Item 6. SELECTED FINANCIAL DATA

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Item 6. SELECTED FINANCIAL DATA



(millions of dollars, except per common share data)	2019		2018		2017 (1)		2016		2015
Operations
Net sales	$	17,900.8	$	17,534.5	$	14,983.8	$	11,855.6	$	11,339.3
Cost of goods sold	9,864.7		10,115.9		8,265.0		5,934.3		5,779.7
Selling, general and administrative expenses	5,274.9		5,033.8		4,797.6		4,140.3		3,885.7
Amortization	312.8		318.1		206.8		25.4		28.2
Interest expense	349.3		366.7		263.5		154.1		61.8
Income from continuing operations before income taxes (2)	1,981.8		1,359.7		1,469.3		1,595.2		1,549.0
Net income from continuing operations (3)	1,541.3		1,108.7		1,769.5		1,132.7		1,053.8



Financial Position
Accounts receivable - net	$	2,088.9	$	2,018.8	$	2,104.6	$	1,231.0	$	1,114.3
Inventories	1,889.6		1,815.3		1,742.5		1,068.3		1,018.5
Working capital - net	109.8		46.8		419.8		798.1		515.2
Property, plant and equipment - net	1,835.2		1,776.8		1,877.1		1,095.9		1,041.8
Total assets (4)	20,496.2		19,134.3		19,899.5		6,752.5		5,778.9
Long-term debt	8,050.7		8,708.1		9,885.7		1,211.3		1,907.3
Total debt	8,685.2		9,343.7		10,520.6		1,952.5		1,950.0
Shareholders’ equity	4,123.3		3,730.7		3,647.9		1,878.4		867.7



Per Share Information
Average shares outstanding - diluted (thousands)	93,447		94,988		94,927		94,488		94,543
Book value	$	44.75	$	40.07	$	38.86	$	20.20	$	9.41
Net income from continuing operations - diluted (5)	16.49		11.67		18.64		11.99		11.15
Cash dividends	4.52		3.44		3.40		3.36		2.68



Financial Ratios
Return on sales	8.6	%	6.3	%	11.8	%	9.6	%	9.3	%
Asset turnover	0.9	x	0.9	x	0.8	x	1.8	x	2.0	x
Return on assets	7.5	%	5.8	%	8.9	%	16.8	%	18.2	%
Return on equity (6)	41.3	%	30.4	%	94.2	%	130.5	%	105.8	%
Dividend payout ratio (7)	38.7	%	18.5	%	28.4	%	30.1	%	30.6	%
Total debt to capitalization	67.8	%	71.5	%	74.3	%	51.0	%	69.2	%
Current ratio	1.0		1.0		1.1		1.3		1.2
Interest coverage (8)	6.7	x	4.7	x	6.6	x	11.4	x	26.1	x
Net working capital to sales	0.6	%	0.3	%	2.8	%	6.7	%	4.5	%
Effective income tax rate (9)	22.2	%	18.5	%	25.1	%	29.0	%	32.0	%



General
Earnings before interest, taxes, depreciation and amortization (EBITDA) (10)	$	2,906.0	$	2,322.7	$	2,224.6	$	1,946.8	$	1,809.3
Capital expenditures	328.9		251.0		222.8		239.0		234.3
Total technical expenditures (11)	224.6		253.9		215.7		153.3		150.4
Advertising expenditures	355.2		357.8		374.1		351.0		338.2
Repairs and maintenance	135.8		131.7		115.8		99.5		98.7
Depreciation	262.1		278.2		285.0		172.1		170.3
Shareholders of record (total count)	5,659		6,244		6,470		6,787		6,987
Number of employees (total count)	61,111		59,740		59,257		49,054		46,911
Sales per employee (thousands of dollars)	$	293	$	294	$	253	$	242	$	242
Sales per dollar of assets	0.87		0.92		0.75		1.76		1.96


(1)	2017 includes Valspar financial results since June 1, 2017.


(2)	2019 includes acquisition-related costs of $389.3 million, non-cash trademark impairment charges of $122.1 million, domestic pension plan settlement expense of $32.4 million, as well as a Brazil indirect tax credit of $50.8 million and a benefit from the resolution of the California litigation of $34.7 million. 2018 includes acquisition-related costs of $484.4 million, environmental expense provisions of $167.6 million, California litigation expense of $136.3 million and domestic pension plan settlement expense of $37.6 million. 2017 includes acquisition-related costs of $488.6 million.

