |
(1)
| The deferred compensation plan assets consist of the investment funds maintained for the future payments under the Company’s executive deferred compensation plans, which are structured as rabbi trusts. The investments are marketable securities accounted for under the Debt and Equity Securities Topic of the ASC. The level 1 investments are valued using quoted market prices multiplied by the number of shares. The level 2 investments are valued based on vendor or broker models. The cost basis of the investment funds is $52,088. |
(2) The net investment hedge asset is the fair value of the cross currency swap (see Note 16). The fair value is based on a valuation model that uses observable inputs, including interest rate curves and foreign currency rates.
(3) The deferred compensation plan liabilities are the Company’s liabilities under its deferred compensation plans. The liabilities represent the fair value of the participant shadow accounts, and the value is based on quoted market prices in active markets for identical assets.
NOTE 15—DEBT
The table below summarizes the carrying amount and fair value of the Company’s publicly traded debt and non-publicly traded debt in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. The fair values of the Company’s publicly traded debt are based on quoted market prices. The fair values of the Company’s non-publicly traded debt are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The Company’s publicly traded debt and non-publicly traded debt are classified as level 1 and level 2, respectively, in the fair value hierarchy.
|
| | | | | | | | | | | | | | | |
| (Thousands of dollars) | | | | | | | |
| | September 30, 2019 | | September 30, 2018 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| Publicly traded debt | $ | 8,203,048 |
| | $ | 8,693,801 |
| | $ | 8,734,479 |
| | $ | 8,512,513 |
|
| Non-publicly traded debt | 269,551 |
| | 263,138 |
| | 286,913 |
| | 276,440 |
|
In June 2019, the Company repurchased $60.9 million of its 2.25% Senior Notes due May 2020. This repurchase resulted in an insignificant gain.
In August 2019, the Company repurchased $1.010 billion of its 2.25% Senior Notes due May 2020 and $490.0 million of its 2.75% Senior Notes due June 2022. These repurchases resulted in a loss of $14.8 million recorded in other expense (income) - net. See Note 10.
In August 2019, the Company issued $800.0 million of 2.95% Senior Notes due 2029 and $550.0 million of 3.80% Senior Notes due 2049 (collectively the "New Notes") in a public offering. The net proceeds from the issuance of the New Notes will be used for general corporate purposes.
On October 8, 2019, the Company amended its five-year credit agreement entered into on July 19, 2018 to, among other things, extend the maturity date to October 8, 2024.
NOTE 16—DERIVATIVES AND HEDGING
On May 9, 2019, the Company entered into a U.S. Dollar to Euro cross currency swap contract with a total notional amount of $400.0 million to hedge the Company's net investment in its European operations. This contract has been designated as a net investment hedge and will mature on January 15, 2022. During the term of the contract, the Company will pay fixed-rate interest in Euros and receive fixed-rate interest in U.S. Dollars, thereby effectively converting a portion of the Company's U.S. Dollar denominated fixed-rate debt to Euro denominated fixed-rate debt. The fair value of the contract is included in other assets on the balance sheet. See Note 14. The changes in fair value are recognized in the foreign currency translation adjustments component of cumulative other comprehensive loss. For the three and nine months ended September 30, 2019, an unrealized gain of $13.9 million and $8.9 million, respectively, net of tax, was recognized in cumulative other comprehensive loss.
NOTE 17—LEASES
The Company leases retail stores, manufacturing and distribution facilities, office space and equipment under operating lease agreements. Operating lease right-of-use (ROU) assets and lease liabilities are recognized based on the present value of lease payments over the lease term. The majority of the ROU asset and lease liability balances relate to the retail operations of The Americas Group.
Most leases include one or more options to renew. The exercise of lease renewal options is at the Company's discretion and is not reasonably certain at lease commencement. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases relate primarily to common area maintenance, insurance, taxes and utilities associated with the properties. Variable payments for equipment leases relate primarily to hours, miles, or other quantifiable usage factors which are not determinable at the time the lease agreement is entered into by the Company. The Company has made an accounting policy election by class of underlying asset to not apply the recognition requirements of ASC 842 to short-term leases. As a result, certain leases with a term of 12 months or less are not recorded on the balance sheet and expense is recognized on a straight-line basis over the lease term. Most leases do not contain an implicit discount rate. Therefore, the Company’s estimated incremental borrowing rate based on information available at the time of lease inception is used to discount lease payments to present value.
Additional lease information is summarized below:
|
| | | | | | | |
| (Thousands of dollars) | | | |
| | Three Months | | Nine Months |
| | Ended | | Ended |
| | September 30, 2019 | | September 30, 2019 |
| | | | |
| Operating lease cost | $ | 114,598 |
| | $ | 338,627 |
|
| Short-term lease cost | 9,281 |
| | 29,680 |
|
| Variable lease cost | 18,576 |
| | 55,057 |
|
| | | | |
| Operating cash outflows from operating leases | 107,136 |
| | 320,571 |
|
At September 30, 2019, the weighted average remaining lease term and discount rate for operating leases was 6.0 years and 4.0%, respectively.
The following table reconciles the undiscounted cash flows for each of the next five years and thereafter to the operating lease liabilities recognized on the balance sheet. The reconciliation excludes short-term leases that are not recorded on the balance sheet.
|
| | | |
| (Thousands of dollars) | |
| | |
| Year Ending December 31, | |
| 2019 (excluding the nine months ended September 30, 2019) | $ | 108,257 |
|
| 2020 | 415,590 |
|
| 2021 | 358,978 |
|
| 2022 | 296,923 |
|
| 2023 | 230,582 |
|
| Thereafter | 525,892 |
|
| Total lease payments | 1,936,222 |
|
| Amount representing interest | (219,597 | ) |
| Present value of operating lease liabilities | $ | 1,716,625 |
|
NOTE 18—NON-TRADED INVESTMENTS
The Company has invested in the U.S. affordable housing and historic renovation real estate markets. These non-tradedmarkets and certain other investments that have been identified as variable interest entities. However, because the Company does not have the power to direct the day-to-day operations of the investments and the risk of loss is limited to the amount of contributed capital, the Company is not considered the primary beneficiary. In accordance with the Consolidation Topic of the ASC, the investments are not consolidated. For affordable housing investments entered into prior to the January 1, 2015 adoption of ASU 2014-01, the Company uses the effective yield method to determine the carrying value of the investments. Under the effective yield method, the initial cost of the investments is amortized to income tax expense over the period that the tax credits are recognized. For affordable housing investments entered into on or after the January 1, 2015 adoption of ASU 2014-01, the Company uses the proportional amortization method. Under the proportional amortization method, the initial cost of the investments is amortized to income tax expense in proportion to the tax credits and other tax benefits received. The carrying amount of the affordable housing and historic renovation investments, included in otherOther assets, was $225.4199.8 million and $214.4225.4 million at September 30, 20192020 and 20182019, respectively. The liability for estimated future capital contributions to the investments was $162.4155.2 million and $160.5162.4 million at September 30, 20192020 and 20182019, respectively.
Item 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(dollars in millions, except as noted and per share data) SUMMARY
BACKGROUND
The Sherwin-Williams Company, founded in 1866, and its consolidated wholly owned subsidiaries (collectively, the “Company”) are engaged in the development, manufacture, distribution and sale of paints,paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region and throughout Europe, Asia and Australia.
The Company is structured into three reportable segments—The Americas Group, Consumer Brands Group and Performance Coatings Group (collectively, the “Reportable Segments”)—and an Administrative segment in the same way it is internally organized for assessing performance and making decisions regarding allocation of resources. See Note 1317 of Item 1 for additional information on the Company's Reportable Segments.
SUMMARY
•Consolidated net sales increased 5.2% in the quarter to $5.122 billion
•Net sales from stores in U.S. and Canada open more than twelve calendar months increased 3.1% in the quarter
•Diluted net income per share increased to $7.66 per share in the quarter compared to $6.16 per share in the third quarter 2019
◦Third quarter 2020 included charges of $0.63 per share for acquisition-related amortization expense; third quarter 2019 included charges of $0.63 per share for acquisition-related amortization expense and $0.14 per share for integration costs, partially offset by a $0.28 per share benefit from the resolution of the California litigation
•Net operating cash increased 54% year-to-date to $2.56 billion, or 18.5% of sales
OUTLOOK
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (COVID-19) to be a global pandemic and recommended containment and mitigation measures worldwide. While the response to the outbreak continues to evolve, it has led to stay-at-home orders and physical distancing guidelines, among other mandates, that have substantially disrupted normal activities in most segments of the global economy. We have worked with government and health authorities to continue to operate our business during this crisis, including our company-operated stores, manufacturing plants and other facilities, due to the essential nature of our products. We have endeavored to follow recommended actions of government authorities and health officials in order to protect the health and well-being of our employees, customers and their families worldwide by implementing online and phone ordering of products, using curb side pickup or delivery, and implementing remote, alternate and flexible work arrangements where possible. We will continue to work with government authorities and health officials in implementing appropriate safety measures, adapting as recommendations and safety protocols evolve so that we may maintain our operations, keep our stores open and continue to return employees who work in office environments.
While the COVID-19 pandemic did not have a material adverse effect on our consolidated financial results for the first three quarters, we anticipate the impact of the deterioration of the U.S and global economies may continue and could have an adverse impact on our business in future periods. The extent to which our operations will be impacted by the outbreak depends largely on future developments, including the duration, severity and scope of the pandemic, all of which remain uncertain.
We have a strong liquidity position, with $619.9 million in cash and $3.50 billion of unused capacity under our credit facilities at September 30, 2020. The Company is in compliance with bank covenants and expects to remain in compliance. During the first half of the year, we took actions to preserve liquidity and generate cash flow during the crisis. As the circumstances around the COVID-19 pandemic remain fluid, we continue to actively monitor the pandemic's impact to the Company worldwide, including our financial position, liquidity, results of operations and cash flows, while managing our response to the crisis through collaboration with employees, customers, suppliers, government authorities, health officials and other business partners.
Please see Item 1A “Risk Factors” in Part II of this Quarterly Report on Form 10-Q for further information regarding the current and potential impact of the COVID-19 pandemic on the Company.
