SHERWIN WILLIAMS CO, 10-Q filed on 7/24/2014
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2014
Document and Entity Information [Abstract]
 
Entity Registrant Name
SHERWIN WILLIAMS CO 
Entity Central Index Key
0000089800 
Document Type
10-Q 
Document Period End Date
Jun. 30, 2014 
Amendment Flag
false 
Document Fiscal Year Focus
2014 
Document Fiscal Period Focus
Q2 
Current Fiscal Year End Date
--12-31 
Entity Filer Category
Large Accelerated Filer 
Entity Common Stock, Shares Outstanding
97,787,954 
Statements of Consolidated Income and Comprehensive Income (Unaudited) (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Income Statement [Abstract]
 
 
 
 
Net sales
$ 3,042,995 
$ 2,713,889 
$ 5,409,551 
$ 4,881,057 
Cost of goods sold
1,633,342 
1,480,310 
2,933,997 
2,684,627 
Gross profit
1,409,653 
1,233,579 
2,475,554 
2,196,430 
Percent to net sales
46.30% 
45.50% 
45.80% 
45.00% 
Selling, general and administrative expenses
969,183 
837,124 
1,853,271 
1,615,803 
Percent to net sales
31.80% 
30.80% 
34.30% 
33.10% 
Other general expense - net
770 
485 
198 
4,432 
Interest expense
16,374 
15,069 
32,768 
30,380 
Interest and net investment income
(757)
(698)
(1,346)
(1,447)
Other (income) expense - net
(5,147)
715 
(4,644)
(2,006)
Income before income taxes
429,230 
380,884 
595,307 
549,268 
Income taxes
137,783 
123,597 
188,403 
175,796 
Net income
291,447 
257,287 
406,904 
373,472 
Net income per common share:
 
 
 
 
Basic (in dollars per share)
$ 3.00 
$ 2.51 
$ 4.14 
$ 3.65 
Diluted (in dollars per share)
$ 2.94 
$ 2.46 
$ 4.06 
$ 3.57 
Average shares outstanding - basic (in shares)
96,599,869 
101,665,737 
97,716,539 
101,813,398 
Average shares and equivalents outstanding - diluted (in shares)
98,541,909 
103,896,780 
99,688,557 
104,031,718 
Comprehensive income
$ 305,178 
$ 213,283 
$ 412,432 
$ 330,871 
Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Jun. 30, 2013
Current assets:
 
 
 
Cash and cash equivalents
$ 267,198 
$ 744,889 
$ 741,084 
Accounts receivable, less allowance
1,402,803 
1,097,751 
1,299,679 
Inventories:
 
 
 
Finished goods
892,488 
779,057 
809,586 
Work in process and raw materials
198,694 
191,758 
175,258 
Total inventory
1,091,182 
970,815 
984,844 
Deferred income taxes
102,733 
104,496 
129,732 
Other current assets
244,202 
240,766 
187,096 
Total current assets
3,108,118 
3,158,717 
3,342,435 
Goodwill
1,174,654 
1,178,687 
1,171,503 
Intangible assets
306,985 
313,299 
311,947 
Deferred pension assets
304,582 
302,446 
250,989 
Other assets
440,365 
407,975 
379,439 
Property, plant and equipment:
 
 
 
Land
131,234 
125,131 
99,579 
Buildings
711,079 
715,096 
718,015 
Machinery and equipment
1,916,103 
1,838,590 
1,812,541 
Construction in progress
40,313 
62,563 
39,087 
Total gross property, plant and equipment
2,798,729 
2,741,380 
2,669,222 
Less allowances for depreciation
1,792,433 
1,719,997 
1,717,031 
Total net property, plant and equipment
1,006,296 
1,021,383 
952,191 
Total Assets
6,341,000 
6,382,507 
6,408,504 
Current liabilities:
 
 
 
Short-term borrowings
64,739 
96,551 
50,664 
Accounts payable
1,244,574 
998,484 
1,117,459 
Compensation and taxes withheld
264,652 
337,637 
218,633 
Accrued taxes
190,368 
79,504 
170,447 
Current portion of long-term debt
502,125 
502,948 
2,632 
Other accruals
458,826 
513,433 
407,670 
Total current liabilities
2,725,284 
2,528,557 
1,967,505 
Long-term debt
1,122,420 
1,122,373 
1,631,951 
Postretirement benefits other than pensions
272,095 
268,874 
320,219 
Other long-term liabilities
696,242 
688,168 
621,299 
Shareholders' equity:
 
 
 
Common stock - $1.00 par value: 97,787,954, 100,129,380 and 102,683,128 shares outstanding at June 30, 2014, December 31, 2013 and June 30, 2013, respectively
114,001 
112,902 
112,454 
Preferred stock - convertible, no par value: 5,722, 40,406 and 68,049 shares outstanding at June 30, 2014, December 31, 2013 and June 30, 2013, respectively
5,722 
40,406 
68,049 
Unearned ESOP compensation
(5,722)
(40,406)
(68,049)
Other capital
1,980,760 
1,847,801 
1,773,060 
Retained earnings
2,072,118 
1,774,050 
1,496,639 
Treasury stock, at cost
(2,326,404)
(1,639,174)
(1,101,633)
Cumulative other comprehensive loss
(315,516)
(321,044)
(412,990)
Total shareholders' equity
1,524,959 
1,774,535 
1,867,530 
Total Liabilities and Shareholders' Equity
$ 6,341,000 
$ 6,382,507 
$ 6,408,504 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
Jun. 30, 2014
Dec. 31, 2013
Jun. 30, 2013
Statement of Financial Position [Abstract]
 
 
 
Common stock, par value (usd per share)
$ 1 
$ 1 
$ 1 
Common stock, shares outstanding (shares)
97,787,954 
100,129,380 
102,683,128 
Preferred stock, par value (usd per share)
   
   
   
Preferred stock, shares outstanding (shares)
5,722 
40,406 
68,049 
Condensed Statements of Consolidated Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
OPERATING ACTIVITIES
 
 
Net income
$ 406,904 
$ 373,472 
Adjustments to reconcile net income to net operating cash:
 
 
Depreciation
83,513 
78,301 
Amortization of intangible assets
15,146 
14,127 
Stock-based compensation expense
29,563 
23,977 
Provisions for qualified exit costs
9,439 
367 
Provisions for environmental-related matters
(175)
1,769 
Defined benefit pension plans net cost
3,626 
9,975 
Net increase in postretirement liability
2,970 
1,800 
Other
3,100 
1,417 
Change in working capital accounts - net
(202,068)
(195,322)
Costs incurred for environmental-related matters
(4,955)
(6,892)
Costs incurred for qualified exit costs
(3,877)
(5,955)
Other
(11,606)
5,039 
Net operating cash
331,580 
302,075 
INVESTING ACTIVITIES
 
 
Capital expenditures
(66,870)
(72,126)
Acquisitions of businesses, net of cash acquired
 
(5,000)
Proceeds from sale of assets
373 
2,586 
Increase in other investments
(17,488)
(52,854)
Net investing cash
(83,985)
(127,394)
FINANCING ACTIVITIES
 
 
Net decrease in short-term borrowings
(31,925)
(17,407)
Payments of long-term debt
(752)
(949)
Payments of cash dividends
(108,836)
(103,300)
Proceeds from stock options exercised
59,442 
40,622 
Income tax effect of stock-based compensation exercises and vesting
45,253 
35,654 
Treasury stock purchased
(665,492)
(232,522)
Other
(23,354)
(18,855)
Net financing cash
(725,664)
(296,757)
Effect of exchange rate changes on cash
378 
570 
Net decrease in cash and cash equivalents
(477,691)
(121,506)
Cash and cash equivalents at beginning of year
744,889 
862,590 
Cash and cash equivalents at end of period
267,198 
741,084 
Income taxes paid
33,994 
34,666 
Interest paid
$ 33,893 
$ 30,942 
Basis of Presentation
BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
There have been no significant changes in critical accounting policies since December 31, 2013. Accounting estimates were revised as necessary during the first six months of 2014 based on new information and changes in facts and circumstances. Certain amounts in the 2013 condensed consolidated financial statements have been reclassified to conform to the 2014 presentation.
The Company primarily uses the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs are subject to the final year-end LIFO inventory valuation. In addition, interim inventory levels include management’s estimates of annual inventory losses due to shrinkage and other factors. The final year-end valuation of inventory is based on an annual physical inventory count performed during the fourth quarter. For further information on inventory valuations and other matters, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2013.
The consolidated results for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014.
Impact of Recently Issued Accounting Pronouncements
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, "Revenue Recognition - Revenue from Contracts with Customers," which is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard is effective for interim and annual periods beginning after December 15, 2016, and either full retrospective adoption or modified retrospective adoption is permitted. The Company is in the process of evaluating the impact of the standard.
Dividends
DIVIDENDS
DIVIDENDS
Dividends paid on common stock during each of the first two quarters of 2014 and 2013 were $.55 per common share and $.50 per common share, respectively.
Changes in Cumulative Other Comprehensive Loss
CHANGES IN CUMULATIVE OTHER COMPREHENSIVE LOSS
CHANGES IN CUMULATIVE OTHER COMPREHENSIVE LOSS
The following tables summarize the changes in Cumulative other comprehensive loss for the six months ended June 30, 2014 and 2013:
(Thousands of dollars)
 
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
 
Net Actuarial (Losses) Gains and Prior Service Costs Recognized for Employee Benefit Plans
 
Unrealized Net Gains (Losses) on Available-for-Sale Securities
 
Total Cumulative Other Comprehensive (Loss) Income
Balance at December 31, 2013
$
(250,942
)
 
$
(70,611
)
 
$
509

 
$
(321,044
)
Other comprehensive income (loss) before reclassifications(1)
4,612

 
(570
)
 
516

 
4,558

Amounts reclassified from other comprehensive income (loss)(2)


 
1,015

 
(45
)
 
970

Net other comprehensive income
4,612

 
445

 
471

 
5,528

Balance at June 30, 2014
$
(246,330
)
 
$
(70,166
)
 
$
980

 
$
(315,516
)

(1) Net of taxes of $244 for net actuarial losses and prior service costs recognized for employee benefit plans and $(324) for unrealized net gains on available-for-sale securities.
(2) Net of taxes of $(417) for net actuarial losses and prior service costs recognized for employee benefit plans and $28 for realized gains on the sale of available-for-sale securities.
(Thousands of dollars)
 
