MASCO CORP /DE/, 10-K filed on 2/13/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Jan. 31, 2015
Jun. 30, 2014
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
MASCO CORP /DE/ 
 
 
Entity Central Index Key
0000062996 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
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
 
 
$ 7,790,502,000 
Entity Common Stock, Shares Outstanding
 
349,544,600 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash investments
$ 1,383 
$ 1,223 
Short-term bank deposits
306 
321 
Receivables
1,040 
1,004 
Inventories
819 
765 
Deferred income taxes
244 
73 
Prepaid expenses and other
71 
82 
Total current assets
3,863 
3,468 
Property and equipment, net
1,139 
1,252 
Goodwill
1,884 
1,903 
Other intangible assets, net
145 
149 
Other assets
136 
185 
Total Assets
7,167 
6,957 
Current Liabilities:
 
 
Accounts payable
950 
902 
Notes payable
505 
Accrued liabilities
756 
778 
Total current liabilities
2,211 
1,686 
Long-term debt
2,919 
3,421 
Other liabilities
803 
666 
Deferred income taxes
106 
397 
Total Liabilities
6,039 
6,170 
Commitments and contingencies
   
   
Masco Corporation's shareholders' equity:
 
 
Common shares authorized: 1,400,000,000; issued and outstanding: 2014 - 345,000,0000; 2013 - 349,500,000
345 
349 
Preferred shares authorized: 1,000,000; issued and outstanding: 2014 and 2013 - None
   
   
Paid-in capital
 
16 
Retained earnings
690 
79 
Accumulated other comprehensive (loss) income
(111)
115 
Total Masco Corporation's shareholders' equity
924 
559 
Noncontrolling interest
204 
228 
Total Equity
1,128 
787 
Total Liabilities and Equity
$ 7,167 
$ 6,957 
CONSOLIDATED BALANCE SHEETS (Parenthetical)
Dec. 31, 2014
Dec. 31, 2013
CONSOLIDATED BALANCE SHEETS
 
 
Common shares, shares authorized
1,400,000,000 
1,400,000,000 
Common shares, shares issued
345,000,000 
349,500,000 
Common shares, shares outstanding
345,000,000 
349,500,000 
Preferred shares, shares authorized
1,000,000 
1,000,000 
Preferred shares, shares issued
Preferred shares, shares outstanding
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
Net sales
$ 8,521 
$ 8,173 
$ 7,495 
Cost of sales
6,134 
5,918 
5,539 
Gross profit
2,387 
2,255 
1,956 
Selling, general and administrative expenses
1,607 
1,582 
1,535 
(Income) charge for litigation settlements
(9)
 
77 
Impairment charge for other intangible assets
 
42 
Operating profit
788 
673 
302 
Other income (expense), net:
 
 
 
Interest expense
(225)
(235)
(254)
Other, net
12 
12 
25 
Total other income (expense), net
(213)
(223)
(229)
Income from continuing operations before income taxes
575 
450 
73 
Income tax (benefit) expense
(333)
111 
91 
Income (loss) from continuing operations
908 
339 
(18)
Loss from discontinued operations, net
(5)
(10)
(61)
Net income (loss)
903 
329 
(79)
Less: Net income attributable to noncontrolling interest
47 
41 
35 
Net income (loss) attributable to Masco Corporation
856 
288 
(114)
Basic:
 
 
 
Income (loss) from continuing operations
$ 2.42 
$ 0.83 
$ (0.16)
Loss from discontinued operations, net
$ (0.01)
$ (0.03)
$ (0.17)
Net income (loss)
$ 2.40 
$ 0.80 
$ (0.33)
Diluted:
 
 
 
Income (loss) from continuing operations
$ 2.39 
$ 0.83 
$ (0.16)
Loss from discontinued operations, net
$ (0.01)
$ (0.03)
$ (0.17)
Net income (loss)
$ 2.38 
$ 0.80 
$ (0.33)
Amounts attributable to Masco Corporation:
 
 
 
Income (loss) from continuing operations
861 
298 
(53)
Loss from discontinued operations, net
(5)
(10)
(61)
Net income (loss) attributable to Masco Corporation
$ 856 
$ 288 
$ (114)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
 
Net income (loss)
$ 903 
$ 329 
$ (79)
Less: Net income attributable to noncontrolling interest
47 
41 
35 
Net income (loss) attributable to Masco Corporation
856 
288 
(114)
Other comprehensive income (loss), net of tax (see Note O):
 
 
 
Cumulative translation adjustment
(124)
(75)
28 
Interest rate swaps
Unrecognized pension prior service cost and net gain (loss)
(140)
138 
(45)
Other comprehensive income (loss)
(263)
65 
(15)
Less: Other comprehensive income (loss) attributable to the noncontrolling interest:
 
 
 
Cumulative translation adjustment
(31)
Unrecognized pension prior service cost and net gain (loss)
(6)
(7)
Less: Other comprehensive (loss) income attributable to noncontrolling interest
(37)
Other comprehensive income (loss) attributable to Masco Corporation
(226)
56 
(17)
Total comprehensive income (loss)
640 
394 
(94)
Less: Total comprehensive income attributable to noncontrolling interests
10 
50 
37 
Total comprehensive income (loss) attributable to Masco Corporation
$ 630 
$ 344 
$ (131)
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$ 903 
$ 329 
$ (79)
Depreciation and amortization
167 
186 
214 
Deferred income taxes
(406)
42 
50 
Non-cash loss on disposition of businesses, net
15 
(Gain) on disposition of investments, net
(2)
(10)
(24)
Impairment charges:
 
 
 
Financial investments
 
 
Other intangible assets
 
42 
Discontinued operations
 
10 
Property and equipment, net
27 
 
 
Stock-based compensation
47 
54 
61 
Other items, net
(44)
(19)
(28)
Increase in receivables
(81)
(85)
(50)
Increase in inventories
(75)
(24)
(16)
Increase in accounts payable and accrued liabilities, net
63 
147 
102 
Net cash from operating activities
602 
645 
281 
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
 