RESULTS OF OPERATIONS
The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The results of operations for the three and nine months ended September 30, 2020 are not indicative of the results to be expected for the full year as business is seasonal in nature with the majority of Net sales for the Reportable Segments traditionally occurring during the second and third quarters. However, periods of economic downturn can alter the Company's seasonal patterns.
The following discussion and analysis addresses comparisons of material changes in the consolidated financial statements for the three and nine months ended September 30, 2020 and 2019.
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (millions of dollars) | Three Months Ended September 30, | | | | | | | | Nine Months Ended September 30, | | | | | | |
| | 2020 | | 2019 | | $ Change | | % Change | | 2020 | | 2019 | | $ Change | | % Change |
| The Americas Group | $ | 2,978.3 | | | $ | 2,898.2 | | | $ | 80.1 | | | 2.8 | % | | $ | 7,807.5 | | | $ | 7,809.1 | | | $ | (1.6) | | | — | % |
| Consumer Brands Group | 838.1 | | | 678.4 | | | 159.7 | | | 23.5 | % | | 2,440.6 | | | 2,137.4 | | | 303.2 | | | 14.2 | % |
| Performance Coatings Group | 1,305.3 | | | 1,290.2 | | | 15.1 | | | 1.2 | % | | 3,622.7 | | | 3,838.0 | | | (215.3) | | | (5.6) | % |
| Administrative | 0.5 | | | 0.9 | | | (0.4) | | | (44.4) | % | | 2.1 | | | 1.9 | | | 0.2 | | | 10.5 | % |
| Total | $ | 5,122.2 | | | $ | 4,867.7 | | | $ | 254.5 | | | 5.2 | % | | $ | 13,872.9 | | | $ | 13,786.4 | | | $ | 86.5 | | | 0.6 | % |
Three Months Ended September 30, 2020
Consolidated net sales increased in the third quarter of 2020 due primarily to higher sales to most of the Consumer Brands Group's retail customers in all regions, continued strong sales in residential repaint and DIY in North American stores, and a return to growth in Performance Coatings Group. Currency translation rate changes decreased net sales by 0.9% in the third quarter of 2020. Net sales of all consolidated foreign subsidiaries were up 5.3% to $967.6 million in the third quarter compared to $918.8 million in the same period last year. The increase in net sales for all consolidated foreign subsidiaries in the third quarter was due primarily to higher volume sales to most of the Consumer Brands Group's retail customers. Net sales of all operations other than consolidated foreign subsidiaries were up 5.2% to $4.155 billion in the third quarter compared to $3.949 billion in the same period last year.
Net sales in The Americas Group increased in the third quarter of 2020 due primarily to higher residential repaint, DIY and new residential paint sales in the U.S. and Canada, partially offset by the impacts of COVID-19 on demand in some end market segments served. Net sales from stores open for more information.than twelve calendar months in the U.S. and Canada increased 3.1% in the third quarter compared to last year’s comparable period. Sales of non-paint products increased 0.2% compared to last year's third quarter. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold.
The Company’s financial condition, liquidityNet sales of the Consumer Brands Group increased in the third quarter due primarily to higher volume sales to most of the group’s retail customers in all regions.
Net sales in the Performance Coatings Group stated in U.S. dollars increased in the third quarter primarily due to higher sales volume and cash flow continued to be strong throughimproving demand in most businesses and regions, led by our Packaging and Industrial Wood divisions. Currency translation rate changes decreased the Performance Coatings Group's net sales by 1.4% in the third quarter.
Nine Months Ended September 30, 2020
Consolidated net sales increased slightly in the first nine months of 2019. A2020 due primarily to higher sales to most of the Consumer Brands Group's retail customers in all regions, mostly offset by demand softness in some end markets in The Americas Group and the Performance Coatings Group caused by the impacts of COVID-19 and unfavorable currency translation rate changes. Currency translation rate changes decreased net sales by 1.3% in the first nine months of 2020. Net sales of all consolidated foreign subsidiaries were down 7.1% to $2.572 billion in the first nine months compared to $2.768 billion in the same period last year. The decrease in net working capitalsales for all consolidated foreign subsidiaries in the first nine months was due primarily to demand softness in some end markets from the impacts of $95.1 million atCOVID-19, and unfavorable currency translation rate changes. Net sales of all operations other than consolidated foreign subsidiaries were up 2.6% to $11.301 billion in the first nine months compared to $11.019 billion in the same period last year.
Net sales in The Americas Group were essentially flat in the first nine months of 2020 due primarily to the impacts of COVID-19 on demand in most end market segments served during the second quarter. Net sales from stores open for more than twelve calendar months in the U.S. and Canada increased 0.7% in the first nine months compared to last year’s comparable
period. Sales of non-paint products decreased 4.3% over last year's first nine months. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold.
Net sales of the Consumer Brands Group increased in the first nine months due primarily to higher volume sales to most of the group’s North American and European retail customers.
Net sales in the Performance Coatings Group stated in U.S. dollars decreased in the first nine months primarily due to softer end market demand in most businesses, mostly due to the impacts of COVID-19, and unfavorable currency translation rate changes, partially offset by increased sales in the Packaging and Coil divisions in all regions. Currency translation rate changes decreased the Performance Coatings Group's net sales by 2.2% in the first nine months of 2020.
Income Before Income Taxes
The following table presents the components of income before income taxes as a percentage of net sales:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (millions of dollars, except % of sales data) | Three Months Ended September 30, | | | | | | | | | | | | Nine Months Ended September 30, | | | | | | |
| | 2020 | | | | 2019 | | | | | | | | 2020 | | | | 2019 | | |
| | | % of Net Sales | | | | % of Net Sales | | | | | | | | % of Net Sales | | | | % of Net Sales |
| Gross profit | $ | 2,455.3 | | | 47.9 | % | | $ | 2,225.6 | | | 45.7 | % | | | | | | $ | 6,553.9 | | | 47.2 | % | | $ | 6,142.1 | | | 44.6 | % |
| Selling, general and administrative expenses | 1,406.8 | | | 27.5 | % | | 1,345.2 | | | 27.6 | % | | | | | | 4,005.7 | | | 28.9 | % | | 3,920.5 | | | 28.4 | % |
| Other general expense - net | 10.5 | | | 0.2 | % | | 12.0 | | | 0.2 | % | | | | | | 13.1 | | | 0.1 | % | | 18.7 | | | 0.2 | % |
| Amortization | 78.7 | | | 1.5 | % | | 77.5 | | | 1.6 | % | | | | | | 234.2 | | | 1.7 | % | | 234.4 | | | 1.7 | % |
| | | | | | | | | | | | | | | | | | | |
| Interest expense | 83.3 | | | 1.6 | % | | 85.3 | | | 1.8 | % | | | | | | 257.6 | | | 1.8 | % | | 265.5 | | | 1.9 | % |
| Interest and net investment income | (1.4) | | | — | % | | (0.6) | | | — | % | | | | | | (2.6) | | | — | % | | (1.6) | | | — | % |
| California litigation expense | — | | | — | % | | (34.7) | | | (0.7) | % | | | | | | — | | | — | % | | (34.7) | | | (0.2) | % |
| Other expense - net | 1.8 | | | — | % | | 31.1 | | | 0.6 | % | | | | | | 30.6 | | | 0.2 | % | | 54.9 | | | 0.4 | % |
| Income before income taxes | $ | 875.6 | | | 17.1 | % | | $ | 709.8 | | | 14.6 | % | | | | | | $ | 2,015.3 | | | 14.5 | % | | $ | 1,684.4 | | | 12.2 | % |
Three Months Ended September 30, 2019 compared to the end of2020
Consolidated gross profit increased $229.7 million in the third quarter of 20182020 compared to the same period in 2019. Consolidated gross profit as a percent of consolidated net sales increased in the third quarter of 2020 to 47.9%, compared to 45.7% during the same period in 2019. Consolidated gross profit dollars and percent improved as a result of favorable customer and product mix and moderating raw material costs.
The Americas Group’s gross profit in the third quarter of 2020 was higher than last year by $107.2 million due primarily to favorable customer and product mix and moderating raw material costs, partially offset by unfavorable currency translation rate changes. The Americas Group’s gross profit as a percent of sales increased in the third quarter of 2020 compared to the same period in 2019 for these same reasons. The Consumer Brands Group’s gross profit increased by $90.3 million in the third quarter compared to the same period last year due primarily to higher sales volume to most of the group's retail customers and moderating raw material costs. The Consumer Brands Group’s gross profit as a percent of sales increased in the third quarter compared to the same period last year due to higher sales volume, moderating raw material costs and actions taken over the past year to improve international operating margins. The Performance Coatings Group’s gross profit increased $31.2 in the third quarter compared to the same period last year, when stated in U.S. dollars, primarily due to moderating raw material costs and higher sales volume. The Performance Coatings Group’s gross profit as a percent of sales increased in the third quarter compared to the same period last year for these same reasons.
Consolidated selling, general and administrative expenses (SG&A) increased $61.6 million in the third quarter of 2020 versus the same period last year due primarily to increased spending from new store openings, and to support higher DIY sales levels with our retail customers. As a percent of sales, consolidated SG&A remained relatively flat at 27.5% in the third quarter of 2020, from 27.6% in the same period last year.
The Americas Group’s SG&A increased $36.5 million in the third quarter of 2020 compared to the same period last year due primarily to increased spending from new store openings and additional sales reps. The Consumer Brands Group’s SG&A increased $8.3 million in the third quarter compared to the same period last year to support higher sales levels. The Performance Coatings Group’s SG&A increased $9.1 million in the third quarter compared to the same period last year to
support higher sales levels and investments in information technology systems. The Administrative segment’s SG&A increased $7.7 million in the third quarter compared to the same period last year due primarily to investments in information technology systems, partially offset by lower integration costs.
In the third quarter of 2020, amortization of acquired intangibles was $50.5 million and $21.7 million for the Performance Coatings and Consumer Brands Groups, respectively. In the third quarter of 2019, amortization of acquired intangibles was $50.5 million and $21.4 million for the Performance Coatings and Consumer Brands Groups, respectively.
Other expense - net improved $29.3 million in the third quarter of 2020 compared to the same period in 2019 primarily due to a decrease in current assets. Current portionforeign currency transaction related losses and the recognition of long-terma $14.8 million loss on extinguishment of debt in the prior year.
