MASCO CORP /DE/, 10-Q filed on 10/27/2015
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2015
Document and Entity Information [Abstract]
 
Entity Registrant Name
MASCO CORP /DE/ 
Entity Central Index Key
0000062996 
Document Type
10-Q 
Document Period End Date
Sep. 30, 2015 
Amendment Flag
false 
Current Fiscal Year End Date
--12-31 
Entity Current Reporting Status
Yes 
Entity Filer Category
Large Accelerated Filer 
Entity Common Stock, Shares Outstanding
336,472,115 
Document Fiscal Year Focus
2015 
Document Fiscal Period Focus
Q3 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Sep. 30, 2015
Dec. 31, 2014
Current assets:
 
 
Cash and cash investments
$ 1,279 
$ 1,379 
Short-term bank deposits
255 
306 
Receivables
1,006 
820 
Deferred income taxes
177 
206 
Prepaid expenses and other
74 
68 
Assets held for sale
 
373 
Inventories:
 
 
Finished goods
392 
361 
Raw material
258 
251 
Work in process
99 
100 
Total
749 
712 
Total current assets
3,540 
3,864 
Property and equipment, net
1,025 
1,046 
Goodwill
843 
840 
Other intangible assets, net
163 
142 
Other assets
156 
200 
Assets held for sale
 
1,141 
Total Assets
5,727 
7,233 
Current Liabilities:
 
 
Notes payable
505 
Accounts payable
827 
721 
Accrued liabilities
727 
685 
Liabilities held for sale
 
300 
Total current liabilities
1,560 
2,211 
Long-term debt
3,418 
2,919 
Other liabilities
721 
768 
Liabilities held for sale
 
207 
Total Liabilities
5,699 
6,105 
Commitments and contingencies
   
   
Masco Corporation's shareholders' equity:
 
 
Common shares, par value $1 per share; Authorized shares: 1,400,000,000; issued and outstanding: 2015- 331,900,000; 2014 - 345,000,000
332 
345 
Preferred shares authorized: 1,000,000; issued and outstanding: 2015 - None; 2014 - None
   
   
Retained (deficit) earnings
(332)
690 
Accumulated other comprehensive loss
(159)
(111)
Total Masco Corporation's shareholders' (deficit) equity
(159)
924 
Noncontrolling interest
187 
204 
Total equity
28 
1,128 
Total liabilities and equity
$ 5,727 
$ 7,233 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Sep. 30, 2015
Dec. 31, 2014
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
Common share, par value (in dollars per share)
$ 1 
$ 1 
Common shares, shares authorized
1,400,000,000 
1,400,000,000 
Common shares, shares issued
331,900,000 
345,000,000 
Common shares, shares outstanding
331,900,000 
345,000,000 
Preferred shares, shares authorized
1,000,000 
1,000,000 
Preferred shares, shares issued
Preferred shares, shares outstanding
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
Net sales
$ 1,839 
$ 1,834 
$ 5,427 
$ 5,340 
Cost of sales
1,250 
1,312 
3,706 
3,761 
Gross profit
589 
522 
1,721 
1,579 
Selling, general and administrative expenses
331 
341 
1,019 
1,024 
Operating profit
258 
181 
702 
555 
Other income (expense), net:
 
 
 
 
Interest expense
(54)
(57)
(171)
(169)
Other, net
(6)
(2)
10 
Total other income (expense), net
(60)
(50)
(173)
(159)
Income from continuing operations before income taxes
198 
131 
529 
396 
Income tax (expense) benefit
(77)
415 
(219)
377 
Income from continuing operations
121 
546 
310 
773 
Income (loss) from discontinued operations, net
 
10 
(1)
21 
Net income
121 
556 
309 
794 
Less: Net income attributable to noncontrolling interest
10 
13 
29 
38 
Net income attributable to Masco Corporation
111 
543 
280 
756 
Basic:
 
 
 
 
Income from continuing operations (in dollars per share)
$ 0.33 
$ 1.49 
$ 0.81 
$ 2.06 
Income (loss) from discontinued operations, net (in dollars per share)
 
$ 0.03 
 
$ 0.06 
Net income (in dollars per share)
$ 0.33 
$ 1.52 
$ 0.81 
$ 2.12 
Diluted:
 
 
 
 
Income from continuing operations (in dollars per share)
$ 0.32 
$ 1.48 
$ 0.81 
$ 2.04 
Income (loss) from discontinued operations, net (in dollars per share)
 
$ 0.03 
 
$ 0.06 
Net income (in dollars per share)
$ 0.32 
$ 1.51 
$ 0.80 
$ 2.10 
Amounts attributable to Masco Corporation:
 
 
 
 
Income from continuing operations
111 
533 
281 
735 
Income (loss) from discontinued operations, net
 
10 
(1)
21 
Net income attributable to Masco Corporation
$ 111 
$ 543 
$ 280 
$ 756 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 
 
 
 
Net income
$ 121 
$ 556 
$ 309 
$ 794 
Less: Net income attributable to noncontrolling interest
10 
13 
29 
38 
Net income attributable to Masco Corporation
111 
543 
280 
756 
Other comprehensive income (loss), net of tax (see Note L)
 
