MASCO CORP /DE/, 10-K filed on 2/16/2010
Annual Report
Document and Company Information (USD $)
In Thousands
Year Ended
Dec. 31, 2009
Jun. 30, 2009
Document and Company Information [Abstract]
 
 
Entity Registrant Name
MASCO CORP /DE/ 
 
Entity Central Index Key
0000062996 
 
Document Type
10-K 
 
Document Period End Date
12/31/2009 
 
Amendment Flag
FALSE 
 
Current Fiscal Year End Date
12/31 
 
Entity Well-known Seasoned Issuer
Yes 
 
Entity Voluntary Filers
No 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Public Float
 
$ 3,338,607 
Entity Common Stock, Shares Outstanding (actual number)
358,778 
 
Consolidated Balance Sheets (USD $)
In Millions
Dec. 31, 2009
Dec. 31, 2008
Balance Sheets [Abstract]
 
 
ASSETS
 
 
Current Assets:
 
 
Cash and cash investments
$ 1,413 
$ 1,028 
Receivables
983 
999 
Inventories
743 
941 
Prepaid expenses and other
312 
332 
Total current assets
3,451 
3,300 
Property and equipment, net
1,981 
2,136 
Goodwill
3,108 
3,371 
Other intangible assets, net
290 
299 
Other assets
345 
377 
Total Assets
9,175 
9,483 
LIABILITIES and EQUITY
 
 
Current Liabilities:
 
 
Accounts payable
578 
531 
Notes payable
364 
71 
Accrued liabilities
839 
945 
Total current liabilities
1,781 
1,547 
Long-term debt
3,604 
3,915 
Deferred income taxes and other
973 
1,040 
Total Liabilities
6,358 
6,502 
Commitments and contingencies
 
 
Masco Corporation's shareholders' equity
 
 
Common shares authorized: 1,400,000,000; issued and outstanding: 2009 - 350,400,000; 2008 - 351,400,000
350 
351 
Preferred shares authorized: 1,000,000; issued and outstanding: 2009 and 2008 - None
Paid-in capital
42 
Retained earnings
1,871 
2,162 
Accumulated other comprehensive income
366 
308 
Total Masco Corporation's shareholders' equity
2,629 
2,821 
Noncontrolling interest
188 
160 
Total Equity
2,817 
2,981 
Total Liabilities and Equity
$ 9,175 
$ 9,483 
Consolidated Balance Sheets (Parenthetical)
Share data in Millions, except Per Share data
Dec. 31, 2009
Dec. 31, 2008
Masco Corporation's shareholders' equity
 
 
Common shares, shares authorized
1,400 
1,400 
Common shares, shares issued
350.4 
351.4 
Common shares, shares outstanding
350.4 
351.4 
Preferred shares, shares authorized
Preferred shares, shares issued
Preferred shares, shares outstanding
Consolidated Statements of Income (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2009
2008
2007
Statements of Income [Abstract]
 
 
 
Net sales
$ 7,792 
$ 9,484 
$ 11,413 
Cost of sales
5,774 
7,125 
8,280 
Gross profit
2,018 
2,359 
3,133 
Selling, general and administrative expenses
1,701 
1,802 
1,953 
Impairment charges for goodwill and other intangible assets
262 
467 
119 
Operating profit
55 
90 
1,061 
Other income (expense), net:
 
 
 
Interest expense
(225)
(228)
(258)
Impairment charges for financial investments
(10)
(58)
(22)
Other, net
29 
95 
Total Other income (expense), net
(206)
(283)
(185)
(Loss) income from continuing operations before income taxes
(151)
(193)
876 
Income tax (benefit)
(49)
134 
337 
(Loss) income from continuing operations
(102)
(327)
539 
(Loss) from discontinued operations, net
(43)
(25)
(116)
Net (loss) income
(145)
(352)
423 
Less: Net income attributable to noncontrolling interest
38 
39 
37 
Net (loss) income attributable to Masco Corporation
(183)
(391)
386 
Basic:
 
 
 
(Loss) income from continuing operations
(0.41)
(1.06)
1.33 
(Loss) from discontinued operations, net
(0.12)
(0.07)
(0.31)
Net (loss) income
(0.53)
(1.13)
1.02 
Diluted:
 
 
 
(Loss) income from continuing operations
(0.41)
(1.06)
1.32 
(Loss) from discontinued operations, net
(0.12)
(0.07)
(0.31)
Net (loss) income
(0.53)
(1.13)
1.02 
Amounts attributable to Masco Corporation:
 
 
 
(Loss) income from continuing operations
(140)
(366)
502 
(Loss) from discontinued operations, net
(43)
(25)
(116)
Net (loss) income
$ (183)
$ (391)
$ 386 
Consolidated Statements of Cash Flows (USD $)
In Millions
Year Ended
Dec. 31,
2009
2008
2007
Statements of Cash Flows [Abstract]
 
 
 
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
 
Net (loss) income
$ (145)
$ (352)
$ 423 
Depreciation and Amortization
254 
238 
248 
Deferred income taxes
(83)
20 
(41)
Loss on disposition of businesses, net
40 
38 
18 
(Gain) on disposition of investments, net
(2)
(41)
Charge for litigation settlements
Impairment charges:
 
 
 
Financial investments
10 
58 
22 
Goodwill and other intangible assets
262 
467 
227 
Stock-based compensation
69 
74 
94 
Other items, net
58 
84 
37 
Decrease in receivables
20 
294 
243 
Decrease in inventories
198 
104 
157 
Increase (decrease) in accounts payable and accrued liabilities, net
17 
(237)
(117)
Net cash from operating activities
705 
797 
1,270 
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
 
Increase in debt
Payment of debt
(14)
(33)
(56)
Issuance of notes, net of issuance costs
596 
Retirement of notes
(100)
(1,425)
Proceeds from settlement of swaps
(16)
Purchase of Company common stock
(11)
(160)
(857)
Issuance of Company common stock
60 
Tax benefit from stock-based compensation
19 
Dividends paid to noncontrolling interest
(16)
(21)
(14)
Cash dividends paid
(166)
(336)
(347)
Net cash for financing activities
(197)
(631)
(2,020)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(125)
(200)
(248)
Acquisition of businesses, net of cash acquired
(8)
(21)
(203)
Purchases of auction rate securities
(1,047)
Proceeds from disposition of auction rate securities
1,025 
Proceeds from disposition of:
 
 
 
Marketable securities
10 
55 
Businesses, net of cash disposed
179 
45 
Property and equipment
23 
45 
Other financial investments, net
48 
75 
Other, net
(27)
(31)
(80)
Net cash for investing activities
(118)
(14)
(333)
Effect of exchange rate changes on cash and cash investments
(5)
(46)
47 
CASH AND CASH INVESTMENTS:
 
 
 
Increase (decrease) for the year
385 
106 
(1,036)
At January 1
1,028 
922 
1,958 
At December 31
$ 1,413 
$ 1,028 
$ 922 
Consolidated Statements of Shareholders Equity (USD $)
In Millions
Common Shares
Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income
Noncontrolling Interest
Total
1/1/2007 - 12/31/2007
 
 
 
 
 
 
Begining Balance
$ 384 
$ 0 
$ 3,575 
$ 491 
$ 129 
$ 4,579 
Net (loss) income
 
 
386 
 
37 
423 
Cumulative translation adjustments
 
 
 
128 
15 
143 
Unrealized (loss) gain on marketable securities, net of income tax of $13; $4 and $5 in 2009; 2008 and 2007 respectively
 
 
 
(7)
 
(7)
Unrecognized prior service cost and net loss, net of income tax of $20; $86 and $27 in 2009; 2008 and 2007 respectively
 
 
 
49 
 
49 
Total comprehensive income
 
 
 
 
 
608 
Cumulative effect of accounting change regarding income tax uncertainties (Note Q)
 
 
(26)
 
 
(26)
Other
 
 
(7)
 
 
(7)
Shares issued
55 
 
 
 
59 
Shares retired:
 
 
 
 
 
 
Repurchased
(31)
(213)
(613)
 
 
(857)
Surrendered (non-cash)
 
(14)
 
 
 
(14)
Cash dividends declared
 
 
(346)
 
 
(346)
Dividends paid to noncontrolling interest
 
 
 
 
(14)
(14)
Stock-based compensation
 
118 
 
 
 
118 
Purchase of noncontrolling interest preferred shares
54 
 
 
(14)
42 
Ending Balance
359 
2,969 
661 
153 
4,142 
1/1/2008 - 12/31/2008
 
 
 
 
 
 
Begining Balance
359 
2,969 
661 
153 
4,142 
Net (loss) income
 
 
(391)
 
39 
(352)
Cumulative translation adjustments
 
 
 
(210)
(11)
(221)
Unrealized (loss) gain on marketable securities, net of income tax of $13; $4 and $5 in 2009; 2008 and 2007 respectively
 
 
 
 
Unrecognized prior service cost and net loss, net of income tax of $20; $86 and $27 in 2009; 2008 and 2007 respectively
 
 
 
(150)
 
(150)
Total comprehensive income
 
 
 
 
 
(716)
Cumulative effect of accounting change regarding income tax uncertainties (Note Q)
 
 
 
 
 
 
Other
 
 
 
 
 
 
Shares issued
 
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(9)
(71)
(80)
 
 
(160)
Surrendered (non-cash)
 
(7)
 
 
 
(7)
Cash dividends declared
 
 
(336)
 
 
(336)
Dividends paid to noncontrolling interest
 
 
 
 
(21)
(21)
Stock-based compensation
 
78 
 
 
 
78 
Purchase of noncontrolling interest preferred shares
 
 
 
 
 
 
Ending Balance
351 
2,162 
308 
160 
2,981 
1/1/2009 - 12/31/2009
 
 
 
 
 
 
Begining Balance
351 
2,162 
308 
160 
2,981 
Net (loss) income
 
 
(183)
 
38 
(145)
Cumulative translation adjustments
 
 
 
22 
28 
Unrealized (loss) gain on marketable securities, net of income tax of $13; $4 and $5 in 2009; 2008 and 2007 respectively
 
 
 
22 
 
22 
Unrecognized prior service cost and net loss, net of income tax of $20; $86 and $27 in 2009; 2008 and 2007 respectively
 
 
 
14 
 
14 
Total comprehensive income
 
 
 
 
 
(81)
Cumulative effect of accounting change regarding income tax uncertainties (Note Q)
 
 
 
 
 
 
Other
 
 
 
 
 
 
Shares issued
(1)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(2)
(9)
 
 
 
(11)
Surrendered (non-cash)
(1)
(4)
 
 
 
(5)
Cash dividends declared
 
 
(108)
 
 
(108)
Dividends paid to noncontrolling interest
 
 
 
 
(16)
(16)
Stock-based compensation
 
56 
 
 
 
56 
Purchase of noncontrolling interest preferred shares
 
 
 
 
 
 
Ending Balance
$ 350 
$ 42 
$ 1,871 
$ 366 
$ 188 
$ 2,817 
Statements of Shareholders Equity Parenthetical (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2009
2008
2007
Common Shares
 
 
 
Common shares, par value
$ 1 
$ 1 
$ 1 
Accumulated Other Comprehensive Income
 
 
 
Income tax benefit on unrealized gain (loss) on marketable securities
13 
Income tax benefit on unrecognized prior service cost
$ 20 
$ 86 
$ 27 
0601- Disclosure - Accounting Policies
ACCOUNTING POLICIES
 
A.  ACCOUNTING POLICIES
 
Principles of Consolidation.  The consolidated financial statements include the accounts of Masco Corporation and all majority-owned subsidiaries. All significant intercompany transactions have been eliminated. The Company consolidates the assets, liabilities and results of operations of variable interest entities, for which the Company is the primary beneficiary.
 