Nine Months Ended September 30, 2020
Consolidated gross profit increased $119.0$411.8 million while current portionin the first nine months of operating lease liabilities2020 compared to the same period in 2019. Consolidated gross profit as a percent of consolidated net sales increased $364.4 millionin the first nine months of 2020 to 47.2%, compared to 44.6% during the same period in 2019. Consolidated gross profit dollars and percent improved as a result of recording operating leases onfavorable customer and product mix and moderating raw material costs.
The Americas Group’s gross profit in the balance sheet as required by ASC 842 (See Notes 2 and 17). In June 2019, the Company repurchased $60.9 million of its 2.25% Senior Notes due May 2020. This repurchase resulted in an insignificant gain. In August 2019, the Company repurchased $1.010 billion of its 2.25% Senior Notes due May 2020 and $490.0 million of its 2.75% Senior Notes due June 2022. These repurchases resulted in a loss of $14.8 million recorded in other expense (income) - net (See Notes 10 and 15). In August 2019, the Company issued $800.0 million of 2.95% Senior Notes due 2029 and $550.0 million of 3.80% Senior Notes due 2049 (collectively the "New Notes") in a public offering. The net proceeds from the issuance of the New Notes will be used for general corporate purposes. The Company has been able to arrange sufficient short-term borrowing capacity at reasonable rates, and the Company continues to have sufficient total available borrowing capacity to fund its current operating needs. Net operating cash for thefirst nine months ended September 30, 2019of 2020 was higher than last year by $236.6 million due to moderating raw material costs and favorable customer and product mix, partially offset by unfavorable currency translation rate changes. The Americas Group’s gross profit as a cash sourcepercent of $1.661 billionsales increased in the first nine months of 2020 compared to a cash source of $1.431 billion for the same period in 2018.2019 for the same reasons. The Consumer Brands Group’s gross profit increased by $178.7 million in the first nine months compared to the same period last year due primarily to higher sales volume to most of the group's North American and European retail customers and moderating raw material costs. The Consumer Brands Group’s gross profit as a percent of sales increased in the first nine months compared to the same period last year for these same reasons. The Performance Coatings Group’s gross profit decreased $15.5 million in the first nine months compared to the same period last year, when stated in U.S. dollars, primarily due to unfavorable currency translation rate changes, partially offset by moderating raw material costs. The Performance Coatings Group’s gross profit as a percent of sales increased in the first nine months compared to the same period last year due to moderating raw material costs.
Consolidated SG&A increased $85.2 million in the first nine months of 2020 versus the same period last year due primarily to increased expenses in The Americas Group, partially offset by reduced or deferred corporate costs related to COVID-19. As a percent of sales, consolidated SG&A in the first nine months compared to the same period last year increased due to these same reasons.
The Americas Group’s SG&A increased $108.0 million in the first nine months of 2020 due primarily to increased spending from new store openings, additional sales reps and COVID-19 costs primarily in the second quarter. The Consumer Brands Group’s SG&A increased $3.1 million in the first nine months compared to the same period last year primarily to support higher sales levels, partially offset by currency translation rate changes. The Performance Coatings Group’s SG&A increased $2.1 million in the first nine months compared to the same period last year primarily due to investments in information technology systems and expenses related to COVID-19, partially offset by currency translation rate changes. The Administrative segment’s SG&A decreased $28.0 million in the first nine months compared to the same period last year due primarily to lower investments in information technology systems.
Other general expense - net decreased $5.6 million in the first nine months of 2020 compared to the same period in 2019 primarily due to increased gains from the sale and disposition of fixed assets in the current year.
In the first nine months of 2020, amortization of acquired intangibles was $150.6 million and $64.5 million for the Performance Coatings and Consumer Brands Groups, respectively. In the first nine months of 2019, amortization of acquired intangibles was $152.1 million and $64.1 million for the Performance Coatings and Consumer Brands Groups, respectively.
Other expense - net improved $24.3 million in the first nine months of 2020 compared to the same period in 2019 primarily due to a $$32.4 million charge recognized in 2019 for the settlement of a domestic pension plan, partially offset by a $6.5 million increase in losses recognized upon extinguishment of debt.
The following table presents income before income taxes by segment and as a percentage of net sales increased 2.9% inby segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | | % | | Nine Months Ended
September 30, | | | | % |
| | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
| Income Before Income Taxes: | | | | | | | | | | | |
| The Americas Group | $ | 747.4 | | | $ | 663.6 | | | 12.6 | % | | $ | 1,735.4 | | | $ | 1,607.1 | | | 8.0 | % |
| Consumer Brands Group | 198.3 | | | 114.9 | | | 72.6 | % | | 519.2 | | | 343.5 | | | 51.1 | % |
| Performance Coatings Group | 155.3 | | | 137.5 | | | 12.9 | % | | 366.4 | | | 386.5 | | | (5.2) | % |
| Administrative | (225.4) | | | (206.2) | | | (9.3) | % | | (605.7) | | | (652.7) | | | 7.2 | % |
| Total | $ | 875.6 | | | $ | 709.8 | | | 23.4 | % | | $ | 2,015.3 | | | $ | 1,684.4 | | | 19.6 | % |
| | | | | | | | | | | |
Income Before Income Taxes
as a % of Net Sales: | | | | | | | | | | | |
| The Americas Group | 25.1 | % | | 22.9 | % | | | | 22.2 | % | | 20.6 | % | | |
| Consumer Brands Group | 23.7 | % | | 16.9 | % | | | | 21.3 | % | | 16.1 | % | | |
| Performance Coatings Group | 11.9 | % | | 10.7 | % | | | | 10.1 | % | | 10.1 | % | | |
| Administrative | nm | | nm | | | | nm | | nm | | |
| Total | 17.1 | % | | 14.6 | % | | | | 14.5 | % | | 12.2 | % | | |
| | | | | | | | | | | |
| nm - not meaningful | | | | | | | | | | | |
Income Tax Expense
The effective tax rate was 19.4% for the third quarter of 20192020 compared to $4.868 billion from $4.731 billion in the third quarter of 2018. The effective tax rate was 18.8% for the third quarter of 2019 and 19.4% for the first nine months of 2020 compared to 14.9%23.3% for the third quarterfirst nine months of 2018. 2019. The decrease in the effective tax rate in the current year compared to prior year was primarily due to a $74.3 million tax provision recorded in the first nine months of 2019 related to the reversal of previously recognized net tax benefits from federal renewable energy tax credit funds. The effective tax rate was also favorably impacted by tax benefits related to employee share based payments during 2020 and 2019. The other significant components of the Company's tax rate were consistent year over year. See Note 15 of Item 1 for additional information.
Net Income Per Share
Diluted net income per share in the third quarter of 20192020 increased to $6.16$7.66 per share compared to $3.72$6.16 per share in the third quarter of 2018. Third quarter 2019 diluted2019. Diluted net income per share for the third quarter of 2020 included a $.28$0.63 per share charge for acquisition-related amortization expense. The third quarter of 2019 included charges of $0.63 per share for acquisition-related amortization expense and $0.14 per share for integration costs, partially offset by a benefit of $0.28 per share from the resolution of the California litigation which increased earnings per share andlitigation. Currency translation rate changes had a $.77 per share charge for acquisition-related costs. Acquisition-related costs are comprised of integration costs recorded in the Administrative segment and primarily amortization of acquired intangible assets recorded in the Performance Coatings and Consumer Brands segments (collectively, "Acquisition-related costs"). Integration costs consist of professional service expenses, salaries, and other employee-related expenses dedicated directly to the integration effort, severance expense, etc., which are included in Selling, general and administrative and other expenses and Cost of goods sold. The amortization of acquired intangible assets is included in Amortization. Third quarter 2018negligible impact on diluted net income per share included charges for Acquisition-related and California litigation costs of $.87 and $1.09 per share, respectively.
Consolidated net sales increased 2.3% in the first nine months of 2019 to $13.786 billion from $13.470 billion in the first nine months of 2018. The effective tax rate was 23.3% for the first nine months of 2019 compared to 19.9% in the first nine months of 2018. third quarter.
Diluted net income per share in the first nine months of 20192020 increased to $13.82$17.60 per share compared to $10.59$13.82 per share in the first nine months of 2018.2019. Diluted net income per share for the first nine months ended September 30,of 2020 included a $1.87 per share charge for acquisition-related amortization expense. The first nine months of 2019 included charges for Acquisition-related costs of $2.23$1.90 per share for acquisition-related amortization expense, $0.33 per share for integration costs, $0.79 per share for a tax credit investment loss of $.79and $0.27 per share andfor pension plan settlement expense, of $.27 per share, partially offset by a $.28benefit of $0.28 per share benefit from the resolution of the California litigation. TheCurrency translation rate changes decreased diluted net income per share in the first nine months of 2018 included charges of $3.05, $1.09 and $.25by $0.09 per share for Acquisition-related costs, the California litigation and environmental expense provisions, respectively.share.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation and fair presentation of the consolidated unaudited interim financial statements and accompanying notes included in this report are the responsibility of management. The financial statements and footnotes have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and contain certain amounts that were based upon management’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances. Management considered the impact of the uncertain economic environment and utilized certain outside sources of economic information when developing the basis for their estimates and assumptions. The impact of the global economic conditions on the estimates and assumptions used by management was believed to be reasonable under the circumstances. Management used assumptions based on historical results, considering the current economic trends, and other assumptions to
form the basis for determining appropriate carrying values of assets and liabilities that were not readily available from other sources. Actual results could differ from those estimates. Also, materially different amounts may result under materially different conditions, materially different economic trends or from using materially different assumptions. However, management believes that any materially different amounts resulting from materially different conditions or material changes in facts or circumstances are unlikely to significantly impact the current valuation of assets and liabilities that were not readily available from other sources.
A comprehensive discussion of the Company’s critical accounting policies, management estimates and significant accounting policies followed in the preparation of the financial statements is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1, on pages 45 through 49, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes in critical accounting policies, management estimates or accounting policies followed since the year ended December 31, 2018, except in connection with the adoption of ASC 842, "Leases," as described in Notes 2 and 17.
FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW
Overview
The Company’s financial condition, liquidity and cash flow continued to be strong throughduring the first nine months of 2020 as net operating cash was $2.564 billion, an improvement of $902.4 million from the prior year comparable period, primarily due to improved operating results as consolidated income before income taxes increased $330.9 million to $2.015 billion in the current year or 14.5% of net sales.
Cash and cash equivalents increased $458.1 million during the first nine months of 2020. Cash flow from operations funded normal seasonal working capital increases, allowed the Company to return $1.663 billion to shareholders in the form of share
buybacks and cash dividends and repay $205.7 million in long-term debt (net of proceeds from issuances) during the first nine months of 2020. At September 30, 2020, the Company's cash and cash equivalents were $619.9 million compared to $161.8 million and $189.6 million at December 31, 2019 and September 30, 2019, respectively.
Total debt at September 30, 2020 was $8.291 billion or 66.3% as a percentage of total capitalization compared to $8.685 billion or 67.8% at December 31, 2019 and $8.908 billion or 68.9% at September 30, 2019. At September 30, 2020, the Company had remaining short-term borrowing ability of $3.500 billion. The Company continues to maintain sufficient short-term borrowing capacity at reasonable rates, and the Company has sufficient cash on hand and total available borrowing capacity to fund its current operating needs.
Net Working Capital
Net working capital, decreased $95.1defined as total current assets less total current liabilities, increased $775.4 million to a surplus of $817.3 million at September 30, 20192020 compared to the enda surplus of the third quarter of 2018 primarily due to a decrease in current assets. Accounts receivable decreased $105.2$41.9 million at September 30, 2019 compared2019. The net working capital increase is primarily due to September 30, 2018, while cash generated from operations, a reduction in short-term borrowings and cash equivalents increased $8.1 million, inventories increased $22.6 million, and otherthe current assets increased $3.2 million. Current portion of long-term debt, increased $119.0 million, duepartially offset by decreases in accounts receivable and inventory.
Comparing current asset balances at September 30, 2020 to 2.25% Senior Notes due May 2020, while current portion of operating lease liabilities increased $364.4 million, as a result of recording operating leases on the balance sheet as required by ASC 842 (See Notes 2 and 17). Accounts payable decreased $137.3 million, accrued taxes decreased $3.7 million and other accruals decreased $18.6 million due to timing of payments. Short-term borrowings decreased $214.4 million. The Company accrued $136.3 million for the California public nuisance litigation expense in the third quarter of 2018 which was reduced in the third quarter of 2019 to $76.7 million as a result of the final court approved agreement to resolve the litigation and the initial payment of $25.0 million to the plaintiffs in accordance with the agreement. The next payment of $12.0 million is due within twelve months and is included in current liabilities, while the remaining $64.7 million is included other long-term liabilities (See Note 9).
In the first nine months ofSeptember 30, 2019, cash and cash equivalents increased $34.1$430.3 million, while accounts receivable increased $460.3decreased $24.5 million, inventories decreased $152.2 million due to increased $9.7 million,DIY paint demand, and other current assets increased $59.1$14.3 million and accounts payable increased $229.0 million when normal seasonal trends typically require significant growth in these categories. Accrued taxes increased $14.2 million, while other accrualsprimarily related to prepaid expenses. Current liability balances decreased $179.2 million and compensation and taxes withheld increased $34.4 million due to timing of payments. Short-term borrowings increased $107.3 million to support treasury stock purchases, common stock cash dividends, and normal operations.
Total debt at September 30, 2019 decreased $763.2 million2020 compared to $8.908 billion from $9.672 billion at September 30, 20182019 primarily due to a $435.5 million decrease in short-term borrowings, a $405.5 million decrease in the current portion of long-term debt, partially offset by increases in accrued expenses and decreased as a percentage of total capitalization to 68.9% from 71.1% at the end of the third quarter last year. Total debt decreased $435.4 million from December 31, 2018 and decreased as a percentage of total capitalization to 68.9% from 71.5%.accounts payable. At September 30, 2019, the Company had remaining short-term borrowing ability of $3.094 billion. Net operating cash improved $230.2 million in the first nine months of 2019 to a cash source of $1.661 billion from a cash source of $1.431 billion in the first nine months of 2018. In the twelve month period from October 1, 2018 through September 30, 2019, the Company generated net operating cash of $2.174 billion.
Net Working Capital, Debt and Other Long-Term Assets and Liabilities
Cash and cash equivalents increased $34.1 million during the first nine months of 2019. Cash flow from operations and increased short-term borrowings funded cash requirements for normal seasonal increases in working capital, treasury stock purchases of $577.8 million, net payments to reduce long-term debt of $542.9 million, payments of cash dividends of $314.9 million, capital expenditures of $224.8 million, and acquisitions of businesses of $72.6 million. At September 30, 2019 and December 31, 2018,2020, the Company’s current ratio was 1.011.19 compared to 1.031.02 and 1.01 at December 31, 2019 and September 30, 2018.2019, respectively.
Goodwill and Intangible Assets
Goodwill and intangible assets decreased $310.3$235.0 million from December 31, 20182019 and decreased $405.2$343.7 million from September 30, 2018.2019. The net decrease during the first nine months of 20192020 was primarily due to amortization of $234.4$234.2 million and foreign currency translation of $124.6 million, partially offset by acquisitions of $45.4 million and capitalized software additions of $3.3$1.6 million. The net decrease over the twelve month period from September 30, 20182019 was primarily due to
amortization of $313.5$312.6 million, impairment of indefinite-lived trademarks during the fourth quarter of 2019 of $122.1 million and foreign currency translation of $140.7$86.6 million, partially offset by acquisitions of $45.4 million and capitalized software additions of $3.5$3.6 million. The fair value of the Company's acquired intangible assets may be impacted by the Company's ongoing integration efforts.
During the first nine months of 2020, the Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic when evaluating whether an interim impairment trigger had occurred related to the Company's recognized goodwill and intangible assets. While the Company determined no impairment trigger occurred during the first nine months of 2020 and believes its assumptions and estimates of fair value related to reporting units and indefinite-lived trademarks are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results (including sales projections related to trademarks impaired during the fourth quarter of 2019) or other underlying assumptions could have a significant impact and future impairment charges could be required.
See Note 5, on pages 52 and 53,6 in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 for more information concerning the Company's goodwill and intangible assets, including impairment testing of these assets.
Deferred pension assets decreased $237.2 million during the first nine months of 2019 and decreased $272.5 million from September 30, 2018. The decrease in both periods is due to settling the majority of the Company's domestic defined benefit pension plan liabilities. See Note 7, on pages 55 through 60, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for more information concerning the Company’s benefit plan assets. 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.Other Assets
Other assets at September 30, 20192020 increased $33.9$6.8 million in the first nine months of 20192020 and increased $.7decreased $40.1 million from a year ago primarily due to increases in deferred tax assets and other investments.
Net property, plant and equipment increased $21.5 million in the first nine months of 2019 and increased $31.9 million in the twelve months since September 30, 2018.ago. The increase in the first nine months was primarily due to capital expendituresan increase in other investments, partially offset by a decrease in deposits. The decrease from September 30, 2019 was primarily due to decreases in deferred tax assets and other investments.
Property, Plant and Equipment
Net property, plant and equipment decreased $55.2 million in the first nine months of $224.82020 and decreased $18.3 million in the twelve months since September 30, 2019. The decrease in the first nine months was primarily due to depreciation expense of $200.0 million, unfavorable changes in currency translation rates of $14.6 million and acquisitionssale or disposition of $16.3fixed assets of $34.4 million, partially offset by capital expenditures of $193.8 million. Since September 30, 2019, the decrease was primarily due to depreciation expense of $195.0$267.1 million, sale or disposition of fixed assets of $17.8$54.1 million, and unfavorable changes in currency translation rates of $7.0 million. Since September 30, 2018, the increase was primarily due to$11.8 million, partially offset by capital expenditures of $309.6$297.9 million and acquisitions of $16.3 million, partially offset by depreciation expense of $261.6 million, sale or disposition of fixed assets of $21.0 million, and changes in currency translation rates of $11.3$16.8 million. Capital expenditures primarily represented expenditures associated with improvements and normal equipment
replacement in manufacturing and distribution facilities in the Consumer Brands Group, normal equipment replacement in The Americas and Performance Coatings Groups, and aviation transportation and information systems hardware in the Administrative Segment.segment.
Debt
In June 2019,March 2020, the Company repurchased $60.9issued $500.0 million of its 2.25%2.30% Senior Notes due May 2020. This repurchase resulted in an insignificant gain. In August 2019, the Company repurchased $1.010 billion2030 and $500.0 million of its 2.25%3.30% Senior Notes due May 2020 and $490.0 million of its 2.75% Senior Notes due June 2022. These repurchases resulted in a loss of $14.8 million recorded in other expense (income) - net (See Notes 10 and 15). In August 2019, the Company issued $800.0 million of 2.95% Senior Notes due 2029 and $550.0 million of 3.80% Senior Notes due 20492050 (collectively the "New Notes"“New Notes”) in a public offering. The net proceeds from the issuance of the New Notes will bewere used for general corporate purposes.
On May 9, 2019, the Company entered into a U.S. Dollar to Euro cross currency swap contract with a total notional amount of $400.0 million to hedge the Company's net investment in its European operations. This contract has been designated as a net investment hedge and will mature on January 15, 2022. During the term of the contract, the Company will pay fixed-rate interest in Euros and receive fixed-rate interest in U.S. Dollars, thereby effectively convertingrepurchase a portion of the Company's U.S. Dollar denominated fixed-rate debt2.75% Senior Notes due 2022 and redeem the 2.25% Senior Notes due May 2020. The repurchase of the 2.75% Senior Notes due 2022 during the first quarter of 2020 resulted in a loss of $21.3 million recorded in Other expense - net.
On September 14, 2020, the Company amended its five-year credit agreement entered into on May 6, 2016. The primary purpose of the amendment was to Euro denominated fixed-rate debt. Forextend the threematurity of $75.0 million of the commitments available for borrowing and nine months ended September 30, 2019, an unrealized gainobtaining the issuance, renewal, extension and increase of $13.9 million and $8.9 million, respectively, neta revolving letter of tax, was recognized in cumulative other comprehensive loss.credit from June 20, 2021 to June 20, 2025.
