MASCO CORP /DE/, 10-Q/A filed on 8/25/2009
Amended Quarterly Report
Document and Company Information (USD $)
In Thousands, except Share data in Millions
Jul. 28, 2009
6 Months Ended
Jun. 30, 2009
Jun. 30, 2008
Document and Company Information [Abstract]
 
 
 
Entity Registrant Name
 
Masco Corporation 
 
Entity Central Index Key
 
0000062996 
 
Document Type
 
10-Q 
 
Document Period End Date
 
06/30/2009 
 
Amendment Flag
 
TRUE 
 
Amendment Description
 
Amended 10-Q 
 
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
 
 
$ 5,516,595 
Entity Common Stock, Shares Outstanding (actual number)
359.2 
 
 
Condensed Consolidated Balance Sheets (USD $)
In Millions
Jun. 30, 2009
Dec. 31, 2008
ASSETS
 
 
Current assets:
 
 
Cash and cash investments
$ 926 
$ 1,028 
Receivables
1,236 
999 
Prepaid expenses and other
346 
332 
Inventories:
 
 
Finished goods
475 
483 
Raw material
308 
333 
Work in process
103 
125 
Total inventories
886 
941 
Total current assets
3,394 
3,300 
Property and equipment, net
2,066 
2,136 
Goodwill
3,378 
3,371 
Other intangible assets, net
295 
299 
Other assets
354 
377 
Total assets
9,487 
9,483 
LIABILITIES
 
 
Current liabilities:
 
 
Notes payable
370 
71 
Accounts payable
637 
531 
Accrued liabilities
862 
945 
Total current liabilities
1,869 
1,547 
Long-term debt
3,610 
3,915 
Deferred income taxes and other
1,003 
1,040 
Total liabilities
6,482 
6,502 
Commitments and contingencies
 
 
Masco Corporation's shareholders' equity:
 
 
Common shares, par value $1 per share, Authorized shares: 1,400,000,000; issued and outstanding: 2009 - 350,000,000; 2008 - 351,400,000
350 
351 
Preferred shares authorized: 1,000,000; issued and outstanding: 2009 - None; 2008 - None
Paid-in capital
23 
Retained earnings
2,082 
2,162 
Accumulated other comprehensive income
387 
308 
Total Masco Corporation's shareholders' equity
2,842 
2,821 
Noncontrolling interest
163 
160 
Total equity
3,005 
2,981 
Total liabilities and equity
$ 9,487 
$ 9,483 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Share data in Millions, except Per Share data
Jun. 30, 2009
Dec. 31, 2008
Common stock, par value
$ 1 
$ 1 
Common shares, shares authorized
1,400 
1,400 
Common shares, shares issued
350 
351.4 
Common shares, shares outstanding
350 
351.4 
Preferred shares, shares authorized
Preferred shares, shares issued
Preferred shares, shares outstanding
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data
3 Months Ended
Jun. 30, 2009
6 Months Ended
Jun. 30, 2009
3 Months Ended
Jun. 30, 2008
6 Months Ended
Jun. 30, 2008
Net sales
$ 2,036 
$ 3,855 
$ 2,643 
$ 5,093 
Cost of sales
1,490 
2,893 
1,943 
3,763 
Gross profit
546 
962 
700 
1,330 
Selling, general and administrative expenses
434 
849 
485 
961 
Charge for defined-benefit plan curtailment
Operating profit
112 
105 
215 
369 
Other income (expense), net:
 
 
 
 
Interest expense
(57)
(113)
(57)
(113)
Impairment charge for financial investments
(7)
(10)
(3)
(29)
Other, net
15 
15 
Total Other income (expense), net:
(49)
(108)
(56)
(140)
Income (loss) from continuing operations before income taxes
63 
(3)
159 
229 
Income taxes
75 
115 
Income (loss) from continuing operations
62 
(12)
84 
114 
Income (loss) from discontinued operations, net
10 
(6)
Net income (loss)
63 
(11)
94 
108 
Less: Net income attributable to noncontrolling interest
15 
12 
24 
Net income (loss) attributable to Masco Corporation
55 
(26)
82 
84 
Basic:
 
 
 
 
Income (loss) from continuing operations
0.15 
(0.08)
0.20 
0.24 
Income (loss) from discontinued operations, net
0.00 
0.00 
0.03 
(0.02)
Net income (loss)
0.15 
(0.08)
0.23 
0.23 
Diluted:
 
 
 
 
Income (loss) from continuing operations
0.15 
(0.08)
0.20 
0.24 
Income (loss) from discontinued operations, net
0.00 
0.00 
0.03 
(0.02)
Net income (loss)
0.15 
(0.08)
0.23 
0.23 
Amounts attributable to Masco Corporation:
 
 
 