Use of Estimates and Assumptions in the Preparation of Financial Statements.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates and assumptions.
 
Revenue Recognition.  The Company recognizes revenue as title to products and risk of loss is transferred to customers or when services are rendered, net of applicable provisions for discounts, returns and allowances. The Company records revenue for unbilled services performed based upon estimates of labor incurred in the Installation and Other Services segment; such amounts are recorded in Receivables. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales.
 
Customer Promotion Costs.  The Company records estimated reductions to revenue for customer programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. In-store displays that are owned by the Company and used to market the Company’s products are included in other assets in the consolidated balance sheets and are amortized using the straight-line method over the expected useful life of three years; related amortization expense is classified as a selling expense in the consolidated statements of income.
 
Foreign Currency.  The financial statements of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates in effect during the year. The resulting cumulative translation adjustments have been recorded in the accumulated other comprehensive income component of shareholders’ equity. Realized foreign currency transaction gains and losses are included in the consolidated statements of income in other income (expense), net.
 
Cash and Cash Investments.  The Company considers all highly liquid investments with an initial maturity of three months or less to be cash and cash investments.
 
Receivables.  The Company does significant business with a number of customers, including certain home centers and homebuilders. The Company monitors its exposure for credit losses on its customer receivable balances and the credit worthiness of its customers on an on-going basis and records related allowances for doubtful accounts. Allowances are estimated based upon specific customer balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon historical collection, return and write-off activity. During downturns in the Company’s markets, declines in the financial condition and creditworthiness of customers impacts the credit risk of the receivables involved and the Company has incurred additional bad debt expense related to customer defaults. A separate allowance is recorded for customer incentive rebates and is generally based upon sales activity. Receivables are presented net of certain allowances (including allowances for doubtful accounts) of $75 million at both December 31, 2009 and 2008. Receivables include unbilled revenue related to the Installation and Other Services segment of $15 million and $24 million at December 31, 2009 and 2008, respectively.
 
Property and Equipment.  Property and equipment, including significant betterments to existing facilities, are recorded at cost. Upon retirement or disposal, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the consolidated statements of income. Maintenance and repair costs are charged against earnings as incurred.
 
The Company reviews its property and equipment as an event occurs or circumstances change that would more likely than not reduce the fair value of the property and equipment below the carrying amount. If the carrying amount of property and equipment is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, the Company evaluates the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.
 
Depreciation.  Depreciation expense is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements, 2 to 10 percent, and machinery and equipment, 5 to 33 percent. Depreciation expense was $237 million, $220 million and $215 million in 2009, 2008 and 2007, respectively.
 
Goodwill and Other Intangible Assets.  The Company performs its annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company has defined its reporting units and completed the impairment testing of goodwill at the operating segment level. The Company’s operating segments are reporting units that engage in business activities, for which discrete financial information, including five-year forecasts, are available. The Company compares the fair value of the reporting units to the carrying value of the reporting units for goodwill impairment testing. Fair value is determined using a discounted cash flow method, which includes significant unobservable inputs (Level 3 inputs).
 
Determining market values using a discounted cash flow method requires the Company to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. The Company’s judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. In estimating future cash flows, the Company relies on internally generated five-year forecasts for sales and operating profits, including capital expenditures, and generally a one to three percent long-term assumed annual growth rate of cash flows for periods after the five-year forecast. The Company generally utilizes its weighted average cost of capital (discount rate) of approximately nine percent to discount the estimated cash flows. However, in 2009 and 2008, due to market conditions, the Company increased the discount rate for most of its reporting units, based upon a review of the current risks impacting our businesses. The Company records an impairment to goodwill (adjusting the value to the estimated fair value) if the book value is below the estimated fair value, on a non-recurring basis.
 
The Company reviews its other indefinite-lived intangible assets for impairment annually in the fourth quarter of each year, or as events occur or circumstances change that indicate the assets may be impaired without regard to the reporting unit. The Company considers the implications of both external (e.g., market growth, competition and local economic conditions) and internal (e.g., product sales and expected product growth) factors and their potential impact on cash flows related to the intangible asset in both the near- and long-term.
 
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. The Company evaluates the remaining useful lives of amortizable identifiable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization. See Note H for additional information regarding Goodwill and Other Intangible Assets.
 
Fair Value Accounting.  On January 1, 2008, the Company adopted fair value guidance for its financial investments and liabilities which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. On January 1, 2009, the Company adopted this guidance for its non-financial investments and liabilities; such adoption did not have a significant effect on its consolidated financial statements.
 
The fair value of financial investments and liabilities is determined at each balance sheet date and future declines in market conditions, the future performance of the underlying investments or new information could affect the recorded values of the Company’s investments in marketable securities, private equity funds and other private investments.
 
The Company uses derivative financial instruments to manage certain exposure to fluctuations in earnings and cash flows resulting from changes in foreign currency exchange rates and interest rates. Derivative financial instruments are recorded in the consolidated balance sheets as either an asset or liability measured at fair value. For each derivative financial instrument that is designated and qualifies as a fair-value hedge, the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in determining current earnings during the period of the change in fair values. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in determining current earnings during the period of the change in fair value.
 
Warranty.  At the time of sale, the Company accrues a warranty liability for estimated costs to provide products, parts or services to repair or replace products in satisfaction of warranty obligations. The Company’s estimate of costs to service its warranty obligations is based upon historical experience and expectations of future conditions.
 
A majority of the Company’s business is at the consumer retail level through home centers and major retailers. A consumer may return a product to a retail outlet that is a warranty return. However, certain retail outlets do not distinguish between warranty and other types of returns when they claim a return deduction from the Company. The Company’s revenue recognition policy takes into account this type of return when recognizing revenue, and deductions are recorded at the time of sale.
 
Product Liability.  The Company provides for expenses associated with product liability obligations when such amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change that would affect the estimated liability.
 
Stock-Based Compensation.  The Company measures compensation expense for stock awards at the market price of the Company’s common stock at the grant date. Effective January 1, 2006, such expense is being recognized ratably over the shorter of the vesting period of the stock awards, typically 5 to 10 years (except for stock awards held by grantees age 66 or older, which vest over five years), or the length of time until the grantee becomes retirement-eligible at age 65. For stock awards granted prior to January 1, 2006, such expense is being recognized over the vesting period of the stock awards, typically 10 years, or for executive grantees that are, or will become, retirement-eligible during the vesting period, the expense is being recognized over five years or immediately upon a grantee’s retirement.
 
The Company measures compensation expense for stock options using a Black-Scholes option pricing model. For stock options granted subsequent to January 1, 2006, such expense is being recognized ratably over the shorter of the vesting period of the stock options, typically five years, or the length of time until the grantee becomes retirement-eligible at age 65. The expense for unvested stock options at January 1, 2006 is based upon the grant date fair value of those options as calculated using a Black-Scholes option pricing model. For stock options granted prior to January 1, 2006, such expense is being recognized ratably over the vesting period of the stock options, typically five years. The Company utilizes the shortcut method to determine the tax windfall pool associated with stock options.
 
Noncontrolling Interest.  The Company owns 68 percent of Hansgrohe AG at both December 31, 2009 and 2008. In accordance with new guidance, the aggregate noncontrolling interest, net of dividends, at December 31, 2009 and 2008 has been recorded as a component of equity on the Company’s consolidated balance sheets.
 
In May 2007, a put option was exercised and the Company issued two million shares of Company common stock with a value of $56 million for an additional four percent ownership in Hansgrohe AG.
 
Interest and Penalties on Unrecognized Tax Benefits.  The Company records interest and penalties on its unrecognized tax benefits in income tax expense.
 
Reclassifications.  Certain prior-year amounts have been reclassified to conform to the 2009 presentation in the consolidated financial statements. The results of operations related to 2009, 2008 and 2007 discontinued operations have been reclassified and separately stated in the accompanying consolidated statements of income for 2009, 2008 and 2007. In the Company’s consolidated statements of cash flows, the cash flows from discontinued operations are not separately classified.
 
Recently Issued Accounting Pronouncements.  In June 2009, the FASB issued guidance regarding how a company determines when an entity that is insufficiently capitalized or is not controlled through voting should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities that most significantly impact the entity’s economic performance. This guidance is effective for the Company beginning January 1, 2010. The Company does not expect that the adoption will have a significant impact on its consolidated financial condition and results of operations.
 
Subsequent Events.  The Company has evaluated subsequent events through February 16, 2010, the date the Company’s consolidated financial statements were issued.
Discontinued Operations
DISCONTINUED OPERATIONS
 
B.  DISCONTINUED OPERATIONS
 
During 2009, 2008 and 2007, the Company sold several business units that were not core to the Company’s long-term growth strategy. The presentation of discontinued operations includes a component of the Company, which comprises operations and cash flows, that can be clearly distinguished from the rest of the Company. The Company has accounted for the business units which were sold in 2009, 2008 and 2007, except as noted, as discontinued operations.
 
During 2009, in separate transactions, the Company completed the sale of Damixa and Breuer, two European business units in the Plumbing Products segment. The Company received gross proceeds of $9 million and recognized a net pre-tax loss of $43 million for the sale of these business units.
 
During 2009, the Company recorded income of $1 million included in (loss) gain on disposal of discontinued operations, net related to cash received for a disposition completed in prior years. Also during 2009, the Company recorded other income of $2 million included in (loss) gain on disposal of discontinued operations, net, reflecting the settlement of certain liabilities related to a business unit disposed in prior years.
 
During 2008, in separate transactions, the Company completed the sale of its Europe-based The Heating Group business unit (Other Specialty Products segment), Glass Idromassaggio (Plumbing Products segment) and Alfred Reinecke (Plumbing Products segment). Total net proceeds from the sale of these business units were $174 million. The Company recorded an impairment of assets related to these discontinued operations which primarily included the write-down of goodwill of $24 million and other assets of $21 million; upon completion of the transactions, the Company recognized a net gain of $6 million included in (loss) gain on disposal of discontinued operations, net. During 2008, the Company recorded other net expenses of $3 million included in (loss) gain on disposal of discontinued operations, net, reflecting the adjustment of certain liabilities related to businesses disposed in prior years.
 
During 2007, the Company completed the sale of Avocet, a European business unit in the Decorative Architectural Products segment. Total gross proceeds from the sale were $41 million; the Company recognized a pre-tax net loss on the disposition of Avocet of $11 million. During 2007, the Company recorded other net gains of $1 million, reflecting the receipt of additional purchase price payments related to businesses disposed in 2006 and 2005.
 
(Losses) gains from these 2009, 2008 and 2007 discontinued operations were included in (loss) from discontinued operations, net, in the consolidated statements of income.
 