Increase in debt
Payment of debt
(6)
(5)
(5)
Issuance of Company common stock
 
 
Tax benefit from stock-based compensation
13 
 
 
Purchase of Company common stock
(158)
(35)
(8)
Dividends paid to noncontrolling interest
(34)
(34)
(40)
Cash dividends paid
(117)
(107)
(107)
Issuance of notes, net of issuance costs
 
 
396 
Credit Agreement costs
 
(4)
 
Retirement of Notes
 
(200)
(791)
Payment for settlement of swaps
 
 
(25)
Net cash for financing activities
(297)
(382)
(576)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(128)
(126)
(119)
Acquisition of businesses, net of cash acquired
(2)
(7)
 
Proceeds from disposition of:
 
 
 
Short-term bank deposits
379 
411 
430 
Businesses, net of cash disposed
 
17 
Property and equipment
16 
27 
67 
Other financial investments
64 
16 
43 
Purchases of:
 
 
 
Other financial investments
(1)
(1)
(3)
Short-term bank deposits
(399)
(409)
(432)
Other, net
(29)
(5)
(24)
Net cash for investing activities
(100)
(77)
(29)
Effect of exchange rate changes on cash and cash investments
(45)
(3)
11 
CASH AND CASH INVESTMENTS:
 
 
 
Increase (decrease) for the year
160 
183 
(313)
At January 1
1,223 
1,040 
1,353 
At December 31
$ 1,383 
$ 1,223 
$ 1,040 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
In Millions, unless otherwise specified
Common Shares ($1 par value)
Paid-In Capital
(Accumulated Deficit) Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interest
Total
Balance at Dec. 31, 2011
$ 348 
$ 65 
$ 46 
$ 76 
$ 215 
$ 750 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive (loss) income
 
 
(114)
(17)
37 
(94)
Shares issued
(4)
 
 
 
(1)
Shares retired:
 
 
 
 
 
 
Repurchased
(1)
(7)
 
 
 
(8)
Surrendered (non-cash)
(1)
(7)
 
 
 
(8)
Cash dividends declared
 
(81)
(26)
 
 
(107)
Dividends paid to noncontrolling interest
 
 
 
 
(40)
(40)
Stock-based compensation
 
50 
 
 
 
50 
Balance at Dec. 31, 2012
349 
16 
(94)
59 
212 
542 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive (loss) income
 
 
288 
56 
50 
394 
Shares issued
(11)
 
 
 
(8)
Shares retired:
 
 
 
 
 
 
Repurchased
(2)
(11)
(22)
 
 
(35)
Surrendered (non-cash)
(1)
(11)
 
 
 
(12)
Cash dividends declared
 
(14)
(93)
 
 
(107)
Dividends paid to noncontrolling interest
 
 
 
 
(34)
(34)
Stock-based compensation
 
47 
 
 
 
47 
Balance at Dec. 31, 2013
349 
16 
79 
115 
228 
787 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive (loss) income
 
 
856 
(226)
10 
640 
Shares issued
(9)
 
 
 
(6)
Shares retired:
 
 
 
 
 
 
Repurchased
(7)
(28)
(123)
 
 
(158)
Surrendered (non-cash)
 
(15)
 
 
 
(15)
Cash dividends declared
 
 
(122)
 
 
(122)
Dividends paid to noncontrolling interest
 
 
 
 
(34)
(34)
Stock-based compensation
 
36 
 
 
 
36 
Balance at Dec. 31, 2014
$ 345 
 
$ 690 
$ (111)
$ 204 
$ 1,128 
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. We consolidate the assets, liabilities and results of operations of variable interest entities, for which we are 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 us 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.    We recognize 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. We record revenue for unbilled services performed based upon material and 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.    We record 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 us and used to market our 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 to five years; related amortization expense is classified as a selling expense in the consolidated statements of operations.

        Foreign Currency.    The financial statements of our 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 (loss) income component of shareholders' equity. Realized foreign currency transaction gains and losses are included in the consolidated statements of operations in other income (expense), net.

        Cash and Cash Investments.    We consider all highly liquid investments with an initial maturity of three months or less to be cash and cash investments.

        Short-Term Bank Deposits.    We invest a portion of our foreign excess cash in short-term bank deposits. These highly liquid investments have original maturities between three and twelve months and are valued at cost, which approximates fair value at December 31, 2014 and 2013. These short-term bank deposits are classified in the current assets section of our consolidated balance sheets, and interest income related to short-term bank deposits is recorded in our consolidated statements of operations in other income (expense), net.

        Receivables.    We do significant business with a number of customers, including certain home centers and homebuilders. We monitor our exposure for credit losses on our customer receivable balances and the credit worthiness of our customers on an on-going basis and record 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 our markets, declines in the financial condition and creditworthiness of customers impacts the credit risk of the receivables involved and we have 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 $48 million and $57 million at December 31, 2014 and 2013, respectively. Receivables include unbilled revenue related to the Installation and Other Services segment of $24 million at both December 31, 2014 and 2013.

        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 operations. Maintenance and repair costs are charged against earnings as incurred.

        We review our 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 we would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, we evaluate 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 $157 million, $175 million and $192 million in 2014, 2013 and 2012, respectively. Such depreciation expense included accelerated depreciation of $1 million (in the Cabinets and Related Products segment), $13 million (primarily in the Cabinets and Related Products and Plumbing Products segments) and $28 million (primarily in the Cabinets and Related Products and Plumbing Products segment) in 2014, 2013 and 2012, respectively.