 
Income (loss) from continuing operations
54 
(27)
72 
90 
Income (loss) from discontinued operations, net
10 
(6)
Net income (loss)
$ 55 
$ (26)
$ 82 
$ 84 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions
6 Months Ended
Jun. 30,
2009
2008
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
Cash provided by operations
$ 217 
$ 385 
(Increase) in receivables
(225)
(193)
Decrease (increase) in inventories
68 
(78)
Increase in accounts payable and accrued liabilities, net
50 
65 
Net cash from operating activities
110 
179 
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
Increase in debt
Payment of debt
(5)
(13)
Purchase of Company common stock
(11)
(147)
Cash dividends paid
(112)
(168)
Dividend payment to noncontrolling interest
(16)
(22)
Net cash (for) financing activities
(142)
(350)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
Capital expenditures
(50)
(92)
Proceeds from disposition of:
 
 
Marketable securities
Other financial investments, net
21 
Businesses, net of cash disposed
151 
Property and equipment
12 
Acquisition of businesses, net of cash acquired
(8)
(17)
Other, net
(17)
(11)
Net cash (for) from investing activities
(61)
73 
Effect of exchange rate changes on cash and cash investments
(9)
29 
CASH AND CASH INVESTMENTS:
 
 
Decrease for the period
(102)
(69)
At January 1
1,028 
922 
At June 30
$ 926 
$ 853 
0601- Disclosure - Accounting Policies
Accounting Policies
A.   In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as at June 30, 2009 and the results of operations for the three months and six months ended June 30, 2009 and 2008 and cash flows for the six months ended June 30, 2009 and 2008. The condensed consolidated balance sheet at December 31, 2008 was derived from audited financial statements.
 
    Certain prior-year amounts have been reclassified to conform to the 2009 presentation in the condensed consolidated financial statements. The results of operations related to 2008 discontinued operations have been separately stated in the accompanying condensed consolidated statements of income for the three months and six months ended June 30, 2008. In the Company’s condensed consolidated statements of cash flows for the six months ended June 30, 2009 and 2008, cash flows of discontinued operations are not separately classified.
 
    The Company has evaluated subsequent events through July 30, 2009, the date the Company’s condensed consolidated financial statements were issued.
 
    Recently Issued Accounting Pronouncements
 
    In June 2009, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a Replacement of SFAS No. 162,” (“SFAS No. 168”). SFAS No. 168 establishes the FASB Standards Account Codification (“Codification”) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. SFAS No. 168 is effective for the quarter ended September 30, 2009 and will supersede all then-existing non-SEC accounting and reporting standards. Once SFAS No. 168 is in effect, all of its content will carry the same level of authority; the GAAP hierarchy will be modified to include only two levels of GAAP: authoritative and nonauthoritative. The Company does not anticipate that the adoption of this pronouncement will have a significant effect on its condensed consolidated financial statements or disclosures.
 
    In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” (“SFAS No. 165”). SFAS No. 165 requires the disclosure of the date through which an entity has evaluated subsequent events and whether that date represents the date the financial statements were issued or were available to be issued. The Company adopted SFAS No. 165 effective June 30, 2009. The adoption of this pronouncement did not have an effect on its condensed consolidated financial statements.
 
    In April 2009, the FASB issued FASB Staff Position No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies,” (“FSP No. FAS 141(R)-1”). FSP No. FAS 141(R)-1 amends and clarifies the accounting, measurement and recognition provisions and the related disclosures arising from contingencies in a business combination under FAS No. 141(R). FSP No. FAS 141(R)-1 is effective for the Company for any business combination that is completed subsequent to January 1, 2009.
    In April 2009, the FASB issued FASB Staff Position No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly,” (“FSP No. FAS 157-4”). FSP No. FAS 157-4 provides additional guidance for estimating fair value under FAS No. 157 when the volume and level of market activity for an asset or liability have significantly decreased when compared with normal market activity for the asset or liability. If there is a significant decrease in the volume and activity for the asset or liability, transactions or quoted prices may not be determinative of fair value in an orderly transaction and further analysis and adjustment of the transactions or quoted prices may be necessary. FSP No. FAS 157-4 is effective for the quarter ended June 30, 2009 and there were not any adjustments to the Company’s estimates of fair value for assets and liabilities measured at fair value upon adoption.
 
    In April 2009, the FASB issued FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” (“FSP No. FAS 115-2 and FAS 124-2”). FSP No. FAS 115-2 and FAS 124-2 amends the method for determining whether an other-than-temporary impairment exists and the classification of the impairment charge for debt securities and the related disclosures. FSP No. FAS 115-2 and FAS 124-2 is effective for the quarter ended June 30, 2009 and there were not any adjustments to the Company’s condensed consolidated financial statements upon adoption.
 
    In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (“FSP No. FAS 107-1 and APB 28-1”). FSP No. FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” to require disclosures about the fair value of financial instruments for interim reporting periods. FSP No. FAS 107-1 and APB 28-1 is effective for the quarter ended June 30, 2009 and the Company has disclosed the fair value of financial instruments in Note J to the condensed consolidated financial statements.
Discontinued Operations
Discontinued Operations
B.   During the second quarter of 2009, the Company recorded income of $1 million included in gain on disposal of discontinued operations related to cash received for a disposition completed in prior years.
 