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
 
Net Actuarial (Losses) Gains and Prior Service Costs Recognized for Employee Benefit Plans
 
Unrealized Net Gains (Losses) on Available-for-Sale Securities
 
Total Cumulative Other Comprehensive (Loss) Income
Balance at December 31, 2012
$
(204,195
)
 
$
(166,595
)
 
$
401

 
$
(370,389
)
Other comprehensive (loss) income before reclassifications(1)
(48,421
)
 
(1,177
)
 
99

 
(49,499
)
Amounts reclassified from other comprehensive income (loss) income(2)
 
 
6,917

 
(19
)
 
6,898

Net other comprehensive income
(48,421
)
 
5,740

 
80

 
(42,601
)
Balance at June 30, 2013
$
(252,616
)
 
$
(160,855
)
 
$
481

 
$
(412,990
)

(1) Net of taxes of $534 for net actuarial losses and prior service costs recognized for employee benefit plans and $(62) for unrealized net gains on available-for-sale securities.
(2) Net of taxes of $(4,001) for net actuarial losses and prior service costs recognized for employee benefit plans and $12 for realized gains on the sale of available-for-sale securities.
Product Warranties
PRODUCT WARRANTIES
PRODUCT WARRANTIES
Changes in the Company’s accrual for product warranty claims during the first six months of 2014 and 2013, including customer satisfaction settlements, were as follows:
 
(Thousands of dollars)
 
 
 
 
2014
 
2013
Balance at January 1
$
26,755

 
$
22,710

Charges to expense
14,446

 
11,031

Settlements
(16,351
)
 
(12,134
)
Balance at June 30
$
24,850

 
$
21,607


For further details on the Company’s accrual for product warranty claims, see Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Exit or Disposal Activities
EXIT OR DISPOSAL ACTIVITIES
EXIT OR DISPOSAL ACTIVITIES
Liabilities associated with exit or disposal activities are recognized as incurred in accordance with the Exit or Disposal Cost Obligations Topic of the ASC. Qualified exit costs primarily include post-closure rent expenses, incremental post-closure costs and costs of employee terminations. Adjustments may be made to liabilities accrued for qualified exit costs if information becomes available upon which more accurate amounts can be reasonably estimated. Concurrently, property, plant and equipment is tested for impairment in accordance with the Property, Plant and Equipment Topic of the ASC, and if impairment exists, the carrying value of the related assets is reduced to estimated fair value. Additional impairment may be recorded for subsequent revisions in estimated fair value.
In the six months ended June 30, 2014, four stores in the Paint Stores Group, three stores in the Latin America Coatings Group and three facilities in the Consumer Group were closed due to lower demand or redundancy. In addition, the Global Finishes Group exited its business in Venezuela.
The following table summarizes the activity and remaining liabilities associated with qualified exit costs at June 30, 2014:
(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
Exit Plan
 
Balance at December 31, 2013
 
Provisions in Cost of goods sold or SG&A
 
 Actual expenditures charged to accrual
 
Adjustments to prior provisions in Other general expense - net
 
Balance at June 30, 2014
Consumer Group facilities shutdown in 2014:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
 
 
$
1,514

 
$
(72
)
 
 
 
$
1,442

Global Finishes Group exit of business in 2014:
 
 
 
 
 
 
 
 
 


Severance and related costs
 
 
 
2,500

 
 
 
 
 
2,500

Other qualified exit costs
 
 
 
2,022

 
 
 
 
 
2,022

Paint Stores Group facility shutdown in 2013:
 
 
 
 
 
 
 
 
 


Severance and related costs
 
$
977

 
1,794

 
(1,069
)
 
 
 
1,702

Other qualified exit costs
 
 
 
1,512

 
(61
)
 
 
 
1,451

Consumer Group facilities shutdown in 2013:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
598

 
97

 
(382
)
 
 
 
313

Global Finishes Group stores shutdown in 2013:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
33

 
 
 
(2
)
 
 
 
31

Other qualified exit costs
 
220

 
 
 
(44
)
 
 
 
176

Latin America Coatings Group facilities shutdown in 2013:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
123

 
 
 
(123
)
 
 
 

Paint Stores Group stores shutdown in 2012:
 
 
 
 
 
 
 
 
 
 
Other qualified exit costs
 
244

 
 
 
(23
)
 
 
 
221

Global Finishes Group facilities shutdown in 2012:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
2,177

 
 
 
(1,863
)
 
 
 
314

Other qualified exit costs
 
83

 
 
 
 
 
 
 
83

Other qualified exit costs for facilities shutdown prior to 2012
 
1,365

 
 
 
(238
)
 
 
 
1,127

Totals
 
$
5,820

 
$
9,439

 
$
(3,877
)
 
$
—

 
$
11,382


For further details on the Company’s exit or disposal activities, see Note 5 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Health Care, Pension and Other Benefits
HEALTH CARE, PENSION AND OTHER BENEFITS
HEALTH CARE, PENSION AND OTHER BENEFITS
Shown below are the components of the Company’s net periodic benefit cost (credit) for domestic defined benefit pension plans, foreign defined benefit pension plans and postretirement benefits other than pensions: 
(Thousands of dollars)
Domestic Defined
Benefit Pension Plans
 
Foreign Defined
Benefit Pension Plans
 
Postretirement
Benefits Other than
Pensions
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Three Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit cost (credit):
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
5,637

 
$
5,397

 
$
1,548

 
$
1,160

 
$
608

 
$
766

Interest cost
6,525

 
4,267

 
2,694

 
1,903

 
3,196

 
3,045

Expected return on assets
(12,665
)
 
(10,342
)
 
(2,740
)
 
(1,782
)
 
 
 
 
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
459

 
455

 
 
 
 
 
(125
)
 
(82
)
Actuarial loss
 
 
3,488

 
355

 
442

 
 
 
984

Net periodic benefit cost (credit)
$
(44
)
 
$
3,265

 
$
1,857

 
$
1,723

 
$
3,679

 
$
4,713

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
11,274

 
$
10,793

 
$
3,095

 
$
2,320

 
$
1,217

 
$
1,531

Interest cost
13,051

 
8,534

 
5,388

 
3,805

 
6,391

 
6,091

Expected return on assets
(25,331
)
 
(20,684
)
 
(5,480
)
 
(3,564
)
 
 
 
 
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
918

 
911

 
 
 
 
 
(251
)
 
(164
)
Actuarial loss
 
 
6,976

 
711

 
884

 
 
 
1,967

Net periodic benefit cost (credit)
$
(88
)
 