 
 
 
Cumulative translation adjustment
(17)
(73)
(70)
(79)
Interest rate swaps
 
 
Amortization of pension prior service cost and net loss
 
11 
Other comprehensive income (loss)
(13)
(73)
(58)
(72)
Less: Other comprehensive income (loss) attributable to noncontrolling interest
(1)
(18)
(10)
(21)
Other comprehensive income (loss) attributable to Masco Corporation
(12)
(55)
(48)
(51)
Total comprehensive income (loss)
108 
483 
251 
722 
Less: Total comprehensive income (loss) attributable to the noncontrolling interest
(5)
19 
17 
Total comprehensive income (loss) attributable to Masco Corporation
$ 99 
$ 488 
$ 232 
$ 705 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
Cash provided by operations
$ 581 
$ 543 
Increase in receivables
(245)
(257)
Increase in inventories
(41)
(109)
Increase in accounts payable and accrued liabilities, net
127 
129 
Net cash from operating activities
422 
306 
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
Retirement of notes
(500)
 
Purchase of Company common stock
(407)
(39)
Cash dividends paid
(94)
(86)
Dividend payment to noncontrolling interest
(36)
(34)
Cash distributed to TopBuild Corp.
(63)
 
Issuance of TopBuild Corp. debt
200 
 
Issuance of notes, net of issuance costs
497 
 
Increase in debt
 
Issuance of Company common stock
Tax benefit from stock-based compensation
32 
 
Payment of debt
(3)
(2)
Credit Agreement and other financing costs
(3)
 
Net cash for financing activities
(373)
(160)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
Capital expenditures
(112)
(82)
Acquisition of companies, net of cash acquired
(41)
(2)
Proceeds from disposition of:
 
 
Short-term bank deposits
251 
322 
Other financial investments
13 
Property and equipment
13 
12 
Purchases of:
 
 
Short-term bank deposits
(225)
(297)
Other, net
(37)
(26)
Net cash for investing activities
(144)
(60)
Effect of exchange rate changes on cash and cash investments
(9)
(27)
CASH AND CASH INVESTMENTS:
 
 
(Decrease) increase for the period
(104)
59 
At January 1
1,383 
1,223 
At September 30
$ 1,279 
$ 1,282 
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
In Millions, unless otherwise specified
Common Shares ($1 par value)
Paid-In Capital
Retained Earnings (Deficit)
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interest
Total
Balance at Dec. 31, 2013
$ 349 
$ 16 
$ 79 
$ 115 
$ 228 
$ 787 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income (loss)
 
 
756 
(51)
17 
722 
Shares issued
(8)
 
 
 
(5)
Shares retired:
 
 
 
 
 
 
Repurchased
(2)
(9)
(28)
 
 
(39)
Surrendered (non-cash)
 
(15)
 
 
 
(15)
Cash dividends declared
 
 
(91)
 
 
(91)
Dividend payment to noncontrolling interest
 
 
 
 
(34)
(34)
Stock-based compensation
 
33 
 
 
 
33 
Balance at Sep. 30, 2014
350 
17 
716 
64 
211 
1,358 
Balance at Dec. 31, 2014
345 
 
690 
(111)
204 
1,128 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income (loss)
 
 
280 
(48)
19 
251 
Shares issued
(12)
 
 
 
(9)
Shares retired:
 
 
 
 
 
 
Repurchased
(15)
(29)
(363)
 
 
(407)
Surrendered (non-cash)
(1)
 
(17)
 
 
(18)
Cash dividends declared
 
 
(94)
 
 
(94)
Dividend payment to noncontrolling interest
 
 
 
 
(36)
(36)
Separation of TopBuild Corp.
 
 
(828)
 
 
(828)
Stock-based compensation
 
41 
 
 
 
41 
Balance at Sep. 30, 2015
$ 332 
 
$ (332)
$ (159)
$ 187 
$ 28 
Accounting Policies
Accounting Policies

 

A. ACCOUNTING POLICIES

 

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly our financial position as at September 30, 2015, our results of operations and comprehensive income (loss) for the three months and nine months ended September 30, 2015 and 2014 and cash flows and changes in shareholders’ equity for the nine months ended September 30, 2015 and 2014.  The condensed consolidated balance sheet at December 31, 2014 was derived from audited financial statements.

 

Reclassification: Certain prior year amounts have been reclassified to conform to the 2015 presentation in the condensed consolidated financial statements.  In our condensed consolidated statements of cash flows, the cash flows from discontinued operations are not separately stated.

 

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, 2018.  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 2014-08 (“ASU 2014-08”) “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.  On January 1, 2015, we adopted ASU 2014-08.  The adoption of the new standard did not have an impact on our financial position or results of operations.

 

In February 2015, the FASB issued Accounting Standards Update 2015-02 (“ASU 2015-02”) “Consolidation (Topic 810) — Amendments to the Consolidations Analysis,” which modifies certain aspects of both the variable interest and voting models.  ASU 2015-02 is effective for us for annual periods beginning January 1, 2016.  We are currently evaluating the impact the adoption of this new standard will have on our financial position or results of operations.