    During the first quarter of 2008, the Company determined that several European business units (previously included in the Plumbing Products segment and the Other Specialty Products segment) were not core to the Company’s long-term growth strategy and, accordingly, embarked on a plan of disposition; the dispositions were completed in August 2008. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”), the Company has accounted for the 2008 dispositions as discontinued operations.
    The impairment charge in the first quarter of 2008 included $6 million related to a business unit that was reclassified from discontinued operations to continuing operations in the third quarter of 2008, since the business unit would not be sold. The related assets and liabilities were also reclassified out of assets and liabilities held for sale. In addition, the Company recognized pre-tax income of $6 million for the three months ended September 30, 2008 related to the reversal of the impairment charge recorded in the first quarter of 2008. The income resulted from an adjustment of the assets to the lower of the carrying value, prior to inclusion in assets held for sale, adjusted for depreciation expenses, or current market value. As a result, this business unit is reported in continuing operations in 2008 and 2009; the related charge of $6 million is reported in continuing operations in 2008.
 
    Selected financial information for these discontinued operations was as follows, in millions:
                 
    Three Months Ended     Six Months Ended  
    June 30, 2008       June 30, 2008  
Net sales
  $ 32     $ 94  
 
           
Income from discontinued operations
  $ 5     $ 12  
Gain on disposal of discontinued operations
    7       7  
Impairment of assets held for sale
    (2 )     (45 )
 
           
Income (loss) before income tax
    10       (26 )
Income tax benefit
          20  
 
           
Income (loss) from discontinued operations, net
  $ 10     $ (6 )
 
           
    The unusual relationship between income taxes and income (loss) before income taxes in 2008 (excluding the impairment charge for assets held for sale and the net gain on disposals) resulted primarily from certain losses providing no current tax benefit and from income not subject to taxes.
Stock Based Compensation
Stock Based Compensation
C.   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 June 30, 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 related income tax benefit, for these stock-based incentives, were as follows, in millions:
                                 
    Three Months Ended     Six Months Ended  
    June 30,         June 30,  
    2009     2008     2009     2008  
Long-term stock awards
  $ 13     $ 11     $ 21     $ 23  
Stock options
    8       10       15       18  
Phantom stock awards and stock appreciation rights
    2       (2 )     2       (3 )
 
                       
Total
  $ 23     $ 19     $ 38     $ 38  
 
                       
 
                               
Income tax benefit
  $ 9     $ 7     $ 14     $ 14  
 
                       
    In June 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.
 
    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:
                 
    Six Months Ended
    June 30,
    2009   2008
Unvested stock award shares at January 1
    8       9  
Weighted average grant date fair value
  $ 26     $ 28  
 
               
Stock award shares granted
    2       1  
Weighted average grant date fair value
  $ 8     $ 21  
 
               
Stock award shares vested
    1       1  
Weighted average grant date fair value
  $ 26     $ 27  
 
               
Stock award shares forfeited
           
Weighted average grant date fair value
  $ 26     $ 28  
 
               
Unvested stock award shares at June 30
    9       9  
Weighted average grant date fair value
  $ 22     $ 26  
    At June 30, 2009 and 2008, there was $144 million and $182 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of seven years at both dates.
 
    The total market value (at the vesting date) of stock award shares which vested during the six months ended June 30, 2009 and 2008 was $11 million and $21 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 5,757,700 of stock option shares in the six months ended June 30, 2009 with a grant date exercise price approximating $8 per share. In the first half of 2009, 838,200 stock option shares were forfeited (including options that expired unexercised).
 
    The Company’s stock option activity was as follows, shares in millions:
                 
    Six Months Ended
    June 30,
    2009   2008
Option shares outstanding, January 1
    31       26  
Weighted average exercise price
  $ 25     $ 27  
 
               
Option shares granted, including restoration options
    6       6  
Weighted average exercise price
  $ 8     $ 19  
 
               
Option shares exercised
           
Aggregate intrinsic value on date of exercise (A)
  $ — million   $ — million
Weighted average exercise price
  $     $ 20  
 
               
Option shares forfeited
    1        
Weighted average exercise price
  $ 25     $ 28  
 
               
Option shares outstanding, June 30
    36       32  
Weighted average exercise price
  $ 23     $ 25  
Weighted average remaining option term (in years)
    6       7  
 
               
Option shares vested and expected to vest, June 30
    36       31  
Weighted average exercise price
  $ 23     $ 25  
Aggregate intrinsic value (A)
  $ 8 million   $ — million
Weighted average remaining option term (in years)
    6       7  
 
               
Option shares exercisable (vested), June 30
    20       16  
Weighted average exercise price
  $ 26     $ 26  
Aggregate intrinsic value (A)
  $ — million   $ — million
Weighted average remaining option term (in years)
    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 June 30, 2009 and 2008, there was $54 million and $78 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model) related to unvested stock options; such options had a weighted average vesting period of three years in 2009 and four years in 2008.
    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, were as follows:
                 