$
6,530

 
$
3,714

 
$
3,445

 
$
7,357

 
$
9,425


For further details on the Company’s health care, pension and other benefits, see Note 6 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Other Long-term Liabilities
OTHER LONG-TERM LIABILITIES
OTHER LONG-TERM LIABILITIES
The Company initially provides for estimated costs of environmental-related activities relating to its past operations and third party sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs are determined based on currently available facts regarding each site. If the best estimate of costs can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is provided. At June 30, 2014, the unaccrued maximum of the estimated range of possible outcomes is $93.6 million higher than the minimum.
The Company continuously assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to any given site, the volumetric contribution which may be attributed to the Company relative to that attributed to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site.
Included in Other long-term liabilities at June 30, 2014 and 2013 were accruals for extended environmental-related activities of $82.7 million and $93.8 million, respectively. Estimated costs of current investigation and remediation activities of $15.4 million and $17.1 million are included in Other accruals at June 30, 2014 and 2013, respectively.
Two of the Company’s currently and formerly owned manufacturing sites account for the majority of the accrual for environmental-related activities and the unaccrued maximum of the estimated range of possible outcomes at June 30, 2014. At June 30, 2014, $56.5 million, or 57.6 percent of the total accrual, related directly to these two sites. In the aggregate unaccrued maximum of $93.6 million at June 30, 2014, $63.0 million, or 67.3 percent, related to the two manufacturing sites. While environmental investigations and remedial actions are in different stages at these sites, additional investigations, remedial actions and monitoring will likely be required at each site.
Management cannot presently estimate the ultimate potential loss contingencies related to these sites or other less significant sites until such time as a substantial portion of the investigation at the sites is completed and remedial action plans are developed. In the event any future loss contingency significantly exceeds the current amount accrued, the recording of the ultimate liability may result in a material impact on net income for the annual or interim period during which the additional costs are accrued. Management does not believe that any potential liability ultimately attributed to the Company for its environmental-related matters will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time during which environmental investigation and remediation takes place. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.
Management expects these contingent environmental-related liabilities to be resolved over an extended period of time. Management is unable to provide a more specific time frame due to the indefinite amount of time to conduct investigation activities at any site, the indefinite amount of time to obtain environmental agency approval, as necessary, with respect to investigation and remediation activities, and the indefinite amount of time necessary to conduct remediation activities.
For further details on the Company’s Other long-term liabilities, see Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Litigation
LITIGATION
LITIGATION
In the course of its business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, the Company accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and the amount of any such loss cannot be reasonably estimated, any potential liability ultimately determined to be attributable to the Company may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. In those cases where no accrual is recorded or exposure to loss exists in excess of the amount accrued, the Contingencies Topic of the ASC requires disclosure of the contingency when there is a reasonable possibility that a loss or additional loss may have been incurred.
Lead pigment and lead-based paint litigation. The Company’s past operations included the manufacture and sale of lead pigments and lead-based paints. The Company, along with other companies, is and has been a defendant in a number of legal proceedings, including individual personal injury actions, purported class actions, and actions brought by various counties, cities, school districts and other government-related entities, arising from the manufacture and sale of lead pigments and lead-based paints. The plaintiffs’ claims have been based upon various legal theories, including negligence, strict liability, breach of warranty, negligent misrepresentations and omissions, fraudulent misrepresentations and omissions, concert of action, civil conspiracy, violations of unfair trade practice and consumer protection laws, enterprise liability, market share liability, public nuisance, unjust enrichment and other theories. The plaintiffs seek various damages and relief, including personal injury and property damage, costs relating to the detection and abatement of lead-based paint from buildings, costs associated with a public education campaign, medical monitoring costs and others. The Company has also been a defendant in legal proceedings arising from the manufacture and sale of non-lead-based paints that seek recovery based upon various legal theories, including the failure to adequately warn of potential exposure to lead during surface preparation when using non-lead-based paint on surfaces previously painted with lead-based paint. The Company believes that the litigation brought to date is without merit or subject to meritorious defenses and is vigorously defending such litigation. The Company has not settled any lead pigment or lead-based paint litigation. The Company expects that additional lead pigment and lead-based paint litigation may be filed against the Company in the future asserting similar or different legal theories and seeking similar or different types of damages and relief.
Notwithstanding the Company’s views on the merits, litigation is inherently subject to many uncertainties, and the Company ultimately may not prevail. Adverse court rulings or determinations of liability, among other factors, could affect the lead pigment and lead-based paint litigation against the Company and encourage an increase in the number and nature of future claims and proceedings. In addition, from time to time, various legislation and administrative regulations have been enacted, promulgated or proposed to impose obligations on present and former manufacturers of lead pigments and lead-based paints respecting asserted health concerns associated with such products or to overturn the effect of court decisions in which the Company and other manufacturers have been successful.
Due to the uncertainties involved, management is unable to predict the outcome of the lead pigment and lead-based paint litigation, the number or nature of possible future claims and proceedings or the effect that any legislation and/or administrative regulations may have on the litigation or against the Company. In addition, management cannot reasonably determine the scope or amount of the potential costs and liabilities related to such litigation, or resulting from any such legislation and regulations. The Company has not accrued any amounts for such litigation. With respect to such litigation, including the public nuisance litigation, the Company does not believe that it is probable that a loss has occurred, and it is not possible to estimate the range of potential losses as there is no prior history of a loss of this nature and 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, the recording of the liability may result in a material impact on net income for the annual or interim period during which such liability is accrued. Additionally, due to the uncertainties associated with the amount of any such liability and/or the nature of any other remedy which may be imposed in such litigation, any potential liability determined to be attributable to the Company arising out of such litigation may have a material adverse effect on the Company’s results of operations, liquidity or financial condition. An estimate of the potential impact on the Company’s results of operations, liquidity or financial condition cannot be made due to the aforementioned uncertainties.
Public nuisance claim litigation. The Company and other companies are or were defendants in legal proceedings seeking recovery based on public nuisance liability theories, among other theories, brought by the State of Rhode Island, the City of St. Louis, Missouri, various cities and counties in the State of New Jersey, various cities in the State of Ohio and the State of Ohio, the City of Chicago, Illinois, the City of Milwaukee, Wisconsin and the County of Santa Clara, California and other public entities in the State of California. Except for the Santa Clara County, California proceeding, all of these legal proceedings have been concluded in favor of the Company and other defendants at various stages in the proceedings.
The proceedings initiated by the State of Rhode Island included two jury trials. At the conclusion of the second trial, the jury returned a verdict finding that (i) the cumulative presence of lead pigment in paints and coatings on buildings in the State of Rhode Island constitutes a public nuisance, (ii) the Company, along with two other defendants, caused or substantially contributed to the creation of the public nuisance and (iii) the Company and two other defendants should be ordered to abate the public nuisance. The Company and two other defendants appealed and, on July 1, 2008, the Rhode Island Supreme Court, among other determinations, reversed the judgment of abatement with respect to the Company and two other defendants. The Rhode Island Supreme Court’s decision reversed the public nuisance liability judgment against the Company on the basis that the complaint failed to state a public nuisance claim as a matter of law.
The Santa Clara County, California proceeding was initiated in March 2000 in the Superior Court of the State of California, County of Santa Clara. In the original complaint, the plaintiffs asserted various claims including fraud and concealment, strict product liability/failure to warn, strict product liability/design defect, negligence, negligent breach of a special duty, public nuisance, private nuisance, and violations of California’s Business and Professions Code. A number of the asserted claims were resolved in favor of the defendants through pre-trial proceedings. The named plaintiffs in the Fourth Amended Complaint, filed on March 16, 2011, are the Counties of Santa Clara, Alameda, Los Angeles, Monterey, San Mateo, Solano and Ventura, the Cities of Oakland and San Diego and the City and County of San Francisco. The Fourth Amended Complaint asserted a sole claim for public nuisance, alleging that the presence of lead pigments for use in paint and coatings in, on and around residences in the plaintiffs’ jurisdictions constitutes a public nuisance. The plaintiffs sought the abatement of the alleged public nuisance that exists within the plaintiffs’ jurisdictions. A trial commenced on July 15, 2013 and ended on August 22, 2013. The court entered final judgment on January 27, 2014, finding in favor of the plaintiffs and against the Company and two other defendants (ConAgra Grocery Products Company and NL Industries, Inc.). The final judgment held the Company jointly and severally liable with the other two defendants to pay $1.15 billion into a fund to abate the public nuisance. The Company strongly disagrees with the judgment. On February 18, 2014, the Company filed a motion for new trial and a motion to vacate the judgment. The court denied these motions on March 24, 2014. On March 28, 2014, the Company filed a notice of appeal to the Sixth District Court of Appeal for the State of California. The filing of the notice of appeal effects an automatic stay of the judgment without the requirement to post a bond. The Company believes that the judgment conflicts with established principles of law and is unsupported by the evidence. The Company has had a favorable history with respect to lead pigment and lead-based paint litigation, particularly other public nuisance litigation, and accordingly, the Company believes that it is not probable that a loss has occurred and it is not possible to estimate the range of potential loss with respect to the case.
Litigation seeking damages from alleged personal injury. The Company and other companies are defendants in a number of legal proceedings seeking monetary damages and other relief from alleged personal injuries. These proceedings include claims by children allegedly injured from ingestion of lead pigment or lead-containing paint and claims for damages allegedly incurred by the children’s parents or guardians. These proceedings generally seek compensatory and punitive damages, and seek other relief including medical monitoring costs. These proceedings include purported claims by individuals, groups of individuals and class actions.
The plaintiff in Thomas v. Lead Industries Association, et al., initiated an action in state court against the Company, other alleged former lead pigment manufacturers and the Lead Industries Association in September 1999. The claims against the Company and the other defendants included strict liability, negligence, negligent misrepresentation and omissions, fraudulent 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., has been appealed by the plaintiff and is awaiting a decision by the United States Court of Appeals for the Seventh Circuit. Also, in Yasmine Clark v. The Sherwin-Williams Company, et al., the Wisconsin Circuit Court, Milwaukee County, on March 25, 2014, held that the application to a pending case of Section 895.046 of the Wisconsin Statutes (which clarifies the application of the risk contribution theory) is unconstitutional as a violation of the plaintiff’s right to due process of law under the Wisconsin Constitution. On April 8, 2014, defendants filed a petition requesting the Wisconsin Court of Appeal to hear the issue as an interlocutory appeal, and plaintiff filed a response on April 22, 2014.
Insurance coverage litigation. The Company and its liability insurers, including certain underwriters at Lloyd’s of London, initiated legal proceedings against each other to primarily determine, among other things, whether the costs and liabilities associated with the abatement of lead pigment are covered under certain insurance policies issued to the Company. The Company’s action, filed on March 3, 2006 in the Common Pleas Court, Cuyahoga County, Ohio, is currently stayed and inactive. The liability insurers’ action, which was filed on February 23, 2006 in the Supreme Court of the State of New York, County of New York, has been dismissed. An ultimate loss in the insurance coverage litigation would mean that insurance proceeds could be unavailable under the policies at issue to mitigate any ultimate abatement related costs and liabilities. The Company has not recorded any assets related to these insurance policies or otherwise assumed that proceeds from these insurance policies would be received in estimating any contingent liability accrual. Therefore, an ultimate loss in the insurance coverage litigation without a determination of liability against the Company in the lead pigment or lead-based paint litigation will have no impact on the Company’s results of operation, liquidity or financial condition. As previously stated, however, 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.

Government tax assessment settlements related to Brazilian operations. Charges totaling $28.7 million and $2.9 million were recorded to Cost of goods sold and SG&A, respectively, during the second and third quarters of 2013. The charges were primarily related to import duty taxes paid to the Brazilian government related to the handling of import duties on products brought into the country for the years 2006 through 2012. The Company elected to pay the taxes through an existing voluntary amnesty program offered by the government to resolve these issues rather than contest them in court. The after-tax charges were $21.9 million for the full year 2013. The Company’s import duty process in Brazil was changed to reach a final resolution of this matter with the Brazilian government.

Litigation related to Consorcio Comex. As previously disclosed, the Company entered into a definitive Stock Purchase Agreement (as subsequently amended and restated, the “Purchase Agreement”), with Avisep, S.A. de C.V. (“Avisep”) and Bevisep, S.A. de C.V. (“Bevisep”) to, among other things, acquire the Mexico business of Consorcio Comex, S.A. de C.V. (the "Acquisition"). Under the terms of the Purchase Agreement, either the Company or Avisep and Bevisep had the right to terminate the Purchase Agreement in the event that the closing of the Acquisition did not occur on or prior to March 31, 2014 and such party was not in material breach of the Purchase Agreement.

On April 3, 2014, the Company sent notice to Avisep and Bevisep that the Company was terminating the Purchase Agreement. On April 3, 2014, the Company filed a complaint for declaratory judgment in the Supreme Court of the State of New York, New York County, requesting the court to declare that the Company had used commercially reasonable efforts as required under the Purchase Agreement and has not breached the Purchase Agreement. On April 11, 2014, Avisep and Bevisep initiated an arbitration proceeding against the Company in the International Court of Arbitration contending that the Company breached the Purchase Agreement by terminating the Purchase Agreement and not utilizing commercially reasonable efforts under the Purchase Agreement, which allegedly caused Avisep and Bevisep to incur damages. The Company believes that the claims are without merit and intends to vigorously defend against such claims.
Other
OTHER
OTHER
Other general expense - net
Included in Other general expense - net were the following:
(Thousands of dollars)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Provisions for environmental matters - net
$
259

 
$
1,446

 
$
(175
)
 
$
1,769

Loss (gain) on disposition of assets
511

 
(1,173
)
 
373

 
2,323

Adjustments to prior provisions for qualified exit costs
 
 
212

 
 
 
340

Total
$
770

 
$
485

 
$
198

 
$
4,432


Provisions for environmental matters - net represent site-specific increases or decreases to environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Environmental-related accruals are not recorded net of insurance proceeds in accordance with the Offsetting Subtopic of the Balance Sheet Topic of the ASC. See Note 8 for further details on the Company’s environmental-related activities.
The loss (gain) on disposition of assets represents net realized losses (gains) associated with the disposal of fixed assets previously used in the conduct of the primary business of the Company.
The adjustments to prior provisions for qualified exit costs represent site specific increases or decreases to accrued qualified exit costs as adjustments for costs of employee terminations are required or as information becomes available upon which more accurate amounts can be reasonably estimated. See Note 6 for further details on the Company’s exit or disposal activities.
Other (income) expense - net
Included in Other (income) expense - net were the following:
 