        Goodwill and Other Intangible Assets.    We perform our 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. We have defined our reporting units and completed the impairment testing of goodwill at the operating segment level. Our operating segments are reporting units that engage in business activities, for which discrete financial information, including five-year forecasts, are available. We compare 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 us to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. In estimating future cash flows, we rely 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. We utilize our weighted average cost of capital of approximately 9 percent as the basis to determine the discount rate to apply to the estimated future cash flows. Our weighted average cost of capital decreased in 2014 due to lower bond rates. In 2014, based upon our assessment of the risks impacting each of our businesses, we applied a risk premium to increase the discount rate to a range of 11.0 percent to 14.0 percent for our reporting units.

        If the carrying amount of a reporting unit exceeds its fair value, we measure the possible goodwill impairment based upon an allocation of the estimate of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets (Step Two Analysis). The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit's recorded goodwill exceeds the implied fair value of goodwill.

        We review our 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 business unit. We consider 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. We evaluate the remaining useful lives of amortizable 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.    We follow accounting guidance for our financial investments and liabilities which defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements. We also follow this guidance for our non-financial investments and liabilities.

        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 our investments in marketable securities, private equity funds and other private investments.

        We use derivative financial instruments to manage certain exposure to fluctuations in earnings and cash flows resulting from changes in foreign currency exchange rates, commodity costs and interest rate exposures. Derivative financial instruments are recorded in the consolidated balance sheets as either an asset or liability measured at fair value, netted by counterparty, where the right of offset exists. 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, we accrue a warranty liability for the estimated cost to provide products, parts or services to repair or replace products in satisfaction of warranty obligations. Our estimate of costs to service our warranty obligations is based upon the information available and includes a number of factors such as the warranty coverage, the warranty period, historical experience specific to the nature, frequency and average cost to service the claim, along with product manufacturing metrics and industry and demographic trends.

        Certain factors and related assumptions in determining our warranty liability involve judgments and estimates and are sensitive to changes in the aforementioned factors. We believe that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates thereby requiring adjustments to previously established accruals.

        A majority of our 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 us. Our revenue recognition policy takes into account this type of return when recognizing revenue, and deductions are recorded at the time of sale.

        Insurance Reserves.    We provide for expenses associated with workers' compensation and 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.    We measure compensation expense for stock awards at the market price of our common stock at the grant date. Such expense is recognized ratably over the shorter of the vesting period of the stock awards, typically 5 to 10 years, or the length of time until the grantee becomes retirement-eligible at age 65.

        We measure compensation expense for stock options using a Black-Scholes option pricing model. Such expense is 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. We utilize the shortcut method to determine the tax windfall pool associated with stock options.

        Noncontrolling Interest.    We own 68 percent of Hansgrohe SE at both December 31, 2014 and 2013. The aggregate noncontrolling interest, net of dividends, at December 31, 2014 and 2013 has been recorded as a component of equity on our consolidated balance sheets.

        Interest and Penalties on Uncertain Tax Positions.    We record interest and penalties on our uncertain tax positions in income tax expense.

        Reclassifications.    Certain prior year amounts have been reclassified to conform to the 2014 presentation in the consolidated financial statements. In our consolidated statements of cash flows, the cash flows from discontinued operations are not separately classified.

        Revision of Previously Issued Financial Statements.    During the fourth quarter ended December 31, 2014, we identified an error related to the classification of our insurance reserves. We have revised previously reported balances on our consolidated balance sheet as of December 31, 2013 to correct for claims not expected to be settled within the next year. Accrued liabilities decreased from the amounts previously reported by $96 million. Other liabilities increased from the amounts previously reported by $96 million. This revision had no effect on our consolidated statements of operations or consolidated statements of cash flows. This error is not considered material to any prior period financial statement.

        During the quarter ended March 31, 2014, we identified an error in the accounting for certain of our investments in private equity limited partnership funds. The investments were inappropriately accounted for under the cost basis versus the equity method. The impact of the error was to under report the investment value (included in other assets on the consolidated balance sheets) and to over (under) state equity investment earnings (loss) (included in other income (expense), net in the consolidated statements of operations). We have revised our December 31, 2013 and 2012 consolidated statement of operations and consolidated balance sheet as of December 31, 2013 in these financial statements to reflect the investment accounted for as an equity investment. Retained earnings and other comprehensive income were adjusted for the changes in net income. This error is not considered material to any prior period financial statement.

        This revision has no net effect on our consolidated statement of cash flows.

        The following table presents the impact of the revisions on our previously issued full-year consolidated statements of operations (in millions):

                                                                                                                                                                                    

 

 

2013

 

2012

 

Other income (expense), net

 

 

 

 

 

 

 

As reported

 

$

(239

)

$

(229

)

Correction

 

 

16

 

 

—  

 

​  

​  

​  

​  

As revised

 

$

(223

)

$

(229

)

​  

​  

​  

​  

​  

​  

​  

​  

​  

Income (loss) from continuing operations, before income taxes

 

 

 

 

 

 

 

As reported

 

$

434

 

$

73

 

Correction

 

 

16

 

 

—  

 

​  

​  

​  

​  

As revised

 

$

450

 

$

73

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

Income (loss) from continuing operations

 

 

 

 

 

 

 

As reported

 

$

323

 

$

(18

)

Correction

 

 

16

 

 

—  

 

​  

​  

​  

​  

As revised

 

$

339

 

$

(18

)

​  

​  

​  

​  

​  

​  

​  

​  

​  

Net income (loss)

 

 

 

 

 

 

 

As reported

 

$

313

 

$

(79

)

Correction

 

 

16

 

 

—  

 

​  

​  

​  

​  

As revised

 

$

329

 

$

(79

)

​  

​  

​  

​  

​  

​  

​  

​  

​  

        The following table presents the impact of the revisions on our previously issued consolidated balance sheet (in millions):

                                                                                                                                                                                    

 

 

At December 31,
2013

 

Other assets

 

 

 

 

As reported

 

$

161 

 

Correction

 

 

24 

 

​  

​  

As revised

 

$

185 

 

​  

​  

​  

​  

​  

Total assets

 

 

 

 

As reported

 

$

6,933 

 

Correction

 

 

24 

 

​  

​  

As revised

 

$

6,957 

 

​  

​  

​  

​  

​  

        Recently Issued Accounting Pronouncements.    In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard for revenue recognition, Accounting Standards Codification 606 (ASC 606). The purpose of ASC 606 is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability across industries. ASC 606 is effective for us for annual periods beginning January 1, 2017. We are currently evaluating the impact the adoption of this new standard will have on our results of operations.