(2)

2019 includes acquisition-related costs of $389.3 million, non-cash trademark impairment charges of $122.1 million, domestic pension plan settlement expense of $32.4 million, as well as a Brazil indirect tax credit of $50.8 million and a benefit from the resolution of the California litigation of $34.7 million. 2018 includes acquisition-related costs of $484.4 million, environmental expense provisions of $167.6 million, California litigation expense of $136.3 million and domestic pension plan settlement expense of $37.6 million. 2017 includes acquisition-related costs of $488.6 million.


(3)	2019 includes after-tax acquisition-related costs of $299.6 million, after-tax trademark impairment charges of $93.1 million, tax credit investment loss of $74.3 million and after-tax domestic pension settlement expense of $25.0 million, partially offset by an after-tax Brazil indirect tax credit of $33.3 million and after-tax benefit from the resolution of the California litigation of $26.1 million. 2018 includes after-tax acquisition-related costs of $394.4 million, after-tax environmental expense provisions of $126.1 million, after-tax California litigation expense of $103.4 million and after-tax domestic pension plan settlement expense of $28.3 million. 2017 includes a one-time income tax benefit of $668.8 million from deferred income tax reductions resulting from the Tax Act (see Note 19 of Item 8) and includes after-tax acquisition-related costs of $329.4 million.

(3)

2019 includes after-tax acquisition-related costs of $299.6 million, after-tax trademark impairment charges of $93.1 million, tax credit investment loss of $74.3 million and after-tax domestic pension settlement expense of $25.0 million, partially offset by an after-tax Brazil indirect tax credit of $33.3 million and after-tax benefit from the resolution of the California litigation of $26.1 million. 2018 includes after-tax acquisition-related costs of $394.4 million, after-tax environmental expense provisions of $126.1 million, after-tax California litigation expense of $103.4 million and after-tax domestic pension plan settlement expense of $28.3 million. 2017 includes a one-time income tax benefit of $668.8 million from deferred income tax reductions resulting from the Tax Act (see Note 19 of Item 8) and includes after-tax acquisition-related costs of $329.4 million.


(4)	Total assets at December 31, 2019 includes operating lease right-of-use assets due to the adoption of ASU 2016-02, "Leases", effective January 1, 2019. See Note 2 to the Consolidated Financial Statements in Item 8.


(5)	2019 includes charges of $3.21 per share for acquisition-related costs, $1.00 per share for non-cash trademark impairment charges, a tax credit investment loss of $0.79 per share and domestic pension plan settlement expense of $0.27 per share, partially offset by a Brazil indirect tax credit of $0.36 per share and a benefit from the resolution of the California litigation of $0.28 per share. 2018 includes charges of $4.15 per share for acquisition-related costs, $1.32 per share for environmental expense provisions, $1.09 per share for California litigation expense and $0.30 per share for domestic pension settlement expense. 2017 includes a one-time benefit of $7.04 per share from deferred income tax reductions resulting from the Tax Act (see Note 19 of Item 8) and a charge of $3.47 per share for acquisition-related costs.

(5)

2019 includes charges of $3.21 per share for acquisition-related costs, $1.00 per share for non-cash trademark impairment charges, a tax credit investment loss of $0.79 per share and domestic pension plan settlement expense of $0.27 per share, partially offset by a Brazil indirect tax credit of $0.36 per share and a benefit from the resolution of the California litigation of $0.28 per share. 2018 includes charges of $4.15 per share for acquisition-related costs, $1.32 per share for environmental expense provisions, $1.09 per share for California litigation expense and $0.30 per share for domestic pension settlement expense. 2017 includes a one-time benefit of $7.04 per share from deferred income tax reductions resulting from the Tax Act (see Note 19 of Item 8) and a charge of $3.47 per share for acquisition-related costs.


(6)	Based on net income and shareholders' equity at beginning of year.


(7)	Based on cash dividends per common share and prior year's diluted net income per common share.


(8)	Ratio of income from continuing operations before income taxes and interest expense to interest expense.