(Thousands of dollars)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Dividend and royalty income
$
(1,195
)
 
$
(813
)
 
$
(2,246
)
 
$
(3,637
)
Net expense from financing activities
2,547

 
2,845

 
5,469

 
4,743

Foreign currency transaction related (gains) losses
(1,830
)
 
3,196

 
1,028

 
5,944

Other income
(6,973
)
 
(7,107
)
 
(13,279
)
 
(14,419
)
Other expense
2,304

 
2,594

 
4,384

 
5,363

Total
$
(5,147
)
 
$
715

 
$
(4,644
)
 
$
(2,006
)

The net expense from financing activities includes the net expense relating to the change in the Company’s financing fees.
Foreign currency transaction related (gains) losses represent net realized (gains) losses on U.S. dollar-denominated liabilities of foreign subsidiaries and net realized and unrealized (gains) losses from foreign currency option and forward contracts. There were no foreign currency option and forward contracts outstanding at June 30, 2014 and 2013.
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 items within the other income or other expense caption that were individually significant.
Income Taxes
INCOME TAXES
INCOME TAXES
The effective tax rate was 32.1 percent and 31.6 percent for the second quarter and first six months of 2014, respectively, compared to 32.5 percent and 32.0 percent for the second quarter and first six months of 2013, respectively. The major components of the Company's effective tax rate were consistent for the second quarter and first six months of 2014 compared to 2013.
At December 31, 2013, the Company had $31.0 million in unrecognized tax benefits, the recognition of which would have an effect of $27.8 million on the current provision for income taxes. Included in the balance of unrecognized tax benefits at December 31, 2013, was $5.6 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised of items related to federal audits of partnership investments, assessed state income tax audits, state settlement negotiations currently in progress and expiring statutes in federal, foreign and state jurisdictions.
The Company classifies all income tax related interest and penalties as income tax expense. At December 31, 2013, the Company had accrued $6.2 million for the potential payment of income tax interest and penalties.
There were no significant changes to any of the balances of unrecognized tax benefits at December 31, 2013 during the first six months of 2014.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The IRS commenced an examination of the Company's U.S. income tax returns for the 2010, 2011 and 2012 tax years in the fourth quarter of 2013. Fieldwork is expected to be completed during 2014.
As of June 30, 2014, the Company is subject to non-U.S. income tax examinations for the tax years of 2007 through 2013. In addition, the Company is subject to state and local income tax examinations for the tax years 2003 through 2013.
Net Income Per Common Share
NET INCOME PER COMMON SHARE
NET INCOME PER COMMON SHARE
(Thousands of dollars except per share data)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Basic
 
 
 
 
 
 
 
Average common shares outstanding
96,599,869

 
101,665,737

 
97,716,539

 
101,813,398

 
 
 
 
 
 
 
 
Net income
$
291,447

 
$
257,287

 
$
406,904

 
$
373,472

Less net income allocated to unvested restricted shares
(1,722
)
 
(1,639
)
 
(2,245
)
 
(2,278
)
Net income allocated to common shares
$
289,725

 
$
255,648

 
$
404,659

 
$
371,194

Basic net income per common share
$
3.00

 
$
2.51

 
$
4.14

 
$
3.65

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Average common shares outstanding
96,599,869

 
101,665,737

 
97,716,539

 
101,813,398

Stock options and other contingently issuable shares (1)
1,942,040

 
2,231,043

 
1,972,018

 
2,218,320

Average common shares outstanding assuming dilution
98,541,909

 
103,896,780

 
99,688,557

 
104,031,718

 
 
 
 
 
 
 
 
Net income
$
291,447

 
$
257,287

 
$
406,904

 
$
373,472

Less net income allocated to unvested restricted shares
 
 
 
 
 
 
 
assuming dilution
(1,690
)
 
(1,607
)
 
(2,205
)
 
(2,235
)
Net income allocated to common shares assuming
 
 
 
 
 
 
 
dilution
$
289,757

 
$
255,680

 
$
404,699

 
$
371,237

Diluted net income per common share
$
2.94

 
$
2.46

 
$
4.06

 
$
3.57

 
(1) 
There were no options excluded due to their anti-dilutive effect for the three months ended June 30, 2014. Stock options and other contingently issuable shares excluded 2,932 shares for the six months ended June 30, 2014. There were no options excluded due to their anti-dilutive effect for the three and six months ended June 30, 2013.
The Company has two classes of participating securities: common shares and restricted shares, representing 99% and 1% of outstanding shares, respectively. The restricted shares are shares of unvested restricted stock granted under the Company’s restricted stock award program. Time-based restricted shares receive non-forfeitable dividends, while dividends on performance-based restricted shares are deferred and payment is contingent upon the awards vesting. The time-based restricted shares are considered a participating security, therefore, basic and diluted earnings per share are calculated using the two-class method in accordance with the Earnings Per Share Topic of the ASC.
Reportable Segment Information
REPORTABLE SEGMENT INFORMATION
REPORTABLE SEGMENT INFORMATION
The Company reports 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 Disclosures Topic of the ASC. The Company has determined that it has four reportable operating segments: Paint Stores Group, Consumer Group, Global Finishes Group and Latin America Coatings Group (individually, a "Reportable Segment" and collectively, the “Reportable Segments”).
(Thousands of dollars)
Three Months Ended June 30, 2014
 
Paint Stores
Group
 
Consumer
Group
 
Global
Finishes
Group
 
Latin America
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
1,882,592

 
$
433,356

 
$
544,597

 
$
181,221

 
$
1,229

 
$
3,042,995

Intersegment transfers
 
 
766,080

 
2,202

 
9,927

 
(778,209
)
 
 
Total net sales and intersegment transfers
$
1,882,592

 
$
1,199,436

 
$
546,799

 
$
191,148

 
$
(776,980
)
 
$
3,042,995

 
 
 
 
 
 
 
 
 
 
 
 
Segment profit
$
375,857

 
$
92,488

(1) 
$
54,865

 
$
5,660

 
 
 
$
528,870

Interest expense
 
 
 
 
 
 
 
 
$
(16,374
)
 
(16,374
)
Administrative expenses and other
 
 
 
 
 
 
 
 
(83,266
)
 
(83,266
)
Income before income taxes
$
375,857

 
$
92,488

 
$
54,865

 
$
5,660

 
$
(99,640
)
 
$
429,230

 
Three Months Ended June 30, 2013
 
Paint Stores
Group
 
Consumer
Group
 
Global
Finishes
Group
 
Latin America
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
1,606,509

 
$
393,660

 
$
513,524

 
$
198,991

 
$
1,205

 
$
2,713,889

Intersegment transfers
 
 
658,202

 
3,740

 
9,691

 
(671,633
)
 
 
Total net sales and intersegment transfers
$
1,606,509

 
$
1,051,862

 
$
517,264

 
$
208,682

 
$
(670,428
)
 
$
2,713,889

 
 
 
 
 
 
 
 
 
 
 
 
Segment profit
$
332,972

 
$
79,042

(1) 
$
54,462

 
$
856

 
 
 
$
467,332

Interest expense
 
 
 
 
 
 
 
 
$
(15,069
)
 
(15,069
)
Administrative expenses and other
 
 
 
 
 
 
 
 
(71,379
)
 
(71,379
)
Income before income taxes
$
332,972

 
$
79,042

 
$
54,462

 
$
856

 
$
(86,448
)
 
$
380,884

(1) Segment profit includes $8,891 and $8,108 of mark-up on intersegment transfers realized as a result of external sales by the Paint Stores Group during the second quarter of 2014 and 2013, respectively.
 
Six Months Ended June 30, 2014
 
Paint Stores
Group
 
Consumer
Group
 
Global
Finishes
Group
 
Latin America
Coatings 
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
3,242,595

 
$
758,655

 
$
1,042,236

 
$
363,609

 
$
2,456

 
$
5,409,551

Intersegment transfers
 
 
1,312,642

 
3,615

 
20,049

 
(1,336,306
)
 
 
Total net sales and intersegment transfers
$
3,242,595

 
$
2,071,297

 
$
1,045,851

 
$
383,658

 
$
(1,333,850
)
 
$
5,409,551

 
 
 
 
 
 
 
 
 
 
 
 
Segment profit
$
522,122

 
$
143,576

(2) 
$
101,342

 
$
15,647

 
 
 
$
782,687

Interest expense
 
 
 
 
 
 
 
 
$
(32,768
)
 
(32,768
)
Administrative expenses and other
 
 
 
 
 
 
 
 
(154,612
)
 
(154,612
)
Income before income taxes
$
522,122

 
$
143,576

 
$
101,342

 
$
15,647

 
$
(187,380
)
 
$
595,307


 
Six Months Ended June 30, 2013
 
Paint Stores
Group
 
Consumer
Group
 
Global
Finishes
Group
 
Latin America
Coatings 
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
2,774,446

 
$
702,240

 
$
1,000,342

 
$
401,627

 
$
2,402

 
$
4,881,057

Intersegment transfers
 
 
1,165,906

 
5,031

 
19,912

 
(1,190,849
)
 
 
Total net sales and intersegment transfers
$
2,774,446

 
$
1,868,146

 
$
1,005,373

 
$
421,539

 
$
(1,188,447
)
 
$
4,881,057

 
 
 
 
 
 
 
 
 
 
 
 
Segment profit
$
462,685

 
$
133,014

(2) 
$
88,393

 
$
21,695

 
 
 
$
705,787

Interest expense
 
 
 
 
 
 
 
 
$
(30,380
)
 
(30,380
)
Administrative expenses and other
 
 
 
 
 
 
 
 
(126,139
)
 
(126,139
)
Income before income taxes
$
462,685

 
$
133,014

 
$
88,393

 
$
21,695

 
$
(156,519
)
 