    Six Months Ended
    June 30,
    2009   2008
Weighted average grant date fair value
  $ 2.23     $ 3.73  
Risk-free interest rate
    2.59 %     3.25 %
Dividend yield
    3.73 %     4.95 %
Volatility factor
    39.07 %     32.00 %
Expected option life
  6 years   6 years
Employee Retirement Plans
Employee Retirement Plans
D.   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.
    Net periodic pension cost for the Company’s defined-benefit pension plans was as follows, in millions:
                                 
    Three Months ended June 30,  
    2009     2008  
    Qualified     Non-Qualified     Qualified     Non-Qualified  
Service cost
  $ 2     $ 1     $ 4     $  
Interest cost
    8       1       14       2  
Expected return on plan assets
    (5 )           (14 )      
Amortization of prior service cost
                      1  
Recognized curtailment loss
                       
Amortization of net loss
    2                    
 
                       
Net periodic pension cost
  $ 7     $ 2       4       3  
 
                       
                                 
    Six Months ended June 30,  
    2009     2008  
    Qualified     Non-Qualified     Qualified     Non-Qualified  
Service cost
  $ 6     $ 1     $ 9     $ 1  
Interest cost
    19       3       28       4  
Expected return on plan assets
    (13 )           (30 )      
Amortization of prior service cost
          1             1  
Recognized curtailment loss
    3       5              
Amortization of net loss
    7             1        
 
                       
Net periodic pension cost
  $ 22     $ 10       8       6  
 
                       
    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 is 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. In addition, the Company expects net periodic pension costs related to the domestic defined-benefit pension plans that were remeasured to decrease by approximately $14 million in 2009 to $31 million from the original forecast of $45 million at December 31, 2008.
    Assumptions
    Major assumptions used in accounting for the Company’s domestic defined-benefit pension plans that have been frozen were as follows:
         
    At March 31, 2009
Discount rate for obligations
    7.3 %
Expected return on plan assets
    8.0 %
Discount rate for net periodic pension cost
    6.1 %
    The discount rate for obligations was based upon the expected duration of each defined-benefit pension plan’s liabilities matched to the March 31, 2009 Citigroup Pension Discount Curve. Such rates for the Company’s domestic defined-benefit pension plans that have been frozen ranged from 7.0 percent to 7.4 percent, with the most significant portion of the liabilities having a discount rate for obligations of 7.4 percent at March 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 used to determine the defined-benefit pension expense was March 31.
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
E.   The changes in the carrying amount of goodwill for the six months ended June 30, 2009, by segment, were as follows, in millions:
                                 
    At                     At  
    Dec. 31, 2008     Additions (A)     Other(B)     June 30, 2009  
Cabinets and Related Products
  $ 225     $     $     $ 225  
Plumbing Products
    248       4       3       255  
Installation and Other Services
    1,768                   1,768  
Decorative Architectural Products
    294                   294  
Other Specialty Products
    836                   836  
 
                       
Total
  $ 3,371     $ 4     $ 3     $ 3,378  
 
                       
 
(A)   Additions include acquisitions.
 
(B)   Other principally includes the effect of foreign currency translation, reclassifications and purchase price adjustments related to prior-year acquisitions.
    Other indefinite-lived intangible assets were $196 million and $195 million at June 30, 2009 and December 31, 2008, respectively, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $99 million (net of accumulated amortization of $62 million) at June 30, 2009 and $104 million (net of accumulated amortization of $56 million) at December 31, 2008, and principally included customer relationships and non-compete agreements.
Depreciation and Amortization Expense
Depreciation and Amortization Expense
F.   Depreciation and amortization expense was $128 million and $119 million, respectively, for the six months ended June 30, 2009 and 2008.
Financial Investments
Financial Investments
G.   The Company has maintained investments in available-for-sale securities and a number of private equity funds, 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:
                 
    June 30,     December 31,  
    2009     2008  
Asahi Tec Corporation – common and preferred stock
  $ 69     $ 73  
TriMas Corporation
    8       3  
Auction rate securities
    22       22  
Marketable securities
          3  
Private equity funds
    126       138  
Other investments
    9       10  
 
           
Total
  $ 234     $ 249  
 
           
    The Company’s investments in available-for-sale securities at June 30, 2009 and December 31, 2008 (including marketable securities, auction rate securities, Asahi Tec Corporation common and preferred stock and TriMas Corporation) were as follows, in millions:
                                 
            Pre-tax    
            Unrealized   Unrealized   Recorded
    Cost Basis   Gains   Losses   Basis
June 30, 2009
  $ 72     $ 27     $     $ 99  
 
December 31, 2008
  $ 75     $ 26     $     $ 101  
    The Company’s investments in private equity funds and other private investments are carried at cost. It is not practicable for the Company to estimate a fair value because the private equity funds have no quoted market price 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 quarterly 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 applicable 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. During the three months and six months ended June 30, 2009, the Company determined that the decline in the estimated value of three private equity funds (with a carrying value of $8 million prior to impairment) and five private equity funds (with a carrying value of $41 million prior to impairment), respectively, was other-than-temporary and, accordingly, recognized non-cash, pre-tax impairment charges of $7 million and $10 million, respectively, for the three months and six months ended June 30, 2009.
    The remaining private equity investments, with an aggregate carrying value of $95 million at both June 30, 2009 and December 31, 2008, were not evaluated 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 investments.
    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:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Realized gains from marketable securities
  $     $     $     $  
Realized losses from marketable securities
                      (3 )
Dividend income from marketable securities
                       