 

In April 2015, the FASB issued Accounting Standards Update 2015-03 (“ASU 2015-03”) “Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs,” that requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt.  In August 2015, the FASB amended ASU 2015-03 to clarify that debt issuance costs related to line-of-credit arrangements may be classified as an asset.  ASU 2015-03 is effective for us for annual periods beginning January 1, 2016.  We do not expect that the adoption of the new standard will have a material impact on our financial position.

Discontinued Operations
Discontinued Operations

 

B. DISCONTINUED OPERATIONS

 

The presentation of discontinued operations includes a component or group of components that we have or intend to dispose of, and represents a strategic shift that has (or will have) a major effect on our operations and financial results.  For spin off transactions, discontinued operations treatment is appropriate following the completion of the spin off.

 

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 named TopBuild Corp. (“TopBuild”) through a tax-free distribution of the stock of TopBuild to our stockholders.  We initiated the spin off as TopBuild was no longer considered core to our long-term growth strategy in branded building products.  On June 30, 2015, immediately prior to the effective time of the spin off, TopBuild paid a cash distribution to us of $200 million using the proceeds of its new debt financing arrangement.  This transaction was reported as a financing activity in the condensed consolidated statements of cash flows.

 

We have accounted for the spin off of TopBuild as a discontinued operation. (Losses) gains from this discontinued operation were included in income (loss) from discontinued operations, net, in the condensed consolidated statements of operations.

 

The major classes of line items constituting pre-tax (loss) profit of discontinued operations, in millions:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2015

 

2014

 

2015

 

2014

 

Net sales

 

$

 

$

398

 

$

762

 

$

1,117

 

Cost of sales

 

 

309

 

603

 

877

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

89

 

159

 

240

 

Selling, general and administrative expenses

 

 

68

 

148

 

201

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

$

 

$

21

 

$

11

 

$

39

 

(Loss) gain on disposal of discontinued operations, net (1) 

 

(1

)

1

 

(1

)

(2

)

 

 

 

 

 

 

 

 

 

 

(Loss) income before income tax

 

(1

)

22

 

10

 

37

 

Income tax benefit (expense) (2) 

 

1

 

(12

)

(11

)

(16

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net

 

$

 

$

10

 

$

(1

)

$

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

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

(2)

The unusual relationship between income tax expense and income before income tax for the nine months ended September 30, 2015 resulted primarily from certain non-deductible transaction costs related to the spin off of TopBuild.

 

The carrying amount of major classes of assets and liabilities included as part of the TopBuild discontinued operations, in millions:

 

 

 

December 31,

 

 

 

2014

 

Cash

 

$

 

Receivables

 

220 

 

Inventories

 

107 

 

Deferred income taxes

 

38 

 

Prepaid expenses and other

 

 

Property and equipment, net

 

93 

 

Goodwill

 

1,044 

 

Other intangible assets, net

 

 

Other assets

 

 

 

 

 

 

Total assets classified as held for sale

 

$

1,514 

 

 

 

 

 

 

Accounts payable

 

$

229 

 

Accrued liabilities

 

71 

 

Other liabilities

 

40 

 

Deferred income taxes

 

167 

 

 

 

 

 

Total liabilities classified as held for sale

 

$

507 

 

 

 

 

 

 

 

Other selected financial information for TopBuild during the period owned by us, were as follows, in millions:

 

 

 

Nine Months Ended

 

 

 

Sep. 30,

 

Sep. 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Depreciation and amortization

 

$

 

$

19 

 

Capital expenditures

 

$

 

$

 

 

In conjunction with the spin off, we have entered into a Transition Services Agreement with TopBuild to provide TopBuild administrative services subsequent to the separation.  The fees for services rendered under the Transition Services Agreement are not expected to be material to our results of operations.

Acquisitions
Acquisitions

 

C. ACQUISITIONS

 

In the second quarter of 2015, we acquired a U.K. window business for approximately $16 million in cash in the Other Specialty Products segment.  This acquisition will support our U.K. window business’ growth strategy by expanding its product offerings into timber-alternative windows and doors.

 

In the first quarter of 2015, we acquired an aquatic fitness business for approximately $25 million in cash in the Plumbing Products segment.  This acquisition will allow our spa business to expand its wellness products platform, open new channels of distribution and access a new customer base.

 

These acquisitions are not material to us.  The results of these acquisitions are included in the condensed consolidated financial statements from the date of their respective acquisition.