$
549,268


(2) Segment profit includes $15,325 and $14,278 of mark-up on intersegment transfers realized as a result of external sales by the Paint Stores Group during the first six months of 2014 and 2013, respectively.
In the reportable segment financial information, Segment profit was total net sales and intersegment transfers less operating costs and expenses. Domestic intersegment transfers were accounted for at the approximate fully absorbed manufactured cost, based on normal capacity volumes, plus customary distribution costs. International intersegment transfers were accounted for at values comparable to normal unaffiliated customer sales. The Administrative segment includes the administrative expenses of the Company’s corporate headquarters site. Also included in the Administrative segment was interest expense, interest and investment income, certain expenses related to closed facilities and environmental-related matters, and other expenses which were not directly associated with the Reportable Segments. The Administrative segment did not include any significant foreign operations. Also included in the Administrative segment was a real estate management unit that is responsible for the ownership, management and leasing of non-retail properties held primarily for use by the Company, including the Company’s headquarters site, and disposal of idle facilities. Sales of this segment represented external leasing revenue of excess headquarters space or leasing of facilities no longer used by the Company in its primary businesses. Gains and losses from the sale of property were not a significant operating factor in determining the performance of the Administrative segment.
Net external sales and segment profit of all consolidated foreign subsidiaries were $576.7 million and $32.0 million, respectively, for the second quarter of 2014, and $531.6 million and $5.6 million, respectively, for the second quarter of 2013. Net external sales and segment profit of these subsidiaries were $1.106 billion and $54.7 million, respectively, for the first six months of 2014, and $1.048 billion and $31.2 million, respectively, for the first six months of 2013. Long-lived assets of these subsidiaries totaled $614.6 million and $596.5 million at June 30, 2014 and June 30, 2013, respectively. Domestic operations accounted for the remaining net external sales, segment profits and long-lived assets. No single geographic area outside the United States was significant relative to consolidated net external sales, income before taxes, or consolidated long-lived assets.
Export sales and sales to any individual customer were each less than 10 percent of consolidated sales to unaffiliated customers during all periods presented.
Acquisitions
ACQUISITIONS
ACQUISITIONS
On September 16, 2013, the Company entered into a definitive Stock Purchase Agreement and completed the acquisition of the U.S./Canada business of Consorcio Comex, S.A. de C.V. (Comex). The Company engaged an independent valuation firm to value the assets of the acquired business, and the appropriate adjustments have been recorded. The U.S./Canada business of Comex focuses on the manufacture and sale of paint and paint related products through retail service centers under various proprietary brands. The acquisition of the U.S./Canada business of Comex strengthens the ability of the Paint Stores Group and Consumer Group to serve customers in key geographic markets. Also on September 16, 2013, the Company amended and restated the stock purchase agreement for the acquisition of the Mexico business of Comex to, among other things, extend the exclusivity period to March 31, 2014. Under the terms of the amended and restated stock purchase agreement, either the Company or the sellers may terminate the amended and restated stock purchase agreement in the event that the closing of the acquisition did not occur on or prior to March 31, 2014 and such party is not in material breach of such agreement. On April 3, 2014, pursuant to its right to terminate the amended and restated purchase agreement, the Company sent notice via overnight mail to the sellers that it was terminating such agreement, effective immediately. Please refer to the Company’s Current Report on Form 8-K, dated April 3, 2014, which is incorporated herein by reference, for further information.
The completed acquisition above has been accounted for as a purchase and the results of operations have been included in the consolidated financial statements since the date of acquisition. This acquisition resulted in the recognition of intangible assets.
The following unaudited pro-forma summary presents consolidated financial information as if the U.S./Canada business of Comex had been acquired as of the beginning of each period presented. The pro-forma consolidated financial information does not necessarily reflect the actual results that would have occurred had the acquisition taken place on January 1, 2013 or of future results of operations of this acquisition under ownership and operation of the Company. 
(Thousands of dollars except per share data)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
3,042,995

 
$
2,849,091

 
$
5,409,551

 
$
5,123,962

Net income
291,447

 
249,693

 
406,904

 
352,502

Net income per common share:
 
 
 
 
 
 
 
Basic
$
3.00

 
$
2.44

 
$
4.14

 
$
3.44

Diluted
$
2.94

 
$
2.39

 
$
4.06

 
$
3.37

Fair Value Measurements
FAIR VALUE MEASUREMENTS
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. It does not expand the use of fair value measurements. The Company did not have any fair value measurements for its non-financial assets and liabilities during the second quarter. The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis, categorized using the fair value hierarchy:
(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
Quoted Prices
 
 
 
 
 
 
 
in Active
 
 
 
Significant
 
Fair Value at
 
Markets for
 
Significant Other
 
Unobservable
 
June 30,
 
Identical Assets
 
Observable Inputs
 
Inputs
 
2014
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Deferred compensation plan asset (1)
$
23,161

 
$
3,728

 
$
19,433

 

Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liability (2)
$
29,382

 
$
29,382

 

 

 
(1) 
The deferred compensation plan asset consists of the investment funds maintained for the future payments under the Company’s executive deferred compensation plan, which is structured as a rabbi trust. 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 $22,405.

(2) 
The deferred compensation plan liability is the Company’s liability under its executive deferred compensation plan. The liability represents the fair value of the participant shadow accounts, and the value is based on quoted market prices.
Debt
DEBT
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-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-traded debt are classified as level 1 and level 2, respectively, in the fair value hierarchy.
(Thousands of dollars)
June 30, 2014
 
June 30, 2013
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Publicly traded debt
$
1,620,784

 
$
1,654,524

 
$
1,630,197

 
$
1,637,505

Non-traded debt
3,761

 
3,558

 
4,386

 
4,245

Non-Traded Investments
NON-TRADED INVESTMENTS
NON-TRADED INVESTMENTS
The Company has invested in the U.S. affordable housing and historic renovation real estate markets. These non-traded investments have been identified as variable interest entities. However, because the Company does not have the power to direct the day-to-day operations of the investments and the risk of loss is limited to the amount of contributed capital, the Company is not considered the primary beneficiary. In accordance with the Consolidation Topic of the ASC, the investments are not consolidated. 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 over the period that the tax credits are recognized. The carrying amount of the investments, included in Other assets, was $245.3 million and $236.5 million at June 30, 2014 and 2013, respectively. The liability for estimated future capital contributions to the investments was $217.7 million and $205.8 million at June 30, 2014 and 2013, respectively.
Basis of Presentation (Policies)
Inventory Policy 
The Company primarily uses the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs are subject to the final year-end LIFO inventory valuation. In addition, interim inventory levels include management’s estimates of annual inventory losses due to shrinkage and other factors. The final year-end valuation of inventory is based on an annual physical inventory count performed during the fourth quarter. For further information on inventory valuations and other matters, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2013.
New Accounting Pronouncements, Policy 
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, "Revenue Recognition - Revenue from Contracts with Customers," which is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard is effective for interim and annual periods beginning after December 15, 2016, and either full retrospective adoption or modified retrospective adoption is permitted. The Company is in the process of evaluating the impact of the standard.
Changes in Cumulative Other Comprehensive Loss (Tables)
Changes in Cumulative Other Comprehensive Loss
The following tables summarize the changes in Cumulative other comprehensive loss for the six months ended June 30, 2014 and 2013:
(Thousands of dollars)
 
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
 
Net Actuarial (Losses) Gains and Prior Service Costs Recognized for Employee Benefit Plans
 
Unrealized Net Gains (Losses) on Available-for-Sale Securities
 
Total Cumulative Other Comprehensive (Loss) Income
Balance at December 31, 2013
$
(250,942
)
 
$
(70,611
)
 
$
509

 
$
(321,044
)
Other comprehensive income (loss) before reclassifications(1)
4,612

 
(570
)
 
516

 
4,558

Amounts reclassified from other comprehensive income (loss)(2)


 
1,015

 
(45
)
 
970

Net other comprehensive income
4,612

 
445

 
471

 
5,528

Balance at June 30, 2014
$
(246,330
)
 
$
(70,166
)
 
$
980

 
$
(315,516
)

(1) Net of taxes of $244 for net actuarial losses and prior service costs recognized for employee benefit plans and $(324) for unrealized net gains on available-for-sale securities.
(2) Net of taxes of $(417) for net actuarial losses and prior service costs recognized for employee benefit plans and $28 for realized gains on the sale of available-for-sale securities.
(Thousands of dollars)
 
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
 
Net Actuarial (Losses) Gains and Prior Service Costs Recognized for Employee Benefit Plans
 
Unrealized Net Gains (Losses) on Available-for-Sale Securities
 
Total Cumulative Other Comprehensive (Loss) Income
Balance at December 31, 2012
$
(204,195
)
 
$
(166,595
)
 
$
401

 
$
(370,389
)
Other comprehensive (loss) income before reclassifications(1)
(48,421
)
 
(1,177
)
 
99

 
(49,499
)
Amounts reclassified from other comprehensive income (loss) income(2)
 
 
6,917

 
(19
)
 
6,898

Net other comprehensive income
(48,421
)
 
5,740

 
80

 
(42,601
)
Balance at June 30, 2013
$
(252,616
)
 
$
(160,855
)
 
$
481

 
$
(412,990
)

(1) Net of taxes of $534 for net actuarial losses and prior service costs recognized for employee benefit plans and $(62) for unrealized net gains on available-for-sale securities.
(2) Net of taxes of $(4,001) for net actuarial losses and prior service costs recognized for employee benefit plans and $12 for realized gains on the sale of available-for-sale securities.
Product Warranties (Tables)
Company's accrual for product warranty claims
Changes in the Company’s accrual for product warranty claims during the first six months of 2014 and 2013, including customer satisfaction settlements, were as follows:
 
(Thousands of dollars)
 
 
 
 
2014
 
2013
Balance at January 1
$
26,755

 
$
22,710

Charges to expense
14,446

 
11,031

Settlements
(16,351
)
 
(12,134
)
Balance at June 30
$
24,850

 
$
21,607

Exit or Disposal Activities (Tables)
Summary of activity and remaining liabilities associated with qualified exit costs
The following table summarizes the activity and remaining liabilities associated with qualified exit costs at June 30, 2014:
(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
Exit Plan
 
Balance at December 31, 2013
 
Provisions in Cost of goods sold or SG&A
 
 Actual expenditures charged to accrual
 
Adjustments to prior provisions in Other general expense - net
 
Balance at June 30, 2014
Consumer Group facilities shutdown in 2014:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
 
 
$
1,514

 
$
(72
)
 
 
 
$
1,442

Global Finishes Group exit of business in 2014:
 
 
 
 
 
 
 
 
 


Severance and related costs
 
 
 
2,500

 
 
 
 
 
2,500

Other qualified exit costs
 
 
 