(9)	Based on income from continuing operations before income taxes. 2017 excludes impact of one-time income tax benefit primarily related to Tax Cuts and Jobs Act.


(10)	EBITDA is a non-GAAP measure which management believes enhances the understanding of the Company's operating performance. See the Non-GAAP Financial Measures section within this Item 6 for additional information.


(11)	See Note 1 to the Consolidated Financial Statements in Item 8 for additional information.

Non-GAAP Financial Measures

Management utilizes certain financial measures that are not in accordance with U.S. generally accepted accounting principles (US GAAP) to analyze and manage the performance of the business. 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 and Adjusted EBITDA

EBITDA is a non-GAAP financial measure defined as net income from continuing operations before income taxes and interest, depreciation and amortization. Adjusted EBITDA is a non-GAAP financial measure that excludes the Valspar acquisition and other adjustments. Management considers EBITDA and Adjusted EBITDA useful in understanding the operating performance of the Company. The reader is cautioned that the Company's EBITDA and Adjusted EBITDA should not be compared to other entities unknowingly. Further, EBITDA and Adjusted EBITDA should not be considered alternatives to Net income or Net operating cash as an indicator of operating performance or as a measure of liquidity. The reader should refer to the determination of Net income and Net operating cash in accordance with US GAAP disclosed in the Statements of Consolidated Income and Statements of Consolidated Cash Flows in Item 8.

The following table summarizes EBITDA and Adjusted EBITDA as calculated by management for the years indicated below:



(millions of dollars)	Year Ended December 31,
	2019			2018
Net income from continuing operations	$	1,541.3		$	1,108.7
Interest expense	349.3			366.7
Income taxes	440.5			251.0
Depreciation	262.1			278.2
Amortization	312.8			318.1
EBITDA from continuing operations	2,906.0			2,322.7
Trademark impairment	122.1
Brazil indirect tax credit	(50.8		)
California litigation expense	(34.7		)	136.3
Domestic pension plan settlement expense	32.4			37.6
Environmental expense provision				167.6
Integration costs	81.8			157.7
Adjusted EBITDA	$	3,056.8		$	2,821.9

Free Cash Flow

Free Cash Flow is a non-GAAP financial measure defined as Net operating cash, as shown in the Statements of Consolidated Cash Flows, less the amount reinvested in the business for Capital expenditures and the return of investment to its shareholders by the payment of cash dividends. Management considers Free Cash Flow to be a useful tool in its determination of appropriate uses of the Company’s Net operating cash. The reader is cautioned that the Free Cash Flow measure should not be compared to other entities unknowingly as it may not be comparable, and it does not consider certain non-discretionary cash flows, such as mandatory debt and interest payments. The amount shown below should not be considered an alternative to Net operating cash or other cash flow amounts provided in accordance with US GAAP as disclosed in the Statements of Consolidated Cash Flows in Item 8.

The following table summarizes Free Cash Flow as calculated by management for the years indicated below:



(millions of dollars)	Year Ended December 31,
	2019			2018
Net operating cash	$	2,321.3		$	1,943.7
Capital expenditures	(328.9		)	(251.0		)
Cash dividends	(420.8		)	(322.9		)
Free cash flow	$	1,571.6		$	1,369.8

Adjusted Diluted Net Income Per Share

Management of the Company believes that investors' understanding of the Company's operating performance is enhanced by the disclosure of diluted net income per share excluding Valspar acquisition-related costs and other adjustments. This adjusted earnings per share measurement is not in accordance with US GAAP. It should not be considered a substitute for earnings per share in accordance with US GAAP and may not be comparable to similarly titled measures reported by other companies.

The following tables reconcile diluted net income per share computed in accordance with US GAAP to adjusted diluted net income per share.