Selected financial information for the discontinued operations during the period owned by the Company, were as follows, in millions:
 
                         
    2009     2008     2007  
 
Net sales
  $ 66     $ 216     $ 420  
                         
(Loss) from discontinued operations
  $ (10 )   $ (5 )   $ (104 )
Impairment of assets held for sale
          (45 )      
(Loss) gain on disposal of discontinued operations, net
    (40 )     3       (10 )
                         
(Loss) before income tax
    (50 )     (47 )     (114 )
Income tax benefit (expense)
    7       22       (2 )
                         
(Loss) from discontinued operations, net
  $ (43 )   $ (25 )   $ (116 )
                         
 
Included in income tax benefit (expense) above was income tax benefit (expense) related to (loss) from discontinued operations of $1 million, $1 million and $(1) million in 2009, 2008 and 2007, respectively. (Loss) from discontinued operations also includes non-cash, pre-tax and after tax impairment charges for goodwill of $108 million in 2007. The unusual relationship between income taxes and (loss) before income taxes resulted primarily from certain losses providing no current tax benefit.
 
During 2007, the Company completed the sale of two small businesses, the results of which were included in continuing operations through the dates of sale. These small businesses in the Plumbing Products segment had combined net sales and operating (loss) of $12 million and $(400,000), respectively, in 2007 through the respective dates of sale. Gross proceeds from the sale of these businesses were $10 million; the Company recognized a net loss of $8 million included in other, net, in continuing operations, related to the sale of these businesses, for the year ended December 31, 2007.
Acquisitions
ACQUISITIONS
 
C.  ACQUISITIONS
 
During 2009, the Company acquired a small business in the Plumbing Products segment; this business allows the Company to expand into a developing market and had annual sales of $11 million. During 2008, the Company acquired a relatively small countertop business (Cabinet and Related Products segment) which allows the Company to expand the products and services it offers to its customers and had annual sales of over $40 million. During 2007, the Company acquired several relatively small installation service businesses (Installation and Other Services segment), as well as Erickson Construction Company and Guy Evans, Inc. (Installation and Other Services segment).
 
The results of all acquisitions are included in the consolidated financial statements from the respective dates of acquisition.
 
The total net purchase price of these acquisitions was as follows, in millions:
 
                         
    2009     2008     2007  
 
Cash, net
  $ 6     $ 18     $ 195  
Assumed debt
                7  
                         
Total
  $ 6     $ 18     $ 202  
                         
 
Certain purchase agreements provided for the payment of additional consideration in cash, contingent upon whether certain conditions are met, including the operating performance of the acquired business. In 2008, the Company paid in cash an additional $1 million of acquisition-related consideration, contingent consideration and other purchase price adjustments, relating to previously acquired companies. At December 31, 2009 and 2008, there was no outstanding contingent consideration.
Inventories
INVENTORIES
 
D.  INVENTORIES
 
                 
(In Millions)  
    At December 31  
    2009     2008  
 
Finished goods
  $ 405     $ 483  
Raw material
    247       333  
Work in process
    91       125  
                 
Total
  $ 743     $ 941  
                 
 
Inventories, which include purchased parts, materials, direct labor and applied manufacturing overhead, are stated at the lower of cost or net realizable value, with cost determined by use of the first-in, first-out method.
Fair Value of Financial Instruments and Liabilities
FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES
 
E.  FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES
 
Accounting Policy.  On January 1, 2008, the Company adopted fair value guidance that defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for its financial investments and liabilities. The guidance defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Further, it defines a fair value hierarchy, as follows: Level 1 inputs as quoted prices in active markets for identical assets or liabilities; Level 2 inputs as observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities or other inputs that are observable or can be corroborated by market data; and Level 3 inputs as unobservable inputs that are supported by little or no market activity and that are financial instruments whose value is determined using pricing models or instruments for which the determination of fair value requires significant management judgment or estimation.
 
Financial investments that are available to be traded on readily accessible stock exchanges (domestic or foreign) are considered to have active markets and have been valued using Level 1 inputs. Financial investments that are not available to be traded on a public market or have limited secondary markets, or contain provisions that limit the ability to sell the investment are considered to have inactive markets and have been valued using Level 2 or 3 inputs. The Company incorporated credit risk into the valuations of financial investments by estimating the likelihood of non-performance by the counterparty to the applicable transactions. The estimate included the length of time relative to the contract, financial condition of the counterparty and current market conditions. The criteria for determining if a market was active or inactive were based on the individual facts and circumstances.
 
Financial Investments.  The Company has maintained investments in available-for-sale securities and a number of private equity funds and other private investments, principally as part of its tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses.
 
Financial investments included in other assets were as follows, in millions:
 
                 
    At December 31  
    2009     2008  
 
Asahi Tec Corporation — common and preferred stock
  $ 71     $ 73  
Auction rate securities
    22       22  
TriMas Corporation common stock
    17       3  
Marketable securities
          3  
Other investments
          3  
                 
Total recurring investments
    110       104  
                 
Private equity funds
    123       138  
Other investments
    9       7  
                 
Total non-recurring investments
    132       145  
                 
Total
  $ 242     $ 249  
                 
 
The Company’s investments in available-for-sale securities at December 31, 2009 and 2008 were as follows, in millions:
 
                                 
          Pre-tax        
          Unrealized
    Unrealized
    Recorded
 
    Cost Basis     Gains     Losses     Basis  
 
December 31, 2009
  $ 71     $ 39     $     $ 110  
December 31, 2008
  $ 75     $ 26     $     $ 101  
 
The Company’s investments in private equity funds and other private investments are carried at cost. At December 31, 2009, the Company has investments in 17 venture capital funds, with an aggregate carrying value of $28 million. The venture capital funds invest in start-up or smaller, early-stage established businesses, principally in the information technology, bio-technology and health care sectors. At December 31, 2009, the Company also has investments in 28 buyout funds, with an aggregate carrying value of $95 million. The buyout funds invest in later-stage, established businesses and, other than the Heartland Industrial Partners Fund (“Heartland Fund”), which is primarily in the automotive and transportation sector, no buyout fund has a concentration in a particular sector.
 
Recurring Fair Value Measurements.  For financial investments measured at fair value on a recurring basis at each reporting period, the unrealized gains or losses (that are deemed to be temporary) are recognized, net of tax effect, through shareholders’ equity, as a component of other comprehensive income. Realized gains and losses and charges for other-than-temporary impairments are included in determining net income, with related purchase costs based upon specific identification.
 
For marketable securities, the Company reviews, on a recurring basis, industry analyst reports, key ratios and statistics, market analyses and other factors for each investment to determine if an unrealized loss is other-than-temporary.
 
In the past, the Company invested excess cash in auction rate securities. Auction rate securities are investment securities that have interest rates which are reset every 7, 28 or 35 days. The fair values of the auction rate securities held by the Company have been estimated, on a recurring basis, using a discounted cash flow model (Level 3 input). The significant inputs in the discounted cash flow model used to value the auction rate securities include: expected maturity of auction rate securities, discount rate used to determine the present value of expected cash flows and assumptions for credit defaults, since the auction rate securities are backed by credit default swap agreements.
 
In December 2009, the Company sold its investment in Asahi Tec common stock for proceeds approximating book value. The preferred stock of Asahi Tec has been valued primarily using a discounted cash flow model, because there are currently no observable prices in an active market for the same or similar securities. The significant inputs in the discounted cash flow model used to value the Asahi Tec preferred stock include: the present value of future dividends, present value of redemption rights, fair value of conversion rights and the discount rate based on credit spreads for Japanese-issued preferred securities and other market factors. The Asahi Tec preferred stock accrues dividends at an annual rate of 1.75% cash at the discretion of Asahi Tec or noncash dividends at an annual rate of $1.75% plus an additional dividend at an annual rate of 3.75% on the unpaid noncash dividend; the Company has elected to record such dividends when cash proceeds are received. For the year ended December 31, 2008, the unrealized loss of $2 million related to the change in fair value of the derivative related to the conversion feature on the Asahi Tec preferred stock, has been included in the Company’s consolidated statements of income, in income from other investments, net. At both December 31, 2009 and 2008, the conversion feature value was deemed insignificant.
 
Non-Recurring Fair Value Measurements.  It is not practicable for the Company to estimate a fair value for private equity funds and other private investments because there are no quoted market prices, and sufficient information is not readily available for the Company to utilize a valuation model to determine the fair value for each fund. These investments are evaluated, on a non-recurring basis, for potential other-than-temporary impairment when impairment indicators are present, or when an event or change in circumstances has occurred, that may have a significant adverse effect on the fair value of the investment.
 
Impairment indicators the Company considers include the following: whether there has been a significant deterioration in earnings performance, asset quality or business prospects; a significant adverse change in the regulatory, economic or technological environment; a significant adverse change in the general market condition or geographic area in which the investment operates; industry and sector performance; current equity and credit market conditions; and any bona fide offers to purchase the investment for less than the carrying value. The Company also considers specific adverse conditions related to the financial health of and business outlook for the fund, including industry and sector performance. The significant assumptions utilized in analyzing a fund for potential other-than-temporary impairment include current economic conditions, market analysis for specific funds and performance indicators in the automotive and transportation, residential and commercial construction, bio-technology, health care and information technology sectors in which the given funds’ investments operate. Since there is no active trading market for these investments, they are for the most part illiquid. These investments, by their nature, can also have a relatively higher degree of business risk, including financial leverage, than other financial investments. Future changes in market conditions, the future performance of the underlying investments or new information provided by private equity fund managers could affect the recorded values of such investments and the amounts realized upon liquidation. Due to the significant unobservable inputs, the fair value measurements used to evaluate impairment are a Level 3 input.
 
Recurring Fair Value Measurements.  Financial investments and (liabilities) measured at fair value on a recurring basis at each reporting period and the amounts for each level within the fair value hierarchy were as follows, in millions:
 
                                 
          Fair Value Measurements Using  
                Significant
       
          Quoted
    Other
    Significant
 
          Market
    Observable
    Unobservable
 
    Dec. 31,
    Prices
    Inputs
    Inputs
 
    2009     (Level 1)     (Level 2)     (Level 3)  
 
Asahi Tec Corporation:
                               
Preferred stock
  $ 71     $     $     $ 71  
Auction rate securities
    22                   22  
TriMas Corporation
    17       17              
                                 
Total
  $ 110     $ 17     $     $ 93  
                                 
 
                                 
          Fair Value Measurements Using  
                Significant
       
          Quoted
    Other
    Significant
 
          Market
    Observable
    Unobservable
 
    Dec. 31,
    Prices
    Inputs
    Inputs
 
    2008     (Level 1)     (Level 2)     (Level 3)  
 
Asahi Tec Corporation:
                               
Preferred stock
  $ 72     $     $     $ 72  
Common stock
    1       1              
Auction rate securities
    22                   22  
Marketable securities
    3       3              
TriMas Corporation
    3       3              
Other private investments
    3             3        
                                 
Total
  $ 104     $ 7     $ 3     $ 94  
                                 
 
The following table summarizes the changes in Level 3 financial investments measured at fair value on a recurring basis for the years ended December 31, 2009 and 2008, in millions:
 
                         
    Asahi Tec
    Auction Rate
       
    Preferred Stock     Securities     Total  
 
Fair value January 1, 2009
  $ 72     $ 22     $ 94  
Total losses included in earnings
                 