2,022

 
 
 
 
 
2,022

Paint Stores Group facility shutdown in 2013:
 
 
 
 
 
 
 
 
 


Severance and related costs
 
$
977

 
1,794

 
(1,069
)
 
 
 
1,702

Other qualified exit costs
 
 
 
1,512

 
(61
)
 
 
 
1,451

Consumer Group facilities shutdown in 2013:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
598

 
97

 
(382
)
 
 
 
313

Global Finishes Group stores shutdown in 2013:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
33

 
 
 
(2
)
 
 
 
31

Other qualified exit costs
 
220

 
 
 
(44
)
 
 
 
176

Latin America Coatings Group facilities shutdown in 2013:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
123

 
 
 
(123
)
 
 
 

Paint Stores Group stores shutdown in 2012:
 
 
 
 
 
 
 
 
 
 
Other qualified exit costs
 
244

 
 
 
(23
)
 
 
 
221

Global Finishes Group facilities shutdown in 2012:
 
 
 
 
 
 
 
 
 
 
Severance and related costs
 
2,177

 
 
 
(1,863
)
 
 
 
314

Other qualified exit costs
 
83

 
 
 
 
 
 
 
83

Other qualified exit costs for facilities shutdown prior to 2012
 
1,365

 
 
 
(238
)
 
 
 
1,127

Totals
 
$
5,820

 
$
9,439

 
$
(3,877
)
 
$
—

 
$
11,382

Health Care, Pension and Other Benefits (Tables)
Components of net periodic benefit costs for pension and other employee benefit plans
Shown below are the components of the Company’s net periodic benefit cost (credit) for domestic defined benefit pension plans, foreign defined benefit pension plans and postretirement benefits other than pensions: 
(Thousands of dollars)
Domestic Defined
Benefit Pension Plans
 
Foreign Defined
Benefit Pension Plans
 
Postretirement
Benefits Other than
Pensions
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Three Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit cost (credit):
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
5,637

 
$
5,397

 
$
1,548

 
$
1,160

 
$
608

 
$
766

Interest cost
6,525

 
4,267

 
2,694

 
1,903

 
3,196

 
3,045

Expected return on assets
(12,665
)
 
(10,342
)
 
(2,740
)
 
(1,782
)
 
 
 
 
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
459

 
455

 
 
 
 
 
(125
)
 
(82
)
Actuarial loss
 
 
3,488

 
355

 
442

 
 
 
984

Net periodic benefit cost (credit)
$
(44
)
 
$
3,265

 
$
1,857

 
$
1,723

 
$
3,679

 
$
4,713

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
11,274

 
$
10,793

 
$
3,095

 
$
2,320

 
$
1,217

 
$
1,531

Interest cost
13,051

 
8,534

 
5,388

 
3,805

 
6,391

 
6,091

Expected return on assets
(25,331
)
 
(20,684
)
 
(5,480
)
 
(3,564
)
 
 
 
 
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
918

 
911

 
 
 
 
 
(251
)
 
(164
)
Actuarial loss
 
 
6,976

 
711

 
884

 
 
 
1,967

Net periodic benefit cost (credit)
$
(88
)
 
$
6,530

 
$
3,714

 
$
3,445

 
$
7,357

 
$
9,425

Other (Tables)
Other general expense - net 
Included in Other general expense - net were the following:
(Thousands of dollars)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Provisions for environmental matters - net
$
259

 
$
1,446

 
$
(175
)
 
$
1,769

Loss (gain) on disposition of assets
511

 
(1,173
)
 
373

 
2,323

Adjustments to prior provisions for qualified exit costs
 
 
212

 
 
 
340

Total
$
770

 
$
485

 
$
198

 
$
4,432

Other (income) expense - net 
Included in Other (income) expense - net were the following:
 
(Thousands of dollars)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Dividend and royalty income
$
(1,195
)
 
$
(813
)
 
$
(2,246
)
 
$
(3,637
)
Net expense from financing activities
2,547

 
2,845

 
5,469

 
4,743

Foreign currency transaction related (gains) losses
(1,830
)
 
3,196

 
1,028

 
5,944

Other income
(6,973
)
 
(7,107
)
 
(13,279
)
 
(14,419
)
Other expense
2,304

 
2,594

 
4,384

 
5,363

Total
$
(5,147
)
 
$
715

 
$
(4,644
)
 
$
(2,006
)
Net Income Per Common Share (Tables)
Computation of net income per common share
(Thousands of dollars except per share data)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Basic
 
 
 
 
 
 
 
Average common shares outstanding
96,599,869

 
101,665,737

 
97,716,539

 
101,813,398

 
 
 
 
 
 
 
 
Net income
$
291,447

 
$
257,287

 
$
406,904

 
$
373,472

Less net income allocated to unvested restricted shares
(1,722
)
 
(1,639
)
 
(2,245
)
 
(2,278
)
Net income allocated to common shares
$
289,725

 
$
255,648

 
$
404,659

 
$
371,194

Basic net income per common share
$
3.00

 
$
2.51

 
$
4.14

 
$
3.65

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Average common shares outstanding
96,599,869

 
101,665,737

 
97,716,539

 
101,813,398

Stock options and other contingently issuable shares (1)
1,942,040

 
2,231,043

 
1,972,018

 
2,218,320

Average common shares outstanding assuming dilution
98,541,909

 
103,896,780

 
99,688,557

 
104,031,718

 
 
 
 
 
 
 
 
Net income
$
291,447

 
$
257,287

 
$
406,904

 
$
373,472

Less net income allocated to unvested restricted shares
 
 
 
 
 
 
 
assuming dilution
(1,690
)
 
(1,607
)
 
(2,205
)
 
(2,235
)
Net income allocated to common shares assuming
 
 
 
 
 
 
 
dilution
$
289,757

 
$
255,680

 
$
404,699

 
$
371,237

Diluted net income per common share
$
2.94

 
$
2.46

 
$
4.06

 
$
3.57

 
(1) 
There were no options excluded due to their anti-dilutive effect for the three months ended June 30, 2014. Stock options and other contingently issuable shares excluded 2,932 shares for the six months ended June 30, 2014. There were no options excluded due to their anti-dilutive effect for the three and six months ended June 30, 2013.
Reportable Segment Information (Tables)
Reportable segment information
(Thousands of dollars)
Three Months Ended June 30, 2014
 
Paint Stores
Group
 
Consumer
Group
 
Global
Finishes
Group
 
Latin America
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
1,882,592

 
$
433,356

 
$
544,597

 
$
181,221

 
$
1,229

 
$
3,042,995

Intersegment transfers
 
 
766,080

 
2,202

 
9,927

 
(778,209
)
 
 
Total net sales and intersegment transfers
$
1,882,592

 
$
1,199,436

 
$
546,799

 
$
191,148

 
$
(776,980
)
 
$
3,042,995

 
 
 
 
 
 
 
 
 
 
 
 
Segment profit
$
375,857

 
$
92,488

(1) 
$
54,865

 
$
5,660

 
 
 
$
528,870

Interest expense
 
 
 
 
 
 
 
 
$
(16,374
)
 
(16,374
)
Administrative expenses and other
 
 
 
 
 
 
 
 
(83,266
)
 
(83,266
)
Income before income taxes
$
375,857

 
$
92,488

 
$
54,865

 
$
5,660

 
$
(99,640
)
 
$
429,230

 
Three Months Ended June 30, 2013
 
Paint Stores
Group
 
Consumer
Group
 
Global
Finishes
Group
 
Latin America
Coatings
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
1,606,509

 
$
393,660

 
$
513,524

 
$
198,991

 
$
1,205

 
$
2,713,889

Intersegment transfers
 
 
658,202

 
3,740

 
9,691

 
(671,633
)
 
 
Total net sales and intersegment transfers
$
1,606,509

 
$
1,051,862

 
$
517,264

 
$
208,682

 
$
(670,428
)
 
$
2,713,889

 
 
 
 
 
 
 
 
 
 
 
 
Segment profit
$
332,972

 
$
79,042

(1) 
$
54,462

 
$
856

 
 
 
$
467,332

Interest expense
 
 
 
 
 
 
 
 
$
(15,069
)
 
(15,069
)
Administrative expenses and other
 
 
 
 
 
 
 
 
(71,379
)
 
(71,379
)
Income before income taxes
$
332,972

 
$
79,042

 
$
54,462

 
$
856

 
$
(86,448
)
 
$
380,884

(1) Segment profit includes $8,891 and $8,108 of mark-up on intersegment transfers realized as a result of external sales by the Paint Stores Group during the second quarter of 2014 and 2013, respectively.
 
Six Months Ended June 30, 2014
 
Paint Stores
Group
 
Consumer
Group
 
Global
Finishes
Group
 
Latin America
Coatings 
Group
 
Administrative
 
Consolidated
Totals
Net external sales
$
3,242,595

 
$
758,655

 
$
1,042,236

 
$
363,609

 
$
2,456

 
$
5,409,551

Intersegment transfers
 
 
1,312,642

 
3,615

 
20,049

 
(1,336,306
)
 
 
Total net sales and intersegment transfers
$
3,242,595

 
$
2,071,297

 
$
1,045,851

 
$
383,658

 
$
(1,333,850
)
 
$
5,409,551

 
 
 
 
 
 
 
 
 
 
 
 
Segment profit
$
522,122

 
$
143,576

(2) 
$
101,342

 
$
15,647

 
 
 
$
782,687

Interest expense
 
 
 
 
 
 
 
 
$
(32,768
)
 
(32,768
)
Administrative expenses and other
 
 
 
 
 
 
 
 
(154,612
)
 
(154,612
)
Income before income taxes
$
522,122

 
$
143,576

 
$
101,342

 
$
15,647

 
$
(187,380
)
 
$
595,307


Acquisitions (Tables)
Summary of pro-forma consolidated financial information
The following unaudited pro-forma summary presents consolidated financial information as if the U.S./Canada business of Comex had been acquired as of the beginning of each period presented. The pro-forma consolidated financial information does not necessarily reflect the actual results that would have occurred had the acquisition taken place on January 1, 2013 or of future results of operations of this acquisition under ownership and operation of the Company. 
(Thousands of dollars except per share data)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
3,042,995

 
$
2,849,091

 
$
5,409,551

 
$
5,123,962

Net income
291,447

 
249,693

 
406,904

 
352,502

Net income per common share:
 
 
 
 
 
 
 
Basic
$
3.00

 
$
2.44

 
$
4.14

 
$
3.44

Diluted
$
2.94

 
$
2.39

 
$
4.06

 
$
3.37

Fair Value Measurements (Tables)
Financial assets and liabilities measured at fair value on a recurring basis
The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis, categorized using the fair value hierarchy:
(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
Quoted Prices
 
 
 
 
 
 
 
in Active
 
 
 
Significant
 
Fair Value at
 
Markets for
 
Significant Other
 
Unobservable
 
June 30,
 
Identical Assets
 
Observable Inputs
 
Inputs
 
2014
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Deferred compensation plan asset (1)
$
23,161

 
$
3,728

 
$
19,433

 

Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liability (2)
$
29,382

 
$
29,382

 

 

 
(1) 
The deferred compensation plan asset consists of the investment funds maintained for the future payments under the Company’s executive deferred compensation plan, which is structured as a rabbi trust. 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 $22,405.