        In April 2014, the FASB issued Accounting Standards Update 2014-8 (ASU 2014-8), "Reporting of Discontinued Operations and Disclosure of Disposals of Components of an Entity," which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. ASU 2014-8 is effective for us beginning January 1, 2015. We do not expect that the adoption will have a significant impact on our financial position or results of operations.

DISCONTINUED OPERATIONS
DISCONTINUED OPERATIONS

 

B. DISCONTINUED OPERATIONS

        The presentation of discontinued operations includes components that we intend to sell, which comprises operations and cash flows that can be clearly distinguished from us.

        On September 30, 2014, we announced a plan to spin off 100 percent of our Installation and Other Services businesses into an independent, publicly-traded company through a tax-free stock distribution to our shareholders. The transaction is expected to be completed in mid-2015. Through December 31, 2014, we have incurred $6 million of costs and charges related to this transaction. Under generally accepted accounting principles, the Installation and Other Services businesses are included in continuing operations until the transaction is completed.

        In February 2013, we determined that Tvilum, our Danish ready-to-assemble cabinet business, was no longer core to our long-term growth strategy and, accordingly, we embarked on a plan for disposition. In December 2013, we completed the disposition of this business and a related Danish holding company for net proceeds of $17  

        We have accounted for Tvilum as a discontinued operation. Losses from this discontinued operation were included in loss from discontinued operations, net, in the consolidated statements of operations.

        Selected financial information for the discontinued operations during the period owned by us, were as follows, in millions:

                                                                                                                                                                                    

 

 

2014

 

2013

 

2012

 

Net sales

 

$

 

$

265

 

$

321

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Operating loss from discontinued operations

 

$

 

$

(7

)

$

(44

)

Impairment of assets held for sale

 

 

 

 

(10

)

 

(3

)

(Loss) gain on disposal of discontinued operations, net

 

 

(6

)

 

3

 

 

(6

)

​  

​  

​  

​  

​  

​  

Loss before income tax

 

 

(6

)

 

(14

)

 

(53

)

Income tax (benefit) expense

 

 

(1


)

 

(4


)

 

8

 

​  

​  

​  

​  

​  

​  

Loss from discontinued operations, net

 


$

(5


)


$

(10


)


$

(61


)

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

        Included in (loss) gain on disposal of discontinued operations, net in 2014 are additional costs and charges related to the 2013 sale of Tvilum.

        Included in impairment of assets held for sale in 2013 is the impairment of fixed assets. During 2013, we estimated the fair value of the business held for sale, using unobservable inputs (Level 3). After considering the currency translation gains reported in accumulated other comprehensive (loss) income, we recorded an impairment of $10 million in 2013.

        In 2013, in conjunction with the transaction to sell Tvilum (included in discontinued operations), we also disposed of a non-operating entity in Denmark. This disposition triggered the settlement of loans, which resulted in the recognition of $18 million of currency translation expense, which is included in other income (expense), net from continuing operations in the consolidated statements of operations.

        The unusual relationship between income tax expense and loss before income tax in 2012 resulted primarily from the increase in the deferred tax liability associated with the abandonment of tax basis in indefinite-lived intangibles due to the disposition of certain discontinued operations.

        In the fourth quarter of 2012, we determined that the estimated fair value calculated for Tvilum was lower than the net book value. We assessed the long-lived assets associated with this business unit and determined that no impairment was necessary at December 31, 2012.

ACQUISITIONS
ACQUISITIONS

 

C. ACQUISITIONS

        In the first quarter of 2013, we acquired a small U.K. door business in the Other Specialty Products segment. The total net cash purchase price was $4 million in 2013.

        The results of this acquisition are included in the consolidated financial statements from the respective date of acquisition.

INVENTORIES
INVENTORIES

 

D. INVENTORIES

                                                                                                                                                                                    

 

 

(In Millions)

 

 

 

At December 31

 

 

 

2014

 

2013

 

Finished goods

 

$

425 

 

$

398 

 

Raw material

 

 

294 

 

 

268 

 

Work in process

 

 

100 

 

 

99 

 

​  

​  

​  

​  

Total

 

$

819 

 

$

765 

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

        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 INVESTMENTS AND LIABILITIES
FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES

 

E. FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES

        Accounting Policy.    We follow accounting guidance that defines fair value, establishes a framework for measuring fair value and prescribes 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. We 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.    We have maintained investments in available-for-sale securities, equity method investments, and a number of private equity funds and other private investments, principally as part of our 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

 

 

 

2014

 

2013

 

Auction rate securities

 

$

22 

 

$

22 

 

​  

​  

​  

​  

Total recurring investments

 

 

22 

 

 

22 

 

Equity method investments

 

 

11 

 

 

70 

 

Private equity funds

 

 

14 

 

 

18 

 

Other investments

 

 

 

 

 

​  

​  

​  

​  

Total

 

$

50 

 

$

113 

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

        Auction Rate Securities.    Our investments in available-for-sale securities included cost basis of $19 million and pre-tax unrealized gains of $3 million and had a recorded basis of $22 million at both December 31, 2014 and 2013.