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

 

D.GOODWILL AND OTHER INTANGIBLE ASSETS

 

The changes in the carrying amount of goodwill for the nine months ended September 30, 2015, by segment, were as follows, in millions:

 

 

 

Gross Goodwill

 

Accumulated

 

Net Goodwill

 

 

 

 

 

 

 

 

 

At

 

Impairment

 

At

 

 

 

 

 

 

 

 

 

Sep. 30, 2015

 

Losses

 

Sep. 30, 2015

 

 

 

 

 

 

 

Cabinets and Related Products

 

$

240

 

$

(59

)

$

181

 

 

 

 

 

 

 

Plumbing Products

 

528

 

(340

)

188

 

 

 

 

 

 

 

Decorative Architectural Products

 

294

 

(75

)

219

 

 

 

 

 

 

 

Other Specialty Products

 

989

 

(734

)

255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,051

 

$

(1,208

)

$

843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Goodwill

 

Accumulated

 

Net Goodwill

 

 

 

 

 

Net Goodwill

 

 

 

At

 

Impairment

 

At

 

 

 

 

 

At

 

 

 

Dec. 31, 2014

 

Losses

 

Dec. 31, 2014

 

Acquisitions

 

Other(A)

 

Sep. 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cabinets and Related Products

 

$

240

 

$

(59

)

$

181

 

$

 

$

 

$

181

 

Plumbing Products

 

531

 

(340

)

191

 

8

 

(11

)

188

 

Decorative Architectural Products

 

294

 

(75

)

219

 

 

 

219

 

Other Specialty Products

 

983

 

(734

)

249

 

6

 

 

255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,048

 

$

(1,208

)

$

840

 

$

14

 

$

(11

)

$

843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(A) Other principally includes the effect of foreign currency translation.

 

Other indefinite-lived intangible assets were $137 million and $130 million at September 30, 2015 and December 31, 2014, respectively, and principally included registered trademarks. The carrying value of our definite-lived intangible assets was $26 million (net of accumulated amortization of $49 million) at September 30, 2015 and $12 million (net of accumulated amortization of $48 million) at December 31, 2014, and principally included customer relationships.  As a result of our 2015 acquisitions, other indefinite-lived intangible assets and definite-lived intangible assets increased by $7 million and $17 million, respectively, as of the acquisition dates.

Depreciation and Amortization
Depreciation and Amortization

 

E.DEPRECIATION AND AMORTIZATION

 

Depreciation and amortization expense, including discontinued operations, was $100 million and $125 million for the nine months ended September 30, 2015 and 2014, respectively.  Depreciation and amortization expense included accelerated depreciation (relating to business rationalization initiatives) of $1 million for the nine months ended September 30, 2014.

 

As a result of business rationalization initiatives, at September 30, 2014, we decided to sell two facilities within our Cabinets and Related Products segment. At September 30, 2014, the net book value of those facilities was approximately $10 million.  In the third quarter of 2014, we recorded a charge of $28 million, included in cost of goods sold in the condensed consolidated statement of operations, to reflect the estimated fair value of those facilities.  Fair value was estimated using a market approach (Level 3 input), considering the estimated fair values for other comparable facilities in the areas where the facilities are located.

Fair Value of Financial Investments
Fair Value of Financial Investments

 

F.FAIR VALUE OF FINANCIAL INVESTMENTS

 

We have maintained investments in available-for-sale securities, equity method investments and a number of private equity funds, 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:

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Auction rate securities

 

$

22 

 

$

22 

 

 

 

 

 

 

 

 

 

Total recurring investments

 

22 

 

22 

 

 

 

 

 

 

 

Equity method investments

 

13 

 

11 

 

Private equity funds

 

12 

 

14 

 

Other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

50 

 

$

50 

 

 

 

 

 

 

 

 

 

 

Recurring Fair Value Measurements.  The fair value 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 the assumptions for credit defaults, since the auction rate securities are backed by credit default swap agreements.

 

Our investments in auction rate 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 September 30, 2015 and December 31, 2014.

 

Non-Recurring Fair Value Measurements.  During the three months and nine months ended September 30, 2015 and 2014, we did not measure any financial investments at fair value on a non-recurring basis, as there was no other-than-temporary decline in the estimated value of these investments.

 

We did not have any transfers between Level 1 and Level 2 financial assets in the nine months ended September 30, 2015 or 2014.

 

Realized Gains (Losses).  Income from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Realized gains from private equity funds

 

$

1

 

$

 

$

5

 

$

4

 

Equity investment income (loss), net

 

 

 

2

 

(2

)

 

 

 

 

 

 

 

 

 

 

Total income from financial investments, net

 

$

1

 

$

 

$

7

 

$

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value of Debt.  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 September 30, 2015 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, 2014 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

 

G.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 contracts and metals 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.

 

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, we, including certain of our 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 condensed consolidated statements of operations in other, net within 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.  We have 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 condensed consolidated statements of operations in cost of sales.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Foreign currency contracts

 

 

 

 

 

 

 

 

 

Exchange contracts

 

$

 

$

5

 

$

3

 

$

2

 

Forward contracts

 

1

 

1

 

(3

)

 

Metal contracts

 

(9

)

 

(14

)

 

Interest rate swaps

 

 

 

(1

)

(1

)

 

 

 

 

 

 

 

 

 

 

Total (loss) gain

 

$

(8

)

$

6

 

$

(15

)

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We present our derivatives, net by counterparty due to the right of offset under master netting arrangements in the condensed consolidated balance sheets.  The notional amounts being hedged and the fair value of those derivative instruments are as follows, in millions:

 

 

 

At September 30, 2015

 

 

 

Notional

 

 

 

 

 

Amount

 

Balance Sheet

 

Foreign currency contracts

 

 

 

 

 

Exchange contracts

 

$

28

 

 

 