	Year Ended
	December 31, 2019
	Pre-Tax			Tax Effect (3)			After-Tax
Diluted net income per share							$	16.49

Trademark impairment	$	1.31		$	.31		1.00
Brazil indirect tax credit	(.54		)	(.18		)	(.36		)
California litigation expense provision reduction	(.37		)	(.09		)	(.28		)
Tax credit investment loss				(.79		)	.79
Domestic pension plan settlement expense	.35			.08			.27
Total other adjustments	.75			(.67		)	1.42

Integration costs (1)	.88			.19			.69
Acquisition-related amortization expense (2)	3.29			.77			2.52
Total acquisition-related costs	$	4.17		$	.96		3.21

Adjusted diluted net income per share							$	21.12



	Year Ended
	December 31, 2018
	Pre-Tax		Tax Effect (3)		After-Tax
Diluted net income per share					$	11.67

California litigation expense	$	1.44	$	.35	1.09
Environmental expense provision	1.75		.43		1.32
Domestic pension plan settlement expense	.40		.10		.30
Total other adjustments	3.59		.88		2.71

Integration costs (1)	1.65		.10		1.55
Acquisition-related amortization expense (2)	3.44		.84		2.60
Total acquisition-related costs	$	5.09	$	.94	4.15

Adjusted diluted net income per share					$	18.53


(1)	Integration costs consist primarily of professional service expenses, salaries and other employee-related expenses dedicated directly to the integration effort, and severance expense. These costs are included in Selling, general and administrative and other expenses and Cost of goods sold.


(2)	Acquisition-related amortization expense consists primarily of the amortization of intangible assets related to the Valspar acquisition and is included in Amortization.


(3)	The tax effect is calculated based on the statutory rate and the nature of the item, unless otherwise noted.

Adjusted Segment Profit

Management of the Company believes that investors' understanding of the Company's operating performance is enhanced by the disclosure of segment profit excluding Valspar acquisition-related costs and other adjustments. This adjusted segment profit measurement is not in accordance with US GAAP. It should not be considered a substitute for segment profit in accordance with US GAAP and may not be comparable to similarly titled measures reported by other companies. The following tables reconcile segment profit computed in accordance with US GAAP to adjusted segment profit.



	Year Ended December 31, 2019
	The Americas Group			Consumer Brands Group			Performance Coatings Group			Administrative			Total
Net external sales	$	10,171.9		$	2,676.8		$	5,049.2		$	2.9		$	17,900.8

Income before income taxes	$	2,056.5		$	373.2		$	379.1		$	(827.0	)	$	1,981.8
as a % of Net external sales	20.2		%	13.9		%	7.5		%				11.1		%

Trademark impairment				5.1			117.0						122.1
Brazil indirect tax credit										(50.8		)	(50.8		)
California litigation expense provision reduction										(34.7		)	(34.7		)
Domestic pension plan settlement expense										32.4			32.4
Total other adjustments	—			5.1			117.0			(53.1		)	69.0

Integration costs (1)										81.8			81.8
Acquisition-related amortization expense (2)				91.2			215.5			0.8			307.5
Total acquisition-related costs	—			91.2			215.5			82.6			389.3

Adjusted segment profit	$	2,056.5		$	469.5		$	711.6		$	(797.5	)	$	2,440.1
as a % of Net external sales	20.2		%	17.5		%	14.1		%				13.6		%



	Year Ended December 31, 2018
	The Americas Group			Consumer Brands Group			Performance Coatings Group			Administrative			Total
Net external sales	$	9,625.1		$	2,739.1		$	5,166.4		$	3.9		$	17,534.5

Income before income taxes	$	1,898.4		$	261.1		$	452.1		$	(1,251.9	)	$	1,359.7
as a % of Net external sales	19.7		%	9.5		%	8.8		%				7.8		%

California litigation expense										136.3			136.3
Environmental expense provision										167.6			167.6
Domestic pension plan settlement expense										37.6			37.6
Total other adjustments	—			—			—			341.5			341.5

Integration costs (1)										157.7			157.7
Acquisition-related amortization expense (2)				110.9			215.8						326.7
Total acquisition-related costs	—			110.9			215.8			157.7			484.4

Adjusted segment profit	$	1,898.4		$	372.0		$	667.9		$	(752.7	)	$	2,185.6
as a % of Net external sales	19.7		%	13.6		%	12.9		%				12.5		%


(1)	Integration costs consist primarily of professional service expenses, salaries and other employee-related expenses dedicated directly to the integration effort, and severance expense. These costs are included in Selling, general and administrative and other expenses and Cost of goods sold.


(2)	Acquisition-related amortization expense consists primarily of the amortization of intangible assets related to the Valspar acquisition and is included in Amortization.

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