Unrealized (losses)
    (1 )           (1 )
Purchases, issuances, settlements
                 
                         
Fair value at December 31, 2009
  $ 71     $ 22     $ 93  
                         
 
                         
    Asahi Tec
    Auction Rate
       
    Preferred Stock     Securities     Total  
 
Fair value January 1, 2008
  $ 55     $ 22     $ 77  
Total losses included in earnings
                 
Unrealized gains
    17             17  
Purchases, issuances, settlements
                 
                         
Fair value at December 31, 2008
  $ 72     $ 22     $ 94  
                         
 
Non-Recurring Fair Value Measurements.  Financial investments measured at fair value on a non-recurring basis during the period and the amounts for each level within the fair value hierarchy were as follows, in millions:
 
                                         
          Fair Value Measurements Using  
                Significant
             
          Quoted
    Other
    Significant
       
          Market
    Observable
    Unobservable
    Total
 
    Dec. 31,
    Prices
    Inputs
    Inputs
    Gains
 
    2009     (Level 1)     (Level 2)     (Level 3)     (Losses)  
 
Private equity funds
  $ 31     $     $     $ 31     $ (10 )
Other private investments
    3                   3        
                                         
    $ 34     $     $     $ 34     $ (10 )
                                         
 
                                         
          Fair Value Measurements Using  
                Significant
             
          Quoted
    Other
    Significant
       
          Market
    Observable
    Unobservable
    Total
 
    Dec. 31,
    Prices
    Inputs
    Inputs
    Gains
 
    2008     (Level 1)     (Level 2)     (Level 3)     (Losses)  
 
Private equity funds
  $ 43     $     $     $ 43     $ (23 )
Other private investments
    4                   4       (3 )
                                         
    $ 47     $     $     $ 47     $ (26 )
                                         
 
The Company’s investments in private equity funds for which fair value was determined with unrealized losses, were as follows, in millions:
 
                         
          Unrealized Loss  
    Fair Value     Less than 12 Months     Over 12 Months  
 
December 31, 2009
  $     $     $  
December 31, 2008
  $     $     $  
 
The remaining private equity investments in 2009 and 2008 with an aggregate carrying value of $92 million and $95 million, respectively, were not reviewed for impairment, as there were no indicators of impairment or identified events or changes in circumstances that would have a significant adverse effect on the fair value of the investment.
 
Realized Gains (Losses) and Impairment Charges.  During 2009, the Company determined that the decline in the estimated value of five private equity funds, with an aggregate carrying value of $41 million prior to impairment, was other-than-temporary. Accordingly, for the year ended December 31, 2009, the Company recognized non-cash, pre-tax impairment charges of $10 million.
 
During 2008, based upon its review of marketable securities, the Company recognized non-cash, pre-tax impairment charges of $31 million related to its investment in TriMas Corporation (“TriMas”) common stock (NYSE: TRS) and $1 million related to its investment in Asahi Tec Corporation (“Asahi Tec”) common stock (Tokyo Stock Exchange: 5606.T). During 2008, the Company determined that the decline in the estimated value of certain private equity fund investments, with an aggregate carrying value of $66 million prior to the impairment, was other-than-temporary. Accordingly, for the year ended December 31, 2008, the Company recognized non-cash, pre-tax impairment charges of $23 million. A review of sector performance and other factors specific to the underlying investments in six funds having other-than-temporary declines in fair value, including the Heartland Fund (automotive and transportation sector of $10 million) and five other funds ($13 million.)
 
During 2007, the Company recognized non-cash, pre-tax impairment charges of $6 million related to its investment in Furniture Brands International common stock (NYSE: FBN) and $3 million related to its investment in Asahi Tec common stock. During 2007, the Company also recognized a non-cash, pre-tax impairment charge of $3 million related to auction rate securities. For the year ended December 31, 2007, as a result of the acquisition of Metaldyne Corporation by Asahi Tec, the Company recognized a gain of $14 million, net of transaction fees, included in the Company’s consolidated statement of income in income from other investments, net. In addition, immediately prior to its sale, Metaldyne distributed shares of TriMas common stock as a dividend to the holders of Metaldyne common stock; the Company recognized income of $4 million included in the Company’s consolidated statement of income, in dividend income from other investments for the year ended December 31, 2007. Also, during 2007, the Company determined that the decline in the estimated value of certain private equity fund investments, with an aggregate carrying value of $54 million prior to the impairment, was other-than-temporary. Accordingly, for the year ended December 31, 2007, the Company recognized non-cash, pre-tax impairment charges of $10 million.
 
Income from financial investments, net, included in other, net, within other income (expense), net, and impairment charges for financial investments were as follows, in millions:
 
                         
    2009     2008     2007  
 
Realized gains from marketable securities
  $     $     $ 9  
Realized losses from marketable securities
          (3 )     (4 )
Dividend income from marketable securities
                1  
Income from other investments, net
    3       4       38  
Dividend income from other investments
                5  
                         
Income from financial investments, net
  $ 3     $ 1     $ 49  
                         
Impairment charges:
                       
Private equity funds
  $ (10 )   $ (23 )   $ (10 )
Auction rate securities
                (3 )
Marketable securities
          (1 )     (9 )
TriMas Corporation
          (31 )      
Other private investments
          (3 )      
                         
Total impairment charges
  $ (10 )   $ (58 )   $ (22 )
                         
 
The impairment charges related to the Company’s financial investments recognized during 2009, 2008 and 2007 were based upon then-current estimates for the fair value of certain financial investments; such estimates could change in the near-term based upon future events and circumstances.
 
The fair value of the Company’s short-term and long-term fixed-rate debt instruments is based principally upon quoted market prices for the same or similar issues or the current rates available to the Company for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at December 31, 2009 was approximately $3.9 billion, compared with the aggregate carrying value of $4.0 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2008 was approximately $3.0 billion, compared with the aggregate carrying value of $3.9 billion.
Derivatives
DERIVATIVES
 
F.  DERIVATIVES
 
During 2009, the Company, including certain European operations, had entered into foreign currency forward contracts with notional amounts of $55 million and $10 million to manage exposure to currency fluctuations in the European euro and the U.S. dollar, respectively. At December 31, 2008, the Company, including certain European operations, had entered into foreign currency forward contracts with notional amounts of $31 million and $14 million to manage exposure to currency fluctuations in the European euro and the U.S. dollar, respectively. Based upon year-end market prices, the Company had recorded a $(1) million loss and a $2 million gain to reflect the contract prices at December 31, 2009 and 2008, respectively. Gains (losses) related to these contracts are recorded in the Company’s consolidated statements of income in other income (expense), net. In the event that the counterparties fail to meet the terms of the foreign currency forward contracts, the Company’s exposure is limited to the aggregate foreign currency rate differential with such institutions.
 
At December 31, 2008, the Company had entered into foreign currency exchange contracts to hedge currency fluctuations related to intercompany loans denominated in non-functional currencies with notional amounts of $161 million. At December 31, 2008, the Company had recorded a $16 million loss on the foreign currency exchange contract, which was more than offset by gains related to the translation of loans and accounts denominated in non-functional currencies.
 
The fair value of these derivative contracts is estimated on a recurring basis, quarterly, using Level 2 inputs (significant other observable inputs).
 
In 2009, the Company recognized a decrease in interest expense of $10 million related to the amortization of the gains resulting from the terminations (in 2008 and 2004) of two interest rate swap agreements. In 2008, the Company recognized a decrease in interest expense of $12 million related to the interest rate swap agreements. In 2007, the Company recognized an increase in interest expense of $3 million related to these swap agreements, due to increasing interest rates.
Property and Equipment
PROPERTY AND EQUIPMENT
 
G.  PROPERTY AND EQUIPMENT
 
                 
(In Millions)  
    At December 31  
    2009     2008  
 
Land and improvements
  $ 195     $ 203  
Buildings
    1,044       1,056  
Machinery and equipment
    2,420       2,486  
                 
      3,659       3,745  
Less: Accumulated depreciation
    1,678       1,609  
                 
Total
  $ 1,981     $ 2,136  
                 
 
The Company leases certain equipment and plant facilities under noncancellable operating leases. Rental expense recorded in the consolidated statements of income totaled approximately $135 million, $161 million and $166 million during 2009, 2008 and 2007, respectively. Future minimum lease payments at December 31, 2009 were approximately as follows: 2010 — $68 million; 2011 — $49 million; 2012 — $31 million; 2013 — $16 million; and 2014 and beyond — $79 million.
 
The Company leases operating facilities from certain related parties, primarily former owners (and in certain cases, current management personnel) of companies acquired. The Company recorded rental expense to such related parties of approximately $8 million, $10 million and $7 million in 2009, 2008 and 2007, respectively.
Goodwill and Other Intangible Assets
GOODWILL AND OTHER INTANGIBLE ASSETS
 
H.  GOODWILL AND OTHER INTANGIBLE ASSETS
 
The changes in the carrying amount of goodwill for 2009 and 2008, by segment, were as follows, in millions:
 
                         
    Gross Goodwill
    Accumulated
    Net Goodwill
 
    At December 31,
    Impairment
    At December 31,
 
    2009     Losses     2009  
 
Cabinets and Related Products
  $ 590     $ (364 )   $ 226  
Plumbing Products
    547       (340 )     207  
Installation and Other Services
    1,819       (51 )     1,768  
Decorative
                       
Architectural Products
    294             294  
Other Specialty Products
    980       (367 )     613  
                         
Total
  $ 4,230     $ (1,122 )   $ 3,108  
                         
 
                                                                         
    Gross Goodwill
    Accumulated
    Net Goodwill
                Pre-tax
          Net Goodwill
       
    At December 31,
    Impairment
    At December 31,
          Discontinued
    Impairment
          At December 31,
       
    2008     Losses     2008     Additions(A)     Operations     Charge     Other(C)     2009        
 
Cabinets and Related Products
  $ 589     $ (364 )   $ 225     $     $     $     $ 1     $ 226          
Plumbing Products
    549       (301 )     248       4       (13 )     (39 )     7       207          
Installation and Other Services
    1,819       (51 )     1,768                               1,768          
Decorative Architectural Products
    294             294                               294          
Other Specialty Products
    980       (144 )     836                   (223 )           613          
                                                                         
Total
  $ 4,231     $ (860 )   $ 3,371     $ 4     $ (13 )   $ (262 )   $ 8     $ 3,108          
                                                                         
 
                                                                         
    Gross Goodwill
    Accumulated
    Net Goodwill
                Pre-tax
          Net Goodwill
       
    At December 31,
    Impairment
    At December 31,
          Discontinued
    Impairment
          At December 31,
       
    2007     Losses     2007     Additions(A)     Operations (B)     Charge     Other(C)     2008        
 
Cabinets and Related Products
  $ 598     $ (305 )   $ 293     $ 4     $     $ (59 )   $ (13 )   $ 225          
Plumbing Products
    597       (98 )     499                   (203 )     (48 )     248          
Installation and Other Services
    1,816             1,816       2             (51 )     1       1,768          
Decorative Architectural Products
    300             300                         (6 )     294          
Other Specialty Products
    1,031       (1 )     1,030             (24 )     (143 )     (27 )     836          
                                                                         
Total
  $ 4,342     $ (404 )   $ 3,938     $ 6     $ (24 )   $ (456 )   $ (93 )   $ 3,371          
                                                                         
 
 
(A) Additions include acquisitions.
 