Income from other investments, net
          3             3  
Dividend income from other investments
                       
 
                       
Income from financial investments, net
  $     $ 3     $     $  
 
                       
 
                               
Impairment charges:
                               
Private equity funds
  $ (7 )   $ (3 )   $ (10 )   $ (7 )
TriMas Corporation
                      (22 )
 
                       
Impairment charges
  $ (7 )   $ (3 )   $ (10 )   $ (29 )
 
                       
Derivatives
Derivatives
H.   During 2009 and 2008, the Company had entered into foreign currency exchange contracts to hedge currency fluctuations related to intercompany loans denominated in non-functional currencies. At June 30, 2009 and December 31, 2008, the Company had recorded losses of $3 million and $16 million, respectively, on the foreign currency exchange contract, which is more than offset by gains related to the translation of loans and accounts denominated in non-functional currencies. Gains (losses) related to these contracts are recorded in the Company’s consolidated statements of income in other income (expense), net. For the three months and six months ended June 30, 2009, the Company had recorded losses of $2 million and $3 million, respectively, related to these foreign currency exchange contracts. For both the three months and six months ended June 30, 2008, the Company had recorded a loss of $4 million related to these foreign currency exchange contracts.
 
    During 2009 and 2008, the Company, including certain European operations, also had entered into foreign currency forward contracts to manage a portion of its exposure to currency fluctuations in the European euro and the U.S. dollar. At June 30, 2009 and December 31, 2008, the Company had recorded gains of $1 million and $2 million, respectively, on these contracts based upon period-end market prices. Gains (losses) related to these contracts are recorded in the Company’s consolidated statements of income in other income (expense), net. For the three months and six months ended June 30, 2009, the Company had recorded losses of $2 million and $1 million, respectively, related to these foreign currency exchange contracts. For the six months ended June 30, 2008, the Company had recorded a loss of $2 million related to these foreign currency exchange contracts.
    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.
Debt
Debt
I.   At June 30, 2009 and December 31, 2008, there were outstanding $108 million principal amount of Zero Coupon Convertible Senior Notes due 2031, with an accreted value of $55 million and $54 million, respectively.
    The Company adopted FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement),” (“FSP No. APB 14-1”) effective January 1, 2009. The adoption of FSP No. APB 14-1 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 condensed consolidated financial statements for the periods ended June 30, 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, which expires February 2011. 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 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. Under the terms of the Amended Credit Facility, any outstanding Letters of Credit reduce the Company’s borrowing capacity. At June 30, 2009, the Company had $57 million of unused Letters of Credit; accordingly, the Company’s remaining borrowing capacity is approximately $1.2 billion. 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.
    At June 30, 2009, the Company was in compliance with the requirements of the Amended Five-Year Revolving Credit Facility.
Fair Value
Fair Value
J.   On January 1, 2008, the Company adopted SFAS No. 157 for its financial assets and liabilities. On January 1, 2009, the Company adopted SFAS No. 157 for its non-financial assets and liabilities; such adoption did not have a significant effect on its condensed consolidated financial statements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 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.” SFAS No. 157 further 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 estimating if a market was active or inactive were based on the individual facts and circumstances.
    Financial assets 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 established by SFAS No. 157, were as follows, in millions:
                                 
            Fair Value Measurements Using  
                    Significant        
            Quoted     Other     Significant  
            Market     Observable     Unobservable  
    June 30,     Prices     Inputs     Inputs  
    2009     (Level 1)     (Level 2)     (Level 3)  
Asahi Tec Corporation:
                               
Preferred stock
  $ 68     $     $     $ 68  
Common stock
    1       1              
Foreign currency exchange contracts (A)
    (2 )           (2 )      
Auction rate securities
    22                   22  
TriMas Corporation
    8       8              
 
                       
Total
  $ 97     $ 9     $ (2 )   $ 90  
 
                       
                                 
            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              
Foreign currency exchange contracts (A)
    (14 )           (14 )      
Auction rate securities
    22                   22  
Marketable securities
    3       3              
TriMas Corporation
    3       3              
Other investments
    3             3        
 
                       
Total
  $ 90     $ 7     $ (11 )   $ 94  
 
                       
 
(A)   The foreign currency exchange contracts include contracts entered into to hedge currency fluctuations related to intercompany loans denominated in non-functional currencies and to manage exposure to currency fluctuations in the European euro and U.S. dollar. The loss on the foreign currency exchange contracts is more than offset by gains related to the translation of loans and accounts denominated in non-functional currencies.
    The following table summarizes the changes in Level 3 financial assets measured at fair value on a recurring basis for the six months ended June 30, 2009 and the year ended December 31, 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)
    (4 )           (4 )
Purchases, issuances, settlements
                 