Receivables

 

 

 

$

1

 

Forward contracts

 

35

 

 

 

Accrued liabilities

 

 

 

(3

)

 

 

 

 

 

 

Metals contracts

 

67

 

 

 

Accrued liabilities

 

 

 

(9

)

Other liabilities

 

 

 

(2

)

 

 

 

At December 31, 2014

 

 

 

Notional

 

 

 

 

 

Amount

 

Balance Sheet

 

Foreign currency contracts

 

 

 

 

 

Exchange contracts

 

$

55

 

 

 

Receivables

 

 

 

$

6

 

Forward contracts

 

79

 

 

 

Other assets

 

 

 

2

 

Accrued liabilities

 

 

 

(1

)

 

 

 

 

 

 

Metals contracts

 

70

 

 

 

Accrued liabilities

 

 

 

(2

)

 

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

Warranty Liability
Warranty Liability

 

H.WARRANTY LIABILITY

 

Changes in our warranty liability were as follows, in millions:

 

 

 

Nine Months Ended

 

Twelve Months Ended

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Balance at January 1

 

$

135

 

$

124

 

Accruals for warranties issued during the period

 

39

 

51

 

Accruals related to pre-existing warranties

 

8

 

11

 

Settlements made (in cash or kind) during the period

 

(36

)

(46

)

Other, net (including currency translation)

 

(3

)

(5

)

 

 

 

 

 

 

Balance at end of period

 

$

143

 

$

135

 

 

 

 

 

 

 

 

 

 

Debt
Debt

 

I.DEBT

 

On June 15, 2015, we repaid and retired all of our $500 million, 4.8% Notes on the scheduled retirement date.

 

On March 24, 2015, we issued $500 million of 4.45% Notes due April 1, 2025.  These Notes are senior indebtedness and 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.  On May 29, 2015 and August 28, 2015, we amended the Credit Agreement with the bank group (the “Amended Credit Agreement”).  The Amended Credit Agreement reduces the aggregate commitment to $750 million and extends the maturity date to May 29, 2020.  Under the Amended Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional $375 million with the current bank group or new lenders.

 

The Amended 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 $75 million and obtain letters of credit of up to $100 million; any outstanding letters of credit under the Amended Credit Agreement reduce our borrowing capacity. At September 30, 2015, we had $42 million of outstanding standby letters of credit.

 

Revolving credit loans bear interest under the Amended 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 Amended Credit Agreement contains financial covenants requiring us to maintain (A) a maximum net leverage ratio, as adjusted for certain items, of 4.0 to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, equal to or greater than 2.5 to 1.0.

 

In order for us to borrow under the Amended Credit Agreement, there must not be any default in our covenants in the Amended 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 Amended 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, 2014, in each case, no material ERISA or environmental non-compliance, and no material tax deficiency). We were in compliance with all covenants and no borrowings have been made at September 30, 2015.

Stock-Based Compensation
Stock-Based Compensation

 

J.STOCK-BASED COMPENSATION

 

Our 2014 Long Term Stock Incentive Plan (the “2014 Plan”) provides for the issuance of stock-based incentives in various forms to our employees and non-employee Directors.  At September 30, 2015, 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:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Long-term stock awards

 

$

 

$

 

$

19 

 

$

27 

 

Stock options

 

 

 

 

 

Phantom stock awards and stock appreciation rights

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 

$

10 

 

$

30 

 

$

34 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (37 percent tax rate – before valuation allowance)

 

$

 

$

 

$

11 

 

$

13 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 719,546 shares of long-term stock awards in the nine months ended September 30, 2015.

 

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2015

 

2014

 

Unvested stock award shares at January 1

 

 

 

Weighted average grant date fair value

 

$

18 

 

$

17 

 

 

 

 

 

 

 

Stock award shares granted

 

 

 

Weighted average grant date fair value

 

$

26 

 

$

22 

 

 

 

 

 

 

 

Stock award shares vested

 

 

 

Weighted average grant date fair value

 

$

17 

 

$

17 

 

 

 

 

 

 

 

Stock award shares forfeited

 

 

 

Weighted average grant date fair value

 

$

18 

 

$

16 

 

 

 

 

 

 

 

Forfeitures upon spin off (A) 

 

 

 

Weighted average grant date fair value

 

$

20 

 

$

 

 

 

 

 

 

 

Modification upon spin off (B) 

 

 

 

 

 

 

 

 

 

Unvested stock award shares at September 30

 

 

 

Weighted average grant date fair value

 

$

17 

 

$

18 

 

 

 

(A)

In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.

(B)

Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee directors such that all individuals received an equivalent fair value both before and after the separation.  The modification to the outstanding stock awards was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan.

 

At September 30, 2015 and 2014, there was $47 million and $68 million of total unrecognized compensation expense related to unvested stock awards, respectively; such awards had a weighted average remaining vesting period of three years in both 2015 and 2014.

 

The total market value (at the vesting date) of stock award shares which vested during the nine months ended September 30, 2015 and 2014 was $54 million and $50 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 452,380 of stock option shares in the nine months ended September 30, 2015 with a grant date exercise price approximating $26 per share. In the first nine months of 2015, 3,150,790 stock option shares were forfeited (including options that expired unexercised).