(B) During 2008, the Company reclassified the goodwill related to the business units held for sale. Subsequent to the reclassification, the Company recognized a charge for those business units expected to be divested at a loss; the charge included a write-down of goodwill of $24 million.
 
(C) Other principally includes the effect of foreign currency translation and purchase price adjustments related to prior-year acquisitions.
 
In the fourth quarters of 2009 and 2008, the Company completed its annual impairment testing of goodwill and other indefinite-lived intangible assets. During each year, there were no events or circumstances that would have indicated potential impairment.
 
The impairment tests in 2009 and 2008 indicated that goodwill recorded for certain of the Company’s reporting units was impaired. The Company recognized the non-cash, pre-tax impairment charges for goodwill of $262 million ($180 million, after tax) and $456 million ($438 million, after tax) for 2009 and 2008, respectively. In 2009, the pre-tax impairment charge in the Plumbing Products segment relates to a European shower enclosure manufacturer; the pre-tax impairment charge in the Other Specialty Products segment relates to the Company’s North American manufacturer of staple gun tackers and other fastening tools. The pre-tax impairment charge recognized in 2008, in the Cabinets and Related Products, Plumbing Products and Other Specialty Products segments, related to three of the Company’s United Kingdom manufacturers and distributors; in the Installation and Other Services segment, the charge related to a small installation service business in North America. The impairment charges in 2009 and 2008 reflect the anticipated long-term outlook for the reporting units, including declining demand for certain products, as well as decreased operating profit margins.
 
Other indefinite-lived intangible assets were $196 million and $195 million at December 31, 2009 and 2008, respectively, and principally included registered trademarks. In 2008, the impairment test indicated that the registered trademark for a small installation service business in North America in the Installation and Other Services segment and the registered trademark for a North American business unit in the Other Specialty Products segment were impaired due to changes in the anticipated long-term outlook for the business units, particularly in the new home construction market. The Company recognized non-cash, pre-tax impairment charges for other indefinite-lived intangible assets of $11 million ($7 million, after tax) in 2008.
 
The carrying value of the Company’s definite-lived intangible assets was $94 million at December 31, 2009 (net of accumulated amortization of $67 million) and $104 million at December 31, 2008 (net of accumulated amortization of $56 million) and principally included customer relationships and non-compete agreements, with a weighted average amortization period of 15 years in both 2009 and 2008. Amortization expense related to the definite-lived intangible assets was $11 million, $16 million and $15 million in 2009, 2008 and 2007, respectively.
 
At December 31, 2009, amortization expense related to the definite-lived intangible assets during each of the next five years was as follows: 2010 — $12 million; 2011 — $11 million; 2012 — $10 million; 2013 — $9 million; and 2014 — $9 million.
Other Assets
OTHER ASSETS
 
I.  OTHER ASSETS
 
                 
(In Millions)  
    At December 31  
    2009     2008  
 
Financial investments (Note E)
  $ 242     $ 249  
In-store displays, net
    44       63  
Debenture expense
    25       29  
Notes receivable
    3       4  
Other
    31       32  
                 
Total
  $ 345     $ 377  
                 
 
In-store displays are amortized using the straight-line method over the expected useful life of three years; the Company recognized amortization expense related to in-store displays of $44 million, $43 million and $46 million in 2009, 2008 and 2007, respectively. Cash spent for displays was $26 million, $37 million and $43 million in 2009, 2008 and 2007, respectively.
Accrued Liabilities
ACCRUED LIABILITIES
 
J.  ACCRUED LIABILITIES
 
                 
(In Millions)  
    At December 31  
    2009     2008  
 
Insurance
  $ 193     $ 198  
Salaries, wages and commissions
    193       183  
Warranty (Note S)
    109       119  
Advertising and sales promotion
    80       107  
Interest
    68       68  
Employee retirement plans
    36       34  
Property, payroll and other taxes
    33       29  
Dividends payable
    27       85  
Litigation
    7       14  
Plant closures
    3       10  
Other
    90       98  
                 
Total
  $ 839     $ 945  
                 
Debt
DEBT
 
K.  DEBT
 
                 
(In Millions)  
    At December 31  
    2009     2008  
 
Notes and debentures:
               
5.875%, due July 15, 2012
  $ 850     $ 850  
7.125%, due Aug. 15, 2013
    200       200  
4.8% , due June 15, 2015
    500       500  
6.125%, due Oct. 3, 2016
    1,000       1,000  
5.85% , due Mar. 15, 2017
    300       300  
6.625%, due Apr. 15, 2018
    114       114  
7.75% , due Aug. 1, 2029
    296       296  
6.5% , due Aug. 15, 2032
    300       300  
Zero Coupon Convertible Senior Notes due 2031 (accreted value)
    55       54  
Floating-Rate Notes, due Mar. 12, 2010
    300       300  
Other
    53       72  
                 
      3,968       3,986  
Less: Current portion
    364       71  
                 
Total Long-term debt
  $ 3,604     $ 3,915  
                 
 
All of the notes and debentures above are senior indebtedness and, other than the 6.625% notes due 2018 and the 7.75% notes due 2029, are redeemable at the Company’s option.
 
The Company retired $100 million of 5.75% notes on October 15, 2008, the scheduled maturity date.
 
In July 2001, the Company issued $1.9 billion principal amount at maturity of Zero Coupon Convertible Senior Notes due 2031 (“Old Notes”), resulting in gross proceeds of $750 million. The issue price per Note was $394.45 per $1,000 principal amount at maturity, which represented a yield to maturity of 3.125% compounded semi-annually. In December 2004, the Company completed an exchange of the outstanding Old Notes for Zero Coupon Convertible Senior Notes Series B due July 2031 (“New Notes or Notes”). The Company will not pay interest in cash on the Notes prior to maturity, except in certain circumstances, including possible contingent interest payments that are not expected to be material. Holders of the Notes have the option to require that the Notes be repurchased by the Company on July 20, 2011 and every five years thereafter. Upon conversion of the Notes, the Company will pay the principal return, equal to the lesser of (1) the accreted value of the Notes in only cash, and (2) the conversion value, as defined, which will be settled in cash or shares of Company common stock, or a combination of both, at the option of the Company. The Notes are convertible if the average price of Company common stock for the 20 days immediately prior to the conversion date exceeds 1171/3%, declining by 1/3% each year thereafter, of the accreted value of the Notes divided by the conversion rate of 12.7317 shares for each $1,000 principal amount at maturity of the Notes. Notes also become convertible if the Company’s credit rating is reduced to below investment grade, or if certain actions are taken by the Company. The Company may at any time redeem all or part of the Notes at their then accreted value. On January 20, 2007, holders of $1.8 billion (94 percent) principal amount at maturity of the Notes required the Company to repurchase their Notes at a cash value of $825 million.
 
A credit rating agency (i.e., Moody’s or Standard and Poor’s) is an entity that assigns credit ratings for issuers of certain types of debt obligations. In December 2008, one rating agency reduced the credit rating on the Company’s debt to below investment grade; as a result, the Notes are convertible on demand. The Company does not anticipate conversion of the Notes since, based on the terms, it would not currently be profitable for holders of the Notes to exercise the option to convert the Notes.
 
At both December 31, 2009 and 2008, there were outstanding $108 million principal amount at maturity of Notes, with an accreted value of $55 million and $54 million, respectively, which has been reclassified to short-term debt.
 
The Company adopted new accounting guidance regarding accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) effective January 1, 2009. The adoption of this new guidance will have no impact on 2009 results; the Company recorded a $1 million cumulative effect of accounting change as of January 1, 2007 and the adoption had no impact on the Company’s consolidated financial statements for the years ended December 31, 2009 and 2008.
 
At the Company’s request, in late April 2009, the Company and its Bank Group modified the terms of its Five-Year Revolving Credit Facility (“Amended Five-Year Revolving Credit Agreement”), which expires February 2011. This agreement allows for borrowings denominated in U.S. dollars or European euros with interest payable based upon various floating-rate options as selected by the Company. After reviewing its anticipated liquidity position, the Company requested that the maximum amount the Company could borrow under this facility be reduced to $1.25 billion from $2.0 billion; in addition, the debt to total capitalization ratio requirement has been increased from 60 percent to 65 percent. The debt to total capitalization ratio and the minimum net worth covenant have also been amended to allow the add-back, if incurred, of up to the first $500 million of certain non-cash charges, including goodwill and other intangible asset impairment charges that would negatively impact shareholders’ equity. The Company incurred approximately $2 million of fees and expenses associated with the Amendment. The Company, if the facility is utilized, will incur higher borrowing costs as a result of the Amendment.
 
The Amended Five-Year Revolving Credit Agreement contains a requirement for maintaining a certain level of net worth; at December 31, 2009, the Company’s net worth exceeded such requirement by $1.0 billion. Under the terms of the Amended Five-Year Revolving Credit Agreement, any outstanding Letters of Credit reduce the Company’s borrowing capacity. At December 31, 2009, the Company had $83 million of unused Letters of Credit. The Amended Five-Year Revolving Credit Agreement also contains limitations on additional borrowings, related to the debt to total capitalization requirements; at December 31, 2009, the Company had additional borrowing capacity, subject to availability, of up to $1.2 billion. In addition, at December 31, 2009, the Company could absorb a reduction to shareholders’ equity of approximately $867 million, and remain in compliance with the debt to total capitalization covenant.
 
In order to borrow under the Amended Five-Year Revolving Credit Agreement, there must not be any defaults in the Company’s covenants in the credit agreement (i.e., in addition to the two financial covenants, principally limitations on subsidiary debt, negative pledge restrictions, legal compliance requirements and maintenance of insurance) and the Company’s representations and warranties in the credit agreement must be true in all material respects on the date of borrowing (i.e., principally no material adverse change or litigation likely to result in a material adverse change, in each case since December 31, 2008, no material ERISA or environmental non-compliance and no material tax deficiency).
 
At December 31, 2009 and 2008, the Company was in compliance with the requirements of the Amended Five-Year Revolving Credit Agreement.
 
There were no borrowings under the Five-Year Revolving Credit Agreement at December 31, 2009 and 2008.
 
At December 31, 2009, the maturities of long-term debt during each of the next five years were as follows: 2010 – $364 million; 2011 – $1 million; 2012 – $878 million; 2013 – $201 million; and 2014 – $2 million.
 
Interest paid was $226 million, $232 million and $262 million in 2009, 2008 and 2007, respectively.
Stock Based Compensation
STOCK-BASED COMPENSATION
 
L.  STOCK-BASED COMPENSATION
 
The Company’s 2005 Long Term Stock Incentive Plan (the “2005 Plan”) provides for the issuance of stock-based incentives in various forms to employees and non-employee Directors of the Company. At December 31, 2009, outstanding stock-based incentives were in the form of long-term stock awards, stock options, phantom stock awards and stock appreciation rights.
 
Pre-tax compensation expense (income) and the income tax benefit related to these stock-based incentives were as follows, in millions:
 
                         
    2009     2008     2007  
 
Long-term stock awards
  $ 37     $ 43     $ 52  
Stock options
    25       36       49  
Phantom stock awards and stock appreciation rights
    7       (5 )     (7 )
                         
Total
  $ 69     $ 74     $ 94  
                         
Income tax benefit
  $ 26     $ 27     $ 35  
                         
 
In 2009, the Company recognized $6 million of accelerated stock compensation expense (for previously granted stock awards and options) related to the retirement from full-time employment of the Company’s Executive Chairman of the Board of Directors; he will continue to serve as a non-executive, non-employee Chairman of the Board of Directors.
 