At September 30, 2019,2020, the Company hadCompany's outstanding debt was primarily comprised of $8.291 billion of long-term debt primarily associated with senior notes. There were no borrowings outstanding on its revolving lines of $305.8 million with a weighted average interest rate of 2.4%credit or under its commercial paper program. The Company had unused capacity under its globalvarious credit agreementagreements of $1.694$3.500 billion at September 30, 2019. On October 8, 2019, the Company amended its five-year credit agreement entered into on July 19, 2018 to, among other things, extend the maturity date to October 8, 2024. Short-term borrowings under various other foreign programs were $29.9 million with a weighted average interest rate of 4.3%.2020.
Defined Benefit Pension and Other Postretirement Benefit Plans
Long-term liabilities for postretirement benefits other than pensions did not change significantly from December 31, 20182019 and September 30, 2018.2019. See Note 7, on pages 55 through 60,8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 for more information concerning the Company’s benefit plan obligations.
Deferred Income Taxes
Deferred income taxes at September 30, 20192020 decreased $34.0$13.2 million in the first nine months of 2019,2020, and decreased $259.7$140.2 million from a year ago, primarily due to the overall favorable impactamortization of the Tax Cuts and Jobs Act.acquisition-related intangible assets.
Environmental-Related Liabilities
The operations of the Company, like those of other companies in the same industry, are subject to various federal, state and local environmental laws and regulations. These laws and regulations not only govern current operations and products, but also impose potential liability on the Company for past operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and the industry in the future. Management believes that the Company conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance.
Depreciation of capital expenditures and other expenses related to ongoing environmental compliance measures were included in the normal operating expenses of conducting business. The Company’s capital expenditures, depreciation and other expenses related to ongoing environmental compliance measures were not material to the Company’s financial condition, liquidity, cash flow or results of operations during the first nine months of 2019.2020. Management does not expect that such capital expenditures, depreciation and other expenses will be material to the Company’s financial condition, liquidity, cash flow or results of operations in 2019.2020. See Note 8 for further information on environmental-related long-term liabilities.
Contractual Obligations, Commercial Commitments and Warranties
Short-term borrowings increased $107.3decreased $204.5 million to $435.7$0.2 million at September 30, 20192020 from $328.4$204.7 million at December 31, 2018.2019. Total long-term debt decreased $542.6$189.5 million to $8.291 billion at September 30, 2020 from $8.481 billion at December 31, 2019, and decreased $181.6 million from $8.473 billion at September 30, 2019 from $9.015 billion at December 31, 2018, and decreased $548.8 million from $9.021 billion at September 30, 2018. 2019.
The California litigation accrual decreased $59.6$12.0 million to $76.7$64.7 million ($12.0 million current and $64.7$52.7 million long-term) at September 30, 2020 from $76.7 million at September 30, 2019 as a result of the Company remitting its annual payment in September in accordance with the final court approved agreement to resolve the litigation and the initial payment of $25.0 million to the plaintiffs in accordance with the agreement in September 2019.litigation. See Note 9. 9 for additional information.
There have been no other significant changes to the Company’s contractual obligations and commercial commitments in the third quarter of 20192020 as summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
See Note 5 for changes to the Company’s accrual for product warranty claims in the first nine months of 2019.
Litigation
See Note 9 for information concerning litigation.
Shareholders’ Equity
Shareholders’ equity increased $292.1$84.0 million to $4.207 billion at September 30, 2020 from $4.123 billion at December 31, 2019 and increased $184.4 million from $4.023 billion at September 30, 2019 from $3.731 billion at December 31, 2018 and increased $92.3 million from $3.931 billion at September 30, 2018. 2019.
The increase in Shareholders’ equity for the first nine months of 20192020 resulted primarily from net income of $1.293$1.623 billion and an increase in other capital of $182.9$220.3 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by increased$1.277 billion of Treasury stock activity primarily attributable to treasury stock of $732.1 million,repurchases, cash dividends paid on common stock of $314.9$367.8 million and an increase in cumulativeAccumulated other comprehensive loss of $137.3$112.8 million.
The increase in Shareholders' equity since September 30, 20182019 resulted primarily from net income of $1.394$1.872 billion and an increase in other capital of $227.4$294.0 million primarily associated with stock-based compensation expense and stock option exercises, partially offset by increased$1.481 billion of Treasury stock activity primarily attributable to treasury stock of $977.2 million,repurchases, cash dividends paid on common stock of $395.3$473.7 million and an increase in cumulativeAccumulated other comprehensive loss of $156.6$25.2 million.
During the first nine months of 2019,2020, the Company purchased 1,325,0002,300,000 shares of its common stock for treasury purposes through open market purchases. The Company acquires its common stock for general corporate purposes, and depending on its cash position and market conditions, it may acquire additional shares in the future. The Company had remaining authorization at September 30, 20192020 to purchase 8.806.15 million shares of its common stock.
In February 2019,2020, the Company's Board of Directors increased the quarterly cash dividend from $.86$1.13 per common share to $1.13$1.34 per common share. This quarterly dividend will result in an annual dividend for 20192020 of $4.52$5.36 per common share or a 38.7%32.5% payout of 20182019 diluted net income per common share.
Net Investment Hedges
In February 2020, the Company settled its $400.0 million U.S. Dollar to Euro cross currency swap contract entered into in May 2019 to hedge the Company's net investment in its European operations. At the time of the settlement, an unrealized gain of $11.8 million, net of tax, was recognized in AOCI. For the three and nine months ended September 30, 2019, an unrealized gain of $13.9 million and $8.9 million, respectively, net of tax, was recognized in AOCI.
In February 2020, the Company entered into two U.S. Dollar to Euro cross currency swap contracts to hedge the Company's net investment in its European operations. The contracts have a notional value of $500.0 million and $244.0 million, respectively, and mature on June 1, 2024 and November 15, 2021, respectively. During the term of the $500.0 million contract, the Company will pay fixed-rate interest in Euros and receive fixed-rate interest in U.S. Dollars, thereby effectively converting a portion of the Company's U.S. Dollar denominated fixed-rate debt to Euro denominated fixed-rate debt. During the term of the $244.0 million contract, the Company will pay floating-rate interest in Euros and receive floating-rate interest in U.S. Dollars. The fair value of the contracts are included in Other liabilities on the balance sheet. See Note 13. The changes in fair value are recognized in the foreign currency translation adjustments component of AOCI. For the three and nine months ended September 30, 2020, an unrealized loss of $26.4 million and $37.1 million, respectively, net of tax, was recognized in AOCI.
Cash Flow
Net operating cash for the nine months ended September 30, 20192020 was a cash source of $1.661$2.564 billion compared to a cash source of $1.431$1.661 billion for the same period in 2018.2019. The improvement in net operating cash was primarily due to an increase in net income and other long-term items,improved working capital management, partially offset by increasedan increase in cash requirements for working capital. long-term items.
Net investing cash usage increased $173.2decreased $111.9 million in the first nine months of 20192020 to a usage of $176.6 million from a usage of $288.5 million from a usage of $115.3 million in 20182019 primarily due to a decrease in cash used for acquisitions and an increase in capital expenditures and acquisitions. proceeds from sale of assets.
Net financing cash usage increased $16.2$574.5 million to a usage of $1.342$1.916 billion in the first nine months of 20192020 from a usage of $1.325$1.342 billion for the same period in 20182019 primarily due to increased payments of long-term debt,an increase in treasury stock purchases, repayments of short-term borrowings and cash dividends, and other accruals, partially offset by a decrease in long-term debt repayments and issuances, as well as the issuance of new100,000 shares of treasury stock (which were associated with the domestic defined benefit plan terminated in 2018).
long-term debt and an increase in short-term borrowings. In the twelve month period from October 1, 20182019 through September 30, 2019,2020, the Company generated net operating cash of $2.174$3.224 billion, used $424.9$350.7 million in investing activities and used $1.763$2.421 billion in financing activities.
Market Risk
The Company is exposed to market risk associated with interest rate, foreign currency and commodity fluctuations. The Company occasionally utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes. The Company believes it may be exposed to continuing market risk from foreign currency exchange rate and commodity price fluctuations. However, the Company does not expect that foreign currency exchange rate and commodity price fluctuations or hedging contract losses will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Financial Covenant
Certain borrowings contain a consolidated leverage covenant. The covenant states that the Company’s leverage ratio is not to exceed 3.75 to 1.00. The leverage ratio is defined as the ratio of total indebtedness (the sum of Short-term borrowings, Current portion of long-term debt and Long-term debt) at the reporting date to consolidated pro forma “Earnings Before Interest, Taxes, Depreciation, and Amortization” (EBITDA), as defined in the credit agreement, for the twelve month12-month period ended on the same date. Refer to the “Results of Operations” caption“Non-GAAP Financial Measures” section below for a reconciliation of EBITDA to Net income. At September 30, 2019,2020, the Company was in compliance with the covenant.covenant and expects to remain in compliance. The Company’s notes, debentures and revolving credit agreements contain various default and cross-default provisions. In the event of default under any one of these arrangements, acceleration of the maturity of any one or more of these borrowings may result. See Note 8, on pages 61 and 62,7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 for more information concerning the Company’s debt and related covenant.