 

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2015

 

2014

 

Option shares outstanding, January 1

 

18 

 

24 

 

Weighted average exercise price

 

$

21 

 

$

22 

 

 

 

 

 

 

 

Option shares granted

 

 

 

Weighted average exercise price

 

$

26 

 

$

22 

 

 

 

 

 

 

 

Option shares exercised

 

 

 

Aggregate intrinsic value on date of exercise (A) 

 

$

32 million

 

$

17 million

 

Weighted average exercise price

 

$

17 

 

$

16 

 

 

 

 

 

 

 

Option shares forfeited

 

 

 

Weighted average exercise price

 

$

29 

 

$

28 

 

 

 

 

 

 

 

Forfeitures upon spin off (B) 

 

 

 

Weighted average exercise price

 

$

19 

 

$

 

 

 

 

 

 

 

Modification upon spin off (C) 

 

 

 

 

 

 

 

 

 

Option shares outstanding, September 30

 

14 

 

19 

 

Weighted average exercise price

 

$

17 

 

$

21 

 

Weighted average remaining option term (in years)

 

 

 

 

 

 

 

 

 

Option shares vested and expected to vest, September 30

 

14 

 

19 

 

Weighted average exercise price

 

$

17 

 

$

21 

 

Aggregate intrinsic value (A) 

 

$

111 million

 

$

102 million

 

Weighted average remaining option term (in years)

 

 

 

 

 

 

 

 

 

Option shares exercisable (vested), September 30

 

12 

 

16 

 

Weighted average exercise price

 

$

18 

 

$

22 

 

Aggregate intrinsic value (A) 

 

$

96 million

 

$

80 million

 

Weighted average remaining option term (in years)

 

 

 

 

 

(A)

Aggregate intrinsic value is calculated using our stock price at each respective date, less the exercise price (grant date price) multiplied by the number of shares.

(B)

In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.

(C)

Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee directors such that all individuals received an equivalent fair value both before and after the separation.  The modification to the outstanding options was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan.

 

At September 30, 2015 and 2014, there were $6 million and $7 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average remaining vesting period of 2 years at both September 30, 2015 and 2014.

 

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:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2015

 

2014

 

Weighted average grant date fair value

 

$

9.67 

 

$

9.53 

 

Risk-free interest rate

 

1.75 

%

1.91 

%

Dividend yield

 

1.32 

%

1.34 

%

Volatility factor

 

42.00 

%

49.00 

%

Expected option life

 

6 years

 

6 years

 

 

Employee Retirement Plans
Employee Retirement Plans

 

K.EMPLOYEE RETIREMENT PLANS

 

Net periodic pension cost for our defined-benefit pension plans was as follows, in millions:

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

Qualified

 

Non-Qualified

 

Qualified

 

Non-Qualified

 

Service cost

 

$

 

$

 

$

1

 

$

 

Interest cost

 

13

 

1

 

12

 

2

 

Expected return on plan assets

 

(12

)

 

(11

)

 

Amortization of net loss

 

5

 

1

 

2

 

1

 

 

 

 

 

 

 

 

 

 

 

Net periodic pension cost

 

$

6

 

$

2

 

$

4

 

$

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

Qualified

 

Non-Qualified

 

Qualified

 

Non-Qualified

 

Service cost

 

$

2

 

$

 

$

3

 

$

 

Interest cost

 

36

 

5

 

38

 

6

 

Expected return on plan assets

 

(35

)

 

(35

)

 

Amortization of net loss

 

14

 

2

 

8

 

1

 

 

 

 

 

 

 

 

 

 

 

Net periodic pension cost

 

$

17

 

$

7

 

$

14

 

$

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We participate in one regional multi-employer pension plan, principally related to one of our manufacturing companies; the plan is not considered significant to us.

 

Effective January 1, 2010, we froze all future benefit accruals under substantially all of our domestic qualified and non-qualified defined benefit pension plans.  Future benefit accruals related to our foreign non-qualified plans were frozen several years ago.

Reclassifications From Accumulated Other Comprehensive (Loss) Income
Reclassifications From Accumulated Other Comprehensive (Loss) Income

 

L.RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

 

The reclassifications from accumulated other comprehensive (loss) income to the condensed consolidated statements of operations were as follows, in millions:

 

 

 

Amount Reclassified

 

 

 

Accumulated Other

 

Three Months

 

Nine Months

 

 

 

Comprehensive

 

Ended Sep. 30,

 

Ended Sep. 30,

 

Statement of

 

(Loss) Income

 

2015

 

2014

 

2015

 

2014

 

Operations Line Item

 

Amortization of defined benefit pension:

 

 

 

 

 

 

 

 

 

 

 

Actuarial losses, net

 

$

6

 

$

3

 

$

16

 

$

9

 

Selling, general & administrative expenses

 

Tax (benefit)

 

(2

)

(3

)

(5

)

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net of tax

 

$

4

 

$

 

$

11

 

$

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

 

$

1

 

$

1

 

Interest expense

 

Tax (benefit) expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net of tax

 

$

 