At December 31, 2009, a total of 12,209,180 shares of Company common stock were available under the 2005 Plan for the granting of stock options and other long-term stock incentive awards.
 
Long-Term Stock Awards
 
Long-term stock awards are granted to key employees and non-employee Directors of the Company and do not cause net share dilution inasmuch as the Company continues the practice of repurchasing and retiring an equal number of shares on the open market.
 
The Company’s long-term stock award activity was as follows, shares in millions:
 
                         
    2009     2008     2007  
 
Unvested stock award shares at January 1
    8       9       9  
Weighted average grant date fair value
  $ 26     $ 28     $ 27  
Stock award shares granted
    2       2       2  
Weighted average grant date fair value
  $ 8     $ 21     $ 30  
Stock award shares vested
    1       2       2  
Weighted average grant date fair value
  $ 26     $ 26     $ 25  
Stock award shares forfeited
          1        
Weighted average grant date fair value
  $ 24     $ 28     $ 28  
Unvested stock award shares at December 31
    9       8       9  
Weighted average grant date fair value
  $ 21     $ 26     $ 28  
 
At December 31, 2009, 2008 and 2007, there was $126 million, $155 million and $175 million, respectively, of unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of six years.
 
The total market value (at the vesting date) of stock award shares which vested during 2009, 2008 and 2007 was $16 million, $30 million and $48 million, respectively.
 
Stock Options
 
Stock options are granted to key employees and non-employee Directors of the Company. The exercise price equals the market price of the Company’s common stock at the grant date. These options generally become exercisable (vest ratably) over five years beginning on the first anniversary from the date of grant and expire no later than 10 years after the grant date. The 2005 Plan does not permit the granting of restoration stock options, except for restoration options resulting from options previously granted under the 1991 Plan. Restoration stock options become exercisable six months from the date of grant.
 
The Company granted 5,847,700 of stock option shares, including restoration stock option shares, during 2009 with a grant date exercise price range of $8 to $14 per share. During 2009, 1,518,200 stock option shares were forfeited (including options that expired unexercised).
 
The Company’s stock option activity was as follows, shares in millions:
 
                         
    2009     2008     2007  
 
Option shares outstanding, January 1
    31       26       26  
Weighted average exercise price
  $ 25     $ 27     $ 26  
Option shares granted, including restoration options
    6       6       5  
Weighted average exercise price
  $ 8     $ 19     $ 30  
Option shares exercised
                3  
Aggregate intrinsic value on date of exercise (A)
  $     $     $ 26 million  
Weighted average exercise price
  $     $ 20     $ 22  
Option shares forfeited
    1       1       2  
Weighted average exercise price
  $ 22     $ 27     $ 29  
Option shares outstanding, December 31
    36       31       26  
Weighted average exercise price
  $ 23     $ 25     $ 27  
Weighted average remaining option term (in years)
    6       6       6  
Option shares vested and expected to vest, December 31
    36       31       26  
Weighted average exercise price
  $ 23     $ 25     $ 27  
Aggregate intrinsic value (A)
  $ 31     $     $ 7 million  
Weighted average remaining option term (in years)
    6       6       6  
Option shares exercisable (vested), December 31
    21       17       14  
Weighted average exercise price
  $ 26     $ 26     $ 25  
Aggregate intrinsic value (A)
  $     $     $ 7 million  
Weighted average remaining option term (in years)
    4       5       5  
 
 
(A) Aggregate intrinsic value is calculated using the Company’s stock price at each respective date, less the exercise price (grant date price) multiplied by the number of shares.
 
At December 31, 2009, 2008 and 2007, there was $41 million, $59 million and $73 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average remaining vesting period of three years.
 
The Company received cash of $60 million in 2007 for the exercise of stock options.
 
The weighted average grant date fair value of option shares granted and the assumptions used to estimate those values using a Black-Scholes option pricing model, was as follows:
 
                         
    2009     2008     2007  
 
Weighted average grant date fair value
  $ 2.28     $ 3.72     $ 8.92  
Risk-free interest rate
    2.60 %     3.25 %     4.74 %
Dividend yield
    3.70 %     4.96 %     3.00 %
Volatility factor
    39.18 %     32.00 %     31.80 %
Expected option life
    6 years       6 years       7 years  
 
The following table summarizes information for stock option shares outstanding and exercisable at December 31, 2009, shares in millions:
 
                                         
Option Shares Outstanding     Option Shares Exercisable  
            Weighted
                 
            Average
  Weighted
          Weighted
 
            Remaining
  Average
          Average
 
Range of
    Number of
    Option
  Exercise
    Number of
    Exercise
 
Prices
    Shares     Term   Price     Shares     Price  
 
$ 8-23       18     6 Years   $ 16       8     $ 20  
$ 24-28       7     5 Years   $ 27       5     $ 27  
$ 29-32       11     6 Years   $ 30       8     $ 30  
$ 33-38           3 Years   $ 34           $ 34  
                                         
$ 8-38       36     6 Years   $ 23       21     $ 26  
                                         
 
Phantom Stock Awards and Stock Appreciation Rights (“SARs”)
 
The Company grants phantom stock awards and SARs to certain non-U.S. employees.
 
Phantom stock awards are linked to the value of the Company’s common stock on the date of grant and are settled in cash upon vesting, typically over 10 years. The Company accounts for phantom stock awards as liability-based awards; the compensation expense is initially measured as the market price of the Company’s common stock at the grant date and is recognized over the vesting period. The liability is remeasured and adjusted at the end of each reporting period until the awards are fully-vested and paid to the employees. The Company recognized expense (income) of $3 million, $(2) million and $(2) million related to the valuation of phantom stock awards for 2009, 2008 and 2007, respectively. In 2009, 2008 and 2007, the Company granted 318,920 shares, 234,800 shares and 130,000 shares, respectively, of phantom stock awards with an aggregate fair value of $3 million, $5 million and $4 million, respectively, and paid $1 million, $2 million and $4 million of cash in 2009, 2008 and 2007, respectively, to settle phantom stock awards.
 
SARs are linked to the value of the Company’s common stock on the date of grant and are settled in cash upon exercise. The Company accounts for SARs using the fair value method, which requires outstanding SARs to be classified as liability-based awards and valued using a Black-Scholes option pricing model at the grant date; such fair value is recognized as compensation expense over the vesting period, typically five years. The liability is remeasured and adjusted at the end of each reporting period until the SARs are exercised and payment is made to the employees or the SARs expire. The Company recognized expense (income) of $4 million, $(3) million and $(5) million related to the valuation of SARs for 2009, 2008 and 2007, respectively. During 2009, 2008 and 2007, the Company granted SARs for 438,200 shares, 597,200 shares and 521,100 shares, respectively, with an aggregate fair value of $1 million, $2 million and $4 million in 2009, 2008 and 2007, respectively.
 
Information related to phantom stock awards and SARs was as follows, in millions:
 
                                 
    Phantom Stock
    Stock Appreciation
 
    Awards
    Rights
 
    At December 31,     At December 31,  
    2009     2008     2009     2008  
 
Accrued compensation cost liability
  $ 5     $ 4     $ 4     $  
Unrecognized compensation cost
  $ 5     $ 3     $ 3     $  
Equivalent common shares
    1       1       2       2  
Employee Retirement Plans
EMPLOYEE RETIREMENT PLANS
 
M.  EMPLOYEE RETIREMENT PLANS
 
The Company sponsors qualified defined-benefit and defined-contribution retirement plans for most of its employees. In addition to the Company’s qualified defined-benefit pension plans, the Company has unfunded non-qualified defined-benefit pension plans covering certain employees, which provide for benefits in addition to those provided by the qualified pension plans. Substantially all salaried employees participate in non-contributory defined-contribution retirement plans, to which payments are determined annually by the Organization and Compensation Committee of the Board of Directors. Aggregate charges to earnings under the Company’s defined-benefit and defined-contribution retirement plans were $63 million and $35 million in 2009, $38 million and $30 million in 2008 and $44 million and $47 million in 2007, respectively.
 
In March 2009, based on management’s recommendation, the Board of Directors approved a plan to freeze all future benefit accruals under substantially all of the Company’s domestic qualified and non-qualified defined-benefit pension plans. The freeze was effective January 1, 2010. As a result of this action, the liabilities for the plans impacted by the freeze were remeasured and the Company recognized a curtailment charge of $8 million in the first quarter of 2009.
 
Changes in the projected benefit obligation and fair value of plan assets, and the funded status of the Company’s defined-benefit pension plans were as follows, in millions:
 
                                 
    2009     2008  
    Qualified     Non-Qualified     Qualified     Non-Qualified  
 
Changes in projected benefit obligation:
                               
Projected benefit obligation at January 1
  $ 758     $ 147     $ 748     $ 138  
Service cost
    9       1       14       2  
Interest cost
    45       9       46       9  
Participant contributions
    1             1        
Plan amendments
                      6  
Actuarial loss (gain), net
    27       9       24       (1 )
Foreign currency exchange
    9             (38 )      
Disposition
    (3 )                  
Recognized curtailment loss
    (3 )     (5 )            
Benefit payments
    (37 )     (9 )     (37 )     (7 )
                                 
Projected benefit obligation at December 31
  $ 806     $ 152     $ 758     $ 147  
                                 
Changes in fair value of plan assets:
                               
Fair value of plan assets at January 1
  $ 414     $     $ 634     $  
Actual return on plan assets
    74             (164 )      
Foreign currency exchange
    7             (29 )      
Company contributions
    18       9       10       7  
Participant contributions
    1             1        
Disposition
    (1 )                  
Expenses, other
    (2 )           (1 )      
Benefit payments
    (37 )     (9 )     (37 )     (7 )
Fair value of plan assets at December 31
  $ 474     $     $ 414     $  
                                 
Funded status at December 31:
  $ (332 )   $ (152 )   $ (344 )   $ (147 )
                                 
 
Amounts in the Company’s consolidated balance sheets were as follows, in millions:
 
                                 
    At December 31, 2009     At December 31, 2008  
    Qualified     Non-Qualified     Qualified     Non-Qualified  
 
Accrued liabilities
  $ (3 )   $ (10 )   $ (2 )   $ (10 )
Deferred income taxes and other
    (329 )     (142 )     (342 )     (137 )
                                 
Total net liability
  $ (332 )   $ (152 )   $ (344 )   $ (147 )
                                 
 
Amounts in accumulated other comprehensive income before income taxes were as follows, in millions:
 
                                 
    At December 31, 2009     At December 31, 2008  
    Qualified     Non-Qualified     Qualified     Non-Qualified  
 
Net loss
  $ 287     $ 20     $ 319     $ 11  
Net transition obligation
    1             1        
Net prior service cost
    (2 )           2       9  
                                 
Total
  $ 286     $ 20     $ 322     $ 20  
                                 
 
Information for defined-benefit pension plans with an accumulated benefit obligation in excess of plan assets was as follows, in millions:
 
                                 
    At December 31  
    2009     2008  
    Qualified     Non-Qualified     Qualified     Non-Qualified  
 
Projected benefit obligation
  $ 797     $ 152     $ 753     $ 147  
Accumulated benefit obligation
  $ 793     $ 152     $ 661     $ 139  
Fair value of plan assets
  $ 466     $     $ 408     $  
 
The projected benefit obligation was in excess of plan assets for all of the Company’s qualified defined-benefit pension plans at December 31, 2009 and for all except one of the Company’s qualified defined-benefit pension plans at December 31, 2008.
 