RESULTS OF OPERATIONS
Shown below are net sales and income before taxes by segment for the three and nine months ended September 30, 2019:
|
| | | | | | | | | | | | | | | | | | | | | |
| (Thousands of dollars) | Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| Net Sales: | | | | | | | | | | | |
| The Americas Group | $ | 2,898,158 |
| | $ | 2,665,663 |
| | 8.7 | % | | $ | 7,809,059 |
| | $ | 7,371,135 |
| | 5.9 | % |
| Consumer Brands Group | 678,473 |
| | 770,543 |
| | -11.9 | % | | 2,137,447 |
| | 2,204,668 |
| | -3.0 | % |
| Performance Coatings Group | 1,290,247 |
| | 1,294,579 |
| | -0.3 | % | | 3,838,002 |
| | 3,891,678 |
| | -1.4 | % |
| Administrative | 772 |
| | 685 |
| | 12.7 | % | | 1,863 |
| | 2,791 |
| | -33.2 | % |
| Total | $ | 4,867,650 |
| | $ | 4,731,470 |
| | 2.9 | % | | $ | 13,786,371 |
| | $ | 13,470,272 |
| | 2.3 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| (Thousands of dollars) | Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| Income Before Income Taxes: | | | | | | | | | | | |
| The Americas Group | $ | 663,671 |
| | $ | 577,738 |
| | 14.9 | % | | $ | 1,607,143 |
| | $ | 1,485,027 |
| | 8.2 | % |
| Consumer Brands Group | 114,891 |
| | 83,941 |
| | 36.9 | % | | 343,482 |
| | 249,072 |
| | 37.9 | % |
| Performance Coatings Group | 137,432 |
| | 104,868 |
| | 31.1 | % | | 386,452 |
| | 339,828 |
| | 13.7 | % |
| Administrative | (206,161 | ) | | (350,594 | ) | | 41.2 | % | | (652,689 | ) | | (816,302 | ) | | 20.0 | % |
| Total | $ | 709,833 |
| | $ | 415,953 |
| | 70.7 | % | | $ | 1,684,388 |
| | $ | 1,257,625 |
| | 33.9 | % |
Three Months Ended September 30, 2019
Consolidated net sales increased in the third quarter of 2019 due primarily to higher paint sales volume in North American stores and selling price increases, partially offset by demand softness in some end markets outside the U.S. and unfavorable currency translation rate changes. Currency translation rate changes decreased net sales by .9% in the quarter. Net sales of all consolidated foreign subsidiaries were down 3.5% to $918.8 million in the third quarter compared to $951.8 million in the same period last year. The decrease in net sales for all consolidated foreign subsidiaries in the quarter was due primarily to demand softness in some end markets and unfavorable currency translation rate changes. Net sales of all operations other than
consolidated foreign subsidiaries were up 4.5% to $3.949 billion in the quarter compared to $3.780 billion in the same period last year.
Net sales in The Americas Group increased in the third quarter of 2019 due primarily to higher paint sales volume across all end markets in North American stores and selling price increases, partially offset by unfavorable currency translation rate changes. Currency translation rate changes decreased Group net sales by .5% in the quarter. Net sales from stores open for more than twelve calendar months in the U.S. and Canada increased 8.1% in the quarter compared to last year’s comparable period. Sales of non-paint products increased 8.3% over last year's third quarter. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold. Net sales of the Consumer Brands Group decreased in the third quarter due primarily to comparisons to load-in sales for a new customer program in 2018, the divestiture of a furniture protection plan business in the third quarter of 2018 and softer sales in some end markets outside of North America, partially offset by selling price increases and higher volume sales to most of the Consumer Brands Group's retail customers. Currency translation rate changes decreased Consumer Brands Group net sales by .8% in the quarter. Net sales in the Performance Coatings Group decreased in the third quarter primarily due to softer sales in some end markets outside North America and unfavorable currency translation rate changes, partially offset by selling price increases. Currency translation rate changes decreased Performance Coatings Group net sales by 1.6% in the quarter. Net sales in the Administrative segment, which primarily consist of external leasing revenue of excess headquarters space and leasing of facilities no longer used by the Company in its primary business, were essentially flat in the third quarter.
Consolidated gross profit increased $215.2 million in the third quarter of 2019 compared to the same period in 2018. Consolidated gross profit as a percent of consolidated net sales increased in the third quarter of 2019 to 45.7%, compared to 42.5% during the same period in 2018. Consolidated gross profit dollars and percent improved as a result of higher paint sales volume in North American stores and selling price increases, partially offset by unfavorable currency translation rate changes.
The Americas Group’s gross profit in the third quarter of 2019 was higher than last year by $153.8 million due to higher paint sales volume and selling price increases, partially offset by unfavorable currency translation rate changes. The Americas Group’s gross profit as a percent of sales increased in the quarter primarily due to increased paint sales volume and selling price increases. The Consumer Brands Group’s gross profit increased by $25.0 million in the quarter compared to the same period last year due primarily to selling price increases, partially offset by unfavorable currency translation rate changes. The Consumer Brands Group’s gross profit as a percent of sales was up in the quarter compared to the same period last year for these same reasons. The Performance Coatings Group’s gross profit increased $29.5 million in the third quarter compared to the same period last year, when stated in U.S. dollars, primarily due to selling price increases, partially offset by lower sales volumes and unfavorable currency translation rate changes. The Performance Coatings Group’s gross profit as a percent of sales was up in the quarter compared to the same period last year for these same reasons. The Administrative segment’s gross profit improved by $6.9 million in the third quarter compared to the same period last year due primarily to reduced integration expenses.
Selling, general and administrative expenses (SG&A) increased $72.1 million in the third quarter of 2019 versus the same period last year due primarily to increased expenses to support higher sales levels and net new store openings, partially offset by good cost control. As a percent of sales, consolidated SG&A increased to 27.6% in the third quarter of 2019, from 26.9% in the third quarter of 2018, for these same reasons.
The Americas Group’s SG&A increased $52.3 million in the third quarter compared to the same period last year due primarily to net new store openings and general comparable store expenses to support higher sales levels. The Consumer Brands Group’s SG&A decreased $1.3 million in the quarter compared to the same period last year, primarily due to reduced sales levels, good cost control and currency translation rate changes. The Performance Coatings Group’s SG&A increased $.9 million in the quarter compared to the same period last year primarily due to improvements to information technology systems, partially offset by good cost control and currency translation rate changes. The Administrative segment’s SG&A increased $20.2 million in the quarter compared to the same period last year due primarily to litigation expenses and improvements to information technology systems.
Other general expense - net was essentially flat in the third quarter of 2019, compared to the same period in 2018 at $12.0 million.
Amortization expense decreased $2.5 million in the third quarter of 2019 versus the same period in 2018 primarily from the Consumer Brands Group. In the third quarter of 2019, amortization of acquired intangibles was $50.5 million and $21.4 million for the Performance Coatings and Consumer Brands Groups, respectively. In the third quarter of 2018, amortization of acquired intangibles was $50.8 million and $22.4 million for the Performance Coatings and Consumer Brands Groups, respectively.
Interest expense decreased $7.0 million in the third quarter of 2019 compared to the same period in 2018.
Other expense (income) - net increased $29.3 million in the third quarter as compared to the same period in 2018 primarily due to losses related to the extinguishment of the 2.25% and 2.75% Senior Notes recorded in the Administrative segment and increases in foreign currency transaction related losses.
Consolidated income before income taxes increased $293.9 million in the third quarter of 2019 versus the same period last year primarily due to increased profit for all segments and a reduction of the California litigation provision recorded in the Administrative segment.
The effective tax rate was 18.8% for the third quarter of 2019 compared to 14.9% for the third quarter of 2018. The increase in the effective tax rate for the third quarter of 2019 compared to the third quarter of 2018 was primarily due to lower tax benefits in 2019 as a result of the favorable tax benefits recognized in 2018 related to the reduction in the domestic income tax rate from 35% to 21%.
Diluted net income per share in the third quarter of 2019 increased to $6.16 per share compared to $3.72 per share in the third quarter of 2018. Third quarter 2019 diluted net income per share included an accrued expense reduction related to the resolution of the California litigation, which increased earnings per share $.28, and charges for acquisition-related costs of $.77 per share. Currency translation rate changes decreased diluted net income per share in the third quarter by $.11 per share. Third quarter 2018 diluted net income per share included charges for acquisition-related and California litigation costs of $.87 and $1.09 per share, respectively.
Nine Months Ended September 30, 2019
Consolidated net sales increased in the first nine months of 2019 due primarily to higher paint sales volume in North American stores and selling price increases, partially offset by demand softness in some end markets outside the U.S. and unfavorable currency translation rate changes. Currency translation rate changes decreased net sales by 1.5% in the first nine months of 2019. Net sales of all consolidated foreign subsidiaries were down 4.2% to $2.768 billion in the first nine months compared to $2.890 billion in the same period last year. The decrease in net sales for all consolidated foreign subsidiaries in the first nine months was due primarily to demand softness in some end markets and unfavorable currency translation rate changes. Net sales of all operations other than consolidated foreign subsidiaries were up 4.1% to $11.018 billion in the first nine months compared to $10.580 billion in the same period last year.
Net sales in The Americas Group increased in the first nine months of 2019 due primarily to higher paint sales volume across all end markets in North American stores and selling price increases, partially offset by unfavorable currency translation rate changes. Currency translation rate changes decreased Group net sales by .9%. Net sales from stores open for more than twelve calendar months in the U.S. and Canada increased 5.5% in the first nine months compared to last year’s comparable period. Sales of non-paint products increased 5.8% over last year's first nine months. A discussion of changes in volume versus pricing for sales of products other than paint is not pertinent due to the wide assortment of general merchandise sold. Net sales of the Consumer Brands Group decreased in the first nine months primarily due to the divestiture of a furniture protection plan business in the third quarter of 2018, softer sales in some end markets outside of North America and unfavorable currency translation rate changes, partially offset by selling price increases and higher volume sales related to a new customer program. Currency translation rate changes decreased Consumer Brands Group net sales by 1.3% in the first nine months. Net sales in the Performance Coatings Group stated in U.S. dollars decreased in the first nine months primarily due to softer sales in some end markets outside North America and unfavorable currency translation rate changes, partially offset by selling price increases. Currency translation rate changes decreased Performance Coatings Group net sales by 2.7%. Net sales in the Administrative segment, which primarily consist of external leasing revenue of excess headquarters space and leasing of facilities no longer used by the Company in its primary business, were essentially flat in the first nine months.
Consolidated gross profit increased $406.2 million in the first nine months of 2019 compared to the same period in 2018. Consolidated gross profit as a percent of consolidated net sales increased in the first nine months of 2019 to 44.6%, compared to 42.6% during the same period in 2018. Consolidated gross profit dollars and percent improved as a result of higher paint sales volume in North American stores and selling price increases, partially offset by higher raw material costs in the first quarter of 2019 and unfavorable currency translation rate changes.