$

 

$

1

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Information
Segment Information

 

M.SEGMENT INFORMATION

 

Information by segment and geographic area was as follows, in millions:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

 

 

Net Sales(A)

 

Operating Profit (Loss)

 

Net Sales(A)

 

Operating Profit (Loss)

 

Our operations by segment were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cabinets and Related Products

 

$

253

 

$

266

 

$

21

 

$

(35

)

$

771

 

$

756

 

$

32

 

$

(55

)

Plumbing Products

 

853

 

855

 

137

 

141

 

2,495

 

2,504

 

386

 

399

 

Decorative Architectural Products

 

527

 

523

 

102

 

91

 

1,600

 

1,560

 

318

 

280

 

Other Specialty Products

 

206

 

190

 

23

 

20

 

561

 

520

 

50

 

39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,839

 

$

1,834

 

$

283

 

$

217

 

$

5,427

 

$

5,340

 

$

786

 

$

663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our operations by geographic area were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

1,462

 

$

1,420

 

$

234

 

$

162

 

$

4,298

 

$

4,100

 

$

645

 

$

494

 

International, principally Europe

 

377

 

414

 

49

 

55

 

1,129

 

1,240

 

141

 

169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,839

 

$

1,834

 

283

 

217

 

$

5,427

 

$

5,340

 

786

 

663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General corporate expense, net

 

 

 

 

 

(25

)

(36

)

 

 

 

 

(84

)

(108

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

 

 

 

 

258

 

181

 

 

 

 

 

702

 

555

 

Other income (expense), net

 

 

 

 

 

(60

)

(50

)

 

 

 

 

(173

)

(159

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

 

 

 

 

$

198

 

$

131

 

 

 

 

 

$

529

 

$

396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(A)

Inter-segment sales were not material.

Severance Costs
Severance Costs

 

N.SEVERANCE COSTS

 

We recorded charges related to severance of $1 million and $8 million for the three and nine months ended September 30, 2015, respectively, and $13 million and $23 million for the three and nine months ended September 30, 2014, respectively. Such charges are principally reflected in the condensed consolidated statements of operations in selling, general and administrative expenses.  For the three months and nine months ended September 30, 2014, we recorded $13 million and $20 million, respectively, of severance costs related to corporate office actions, which are included in general corporate expense, net.

Other Income (Expense), Net
Other Income (Expense), Net

 

O.OTHER INCOME (EXPENSE), NET

 

Other, net, which is included in other income (expense), net, was as follows, in millions:

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Income from cash and cash investments

 

$

1

 

$

1

 

$

2

 

$

2

 

Income from financial investments, net (Note F)

 

1

 

 

7

 

2

 

Foreign currency transaction (losses) gains

 

(8

)

5

 

(13

)

5

 

Other items, net

 

 

1

 

2

 

1

 

 

 

 

 

 

 

 

 

 

 

Total other, net

 

$

(6

)

$

7

 

$

(2

)

$

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share
Earnings Per Common Share

 

P.EARNINGS PER COMMON SHARE

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Numerator (basic and diluted):

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

111

 

$

533

 

$

281

 

$

735

 

Less: Allocation to unvested restricted stock awards

 

2

 

11

 

4

 

15

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to common shareholders

 

109

 

522

 

277

 

720

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net

 

 

10

 

(1

)

21

 

Less: Allocation to unvested restricted stock awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations attributable to common shareholders

 

 

10

 

(1

)

21

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

109

 

$

532

 

$

276

 

$

741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic common shares (based upon weighted average)

 

335

 

350

 

340

 

350

 

Add:

 

 

 

 

 

 

 

 

 

Stock option dilution

 

3

 

3

 

4

 

3

 

 

 

 

 

 

 

 

 

 

 

Diluted common shares

 

338

 

353

 

344

 

353

 

 

 

 

 

 

 

 

 

 

 

 

For the three months and nine months ended September 30, 2015 and 2014, we allocated dividends and undistributed earnings to the unvested restricted stock awards.

 

Additionally, 4 million and 6 million common shares for the three months and nine months ended September 30, 2015, respectively, and 8 million common shares for both the three months and nine months ended September 30, 2014 related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.

 

In the first nine months of 2015, we repurchased and retired 15.5 million shares of our common stock (including 720 thousand shares to offset the dilutive impact of long-term stock awards granted in the first quarter), for approximately $407 million. As part of the repurchases, in August 2015, we agreed to repurchase a total of $200 million of common stock with an immediate delivery of 6.1 million shares under an accelerated stock repurchase transaction.  In September 2015, upon completion of the transaction, we received an additional 1.5 million shares of our common stock resulting from changes in the volume weighted average stock price of our common stock over the term of the transaction.  At September 30, 2015, we had 29.5 million shares of our common stock remaining under the September 2014 Board of Directors’ repurchase authorization.

 

On the basis of amounts paid (declared), cash dividends per common share were $.090 ($.095) and $.270 ($.275) for the three months and nine months ended September 30, 2015, respectively, and $.090 ($.090) and $.240 ($.255) for the three months and nine months ended September 30, 2014, respectively.