        Equity Method Investments.    Investments in private equity fund partnerships, joint ventures and less than majority-owned subsidiaries in which we have significant influence are accounted for under the equity method. Our consolidated statements of operations include our proportionate share of the net income or (loss) of our equity method investees. When we record our proportionate share of net income (loss), it increases (decreases) our equity income in our consolidated statement of operations and our carrying value of that investment on our consolidated balance sheet.

        During the fourth quarter of 2014, we sold our investment in the private equity fund, Long Point Capital Fund II L.P. (accounted for as an equity method investment) for proceeds of $48 million, which approximated net book value. Such proceeds are included in the consolidated statements of cash flows in proceeds from other financial investments, in the investing activities section.

        Private Equity Funds and Other Investments.    Our investments in private equity funds and other private investments, where we do not have significant influence, are carried at cost. At December 31, 2014, we have investments in five venture capital funds, with an aggregate carrying value of $7 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, 2014, we also have investments in 12 buyout funds, with an aggregate carrying value of $7 million. The buyout funds invest in later-stage, established businesses and 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.

        In the past, we 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 us 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.

        There were no changes in the fair value of Level 3 financial investments for the year ended December 31, 2014 or 2013.

        Non-Recurring Fair Value Measurements.    It is not practicable for us to estimate a fair value for equity method investments or private equity funds and other private investments, where we do not have significant influence, because there are no quoted market prices, and sufficient information is not readily available for us to utilize a valuation model to determine the fair value for each fund. Due to the significant unobservable inputs, the fair value measurements used to evaluate impairment are a Level 3 input. 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 we consider 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.

        During 2014 and 2013, there were no financial investments measured on a non-recurring basis. During 2012, we recognized a $2 million loss related to private equity funds (financial investments measured at fair value on a non-recurring basis) using significant unobservable inputs (Level 3).

        We did not have any transfers between Level 1 and Level 2 financial assets in 2014 or 2013.

        Realized Gains (Losses) and Impairment Charges.    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:

                                                                                                                                                                                    

 

 

2014

 

2013

 

2012

 

Equity investment (loss) income, net

 

$

(2

)

$

16

 

$

 

Realized gains from private equity funds

 

 

4

 

 

11

 

 

24

 

Impairment of private equity funds

 

 

 

 

 

 

(2

)

​  

​  

​  

​  

​  

​  

Income from financial investments, net

 

$

2

 

$

27

 

$

22

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

        The impairment charges related to our financial investments recognized during 2012 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 our short-term and long-term fixed-rate debt instruments is based principally upon modeled market prices for the same or similar issues or the current rates available to us for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at December 31, 2014 was approximately $3.7 billion, compared with the aggregate carrying value of $3.4 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2013 was approximately $3.7 billion, compared with the aggregate carrying value of $3.4 billion.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

F. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

        We are exposed to global market risk as part of our normal daily business activities. To manage these risks, we enter into various derivative contracts. These contracts include interest rate swap agreements, foreign currency exchange contracts and contracts intended to hedge our exposure to copper and zinc. We review our hedging program, derivative positions and overall risk management on a regular basis.

        Interest Rate Swap Agreements.    In March 2012, in connection with the issuance of $400 million of debt, we terminated the interest rate swap hedge relationships that we had entered into in August 2011. These interest rate swaps were designated as cash flow hedges and effectively fixed interest rates on the forecasted debt issuance to variable rates based on 3-month LIBOR. Upon termination, the ineffective portion of the cash flow hedges of approximately $2 million loss was recognized in our consolidated statement of operations in other, net. The remaining loss of approximately $23 million from the termination of these swaps is being amortized as an increase to interest expense over the remaining term of the debt, through March 2022. At December 31, 2014, the balance remaining in accumulated other comprehensive (loss) income was $18 million.

        Foreign Currency Contracts.    Our net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, and investments in subsidiaries. To mitigate this risk during 2014, 2013 and 2012, we, including certain European operations, entered into foreign currency forward contracts and foreign currency exchange contracts.

        Gains (losses) related to foreign currency forward and exchange contracts are recorded in our consolidated statements of operations in other income (expense), net. In the event that the counterparties fail to meet the terms of the foreign currency forward contracts, our exposure is limited to the aggregate foreign currency rate differential with such institutions.

        Metals Contracts.    During 2014, 2013 and 2012, we entered into several contracts to manage our exposure to increases in the price of copper and zinc. Gains (losses) related to these contracts are recorded in our consolidated statements of operations in cost of sales.

        The pre-tax gains (losses) included in our consolidated statements of operations are as follows, in millions:

                                                                                                                                                                                    

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

Foreign Currency Contracts

 

 

 

 

 

 

 

 

 

 

Exchange Contracts

 

$

5

 

$

2

 

$

(2

)

Forward Contracts

 

 

 

 

1

 

 

 

Metals Contracts

 

 

(3


)

 

(7


)

 

2

 

Interest rate swaps

 

 

(2

)

 

(2

)

 

4

 

​  

​  

​  

​  

​  

​  

Total

 

$

 

$

(6

)

$

4

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

        We present our net derivatives due to the right of offset by our counterparties under master netting arrangements in receivables or accrued liabilities in the consolidated balance sheet. The notional amounts being hedged and the fair value of those derivative instruments, on a gross basis, is as follows, in millions:

                                                                                                                                                                                    

 

 

At December 31, 2014

 

 

 

Notional
Amount

 

Balance Sheet

 

Foreign Currency Contracts

 

 

 

 

 

 

 

Exchange Contracts

 

$

55

 

 

 

 

Receivables

 

 

 

 

$

6

 

Forward Contracts

 

 

79

 

 

 

 

Receivables

 

 

 

 

 

2

 

Accrued liabilities

 

 

 

 

 

(1

)

Metals Contracts

 

 

70

 

 

 

 

Accrued liabilities

 

 

 

 

 

(2

)

Total

 

 

 

 

 

 

 

 

                                                                                                                                                                                    

 

 

At December 31, 2013

 

 

 

Notional
Amount

 

Balance Sheet

 

Foreign Currency Contracts

 

 

 

 

 

 

 

Exchange Contracts

 

$

53

 

 

 

 

Accrued liabilities

 

 

 

 

$

(2

)

Forward Contracts

 

 

88

 

 

 

 

Accrued liabilities

 

 

 

 

 

(1

)

Metals Contracts

 

 

48

 

 

 

 

Accrued liabilities

 

 

 

 

 

(2

)

Total

 

 

 

 

 

 

 

        The fair value of all metals and foreign currency derivative contracts is estimated on a recurring basis, quarterly, using Level 2 inputs (significant other observable inputs).

PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT

 

G. PROPERTY AND EQUIPMENT

                                                                                                                                                                                    

 

 

(In Millions)

 

 

 

At December 31

 

 

 

2014

 

2013

 

Land and improvements

 

$

130 

 

$

135 

 

Buildings

 

 

754 

 

 

809 

 

Machinery and equipment

 

 

2,035 

 

 

2,046 

 

​  

​  

​  

​  

 

 

 

2,919 

 

 

2,990 

 

Less: Accumulated depreciation

 

 

1,780 

 

 

1,738 

 

​  

​  

​  

​  

Total

 

$

1,139 

 

$

1,252 

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

        We lease certain equipment and plant facilities under noncancellable operating leases. Rental expense recorded in the consolidated statements of operations totaled approximately $102 million, $93 million and $94 million during 2014, 2013 and 2012, respectively.

        We lease operating facilities from certain related parties, primarily former owners (and in certain cases, current management personnel) of companies acquired. We recorded rental expense to such related parties of approximately $5 million in 2014, $6 million in 2013 and $5 million in 2012.

        At December 31, 2014, future minimum lease payments were as follows, in millions:

                                                                                                                                                                                    

2015

 

$

92 

 

2016

 

 

61 

 

2017

 

 

30 

 

2018

 

 

18 

 

2019

 

 

13 

 

2020 and beyond

 

 

73 

 

        During 2014, we decided to sell two facilities in our Cabinets and Related Products segment, and we recorded a charge of $28 million, included in cost of goods sold in the consolidated statement of operations, to reflect the estimated fair value of those two facilities. Fair value was estimated using a market approach, considering the estimated fair values for other comparable buildings in the areas where the facilities are located, Level 3 inputs.

        As a result of our business rationalization activities over the last several years, at December 31, 2014, we were holding several facilities for sale, primarily within the Cabinets and Related Products segment. At December 31, 2014 and 2013, the net book value of facilities held for sale was approximately $18 million and $17 million, respectively, included in property and equipment in the consolidated balance sheets as of December 31, 2014 and 2013.

GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL AND OTHER INTANGIBLE ASSETS

 

H. GOODWILL AND OTHER INTANGIBLE ASSETS

        The changes in the carrying amount of goodwill, by segment, were as follows, in millions:

                                                                                                                                                                                    

 

 

Gross Goodwill
At December 31,
2014

 

Accumulated
Impairment
Losses

 

Net Goodwill
At December 31,
2014

 

Cabinets and Related Products

 

$

240

 

$

(59

)

$

181

 

Plumbing Products

 

 

531

 

 

(340

)

 

191

 

Installation and Other Services

 

 

1,806

 

 

(762

)

 

1,044

 

Decorative Architectural Products

 

 

294

 

 

(75

)

 

219

 

Other Specialty Products

 

 

983

 

 

(734

)

 

249

 

​  

​  

​  

​  

​  

​  

Total

 

$

3,854

 

$

(1,970

)

$

1,884

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

 

                                                                                                                                                                                    

 

 

Gross Goodwill
At December 31,
2013

 

Accumulated
Impairment
Losses

 

Net Goodwill
At December 31,
2013

 

Additions (A)

 

Other (B)

 

Net Goodwill
At December 31,
2014

 

Cabinets and Related Products

 

$

240

 

$

(59

)

$

181

 

$

 

$

 

$

181

 

Plumbing Products

 

 

550

 

 

(340

)

 

210

 

 

 

 

(19

)

 

191

 

Installation and Other Services

 

 

1,806

 

 

(762

)

 

1,044

 

 

 

 

 

 

1,044

 

Decorative Architectural Products

 

 

294

 

 

(75

)

 

219

 

 

 

 

 

 

219

 

Other Specialty Products

 

 

983

 

 

(734

)

 

249

 

 

 

 

 

 

 

249

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total

 

$

3,873

 

$

(1,970

)

$

1,903

 

$

 

$

(19

)

$

1,884

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

 

                                                                                                                                                                                    

 

 

Gross Goodwill
At December 31,
2012

 

Accumulated
Impairment
Losses

 

Net Goodwill
At December 31,
2012

 

Additions (A)

 

Other (B)

 

Net Goodwill
At December 31,
2013

 

Cabinets and Related Products

 

$

240

 

$

(59

)

$

181

 

$

 

$

 

$

181

 

Plumbing Products

 

 

544

 

 

(340

)

 

204

 

 

 

 

6

 

 

210

 

Installation and Other Services

 

 

1,806

 

 

(762

)

 

1,044

 

 

 

 

 

 

1,044

 

Decorative Architectural Products

 

 

294

 

 

(75

)

 

219

 

 

 

 

 

 

219

 

Other Specialty Products

 

 

980

 

 

(734

)

 

246

 

 

3

 

 

 

 

249

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total

 

$

3,864

 

$

(1,970

)

$

1,894

 

$

3

 

$

6

 

$

1,903

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  


(A)

Additions include acquisitions.

(B)

Other principally includes the effect of foreign currency translation.