(2) 
The deferred compensation plan liability is the Company’s liability under its executive deferred compensation plan. The liability represents the fair value of the participant shadow accounts, and the value is based on quoted market prices.
Debt (Tables)
Carrying amount and fair value of 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-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-traded debt are classified as level 1 and level 2, respectively, in the fair value hierarchy.
(Thousands of dollars)
June 30, 2014
 
June 30, 2013
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Publicly traded debt
$
1,620,784

 
$
1,654,524

 
$
1,630,197

 
$
1,637,505

Non-traded debt
3,761

 
3,558

 
4,386

 
4,245

Dividends (Details)
3 Months Ended
Jun. 30, 2014
Mar. 31, 2014
Jun. 30, 2013
Mar. 31, 2013
Dividends [Abstract]
 
 
 
 
Dividends paid per common share (in dollars per share)
$ 0.55 
$ 0.55 
$ 0.5 
$ 0.5 
Changes in Cumulative Other Comprehensive Loss (Details) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Changes in Net Other Comprehensive (Loss) Income [Roll Forward]
 
 
Beginning balance
$ (321,044)
$ (370,389)
Other comprehensive income (loss) before reclassifications
4,558 1
(49,499)1
Amounts reclassified from other comprehensive income (loss)
970 2
6,898 2
Net other comprehensive loss
5,528 
(42,601)
Ending balance
(315,516)
(412,990)
Tax effect for net actuarial losses and prior service costs recognized for employee benefit plans before reclassifications
244 
534 
Tax effect for unrealized net gains on available-for-sale securities before reclassifications
(324)
(62)
Tax effect for net actuarial losses and prior service costs recognized for employee benefit plans for amounts reclassified from other comprehensive loss
(417)
(4,001)
Tax effect for realized gains on the sale of available-for-sale securities for amounts reclassified from other comprehensive loss
28 
(12)
Foreign Currency Translation Adjustments
 
 
Changes in Net Other Comprehensive (Loss) Income [Roll Forward]
 
 
Beginning balance
(250,942)
(204,195)
Other comprehensive income (loss) before reclassifications
4,612 
(48,421)
Amounts reclassified from other comprehensive income (loss)
   
 
Net other comprehensive loss
4,612 
(48,421)
Ending balance
(246,330)
(252,616)
Net Actuarial (Losses) Gains and Prior Service Costs Recognized for Employee Benefit Plans
 
 
Changes in Net Other Comprehensive (Loss) Income [Roll Forward]
 
 
Beginning balance
(70,611)
(166,595)
Other comprehensive income (loss) before reclassifications
(570)1
(1,177)1
Amounts reclassified from other comprehensive income (loss)
1,015 2
6,917 2
Net other comprehensive loss
445 
5,740 
Ending balance
(70,166)
(160,855)
Unrealized Net Gains (Losses) on Available-for-Sale Securities
 
 
Changes in Net Other Comprehensive (Loss) Income [Roll Forward]
 
 
Beginning balance
509 
401 
Other comprehensive income (loss) before reclassifications
516 1
99 1
Amounts reclassified from other comprehensive income (loss)
(45)2
(19)2
Net other comprehensive loss
471 
80 
Ending balance
$ 980 
$ 481 
Product Warranties (Details) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Company's accrual for product warranty claims
 
 
Balance at January 1
$ 26,755 
$ 22,710 
Charges to expense
14,446 
11,031 
Settlements
(16,351)
(12,134)
Balance at June 30
$ 24,850 
$ 21,607 
Exit or Disposal Activities (Details) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Consumer Group [Member]
facility
Jun. 30, 2014
Paint Stores Group [Member]
store
Jun. 30, 2014
Latin America Coatings Group [Member]
store
Jun. 30, 2014
Other qualified exit costs [Member]
Facilities Shutdown Prior to 2012 [Member]
Jun. 30, 2014
Other qualified exit costs [Member]
Paint Stores Group [Member]
Facilities Shut Down in 2013 [Member]
Jun. 30, 2014
Other qualified exit costs [Member]
Paint Stores Group [Member]
Stores Shut Down in 2012 [Member]
Jun. 30, 2014
Other qualified exit costs [Member]
Global Finishes Group [Member]
Jun. 30, 2014
Other qualified exit costs [Member]
Global Finishes Group [Member]
Stores Shut Down in 2013 [Member]
Jun. 30, 2014
Other qualified exit costs [Member]
Global Finishes Group [Member]
Facilities Shutdown in 2012 [Member]
Dec. 31, 2013
Other qualified exit costs [Member]
Global Finishes Group [Member]
Facilities Shutdown in 2012 [Member]
Jun. 30, 2014
Severance and related costs [Member]
Consumer Group [Member]
Facilities Shutdown in 2014 [Member]
Jun. 30, 2014
Severance and related costs [Member]
Consumer Group [Member]
Facilities Shut Down in 2013 [Member]
Jun. 30, 2014
Severance and related costs [Member]
Paint Stores Group [Member]
Facilities Shut Down in 2013 [Member]
Jun. 30, 2014
Severance and related costs [Member]
Global Finishes Group [Member]
Jun. 30, 2014
Severance and related costs [Member]
Global Finishes Group [Member]
Stores Shut Down in 2013 [Member]
Jun. 30, 2014
Severance and related costs [Member]
Global Finishes Group [Member]
Facilities Shutdown in 2012 [Member]
Jun. 30, 2014
Severance and related costs [Member]
Latin America Coatings Group [Member]
Facilities Shut Down in 2013 [Member]
Exit or Disposal Activities (Textual) [Abstract]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Branches closed
 
 
 
 
4 
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Facilities closed
 
 
 
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Summary of activity and remaining liabilities associated with qualified exit costs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance, at December 31, 2013
 
$ 5,820 
 
 
 
 
$ 1,365 
 
$ 244 
 
$ 220 
$ 83 
$ 83 
 
$ 598 
$ 977 
 
$ 33 
$ 2,177 
$ 123 
Provisions in Cost of goods sold or SG&A
 
9,439 
 
 
 
 
 
1,512 
 
2,022 
 
 
 
1,514 
97 
1,794 
2,500 
 
 
 
Actual expenditures charged to accrual
 
(3,877)
(5,955)
 
 
 
(238)
(61)
(23)
 
(44)
 
 
(72)
(382)
(1,069)
 
(2)
(1,863)
(123)
Adjustments to prior provisions in Other general expense - net
212 
0 
340 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance at June 30, 2014
 
$ 11,382 
 
 
 
 
$ 1,127 
$ 1,451 
$ 221 
$ 2,022 
$ 176 
$ 83 
$ 83 
$ 1,442 
$ 313 
$ 1,702 
$ 2,500 
$ 31 
$ 314 
    
Health Care, Pension and Other Benefits (Details) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Domestic Defined Benefit Pension Plans [Member]
 
 
 
 
Net periodic benefit cost (credit):
 
 
 
 
Service cost
$ 5,637 
$ 5,397 
$ 11,274 
$ 10,793 
Interest cost
6,525 
4,267 
13,051 
8,534 
Expected return on assets
(12,665)
(10,342)
(25,331)
(20,684)
Amortization of:
 
 
 
 
Prior service cost (credit)
459 
455 
918 
911 
Actuarial loss
 
3,488 
 
6,976 
Net periodic benefit cost (credit)
(44)
3,265 
(88)
6,530 
Foreign Defined Benefit Pension Plans [Member]
 
 
 
 
Net periodic benefit cost (credit):
 
 
 
 
Service cost
1,548 
1,160 
3,095 
2,320 
Interest cost
2,694 
1,903 
5,388 
3,805 
Expected return on assets
(2,740)
(1,782)
(5,480)
(3,564)
Amortization of:
 
 
 
 
Actuarial loss
355 
442 
711 
884 
Net periodic benefit cost (credit)
1,857 
1,723 
3,714 
3,445 
Postretirement Benefits Other than Pensions [Member]
 
 
 
 
Net periodic benefit cost (credit):
 
 
 
 
Service cost
608 
766 
1,217 
1,531 
Interest cost
3,196 
3,045 
6,391 
6,091 
Amortization of:
 
 
 
 
Prior service cost (credit)
(125)
(82)
(251)
(164)
Actuarial loss
 
984 
 
1,967 
Net periodic benefit cost (credit)
$ 3,679 
$ 4,713 
$ 7,357 
$ 9,425 
Other Long-Term Liabilities (Details) (USD $)
In Millions, unless otherwise specified
Jun. 30, 2014
ManufacturingSite
Jun. 30, 2013
Other Long-Term Liabilities (Textual) [Abstract]
 
 
Amount by which unaccrued maximum of estimated range exceeds minimum
$ 93.6 
 
Accruals for extended environmental-related activities
82.7 
93.8 
Estimated costs of current investigation and remediation activities included in Other accruals
15.4 
17.1 
Number of manufacturing sites accounting for the majority of the accrual for environmental-related activities
2 
 
Accruals for environmental-related activities of two sites
56.5 
 
Percentage of accrual for environmental-related activities related to two sites
57.60% 
 
Amount of unaccrued maximum related to two sites
$ 63.0 
 
Percentage of aggregate unaccrued maximum related to two sites
67.30% 
 
Litigation (Details) (USD $)
In Millions, unless otherwise specified
12 Months Ended 0 Months Ended 6 Months Ended
Dec. 31, 2013
Jul. 1, 2008
Trial by Jury, State of Rhode Island [Member]
jury_trial
defendant
Sep. 30, 2013
Cost of Sales [Member]
Sep. 30, 2013
Selling, General and Administrative Expenses [Member]
Loss Contingencies [Line Items]
 