Other Commitments and Contingencies
Other Commitments and Contingencies

 

Q. OTHER COMMITMENTS AND CONTINGENCIES

 

We are subject to claims, charges, litigation and other proceedings in the ordinary course of our business, including those arising from or related to contractual matters, intellectual property, personal injury, environmental matters, product liability, product recalls, construction defect, insurance coverage, personnel and employment disputes, anti-trust and other matters, including class actions.  We believe we have adequate defenses in these matters and that the likelihood that the outcome of these matters would have a material adverse effect on us is remote.  However, there is no assurance that we will prevail in these matters, and we could, in the future, incur judgments, enter into settlements of claims or revise our expectations regarding the outcome of these matters, which could materially impact our results of operations.

Income Taxes
Income Taxes

 

R. INCOME TAXES

 

Our effective tax rate was 39 percent and 41 percent for the three months and nine months ended September 30, 2015, respectively.  The tax expense for the nine months ended September 30, 2015 includes an $18 million valuation allowance against the deferred tax assets of TopBuild recorded as a non-cash charge to income tax expense in the second quarter of 2015.  The TopBuild deferred tax assets have been impaired by our decision to spin off TopBuild into a separate company that on a stand-alone basis as of June 30, 2015, the spin off date, will unlikely be able to realize the value of such deferred tax assets as a result of its history of losses.

 

In the third quarter of 2014, we recorded a $517 million tax benefit from the release of the valuation allowance against our U.S. Federal and certain state deferred tax assets due primarily to a return to sustainable profitability in our U.S. operations.  In reaching this conclusion, we considered the continued improvement in both the new home construction market and repair and remodel activity in the U.S. and our progress on strategic initiatives to reduce costs and expand our product leadership positions, which contributed to the continued improvement in our U.S. operations over the past few years.  Additionally, we anticipate the availability of future taxable income and have achieved a cumulative three-year income position in the U.S. as of December 31, 2014.

 

Excluding the $517 million valuation allowance release, our effective tax rate was 78 percent and 35 percent for the three months and nine months ended September 30, 2014, respectively.  As a result of the reversal of the valuation allowance in the third quarter of 2014, the tax expense for the nine months ended September 30, 2014 approximates our U.S. Federal statutory tax rate while the tax expense for the three months ended September 30, 2014 includes an additional tax expense of $47 million to adjust the taxes recorded in the first and second quarter of 2014, which previously benefited from the decrease in the valuation allowance, to the higher third quarter effective tax rate.

 

The tax benefit from certain stock-based compensation is not realized as a deferred tax asset until the tax deduction reduces taxes paid. During the third quarter of 2015, we realized $17 million of the $53 million deferred tax asset on additional net operating losses from stock-based compensation as an increase to paid-in capital due to the continued profitability of our U.S. operations.  We anticipate realizing the majority of the remaining $36 million deferred tax asset on additional net operating losses from stock-based compensation by the end of 2015.

Accounting Policies (Policies)

 

Reclassification: Certain prior year amounts have been reclassified to conform to the 2015 presentation in the condensed consolidated financial statements.  In our condensed consolidated statements of cash flows, the cash flows from discontinued operations are not separately stated.

 

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, 2018.  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 2014-08 (“ASU 2014-08”) “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.  On January 1, 2015, we adopted ASU 2014-08.  The adoption of the new standard did not have an impact on our financial position or results of operations.

 

In February 2015, the FASB issued Accounting Standards Update 2015-02 (“ASU 2015-02”) “Consolidation (Topic 810) — Amendments to the Consolidations Analysis,” which modifies certain aspects of both the variable interest and voting models.  ASU 2015-02 is effective for us for annual periods beginning January 1, 2016.  We are currently evaluating the impact the adoption of this new standard will have on our financial position or results of operations.

 

In April 2015, the FASB issued Accounting Standards Update 2015-03 (“ASU 2015-03”) “Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs,” that requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt.  In August 2015, the FASB amended ASU 2015-03 to clarify that debt issuance costs related to line-of-credit arrangements may be classified as an asset.  ASU 2015-03 is effective for us for annual periods beginning January 1, 2016.  We do not expect that the adoption of the new standard will have a material impact on our financial position.

Discontinued Operations (Tables)
Schedules of major classes of line items constituting pre-tax profit (loss) of discontinued operations, carrying amount of major classes of assets and liabilities, and other selected financial information during the period owned

 

The major classes of line items constituting pre-tax (loss) profit of discontinued operations, in millions:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2015

 

2014

 

2015

 

2014

 

Net sales

 

$

 

$

398

 

$

762

 

$

1,117

 

Cost of sales

 

 

309

 

603

 

877

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

89

 

159

 

240

 

Selling, general and administrative expenses

 

 

68

 

148

 

201

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

$

 

$

21

 

$

11

 

$

39

 

(Loss) gain on disposal of discontinued operations, net (1) 

 

(1

)

1

 

(1

)

(2

)

 

 

 

 

 

 

 

 

 

 

(Loss) income before income tax

 

(1

)

22

 

10

 

37

 

Income tax benefit (expense) (2) 

 

1

 

(12

)

(11

)

(16

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net

 

$