 
                 
Fair value at June 30, 2009
  $ 68     $ 22     $ 90  
 
                 
                         
    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  
 
                 
    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.
    The fair values of the auction rate securities held by the Company have been estimated 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.
    The Company also has investments in private equity funds and other private investments which are carried at cost and are evaluated for potential 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. 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 used to evaluate impairment are a Level 3 input.
    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 established by SFAS No. 157, were as follows, in millions:
                                         
            Fair Value Measurements Using
                    Significant        
            Quoted   Other   Significant    
            Market   Observable   Unobservable   Total
    June 30,   Prices   Inputs   Inputs   Gains
    2009   (Level 1)   (Level 2)   (Level 3)   (Losses)
Private equity funds
  $ 31     $     $     $ 31     $ (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 )
 
                             
    During 2009, the Company determined that the decline in the estimated value of several private equity fund investments was other-than-temporary and, accordingly, recognized non-cash, pre-tax impairment charges of $7 million and $10 million, respectively, for the three months and six months ended June 30, 2009. During 2008, the Company determined that the decline in the estimated value of several private equity funds was other-than-temporary and, accordingly, recognized non-cash, pre-tax impairment charges of $23 million for the year ended December 31, 2008.
    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 long-term debt at June 30, 2009 was approximately $3.4 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.
Shareholders Equity and Comprehensive Income
Shareholders' Equity and Comprehensive Income
K.   Effective January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,” (“SFAS No. 160”). At June 30, 2009 and December 31, 2008, the Company owns 68 percent of Hansgrohe AG. SFAS No. 160 requires the reclassification of the Company’s noncontrolling interest in Hansgrohe AG to shareholders’ equity from deferred income taxes and other. At December 31, 2008, the Company did not have a balance in paid-in capital due to repurchases of Company common stock. The Company’s activity in shareholders’ equity was as follows, in millions:
                                                 
                                    Accumulated        
                                    Other        
            Common     Paid-in-     Retained     Comprehensive     Noncontrolling  
    Total     Shares     Capital     Earnings     Income     Interest  
Balance, January 1, 2008
  $ 4,142     $ 359     $     $ 2,969     $ 661     $ 153  
 
                                               
Net (loss) income
    (352 )                     (391 )             39  
Cumulative translation adjustments
    (221 )                             (210 )     (11 )
Unrealized gain on marketable securities, net of income tax of $4
    7                               7          
Prior service cost and net loss, net of income tax benefit of $86
    (150 )                             (150 )        
 
                                             
Total comprehensive (loss) income
    (716 )                                        
Shares issued
    1       1                                  
Shares retired:
                                               
Repurchased
    (160 )     (9 )     (71 )     (80 )                
Surrendered (non-cash)
    (7 )             (7 )                        
Cash dividends declared
    (357 )                     (336 )             (21 )
Stock-based compensation
    78               78                          
 
                                   
Balance, December 31, 2008
  $ 2,981     $ 351     $     $ 2,162     $ 308     $ 160  
 
                                               
Net (loss) income
    (11 )                     (26 )             15  
Cumulative translation adjustments
    16                               12       4  
Unrealized gain on marketable securities, net of income tax of $3
    5                               5          
Prior service cost and net loss, net of income tax of $36
    62                               62          
 
                                             
Total comprehensive income (loss)
    72                                          
Shares issued
          1       (1 )                        
Shares retired:
                                               
Repurchased
    (11 )     (2 )     (9 )                        
Surrendered (non-cash)
    (3 )             (3 )                        
Cash dividends declared
    (54 )                     (54 )                
Dividend payments to noncontrolling interest
    (16 )                                     (16 )
Stock-based compensation
    36               36                          
 
                                   
Balance, June 30, 2009
  $ 3,005     $ 350     $ 23     $ 2,082     $ 387     $ 163  
 
                                   
    Noncontrolling interest includes accumulated other comprehensive income of $29 million, $25 million and $36 million at June 30, 2009, and December 31, 2008 and January 1, 2008, respectively.
    The Company’s total comprehensive income was as follows, in millions:
                 
    Three Months Ended  
    June 30, 2009  
    Attributable to     Noncontrolling  
    Masco Corporation     Interest  
Net income
  $ 55     $ 8  
Other comprehensive income (loss):
               
Cumulative translation adjustments
    80       15  
Unrealized gain on marketable securities, net
    3        
Prior service cost and net loss, net
           
 
           
Total comprehensive income
  $ 138     $ 23  
 
           
                                 
    Three Months Ended     Six Months Ended  
    June 30, 2008     June 30, 2008  
    Attributable to     Noncontrolling     Attributable to     Noncontrolling  
    Masco Corporation     Interest     Masco Corporation     Interest  
Net income
  $ 82     $ 12     $ 84     $ 24  
Other comprehensive income (loss):
                               