        In the fourth quarters of 2014, 2013 and 2012, we completed our annual impairment testing of goodwill and other indefinite-lived intangible assets. The impairment test in 2014, 2013 and 2012 indicated there was no impairment of goodwill for any of our reporting units.

        Other indefinite-lived intangible assets were $131 million and $133 million at December 31, 2014 and 2013, respectively, and principally included registered trademarks. In 2014, we recognized an insignificant impairment charge for other indefinite-lived intangible assets. In 2013, the impairment test indicated there was no impairment of other intangible assets for any of our business units. In 2012, the impairment test indicated that the registered trademark for a North American business unit in the Other Specialty Products segment was impaired due to changes in the long-term outlook for the business unit. We recognized non-cash, pre-tax impairment charges for other indefinite-lived intangible assets of $42 million ($27 million, after tax) in 2012.

        The carrying value of our definite-lived intangible assets was $14 million (net of accumulated amortization of $65 million) at December 31, 2014 and $16 million (net of accumulated amortization of $62 million) at December 31, 2013 and principally included customer relationships and non-compete agreements, with a weighted average amortization period of 6 years in both 2014 and 2013. Amortization expense related to the definite-lived intangible assets of continuing operations was $5 million in 2014, $5 million in 2013 and $6 million in 2012.

        At December 31, 2014, amortization expense related to the definite-lived intangible assets during each of the next five years was as follows: 2015 – $5 million; 2016 – $3 million; 2017 – $1 million; 2018 – $1 million and 2019 – $1 million.

OTHER ASSETS
OTHER ASSETS

 

I. OTHER ASSETS

                                                                                                                                                                                    

 

 

(In Millions)

 

 

 

At December 31

 

 

 

2014

 

2013

 

Financial investments (Note E)

 

$

50 

 

$

113 

 

In-store displays, net

 

 

36 

 

 

21 

 

Debenture expense

 

 

19 

 

 

24 

 

Other

 

 

31 

 

 

27 

 

​  

​  

​  

​  

Total

 

$

136 

 

$

185 

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

        In-store displays are amortized using the straight-line method over the expected useful life of three to five years; we recognized amortization expense related to in-store displays of $15 million, $19 million and $21 million in 2014, 2013 and 2012, respectively. Cash spent for displays was $30 million, $5 million and $23 million in 2014, 2013 and 2012, respectively and are included in other, investing activities on the consolidated statements of cash flows.

ACCRUED LIABILITIES
ACCRUED LIABILITIES

 

J. ACCRUED LIABILITIES

                                                                                                                                                                                    

 

 

(In Millions)

 

 

 

At December 31

 

 

 

2014

 

2013

 

Salaries, wages and commissions

 

$

189 

 

$

210 

 

Warranty (Note U)

 

 

135 

 

 

124 

 

Advertising and sales promotion

 

 

112 

 

 

111 

 

Insurance reserves

 

 

64 

 

 

70 

 

Interest

 

 

57 

 

 

58 

 

Employee retirement plans

 

 

41 

 

 

48 

 

Income taxes payable

 

 

24 

 

 

32 

 

Property, payroll and other taxes

 

 

29 

 

 

28 

 

Dividends payable

 

 

32 

 

 

27 

 

Other

 

 

73 

 

 

70 

 

​  

​  

​  

​  

Total

 

$

756 

 

$

778 

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

 

DEBT
DEBT

 

K. DEBT

                                                                                                                                                                                    

 

 

(In Millions)

 

 

 

At December 31

 

 

 

2014

 

2013

 

Notes and debentures:

 

 

 

 

 

 

 

4.8%, due June 15, 2015

 

$

500 

 

$

500 

 

6.125%, due Oct. 3, 2016

 

 

1,000 

 

 

1,000 

 

5.85%, due March 15, 2017

 

 

300 

 

 

300 

 

6.625%, due April 15, 2018

 

 

114 

 

 

114 

 

7.125%, due March 15, 2020

 

 

500 

 

 

500 

 

5.95%, due March 15, 2022

 

 

400 

 

 

400 

 

7.75%, due Aug. 1, 2029

 

 

296 

 

 

296 

 

6.5%, due Aug. 15, 2032

 

 

300 

 

 

300 

 

Other

 

 

14 

 

 

17 

 

​  

​  

​  

​  

 

 

 

3,424 

 

 

3,427 

 

Less: Current portion

 

 

505 

 

 

 

​  

​  

​  

​  

Total long-term debt

 

$

2,919 

 

$

3,421 

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

        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 our option.

        On March 28, 2013, we entered into a Credit Agreement (the "Credit Agreement") with a bank group, with an aggregate commitment of $1.25 billion and a maturity date of March 28, 2018.

        The Credit Agreement provides for an unsecured revolving credit facility available to us and one of our foreign subsidiaries, in U.S. dollars, European euros and certain other currencies. Borrowings under the revolver denominated in euros are limited to $500 million, equivalent. We can also borrow swingline loans up to $150 million and obtain letters of credit of up to $250 million; any outstanding Letters of Credit, under the Credit Agreement, reduce our borrowing capacity. At December 31, 2014, we had $75 million of outstanding and unused Letters of Credit, reducing our borrowing capacity by such amount.

        Revolving credit loans bear interest under the Credit Agreement, at our option, at (A) a rate per annum equal to the greater of (i) the prime rate, (ii) the Federal Funds effective rate plus 0.50% and (iii) LIBOR plus 1.0% (the "Alternative Base Rate"); plus an applicable margin based upon our then applicable corporate credit ratings; or (B) LIBOR plus an applicable margin based upon our then applicable corporate credit ratings. The foreign currency revolving credit loans bear interest at a rate equal to LIBOR plus an applicable margin based upon our then applicable corporate credit ratings.