 
 
 
Number of jury trials
 
2 
 
 
Number of additional defendants
 
2 
 
 
Import tax examination, liability adjustment from settlement with taxing authority
 
 
$ 28.7 
$ 2.9 
Import tax examination, liability adjustment from settlement with taxing authority, after tax
$ 21.9 
 
 
 
Other (Details) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Contract
OptionPlan
Jun. 30, 2013
OptionPlan
Contract
Jun. 30, 2014
Contract
OptionPlan
Jun. 30, 2013
OptionPlan
Contract
Other general expense - net
 
 
 
 
Provisions for environmental matters - net
$ 259 
$ 1,446 
$ (175)
$ 1,769 
Loss (gain) on disposition of assets
511 
(1,173)
373 
2,323 
Adjustments to prior provisions for qualified exit costs
 
212 
0 
340 
Total
770 
485 
198 
4,432 
Other (income) expense - net
 
 
 
 
Dividend and royalty income
(1,195)
(813)
(2,246)
(3,637)
Net expense from financing activities
2,547 
2,845 
5,469 
4,743 
Foreign currency transaction related (gains) losses
(1,830)
3,196 
1,028 
5,944 
Other income
(6,973)
(7,107)
(13,279)
(14,419)
Other expense
2,304 
2,594 
4,384 
5,363 
Total
$ (5,147)
$ 715 
$ (4,644)
$ (2,006)
Number of foreign currency option outstanding
0 
0 
0 
0 
Number of foreign forward contracts outstanding
0 
0 
0 
0 
Income Taxes (Details Textual) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Dec. 31, 2013
Income Tax Disclosure [Abstract]
 
 
 
 
 
Effective tax rate
32.10% 
32.50% 
31.60% 
32.00% 
 
Unrecognized tax benefits
 
 
 
 
$ 31,000,000 
Unrecognized tax benefits adjusted
 
 
 
 
27,800,000 
Amount of unrecognized tax benefits where significant change is reasonably possible
0 
 
0 
 
5,600,000 
Accrued income tax interest and penalties
 
 
 
 
$ 6,200,000 
Net Income Per Common Share (Details) (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
ParticipatingSecurities
Jun. 30, 2013
Basic
 
 
 
 
Average common shares outstanding (in shares)
96,599,869 
101,665,737 
97,716,539 
101,813,398 
Net income
$ 291,447 
$ 257,287 
$ 406,904 
$ 373,472 
Less net income allocated to unvested restricted shares
(1,722)
(1,639)
(2,245)
(2,278)
Net income allocated to common shares
289,725 
255,648 
404,659 
371,194 
Basic net income per common share (in dollars per share)
$ 3.00 
$ 2.51 
$ 4.14 
$ 3.65 
Diluted
 
 
 
 
Average common shares outstanding (in shares)
96,599,869 
101,665,737 
97,716,539 
101,813,398 
Stock options and other contingently issuable shares (in shares)
1,942,040 1
2,231,043 1
1,972,018 1
2,218,320 1
Average common shares outstanding assuming dilution (in shares)
98,541,909 
103,896,780 
99,688,557 
104,031,718 
Net income
291,447 
257,287 
406,904 
373,472 
Less net income allocated to unvested restricted shares assuming dilution
(1,690)
(1,607)
(2,205)
(2,235)
Net income allocated to common shares assuming dilution
$ 289,757 
$ 255,680 
$ 404,699 
$ 371,237 
Diluted net income per common share (in dollars per share)
$ 2.94 
$ 2.46 
$ 4.06 
$ 3.57 
Average common shares outstanding, anti-dilutive (in shares)
0 
0 
2,932 
0 
Classes of participating securities
 
 
2 
 
Percent common shares representing outstanding shares
99.00% 
 
99.00% 
 
Percent restricted shares representing outstanding shares
1.00% 
 
1.00% 
 
Reportable Segment Information (Details) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
$ 3,042,995 
$ 2,713,889 
$ 5,409,551 
$ 4,881,057 
Segment profit
528,870 
467,332 
782,687 
705,787 
Interest expense
(16,374)
(15,069)
(32,768)
(30,380)
Administrative expenses and other
(83,266)
(71,379)
(154,612)
(126,139)
Income before income taxes
429,230 
380,884 
595,307 
549,268 
Reportable Segment Information (Textual) [Abstract]
 
 
 
 
Mark-up on intersegment transfers realized as result of external sales included in segment profit
 
 
15,325 
14,278 
Paint Stores Group [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
1,882,592 
1,606,509 
3,242,595 
2,774,446 
Segment profit
375,857 
332,972 
522,122 
462,685 
Income before income taxes
375,857 
332,972 
522,122 
462,685 
Consumer Group [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
1,199,436 
1,051,862 
2,071,297 
1,868,146 
Segment profit
92,488 1
79,042 1
143,576 2
133,014 2
Income before income taxes
92,488 
79,042 
143,576 
133,014 
Reportable Segment Information (Textual) [Abstract]
 
 
 
 
Mark-up on intersegment transfers realized as result of external sales included in segment profit
8,891 
8,108 
 
 
Global Finishes Group [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
546,799 
517,264 
1,045,851 
1,005,373 
Segment profit
54,865 
54,462 
101,342 
88,393 
Income before income taxes
54,865 
54,462 
101,342 
88,393 
Latin America Coatings Group [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
191,148 
208,682 
383,658 
421,539 
Segment profit
5,660 
856 
15,647 
21,695 
Income before income taxes
5,660 
856 
15,647 
21,695 
Administrative [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
(776,980)
(670,428)
(1,333,850)
(1,188,447)
Interest expense
(16,374)
(15,069)
(32,768)
(30,380)
Administrative expenses and other
(83,266)
(71,379)
(154,612)
(126,139)
Income before income taxes
(99,640)
(86,448)
(187,380)
(156,519)
Operating Segments [Member] |
Paint Stores Group [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
1,882,592 
1,606,509 
3,242,595 
2,774,446 
Operating Segments [Member] |
Consumer Group [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
433,356 
393,660 
758,655 
702,240 
Operating Segments [Member] |
Global Finishes Group [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
544,597 
513,524 
1,042,236 
1,000,342 
Operating Segments [Member] |
Latin America Coatings Group [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
181,221 
198,991 
363,609 
401,627 
Corporate, Non-Segment [Member] |
Administrative [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
1,229 
1,205 
2,456 
2,402 
Intersegment Eliminations [Member] |
Administrative [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
(778,209)
(671,633)
(1,336,306)
(1,190,849)
Intersegment Transfers [Member] |
Consumer Group [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
766,080 
658,202 
1,312,642 
1,165,906 
Intersegment Transfers [Member] |
Global Finishes Group [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
2,202 
3,740 
3,615 
5,031 
Intersegment Transfers [Member] |
Latin America Coatings Group [Member]
 
 
 
 
Reportable segment information
 
 
 
 
Net external sales and intersegment transfers
$ 9,927 
$ 9,691 
$ 20,049 
$ 19,912 
Reportable Segment Information (Details Textual) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
segment
Jun. 30, 2013
Segment Reporting Information [Line Items]
 
 
 
 
Number of operating segments
 
 
4 
 
Reportable Segment Information (Textual) [Abstract]
 
 
 
 
Net external sales
$ 3,042,995,000 
$ 2,713,889,000 
$ 5,409,551,000 
$ 4,881,057,000 
Segment profit
528,870,000 
467,332,000 
782,687,000 
705,787,000 
Reportable Segment Information (Additional Textual) [Abstract]
 
 
 
 
Export sales and sales to any individual customer
 
 
less than 10 percent of consolidated sales to unaffiliated customers 
 
Foreign Subsidiaries [Member]
 
 
 
 
Reportable Segment Information (Textual) [Abstract]
 
 
 
 
Net external sales
576,700,000 
531,600,000 
1,106,000,000 
1,048,000,000 
Segment profit
32,000,000 
5,600,000 
54,700,000 
31,200,000 
Long-lived assets
$ 614,600,000 
$ 596,500,000 
$ 614,600,000 
$ 596,500,000 
Acquisitions (Details) (U.S. and Canadian Business of Comex [Member], USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
U.S. and Canadian Business of Comex [Member]
 
 
 
 
Summary of pro-forma consolidated financial information
 
 
 
 
Net sales
$ 3,042,995 
$ 2,849,091 
$ 5,409,551 
$ 5,123,962 
Net income
$ 291,447 
$ 249,693 
$ 406,904 
$ 352,502 
Net income per common share:
 
 
 
 
Basic (in dollars per share)
$ 3.00 
$ 2.44 
$ 4.14 
$ 3.44 
Diluted (in dollars per share)
$ 2.94 
$ 2.39 
$ 4.06 
$ 3.37 
Fair Value Measurements (Details) (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2014
Fair Value Measurements (Textual) [Abstract]
 
Cost basis of the investment funds
$ 22,405 
Estimate of Fair Value Measurement [Member]
 
Assets:
 
Deferred compensation plan asset
23,161 1
Liabilities:
 
Deferred compensation plan liability
29,382 2
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
 
Assets:
 
Deferred compensation plan asset
3,728 1
Liabilities:
 
Deferred compensation plan liability
29,382 2
Significant Other Observable Inputs (Level 2) [Member]
 
Assets:
 
Deferred compensation plan asset
19,433 1
Liabilities:
 
Deferred compensation plan liability
   2
Significant Unobservable Inputs (Level 3) [Member]
 
Assets:
 
Deferred compensation plan asset
   1
Liabilities:
 
Deferred compensation plan liability
   2
Debt (Details) (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2014
Jun. 30, 2013
Publicly traded debt [Member]
 
 
Financial Instruments
 
 
Carrying Amount
$ 1,620,784 
$ 1,630,197 
Fair Value
1,654,524 
1,637,505 
Non-traded debt [Member]
 
 
Financial Instruments
 
 
Carrying Amount
3,761 
4,386 
Fair Value
$ 3,558 
$ 4,245 
Non-Traded Investments (Details Textual) (USD $)
In Millions, unless otherwise specified
Jun. 30, 2014
Jun. 30, 2013
Non Traded Investments (Textual) [Abstract]
 
 
Carrying amount of the investments, included in other assets
$ 245.3 
$ 236.5 
Liability for estimated future capital contributions to the investments
$ 217.7 
$ 205.8