Cumulative translation adjustments
    (10 )     (3 )     97       14  
Unrealized gain on marketable securities, net
    1             8        
Prior service cost and net loss, net
    1             2        
 
                       
Total comprehensive income
  $ 74     $ 9     $ 191     $ 38  
 
                       
    The unrealized gain on marketable securities, net, is net of income tax of $1 million for the three months ended June 30, 2009, and $1 million and $5 million, respectively, for the three months and six months ended June 30, 2008. The prior service cost and net loss, net, is net of income tax of $1 million for both the three months and six months ended June 30,2008.
    In the first quarter of 2009, the Company announced the reduction of its quarterly dividend to $.075 per common share ($.30 per common share annually) from $.235 per common share ($.94 per common share annually). On the basis of amounts paid (declared), cash dividends per common share were $.075 ($.075) and $.31 ($.15) for the three months and six months ended June 30, 2009, respectively. On the basis of amounts paid (declared), cash dividends per common share were $.23 ($.23) and $.46 ($.46) for the three months and six months ended June 30, 2008, respectively.
Segment Information
Segment Information
L.   Information about the Company by segment and geographic area was as follows, in millions:
                                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     2009     2008     2009     2008     2009     2008  
             
    Net Sales(A)     Operating Profit (Loss)     Net Sales(A)     Operating Profit (Loss)  
             
The Company’s operations by segment were:
                                                               
Cabinets and Related Products
  $ 419     $ 608     $ (12 )   $ 37     $ 814     $ 1,204     $ (40 )   $ 65  
Plumbing Products
    654       857       70       107       1,260       1,678       100       206  
Installation and Other Services
    312       508       (34 )     4       629       994       (70 )     (2 )
Decorative Architectural Products
    505       476       116       89       891       855       191       163  
Other Specialty Products
    146       194       7       13       261       362             21  
 
                                               
Total
  $ 2,036     $ 2,643     $ 147     $ 250     $ 3,855     $ 5,093     $ 181     $ 453  
 
                                               
 
                                                               
The Company’s operations by geographic area were:
                                                               
North America
  $ 1,630     $ 2,067     $ 119     $ 200     $ 3,064     $ 3,960     $ 138     $ 349  
International, principally Europe
    406       576       28       50       791       1,133       43       104  
 
                                               
Total
  $ 2,036     $ 2,643       147       250     $ 3,855     $ 5,093       181       453  
 
                                                       
 
                                                               
General corporate expense, net
                    (27 )     (35 )                     (60 )     (78 )
Accelerated stock compensation expense (B)
                    (6 )                           (6 )      
(Loss) on corporate fixed assets, net
                    (2 )                           (2 )      
Charge for defined-benefit plan curtailment (C)
                                                (8 )      
Charge for planned disposition of business (D)
                                                      (6 )
 
                                                       
Operating profit
                    112       215                       105       369  
Other income (expense), net
                    (49 )     (56 )                     (108 )     (140 )
 
                                                       
Income (loss) from continuing operations before income taxes
                  $ 63     $ 159                     $ (3 )   $ 229  
 
                                                       
 
(A)   Inter-segment sales were not material.
 
(B)   See Note C to the condensed consolidated financial statements.
 
(C)   In March 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.
 
(D)   See Note B to the condensed consolidated financial statements.
Other Income (Expense), Net
Other Income (Expense), Net
M.   Other, net, which is included in other income (expense), net, was as follows, in millions:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Income from cash and cash investments
  $ 1     $ 5     $ 4     $ 11  
Income from financial investments, net (Note G)
          3              
Other items, net
    14       (4 )     11       (9 )
 
                       
Total
  $ 15     $ 4     $ 15     $ 2  
 
                       
    Other items, net, included $11 million and $9 million of currency gains for the three months and six months ended June 30, 2009, respectively. Other items, net, included $4 million and $15 million of currency losses for the three months and six months ended June 30, 2008, respectively.
Earnings Per Share
Earnings Per Share
 
N.   Reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per common share were as follows, in millions:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Numerator (basic and diluted):
                               
Income (loss) from continuing operations
  $ 54     $ 72     $ (27 )   $ 90  
Allocation to unvested restricted stock awards
    (1 )     (2 )     (1 )     (4 )
 
                       
Income (loss) from continuing operations attributable to common shareholders
    53       70       (28 )     86  
Income (loss) from discontinued operations, net
    1       10       1       (6 )
 
                       
Net income (loss) available to common shareholders
  $ 54     $ 80     $ (27 )   $ 80  
 
                       
 
                               
Denominator:
                               
Basic common shares (based upon weighted average)
    350       354       351       355  
Add:
                               
Contingent common shares
                       
Stock option dilution
                       
 
                       
Diluted common shares
    350       354       351       355  
 
                       
    Effective January 1, 2009, the Company adopted FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies that share-based payment awards that entitle their holders to receive non-forfeitable dividends prior to vesting should be considered participating securities. The Company has granted restricted stock awards that contain non-forfeitable rights to dividends on unvested shares; such unvested restricted stock awards are considered participating securities under FSP EITF 03-6-1. As participating securities, the unvested shares are required to be included in the calculation of the Company’s basic earnings per common share, using the “two-class method.” The two-class method of computing earnings per common share is an allocation method that calculates earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Unvested restricted stock awards were previously included in the Company’s diluted share calculation using the treasury stock method. For the six months ended June 30, 2009, the Company did not allocate any loss to the unvested restricted stock awards (participating securities), due to the anti-dilutive effect; however, dividends were allocated to the unvested restricted stock awards (participating securities) for both the three months and six months ended June 30, 2009. For the three months ended June 30, 2009, the Company allocated income to the unvested restricted stock awards (participating securities).
 