        The Credit Agreement contains financial covenants requiring us to maintain (A) a maximum debt to total capitalization ratio, as adjusted for certain items, of 65 percent, and (B) a minimum interest coverage ratio, as adjusted for certain items, equal to or greater than 2.5 to 1.0. The debt to total capitalization ratio allows the add-back, if incurred, of up to the first $250 million of certain non-cash charges, including goodwill and other intangible asset impairment charges, occurring from and after January 1, 2012 that would negatively impact shareholders' equity.

        Based on the limitations of the debt to total capitalization ratio covenant in the Credit Agreement, at December 31, 2014, we had additional borrowing capacity, subject to availability, of up to $1.2 billion. Additionally, at December 31, 2014, we could absorb a reduction to shareholders' equity of approximately $747 million and remain in compliance with the debt to total capitalization covenant.

        In order for us to borrow under the Credit Agreement, there must not be any default in our covenants in the new 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 properties and insurance) and our 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, since December 31, 2012, in each case, no material ERISA or environmental non-compliance and no material tax deficiency). At December 31, 2014 and 2013, we were in compliance with all covenants and no borrowings have been made under the Credit Agreement.

        At December 31, 2014, the debt maturities during each of the next five years were as follows: 2015 – $505 million; 2016 – $1,001 million; 2017 – $300 million; 2018 – $115 million and 2019 – $1 million.

        Interest paid was $220 million, $232 million and $269 million in 2014, 2013 and 2012, respectively.

STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION

 

L. STOCK-BASED COMPENSATION

        Our 2014 Long Term Stock Incentive Plan (the "2014 Plan") replaced the 2005 Long Term Stock Incentive Plan in May 2014 and provides for the issuance of stock-based incentives in various forms to employees and non-employee Directors of the Company. At December 31, 2014, 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 and the related income tax benefit for these stock-based incentives were as follows, in millions:

                                                                                                                                                                                    

 

 

2014

 

2013

 

2012

 

Long-term stock awards

 

$

37 

 

$

34 

 

$

35 

 

Stock options

 

 

 

 

13 

 

 

15 

 

Phantom stock awards and stock appreciation rights

 

 

 

 

 

 

11 

 

​  

​  

​  

​  

​  

​  

Total

 

$

47 

 

$

54 

 

$

61 

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Income tax benefit (37 percent tax rate)

 

$

17 

 

$

20 

 

$

23 

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

        At December 31, 2014, a total of 12.2 million shares of our common stock were available under the 2014 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 our key employees and non-employee Directors and do not cause net share dilution inasmuch as we continue the practice of repurchasing and retiring an equal number of shares in the open market. We granted 1,729,800 shares of long-term stock awards during 2014.

        Our long-term stock award activity was as follows, shares in millions:

                                                                                                                                                                                    

 

 

2014

 

2013

 

2012

 

Unvested stock award shares at January 1

 

 

 

 

 

 

10 

 

Weighted average grant date fair value

 

$

17 

 

$

16 

 

$

17 

 

Stock award shares granted

 

 

 

 

 

 

 

Weighted average grant date fair value

 

$

22 

 

$

20 

 

$

12 

 

Stock award shares vested

 

 

 

 

 

 

 

Weighted average grant date fair value

 

$

17 

 

$

17 

 

$

18 

 

Stock award shares forfeited

 

 

 

 


 

 

 

Weighted average grant date fair value

 

$

19 

 

$

16 

 

$

17 

 

Unvested stock award shares at December 31

 

 

 

 

 

 

 

Weighted average grant date fair value

 

$

18 

 

$

17 

 

$

16 

 

        At December 31, 2014, 2013 and 2012, there was $60 million, $69 million and $72 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of three years for 2014 and 2013 and four years for 2012.

        The total market value (at the vesting date) of stock award shares which vested during 2014, 2013 and 2012 was $50 million, $38 million and $27 million, respectively.

        Stock Options.    Stock options are granted to our key employees. The exercise price equals the market price of our 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.

        We granted 332,750 of stock option shares during 2014 with a grant date exercise price approximating $22 per share. During 2014, 3.9 million stock option shares were forfeited (including options that expired unexercised).

        Our stock option activity was as follows, shares in millions:

                                                                                                                                                                                    

 

 

2014

 

2013

 

2012

 

Option shares outstanding, January 1

 

 

24 

 

 

30 

 

 

36 

 

Weighted average exercise price

 

$

22 

 

$

21 

 

$

21 

 

Option shares granted

 

 


 

 

 

 

 

Weighted average exercise price

 

$

22 

 

$

20 

 

$

12 

 

Option shares exercised

 

 

 

 

 

 

 

Aggregate intrinsic value on date of exercise (A)

 

$

22 million

 

$

23 million

 

$

5 million

 

Weighted average exercise price

 

$

16 

 

$

12 

 

$

10 

 

Option shares forfeited

 

 

 

 

 

 

 

Weighted average exercise price

 

$

28 

 

$

26 

 

$

19 

 

Option shares outstanding, December 31

 

 

18 

 

 

24 

 

 

30 

 

Weighted average exercise price

 

$

21 

 

$

22 

 

$

21 

 

Weighted average remaining option term (in years)

 

 

 

 

 

 

 

Option shares vested and expected to vest, December 31

 

 

18 

 

 

24 

 

 

30 

 

Weighted average exercise price

 

$

21 

 

$

22 

 

$

21 

 

Aggregate intrinsic value (A)

 

$

110 million

 

$

109 million

 

$

55 million

 

Weighted average remaining option term (in years)

 

 

 

 

 

 

 

Option shares exercisable (vested), December 31

 

 

15 

 

 

20 

 

 

23 

 

Weighted average exercise price

 

$

22 

 

$

24 

 

$

24 

 

Aggregate intrinsic value (A)

 

$

84 million

 

$

62 million

 

$

22 million

 

Weighted average remaining option term (in years)