The Americas Group’s gross profit in the first nine months of 2019 was higher than last year by $256.4 million due to higher paint sales volume and selling price increases, partially offset by unfavorable currency translation rate changes. The Americas Group’s gross profit as a percent of sales was essentially flat in the first nine months as increased paint sales volume and selling price increases were mostly offset by raw material costs. The Consumer Brands Group’s gross profit increased by $83.4 million in the first nine months compared to the same period last year due primarily to greater supply chain efficiencies, moderating raw material costs and selling price increases, partially offset by unfavorable currency translation rate changes. The Consumer Brands Group’s gross profit as a percent of sales was up in the first nine months compared to the same period last year for these same reasons. The Performance Coatings Group’s gross profit increased $41.2 million in the first nine months compared to the
same period last year, when stated in U.S. dollars, primarily due to selling price increases and moderating raw material costs, partially offset by lower sales volumes and unfavorable currency translation rate changes. The Performance Coatings Group’s gross profit as a percent of sales was up in the first nine months compared to the same period last year for these same reasons. The Administrative segment’s gross profit improved by $25.2 million in the first nine months compared to the same period last year due primarily to reduced integration expenses.
SG&A increased $125.0 million in the first nine months of 2019 versus the same period last year due primarily to increased expenses to support higher sales levels in The Americas Group. As a percent of sales, consolidated SG&A increased slightly to 28.4% in the first nine months of 2019 versus 28.2% in 2018. These increases were primarily due to net new store openings and general comparable store expenses to support higher sales levels partially offset by good cost control.
The Americas Group’s SG&A increased $116.6 million in the first nine months due primarily to net new store openings and general comparable store expenses to support higher sales levels. The Consumer Brands Group’s SG&A decreased $5.5 million in the first nine months compared to the same period last year primarily due to currency translation rate changes and good cost control. The Performance Coatings Group’s SG&A decreased $13.3 million in the first nine months compared to the same period last year primarily due to currency translation rate changes, partially offset by improvements to information technology systems. The Administrative segment’s SG&A increased $27.1 million in the first nine months compared to the same period last year due primarily to litigation expenses and improvements to information technology systems.
Other general expense - net decreased $22.8 million in the first nine months of 2019 compared to the same period in 2018 primarily due to decreased environmental provisions in the Administrative segment.
Amortization expense decreased $4.6 million in the first nine months of 2019 versus the same period in 2018 primarily due to purchase accounting measurement period adjustments in second quarter 2018 which impacted amortization of acquired intangibles. In the first nine months of 2019, amortization of acquired intangibles was $152.1 million and $64.1 million for the Performance Coatings and Consumer Brands Groups, respectively. In the first nine months of 2018, amortization of acquired intangibles was $149.1 million and $68.0 million for the Performance Coatings and Consumer Brands Groups, respectively.
Interest expense decreased $11.9 million in the first nine months of 2019 compared to the same period in 2018.
Other expense (income) - net increased $63.6 million in the first nine months of 2019 compared to the same period in 2018 primarily due to a pension plan settlement expense, losses related to the extinguishment of the 2.25% and 2.75% Senior Notes recorded in the Administrative segment and an increase in miscellaneous pension expense.
Consolidated income before income taxes increased $426.8 million in the first nine months of 2019 versus the same period last year primarily due to an increased profit reported for all segments and reductions of environmental and the California litigation provisions recorded in the Administrative segment.
The effective tax rate was 23.3% for the first nine months of 2019 compared to 19.9% for the first nine months of 2018. The increase in the effective tax rate for the first nine months of 2019 compared to the first nine months of 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. (see Note 11).
Diluted net income per share in the first nine months of 2019 increased to $13.82 per share compared to $10.59 per share in the first nine months 2018. Diluted net income per share for the first nine months of 2019 included a $2.23 per share charge for acquisition-related costs, a tax credit investment loss of $.79 per share and a pension settlement expense of $.27 per share, partially offset by an accrued expense reduction related to the resolution of the California litigation of $.28 per share. The first nine months of 2018 included charges of $3.05, $1.09 and $.25 per share from acquisition-related costs, the California litigation and environmental expense provisions, respectively. Currency translation rate changes decreased diluted net income per share in the first nine months by $.21 per share.Non-GAAP Financial Measures
Management considers a measurementutilizes certain financial measures that isare not in accordance with U.S. generally accepted accounting principles a useful measurement(US GAAP) to analyze and manage the performance of the operational profitabilitybusiness. The required disclosures for these non-GAAP measures are shown below. The Company provides such non-GAAP information in reporting its financial results to give investors additional data to evaluate the Company's operations. Management does not, nor does it suggest investors should, consider such non-GAAP measures in isolation from, or in substitution for, financial information prepared in accordance with US GAAP.
EBITDA
EBITDA is a non-GAAP financial measure defined as net income from continuing operations before income taxes and interest, depreciation and amortization. Management considers EBITDA useful in understanding the operating performance of the Company. Some investment professionals also utilize such a measurement as an indicator of the value of profits and cash that are generated strictly from operating activities, putting aside working capital and certain other balance sheet changes. For this measurement, management increases net income for significant non-operating and non-cash expense items to arrive at an amount known as “Earnings Before Interest, Taxes, Depreciation and Amortization” (EBITDA). The reader is cautioned that the following value forCompany's EBITDA should not be compared to other entities unknowingly. Further, EBITDA should not be considered an alternativealternatives to netNet income or cash flows fromNet operating activitiescash as an indicator of operating performance or as a measure of liquidity. The reader should refer to the determination of netNet income and cash flows fromNet operating activitiescash in accordance with US GAAP disclosed in the Statements of Consolidated Income and Statements of Consolidated Cash Flows in Item 1.
The following table summarizes EBITDA as calculated by management for the periods indicated below:
| | | | | | | | | | | | | | | | | | | | | | | |
| (millions of dollars) | Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Net income | $ | 705.8 | | | $ | 576.5 | | | $ | 1,623.4 | | | $ | 1,292.7 | |
| Interest expense | 83.3 | | | 85.3 | | | 257.6 | | | 265.5 | |
| Income taxes | 169.8 | | | 133.3 | | | 391.9 | | | 391.7 | |
| Depreciation | 67.4 | | | 65.3 | | | 200.0 | | | 195.0 | |
| Amortization | 78.7 | | | 77.5 | | | 234.2 | | | 234.4 | |
| EBITDA | $ | 1,105.0 | | | $ | 937.9 | | | $ | 2,707.1 | | | $ | 2,379.3 | |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with U.S. generally accepted accounting principles disclosed(US GAAP) requires management to make estimates and assumptions that affect amounts reported in the
Statements accompanying consolidated unaudited interim financial statements. These determinations were made based upon management’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of Consolidated Income and Comprehensive Income and Statements of Consolidated Cash Flows. EBITDA as used by management is calculated as follows:these accounting policies
|
| | | | | | | | | | | | | | | |
| (Thousands of dollars) | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net income | $ | 576,438 |
| | $ | 354,027 |
| | $ | 1,292,678 |
| | $ | 1,007,758 |
|
| Interest expense | 85,282 |
| | 92,281 |
| | 265,474 |
| | 277,335 |
|
| Income taxes | 133,395 |
| | 61,926 |
| | 391,710 |
| | 249,867 |
|
| Depreciation | 65,209 |
| | 67,381 |
| | 194,957 |
| | 211,514 |
|
| Amortization | 77,548 |
| | 80,077 |
| | 234,400 |
| | 239,019 |
|
| EBITDA | $ | 937,872 |
| | $ | 655,692 |
| | $ | 2,379,219 |
| | $ | 1,985,493 |
|
A comprehensive discussion of the Company’s critical accounting policies, management estimates and significant accounting policies followed in the preparation of the financial statements is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes in critical accounting policies, management estimates or accounting policies followed since the year ended December 31, 2019.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report constitute “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are based upon management’s current expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth, future business plans and the costs and potential liability for environmental-related matters and the lead pigment and lead-based paint litigation. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as "believe," "expect," "may," "will," "should," "project," "could," "plan," "goal," "potential," "seek," "intend"“believe,” “expect,” “may,” “will,” “should,” “project,” “could,” “plan,” “goal,” “potential,” “seek,” “intend” or "anticipate"“anticipate” or the negative thereof or comparable terminology.
Readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside our control, that could cause actual results to differ materially from such statements and from our historical results and experience. These risks, uncertainties and other factors include such things as:
•general business conditions, strengths of retail and manufacturing economies and growth in the coatings industry;
•changes in general domestic and international economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions, and changing government policies, laws and regulations;
•changes in raw material and energy supplies and pricing;
•changes in our relationships with customers and suppliers;
•our ability to successfully integrate past and future acquisitions into our existing operations, including Valspar, as well as the performance of the businesses acquired;
risks inherent in the achievement of additional anticipated cost synergies resulting from the Valspar acquisition and the timing thereof;
•competitive factors, including pricing pressures and product innovation and quality;
•our ability to attain cost savings from productivity initiatives;
•risks and uncertainties associated with our expansion into and our operations in Asia, Europe, South America and other foreign markets, including general economic conditions, inflation rates, recessions, foreign currency exchange rates, foreign investment and repatriation restrictions, legal and regulatory constraints, civil unrest and other external economic and political factors;
•the achievement of growth in foreign markets, such as Asia, Europe and South America;
•increasingly stringent domestic and foreign governmental regulations, including those affecting health, safety and the environment;
•inherent uncertainties involved in assessing our potential liability for environmental-related activities;
•other changes in governmental policies, laws and regulations, including changes in tariff policies, as well as changes in accounting policies and standards and taxation requirements (such as new tax laws and new or revised tax law interpretations);
•the nature, cost, quantity and outcome of pending and future litigation and other claims, including the lead pigment and lead-based paint litigation, and the effect of any legislation and administrative regulations relating thereto; and
•adverse weather conditions or impacts of climate change, natural disasters and natural disasters.public health crises, including the COVID-19 pandemic; and
•the duration, severity and scope of the COVID-19 pandemic and the actions implemented by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19, which may exacerbate one or more of the aforementioned and/or other risks, uncertainties and factors more fully described in the Company’s reports filed with the Securities and Exchange Commission.
Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the above list should not be considered to be a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk associated with interest rate, foreign currency and commodity fluctuations. The Company occasionally utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes. The Company enters into option and forward currency exchange contracts and commodity swaps to hedge against value changes in foreign currency and commodities. The Company believes it may experience continuing losses from foreign currency translation and commodity price fluctuations. However, the Company does not expect currency translation, transaction, commodity price fluctuations or hedging contract losses to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. There were no material changes in the Company’s exposure to market risk since the disclosure included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chairman and Chief Executive Officer and our Senior Vice President—Finance and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, our Chairman and Chief Executive Officer and our Senior Vice President—Finance and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and accumulated and communicated to our management including our Chairman and Chief Executive Officer and our Senior Vice President—Finance and Chief Financial Officer, to allow timely decisions regarding required disclosure. During the first quarter of 2019, the Company implemented technology, processes and controls related to the global recording of right-of-use assets and lease liabilities in connection with the adoption of ASC 842, "Leases," as described in Notes 2 and 17 of the financial statements. Otherwise, there
There were no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On July 1, 2020, the Company was notified by the California Department of Pesticide Regulation (“DPR”) alleging that the Company engaged in the delivery and/or sale of misbranded and/or unregistered pesticides in violation of the California Food and Agricultural Code. DPR offered to settle the allegations for approximately $134,000. Subsequently, the Company provided DPR with information in support of a reduction of the settlement amount. The Company and DPR are involved in discussions to resolve the matter.
For information with respect toregarding certain other environmental-related matters and other legal proceedings, see the information included under the captions entitled “Environmental-Relatedtitled “Other Long-Term Liabilities” and “Litigation” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 8 and 9 of the “Notes to Condensed Consolidated Financial Statements,Statements.” whichThe information contained in Note 9 to the Condensed Consolidated Financial Statements is incorporated herein by reference.
Item 1A. Risk Factors.
We face a number of risks that could materially and adversely affect our business, results of operations, cash flow, liquidity or financial condition. A discussion of our risk factors can be found in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. During2019 and Part II, Item 1A, Risk Factors in our Quarterly Reports on Forms 10-Q for the third quarterquarterly periods ended SeptemberMarch 31, 2020 and June 30, 2020. The information below updates the risks relating to the COVID-19 pandemic disclosed in Part II, Item IA, Risk Factors in our Quarterly Reports on Forms 10-Q for the quarterly periods ended March 31, 2020 and June 30, 2020. The impact of COVID-19 may also exacerbate other risks discussed in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, there were noany of which could have a material effect on us. This situation continues to change rapidly and additional impacts are likely to arise that we are not aware of currently.
The COVID-19 pandemic has adversely impacted our business, results of operations, cash flow and financial condition, and the extent to which the COVID-19 pandemic will adversely impact our business, results of operations, cash flow, liquidity and financial condition in the future remains uncertain.
A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019. On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic and recommended containment and mitigation measures. On March 13, 2020, the United States declared a national emergency concerning the outbreak. Along with these declarations, extraordinary and wide-ranging actions have been taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19. These actions have included quarantines, physical distancing, face coverings, restrictions on public gatherings and other health and safety protocols, “stay-at-home” orders, travel restrictions, mandatory business closures, and other mandates that have substantially restricted individuals’ daily activities and curtailed or ceased many businesses’ normal operations. While some of these actions and mandates have been lifted or eased as COVID-19 cases decreased or stabilized and economies partially or fully reopened, certain jurisdictions have seen increases in COVID-19 cases recently, resulting in some of these actions and mandates being reinstated or new restrictions being imposed.
In response to the pandemic and these actions, we began implementing changes in our business in March 2020 designed to protect the health and well-being of our employees and customers and to support appropriate physical distancing and other health and safety protocols. In late March, we temporarily reduced store hours and closed our sales floors in our company-operated paint stores to the general public, requiring our customers to order product online or via phone and to access their products via curbside pickup or delivery. We implemented remote, alternate and flexible work arrangements where possible, including implementing split shifts at facilities and remote work options for non-essential on-site functions, enhanced cleaning and sanitary procedures, transitioned some of our facilities to manufacture hand sanitizer for use in our facilities and surrounding communities, implemented domestic and international travel restrictions, implemented return to work and visitor screening protocols, and postponed or canceled hosting or attending large events. We also enhanced certain employee benefits, such as tele-health, paid sick leave and family leave, and established voluntary leave of absence policies. In May, we began the process of reinstituting regular store hours and re-opening the sales floors in our stores with appropriate health and safety protocols, which resulted in all of our stores in the U.S. and Canada being fully re-opened. We also began the process of returning some of our employees who work in office environments to the office, although many employees continue to work remotely. The necessary and appropriate measures we have taken have resulted in additional costs and have adversely impacted our business and financial performance. In addition, we face additional operational risks in connection with remote work arrangements, including but not limited to cybersecurity risks and increased vulnerability to security breaches, cyber attacks, phishing, malware, including computer viruses and ransomware, or other similar events, intrusions and disruptions. As our
response to the pandemic continues and evolves, we expect to incur additional costs and are likely to experience further adverse impacts to our previously disclosed risk factors.business, each of which may be significant.
Given the inherent uncertainty surrounding COVID-19, we expect the pandemic will continue to create challenging operating environments and have an adverse impact on our business in the near term. If these conditions persist for a prolonged period, the COVID-19 pandemic, including any of the above factors and others that are currently unknown, may have a material adverse effect on our business, results of operations, cash flow, liquidity, or financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
A summary of the repurchase activity for the Company’s third quarter is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total
Number of
Shares
Purchased | | Average
Price
Paid Per
Share | | Total Number of
Shares
Purchased as
Part of a
Publicly
Announced
Plan | | Maximum Number of
Shares That
May Yet Be
Purchased
Under the
Plan |
| July 1 - July 31 | | | | | | | | |
Share repurchase program (1) | | 50,000 | | | $ | 648.56 | | | 50,000 | | | 6,700,000 | |
Employee transactions (2) | | 2,585 | | | $ | 601.60 | | | | | N/A |
| | | | | | | | |
| | | | | | | | |
| August 1 - August 31 | | | | | | | | |
Share repurchase program (1) | | 275,000 | | | $ | 657.30 | | | 275,000 | | | 6,425,000 | |
Employee transactions (2) | | 124 | | | $ | 666.94 | | | | | N/A |
| | | | | | | | |
| | | | | | | | |
| September 1 - September 30 | | | | | | | | |
Share repurchase program (1) | | 275,000 | | | $ | 695.43 | | | 275,000 | | | 6,150,000 | |
Employee transactions (2) | | | | | | | | N/A |
| | | | | | | | |
| Total | | | | | | | | |
Share repurchase program (1) | | 600,000 | | | $ | 674.05 | | | 600,000 | | | 6,150,000 | |
Employee transactions (2) | | 2,709 | | | $ | 604.59 | | | | | N/A |
| | | | | | | | |
(1)Shares were purchased through the Company’s publicly announced share repurchase program. There is no expiration date specified for the program.
(2)Shares were delivered to satisfy the exercise price and/or tax withholding obligations by employees who exercised stock options or had restricted stock units vest.
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| Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Number of Shares Purchased as Part of a Publicly Announced Plan | | Number of Shares That May Yet Be Purchased Under the Plan |
| July 1 - July 31 | | | | | | | | |
| | Share repurchase program (1) | | 100,000 |
| | $ | 509.46 |
| | 100,000 |
| | 8,950,000 |
|
| | Employee transactions (2) | | 3,583 |
| | $ | 465.22 |
| | | | N/A |
|
| | | | | | | | | | |
| August 1 - August 31 | | | | | | | | |
| | Share repurchase program (1) | | 150,000 |
| | $ | 508.83 |
| | 150,000 |
| | 8,800,000 |
|
| | Employee transactions (2) | |
| |
| | | | N/A |
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| September 1 - September 30 | | | | | | | | |
| | Share repurchase program (1) | |
|
| |
|
| |
|
| | 8,800,000 |
|
| | Employee transactions (2) | | 2,802 |
| | $ | 545.48 |
| | | | N/A |
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| Total | | |
| | | |
| | |
| | Share repurchase program (1) | | 250,000 |
| | $ | 509.08 |
| | 250,000 |
| | 8,800,000 |
|
| | Employee transactions (2) | | 6,385 |
| | $ | 500.44 |
| | | | N/A |
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| Shares were purchased through the Company’s publicly announced share repurchase program. There is no expiration date specified for the program. The Company had remaining authorization at September 30, 2019 to purchase 8,800,000 shares.
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(2)
| Shares were delivered to satisfy the exercise price and/or tax withholding obligations by employees who exercised stock options or had restricted stock units vest. |
Item 5. Other Information.
During the nine months ended September 30, 2019,2020, the Audit Committee of the Board of Directors of the Company approved permitted non-audit services to be performed by Ernst & Young LLP, the Company’s independent registered public accounting firm. These non-audit services were approved within categories related to domesticglobal tax advisory and tax compliance and other advisory services.
Item 6. Exhibits.
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| 4.1 | Thirteenth Supplemental IndentureAmendment No. 11 to the Credit Agreement, dated as of September 14, 2020, by and betweenamong the Company, Citicorp USA, Inc., as administrative agent and Wells Fargo Bank, National Association, as trustee, dated August 26, 2019 (including Form of Note),issuing bank, and the lenders party thereto, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 26, 2019,September 14, 2020, and incorporated herein by reference.
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4.210.1* |
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10.1* |
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| 31(a) | |
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| 31(b) | |
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| 32(a) | |
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| 32(b) | |
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| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
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| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| 104 | The cover page from this Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2019,2020, formatted in Inline XBRL and contained in Exhibit 101. |
* Management contract or compensatory plan or arrangement.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | THE SHERWIN-WILLIAMS COMPANY |
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| October 27, 2020 | By: | THE SHERWIN-WILLIAMS COMPANY |
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October 22, 2019 | By: | /s/ Jane M. Cronin |
| | Jane M. Cronin |
| | Senior Vice President - |
| | Corporate Controller |
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October 22, 201927, 2020 | By: | /s/ Allen J. Mistysyn |
| | Allen J. Mistysyn |
| | Senior Vice President - Finance |
| | and Chief Financial Officer |