    At June 30, 2009 and 2008, the Company did not include any common shares related to the Zero Coupon Convertible Senior Notes (“Notes”) in the calculation of diluted earnings per common share, as the price of the Company’s common stock at June 30, 2009 and 2008 did not exceed the equivalent accreted value of the Notes.
 
    Additionally, 36 million common shares for both the three months and six months ended June 30, 2009, and 32 million common shares for both the three months and six months ended June 30, 2008 related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.
 
    In the first six months of 2009, the Company granted two million shares of stock awards. In the first half of 2009, the Company also repurchased and retired approximately two million shares of Company common stock, for cash aggregating $11 million to offset the dilutive impact of these stock awards. At June 30, 2009, the Company had 30 million shares of its common stock remaining under the July 2007 Board of Directors repurchase authorization.
Commitments and Contingencies
Commitments and Contingencies
O.   The Company is subject to lawsuits and pending or asserted claims with respect to matters generally arising in the ordinary course of business.
 
    As previously disclosed, a lawsuit has been brought against the Company and a number of its insulation installation companies in the federal court in Atlanta, Georgia alleging that certain practices violate provisions of the federal antitrust laws. In February 2009, the federal court in Atlanta certified a class of 377 insulation contractors. Two additional lawsuits, seeking class action status and alleging anticompetitive conduct, were filed against the Company and a number of its insulation suppliers. One of these lawsuits was filed in a Florida state court and has been dismissed by the court with prejudice. The other lawsuit was filed in federal court in northern California and was subsequently transferred to federal court in Atlanta, Georgia. The Company is vigorously defending the pending cases. Based upon the advice of its outside counsel, the Company believes that the conduct of the Company and its insulation installation companies, which has been the subject of the above-described lawsuits, has not violated any antitrust laws. The Company is unable at this time to reliably estimate any potential liability which might occur from an adverse judgment. There cannot be any assurance that the Company will ultimately prevail in the remaining lawsuits, or, if unsuccessful, that the ultimate liability would not be material and would not have a material adverse effect on its businesses or the methods used by its insulation installation companies in doing business.
 
    As previously disclosed, European governmental authorities are investigating possible anticompetitive business practices relating to the plumbing and heating industries in Europe. The investigations involve a number of European companies, including certain of the Company’s European manufacturing divisions and a number of other large businesses. The Company believes that it will not incur material liability as a result of the matters that are subject to these investigations.
Warranty
Warranty
 
P.   Changes in the Company’s warranty liability were as follows, in millions:
                 
    Six Months Ended     Twelve Months Ended  
    June 30, 2009     December 31, 2008  
Balance at January 1
  $ 119     $ 133  
Accruals for warranties issued during the period
    11       42  
Accruals related to pre-existing warranties
    2       6  
Settlements made (in cash or kind) during the period
    (19 )     (53 )
Other, net
    (1 )     (9 )
 
           
Balance at end of period
  $ 112     $ 119  
 
           
Income Taxes
Income Taxes
Q.   Because the Company’s projected pre-tax income is near break-even, small changes in projected pre-tax income may cause large changes in the estimated annual effective tax rate thereby producing potentially unreliable estimates of tax expense. Since these small changes to pre-tax income are likely to occur, the Company recorded the tax expense for the first six months of 2009 using the actual effective tax rate on the year-to-date pre-tax income and did not use the estimated annual effective tax rate.
    The unusual relationship between income tax expense and loss from continuing operations before income taxes in the first six months of 2009 results primarily from an increase in the valuation allowance on the 2008 net operating loss carryforward of $4 million due to the anticipated continued losses of certain subsidiaries during 2009, losses in certain state and local jurisdictions providing no tax benefit and tax expense associated with foreign earnings that are not permanently reinvested.
 
    During the first six months of 2009, the Company’s liability for unrecognized tax benefits and accrued interest and penalties decreased by $12 million and $3 million, respectively, due primarily to a settlement with a tax authority on various unrecognized tax benefits. As a result of tax audit closings, settlements and expiration of applicable statutes of limitations in various jurisdictions within the next 12 months, the Company anticipates that it is reasonably possible that the liability for unrecognized tax benefits could be reduced by approximately $8 million.
 
    For the three months and six months ended June 30, 2009, the Company reported tax expense of $1 million and $9 million, respectively, which is the result of applying a discrete tax rate for the six months ended June 30, 2009.