Net periodic pension cost for the Company’s defined-benefit pension plans was as follows, in millions:
 
                                                 
    2009     2008     2007  
    Qualified     Non-Qualified     Qualified     Non-Qualified     Qualified     Non-Qualified  
 
Service cost
  $ 9     $ 1     $ 14     $ 2     $ 17     $ 2  
Interest cost
    45       9       46       9       44       8  
Expected return on plan assets
    (29 )           (48 )           (49 )      
Recognized prior service cost
                      2             1  
Recognized curtailment loss
    3       5       1                    
Recognized settlement loss
                                   
Recognized net loss
    12             1             5       1  
                                                 
Net periodic pension cost
  $ 40     $ 15     $ 14     $ 13     $ 17     $ 12  
                                                 
 
The Company expects to recognize $9 million of pre-tax net loss from accumulated other comprehensive income into net periodic pension cost in 2010 related to its defined-benefit pension plans.
 
Plan Assets
 
The Company’s qualified defined-benefit pension plan weighted average asset allocation, which is based upon fair value, was as follows:
 
                 
    At December 31  
    2009     2008  
 
Equity securities
    71%       81%  
Debt securities
    26%       13%  
Other
    3%       6%  
                 
Total
    100%       100%  
                 
 
The investment objectives of the Company’s qualified defined-benefit pension plans are: 1) to earn a return, net of fees, greater than or equal to the expected long-term rate of return on plan assets; 2) to diversify the portfolio among various asset classes with the goal of reducing volatility of return and reducing principal risk; and 3) to maintain liquidity sufficient to meet Plan obligations. Long-term target allocations are: equity securities (70%), debt securities (25%) and other investments (5%).
 
Plan assets included 1.2 million shares and 1.4 million shares, respectively, of Company common stock valued at $16 million at both December 31, 2009 and 2008.
 
The Company’s qualified defined-benefit pension plans have adopted accounting guidance that defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Accounting guidance defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
 
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2009.
 
Common and preferred stocks, debt securities and short-term and other investments:  Valued at the closing price reported on the active market on which the individual securities are traded.
 
Limited Partnerships:  Valued based on an estimated fair value. There is no active trading market for these investments and they are for the most part illiquid. Due to the significant unobservable inputs, the fair value measurements are a Level 3 input.
 
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
 
The following table sets forth by level, within the fair value hierarchy, the qualified defined-benefit pension plan assets at fair value as of December 31, 2009, in millions.
 
                                 
    Assets at Fair Value as of December 31, 2009  
    Level 1     Level 2     Level 3     Total  
 
Common and preferred stocks
  $ 267     $ 17     $     $ 284  
Limited Partnerships
                52       52  
Debt securities
    97       25             122  
Short-term and other investments
    16                   16  
                                 
Total assets at fair value
  $ 380     $ 42     $ 52     $ 474  
                                 
 
The table below sets forth a summary of changes in the fair value of the qualified defined-benefit pension plan level 3 assets for the year ended December 31, 2009, in millions.
 
         
    Year Ended
 
    December 31, 2009
 
    Limited Partnerships  
 
Balance, beginning of year
  $ 48  
Purchases, sales, issuances and settlements (net)
    4  
Unrealized losses
     
         
Balance, end of year
    52  
         
 
Assumptions
 
Major assumptions used in accounting for the Company’s defined-benefit pension plans were as follows:
 
                         
    December 31  
    2009     2008     2007  
 
Discount rate for obligations
    5.80%       6.10%       6.25%  
Expected return on plan assets
    8.00%       8.00%       8.25%  
Rate of compensation increase
    2.00%       4.00%       4.00%  
Discount rate for net periodic pension cost
    6.10%       6.25%       5.50%  
 
The discount rate for obligations was based upon the expected duration of each defined-benefit pension plan’s liabilities matched to the December 31, 2009 Citigroup Pension Discount Curve. Such rates for the Company’s defined-benefit pension plans ranged from 2.60 percent to 6.25 percent, with the most significant portion of the liabilities having a discount rate for obligations of 5.60 percent or higher at December 31, 2009.
 
The Company determined the expected long-term rate of return on plan assets by reviewing an analysis of expected and historical rates of return of various asset classes based upon the current and long-term target asset allocation of the plan assets. The measurement date for the defined-benefit plans was December 31.
 
Other
 
The Company sponsors certain post-retirement benefit plans that provide medical, dental and life insurance coverage for eligible retirees and dependents in the United States based upon age and length of service. The aggregate present value of the unfunded accumulated post-retirement benefit obligation was $13 million and $12 million, respectively, at December 31, 2009 and 2008.
 
Cash Flows
 
At December 31, 2009, the Company expected to contribute approximately $20 million to $25 million to its qualified defined-benefit pension plans to meet ERISA requirements in 2010. The Company also expected to pay benefits of $3 million and $10 million to participants of its unfunded foreign and non-qualified (domestic) defined-benefit pension plans, respectively, in 2010.
 
At December 31, 2009, the benefits expected to be paid in each of the next five years, and in aggregate for the five years thereafter, relating to the Company’s defined-benefit pension plans, were as follows, in millions:
 
                 
    Qualified
  Non-Qualified
    Plans   Plans
 
2010
  $ 35     $ 10  
2011
  $ 36     $ 10  
2012
  $ 37     $ 11  
2013
  $ 39     $ 12  
2014
  $ 40     $ 11  
2015-2019
  $ 222     $ 58  
Shareholders Equity
SHAREHOLDERS' EQUITY
 
N.  SHAREHOLDERS’ EQUITY
 
In July 2007, the Company’s Board of Directors authorized the repurchase for retirement of up to 50 million shares of the Company’s common stock in open-market transactions or otherwise. At December 31, 2009, the Company had remaining authorization to repurchase up to 30 million shares. During 2009, the Company repurchased and retired two million shares of Company common stock, for cash aggregating $11 million to offset the dilutive impact of the 2009 grant of two million shares of long-term stock awards. The Company repurchased and retired nine million common shares in 2008 and 31 million common shares in 2007 for cash aggregating $160 million and $857 million in 2008 and 2007, respectively.
 
On the basis of amounts paid (declared), cash dividends per common share were $.46 ($.30) in 2009, $.925 ($.93) in 2008 and $.91 ($.92) in 2007, respectively. In 2009, the Company decreased its quarterly cash dividend to $.075 per common share from $.235 per common share.
 
Accumulated Other Comprehensive (Loss) Income
 
The components of accumulated other comprehensive income attributable to Masco Corporation were as follows, in millions:
 
                 
    At December 31  
    2009     2008  
 
Cumulative translation adjustments
  $ 546     $ 524  
Unrealized gain on marketable securities, net
    25       3  
Unrecognized prior service cost and net loss, net
    (205 )     (219 )
                 
Accumulated other comprehensive income
  $ 366     $ 308  
                 
 
The unrealized gain on marketable securities, net, is reported net of income tax expense of $14 million and $1 million at December 31, 2009 and 2008, respectively. The unrecognized prior service cost and net loss, net, is reported net of income tax benefit of $105 million and $125 million at December 31, 2009 and 2008, respectively.
Segment Information
SEGMENT INFORMATION
 
O.  SEGMENT INFORMATION
 
The Company’s reportable segments are as follows:
 
Cabinets and Related Products – principally includes assembled and ready-to-assemble kitchen and bath cabinets; home office workstations; entertainment centers; storage products; bookcases; and kitchen utility products.
 
Plumbing Products – principally includes faucets; plumbing fittings and valves; showerheads and hand showers; bathtubs and shower enclosures; and spas.
 
Installation and Other Services – principally includes the sale, installation and distribution of insulation and other building products.
 
Decorative Architectural Products – principally includes paints and stains; and cabinet, door, window and other hardware.
 
Other Specialty Products – principally includes windows, window frame components and patio doors; staple gun tackers, staples and other fastening tools.
 
The above products and services are sold to the home improvement and new home construction markets through mass merchandisers, hardware stores, home centers, builders, distributors and other outlets for consumers and contractors.
 
The Company’s operations are principally located in North America and Europe. The Company’s country of domicile is the United States of America.
 
Corporate assets consist primarily of real property, equipment, cash and cash investments and other investments.
 
The Company’s segments are based upon similarities in products and services and represent the aggregation of operating units, for which financial information is regularly evaluated by the Company’s corporate operating executives in determining resource allocation and assessing performance and is periodically reviewed by the Board of Directors. Accounting policies for the segments are the same as those for the Company. The Company primarily evaluates performance based upon operating profit (loss) and, other than general corporate expense, allocates specific corporate overhead to each segment. The evaluation of segment operating profit also excludes the charge for defined-benefit plan curtailment, the charge for litigation settlements, the accelerated stock compensation expense and the (loss) gain on corporate fixed assets, net.
 
Information about the Company by segment and geographic area was as follows, in millions:
 
                                                                         
    Net Sales (1)(2)(3)(4)(5)     Operating Profit (Loss)(5)(6)     Assets at December 31 (11)(12)  
    2009     2008     2007     2009     2008     2007     2009     2008     2007  
 
The Company’s operations by segment were:
                                                                       
Cabinets and Related Products
  $ 1,674     $ 2,276     $ 2,829     $ (64 )   $ 4     $ 336     $ 1,382     $ 1,518     $ 1,769  
Plumbing Products
    2,564       3,002       3,272       237       110       271       1,815       1,877       2,336  
Installation and Other Services
    1,256       1,861       2,615       (131 )     (46 )     176       2,339       2,454       2,622  
Decorative Architectural Products
    1,714       1,629       1,768       375       299       384       871       878       900  
Other Specialty Products
    584       716       929       (199 )     (124 )     67       1,197       1,441       1,920  
                                                                         
Total
  $ 7,792     $ 9,484     $ 11,413     $ 218     $ 243     $ 1,234     $ 7,604     $ 8,168     $ 9,547  
                                                                         
The Company’s operations by geographic area were:
                                                                       
North America
  $ 6,135     $ 7,482     $ 9,271     $ 93     $ 493     $ 1,008     $ 6,113     $ 6,648     $ 7,089  
International, principally Europe
    1,657       2,002       2,142       125       (250 )     226       1,491       1,520       2,458  
                                                                         
Total, as above
  $ 7,792     $ 9,484     $ 11,413       218       243       1,234       7,604       8,168       9,547  
                                                                         
General corporate expense, net (7)
    (140 )     (144 )     (181 )                        
Charge for defined-benefit curtailment (8)
    (8 )                                    
Charge for litigation settlements (9)
    (7 )     (9 )                              
Accelerated stock compensation expense (10)
    (6 )                                    
(Loss) gain on corporate fixed assets, net
    (2 )           8                          
                                                 
Operating profit, as reported
    55       90       1,061                          
Other income (expense), net
    (206 )     (283 )     (185 )                        
                                                 
(Loss) income from continuing operations before income taxes
  $ (151 )   $ (193 )   $ 876                          
                                                 
Corporate assets
    1,571       1,315       1,360  
                         
Total assets
  $ 9,175     $ 9,483     $ 10,907  
                         
 
                                                 
    Property Additions(5)     Depreciation and Amortization(5)  
    2009     2008     2007     2009     2008     2007  
 
The Company’s operations by segment were:
                                               
Cabinets and Related Products
  $ 30     $ 50     $ 70     $ 84     $ 70     $ 67  
Plumbing Products
    47       72       60       70       72       73  
Installation and Other Services
    30       45       70       35       23       27  
Decorative Architectural Products
    7       14       11       18       18       18  
Other Specialty Products
    7       10       29       28       33       30  
                                                 
      121       191       240       235       216       215  
Unallocated amounts, principally related to corporate assets
    1       2       4       17       16       16  
                                                 
Total
  $ 122     $ 193     $ 244     $ 252     $ 232     $ 231  
                                                 
 
(1) Included in net sales were export sales from the U.S. of $277 million, $275 million and $291 million in 2009, 2008 and 2007, respectively.
 
(2) Intra-company sales between segments represented approximately three percent of net sales in 2009, one percent of net sales in 2008 and two percent of net sales in 2007.
 
(3) Included in net sales were sales to one customer of $2,053 million, $2,058 million and $2,403 million in 2009, 2008 and 2007, respectively. Such net sales were included in the following segments: Cabinets and Related Products, Plumbing Products, Decorative Architectural Products and Other Specialty Products.
 
(4) Net sales from the Company’s operations in the U.S. were $5,952 million, $7,150 million and $8,910 million in 2009, 2008 and 2007, respectively.
 
(5) Net sales, operating profit (loss), property additions and depreciation and amortization expense for 2009, 2008 and 2007 excluded the results of businesses reported as discontinued operations in 2009, 2008 and 2007.
 
(6) Included in segment operating profit (loss) for 2009 were impairment charges for goodwill as follows: Plumbing Products – $39 million; Other Specialty Products – $223 million. Included in segment operating profit (loss) for 2008 were impairment charges for goodwill and other intangible assets as follows: Cabinets and Related Products – $59 million; Plumbing Products – $203 million; Installation and Other Services – $52 million; and Other Specialty Products – $153 million. Included in segment operating profit for 2007 were impairment charges for goodwill and other intangible assets as follows: Plumbing Products – $69 million; and Other Specialty Products – $50 million.
 
(7) General corporate expense, net included those expenses not specifically attributable to the Company’s segments.
 
(8) During 2009, the Company recognized a curtailment loss related to the plan to freeze all future benefit accruals beginning January 1, 2010 under substantially all of the Company’s domestic qualified and non-qualified defined-benefit pension plans. See Note M to the consolidated financial statements.
 
(9) The charge for litigation settlement in 2009 relates to a business unit in the Cabinets and Related Products segment. The charge for litigation settlement in 2008 relates to a business unit in the Installation and Other Services segment.
 
(10) See Note L to the consolidated financial statements.
 
(11) Long-lived assets of the Company’s operations in the U.S. and Europe were $4,628 million and $690 million, $4,887 million and $770 million, and $4,987 million and $1,477 million at December 31, 2009, 2008 and 2007, respectively.
 
(12) Segment assets for 2009 excluded the assets of businesses reported as discontinued operations.
Other Income (Expense), Net
OTHER INCOME (EXPENSE), NET
 
P.  OTHER INCOME (EXPENSE), NET
 
Other, net, which is included in other income (expense), net, was as follows, in millions:
 
                         
    2009     2008     2007  
 
Income from cash and cash investments
  $ 7     $ 22     $ 37  
Other interest income
    2       2       3  
Income from financial investments, net (Note E)
    3       1       49  
Other items, net
    17       (22 )     6  
                         
Total other, net
  $ 29     $ 3     $ 95  
                         
 
Other items, net, included realized foreign currency transaction gains (losses) of $17 million, $(29) million and $9 million in 2009, 2008 and 2007, respectively, as well as other miscellaneous items.
Income Taxes
INCOME TAXES
 
Q.  INCOME TAXES
 
                         
          (In Millions)  
    2009     2008     2007  
 
(Loss) income from continuing operations before income taxes:
                       
U.S. 
  $ (301 )   $ 4     $ 606  
Foreign
    150       (197 )     270  
                         
    $ (151 )   $ (193 )   $ 876  
                         
Provision (benefit) for income taxes on (loss) income from continuing operations:
                       
Currently payable:
                       
U.S. Federal
  $ (29 )   $ 6     $ 263  
State and local
    12       20       33  
Foreign 
    45       68       82  
Deferred:
                       
U.S. Federal
    (64 )     47       (18 )
State and local
    (2 )     4       (11 )
Foreign 
    (11 )     (11 )     (12 )
                         
    $ (49 )   $ 134     $ 337  
                         
Deferred tax assets at December 31:
                       
Receivables
  $ 19     $ 18          
Inventories
    31       30          
Other assets, including stock-based compensation
    135       141          
Accrued liabilities
    171       137          
Long-term liabilities
    200       218          
Capital loss carryforward
          6          
Net operating loss carryforward
    63       22          
Tax credit carryforward
    6                
                         
      625       572          
Valuation allowance
    (43 )     (15 )        
                         
      582       557          
                         
Deferred tax liabilities at December 31:
                       
Property and equipment
    324       323          
Investment in foreign subsidiaries
    9       10          
Intangibles 
    398       414          
Other, principally notes payable
    32       47          
                         
      763       794          
                         
Net deferred tax liability at December 31
  $ 181     $ 237          
                         
 
At December 31, 2009 and 2008, the net deferred tax liability consisted of net short-term deferred tax assets included in prepaid expenses and other of $203 million and $190 million, respectively, and net long-term deferred tax liabilities included in deferred income taxes and other of $384 million and $427 million, respectively.
 
A valuation allowance of $43 million and $15 million was recorded at December 31, 2009 and 2008, respectively, on certain net operating loss carryforward and other deferred tax asset balances that the Company believes will not be realized in future periods primarily due to a recent history of losses of certain subsidiaries.
 
Of the $582 million of deferred tax assets recorded at December 31, 2009 net of a valuation allowance, $432 million is anticipated to be realized through the future reversal of existing taxable temporary differences recorded as a deferred tax liability, and $150 million is anticipated to be realized through future gains from investments and other identified tax-planning strategies, including the potential sale of certain operating assets and through capital gains in the carryback period. As a result, a valuation allowance was not recorded on these deferred tax assets.
 
Of the deferred tax asset related to the net operating loss and tax credit carryforwards at December 31, 2009 and 2008, $65 million and $9 million will expire between 2018 and 2029 and $4 million and $13 million is unlimited, respectively.
 
A $9 million and $10 million deferred tax liability has been provided at December 31, 2009 and 2008, respectively, on the undistributed earnings of certain foreign subsidiaries as such earnings are intended to be repatriated in the foreseeable future. A tax provision has not been provided at December 31, 2009 for U.S. income taxes or additional foreign withholding taxes on approximately $100 million of undistributed earnings of certain foreign subsidiaries that are considered to be permanently reinvested. It is not practicable to determine the amount of deferred tax liability on such earnings as the actual U.S. tax would depend on income tax laws and circumstances at the time of distribution.
 
A reconciliation of the U.S. Federal statutory rate to the provision (benefit) for income taxes on (loss) income from continuing operations was as follows:
 
                         
    2009     2008     2007  
 
U.S. federal statutory rate
    (35 )%     (35 )%     35 %
State and local taxes, net of U.S. Federal tax benefit
    4       8       2  
Lower taxes on foreign earnings
    (11 )     (11 )     (2 )
Foreign unrecognized tax benefits
    (5 )            
Change in U.S. and foreign taxes on distributed and undistributed foreign earnings, including the impact of foreign tax credit
    5       35       5  
Goodwill impairment charges providing no tax benefit
    10       73       3  
Domestic production deduction
                (1 )
Change in foreign tax rates
                (2 )
Other, net
    (1 )     (1 )     (1 )
                         
Effective tax rate
    (33 )%     69 %     39 %
                         
 
During 2009, the Company reversed an accrual for unrecognized tax benefits of approximately $8 million related to a withholding tax issue from a formerly held European company due to a recent favorable court decision which resulted in a decrease in the effective tax rate. In addition, the Company recorded pre-tax impairment charges for goodwill of $262 million ($180 million after-tax) in 2009 that increased the effective tax rate as a portion of the impairment charges did not provide a tax benefit. Excluding the effects of these items, the Company’s effective tax rate in 2009 was approximately 37 percent.
 
During 2008, the Company made a substantial repatriation of low-taxed earnings from certain foreign subsidiaries to fully utilize the existing foreign tax credit carryforward by December 31, 2008. Although the majority of the current U.S. tax on this substantial repatriation was offset by the foreign tax credit carryforward, the Company’s tax expense was increased by approximately $65 million. Also during 2008, the Company recorded pre-tax impairment charges for goodwill and other intangibles of $467 million ($445 million after-tax) that significantly increased the Company’s effective tax rate as the majority of the impairment charges did not provide a tax benefit. Excluding the effects of the substantial repatriation of low-taxed earnings and the impairment charges, the Company’s effective tax rate in 2008 was approximately 33 percent.
 
Income taxes paid were $25 million, $117 million and $363 million in 2009, 2008 and 2007, respectively.
 
Effective January 1, 2007, the Company adopted accounting guidance regarding accounting for uncertainty in income taxes and recorded the cumulative effect of adopting such guidance as a reduction to beginning retained earnings of $26 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits, including related interest and penalties, is as follows:
 
                         
          (In Millions)  
    Unrecognized
    Interest and
       
    Tax Benefits     Penalties     Total  
 
Balance at January 1, 2008
  $ 76     $ 19     $ 95  
Current year tax positions:
                       
Additions
    4             4  
Prior year tax positions:
                       
Additions
    11             11  
Reductions
    (5 )           (5 )
Settlements with tax authorities
    (2 )     (1 )     (3 )
Lapse of applicable statute of limitations
    (3 )           (3 )
Interest and penalties recognized in income tax expense
          7       7  
                         
Balance at December 31, 2008
  $ 81     $ 25     $ 106  
                         
Current year tax positions:
                       
Additions
    5               5  
Reductions
    (1 )             (1 )
Prior year tax positions:
                       
Additions
    7               7  
Reductions
    (8 )             (8 )
Settlements with tax authorities
    (13 )     (3 )     (16 )
Lapse of applicable statute of limitations
    (6 )             (6 )
Interest and penalties recognized in income tax expense
            (1 )     (1 )
                         
Balance at December 31, 2009
  $ 65     $ 21     $ 86  
                         
 
If recognized, $44 million and $54 million of the unrecognized tax benefits at December 31, 2009 and 2008, respectively, net of any U.S. Federal tax benefit, would impact the Company’s effective tax rate.
 
At December 31, 2009 and 2008, $87 and $105 million of the total unrecognized tax benefits, including related interest and penalties, is recorded in deferred income taxes and other, $8 and $7 million is recorded in accrued liabilities and $9 and $6 million is recorded in other assets, respectively.