MASCO CORP /DE/, 10-Q filed on 10/28/2014
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2014
Oct. 21, 2014
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, 2014 
 
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
 
356,260,200 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q3 
 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash investments
$ 1,282 
$ 1,223 
Short-term bank deposits
275 
321 
Receivables
1,229 
1,004 
Prepaid expenses and other
353 
155 
Inventories:
 
 
Finished goods
459 
398 
Raw material
289 
268 
Work in process
114 
99 
Total
862 
765 
Total current assets
4,001 
3,468 
Property and equipment, net
1,153 
1,252 
Goodwill
1,891 
1,903 
Other intangible assets, net
147 
149 
Other assets
181 
185 
Total assets
7,373 
6,957 
Current liabilities:
 
 
Notes payable
505 
Accounts payable
1,020 
902 
Accrued liabilities
890 
874 
Total current liabilities
2,415 
1,782 
Long-term debt
2,919 
3,421 
Deferred income taxes and other
681 
967 
Total liabilities
6,015 
6,170 
Commitments and contingencies
   
   
Masco Corporation's shareholders' equity:
 
 
Common shares, par value $1 per share Authorized shares: 1,400,000,000; issued and outstanding: 2014 - 349,900,000; 2013 - 349,500,000
350 
349 
Preferred shares authorized: 1,000,000; issued and outstanding: 2014 - None; 2013 - None
   
   
Paid-in capital
17 
16 
Retained earnings
716 
79 
Accumulated other comprehensive income
64 
115 
Total Masco Corporation's shareholders' equity
1,147 
559 
Noncontrolling interest
211 
228 
Total equity
1,358 
787 
Total liabilities and equity
$ 7,373 
$ 6,957 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Sep. 30, 2014
Dec. 31, 2013
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
349,900,000 
349,500,000 
Common shares, shares outstanding
349,900,000 
349,500,000 
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, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
Net sales
$ 2,232 
$ 2,150 
$ 6,457 
$ 6,175 
Cost of sales
1,621 
1,543 
4,638 
4,451 
Gross profit
611 
607 
1,819 
1,724 
Selling, general and administrative expenses
409 
395 
1,225 
1,192 
Operating profit
202 
212 
594 
532 
Other income (expense), net:
 
 
 
 
Interest expense
(57)
(58)
(169)
(178)
Other, net
10 
23 
Total other income (expense), net
(50)
(52)
(159)
(155)
Income from continuing operations before income taxes
152 
160 
435 
377 
Income tax benefit (expense)
403 
(38)
361 
(91)
Income from continuing operations
555 
122 
796 
286 
Income (loss) from discontinued operations
(2)
(2)
(16)
Net income
556 
120 
794 
270 
Less: Net income attributable to noncontrolling interest
13 
11 
38 
30 
Net income attributable to Masco Corporation
543 
109 
756 
240 
Basic:
 
 
 
 
Income from continuing operations (in dollars per share)
$ 1.52 
$ 0.31 
$ 2.12 
$ 0.72 
Loss from discontinued operations (in dollars per share)
 
$ (0.01)
$ (0.01)
$ (0.04)
Net income (in dollars per share)
$ 1.52 
$ 0.31 
$ 2.12 
$ 0.67 
Diluted:
 
 
 
 
Income from continuing operations (in dollars per share)
$ 1.51 
$ 0.31 
$ 2.11 
$ 0.71 
Loss from discontinued operations (in dollars per share)
 
$ (0.01)
$ (0.01)
$ (0.04)
Net income (in dollars per share)
$ 1.51 
$ 0.30 
$ 2.10 
$ 0.67 
Amounts attributable to Masco Corporation:
 
 
 
 
Income from continuing operations
542 
111 
758 
256 
Income (loss) from discontinued operations
(2)
(2)
(16)
Net income attributable to Masco Corporation
$ 543 
$ 109 
$ 756 
$ 240 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
 
 
Net income
$ 556 
$ 120 
$ 794 
$ 270 
Less: Net income attributable to noncontrolling interest
13 
11 
38 
30 
Net income attributable to Masco Corporation
543 
109 
756 
240 
Other comprehensive income, net of tax (see Note K):
 
 
 
 
Cumulative translation adjustment
(73)
37 
(79)
11 
Interest rate swaps
 
 
Unrecognized pension prior service cost and net loss
 
14 
Other comprehensive (loss) income
(73)
42 
(72)
26 
Less: Other comprehensive (loss) income attributable to noncontrolling interest
(18)
(21)
Other comprehensive (loss) income attributable to Masco Corporation
(55)
34 
(51)
22 
Total comprehensive income
483 
162 
722 
296 
Less: Total comprehensive (loss) income attributable to the noncontrolling interest
(5)
19 
17 
34 
Total comprehensive income attributable to Masco Corporation
$ 488 
$ 143 
$ 705 
$ 262 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
Cash provided by operations
$ 543 
$ 489 
Increase in receivables
(257)
(302)
Increase in inventories
(109)
(40)
Increase in accounts payable and accrued liabilities, net
129 
203 
Net cash from operating activities
306 
350 
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
Cash dividends paid
(86)
(81)
Dividend payment to noncontrolling interest
(34)
(34)
Purchase of Company common stock
(39)
(35)
Credit Agreement costs
 
(4)
Issuance of Company common stock
 
Retirement of Notes
 
(200)
Payment of debt, net
(2)
(2)
Net cash for financing activities
(160)
(356)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
Capital expenditures
(82)
(88)
Acquisition of companies, net of cash acquired
(2)
(5)
Proceeds from disposition of:
 
 
Other financial investments
13 
13 
Short-term bank deposits
322 
309 
Property and equipment
12 
24 
Purchases of:
 
 
Short-term bank deposits
(297)
(269)
Other, net
(26)
(5)
Net cash for investing activities
(60)
(21)
Effect of exchange rate changes on cash and cash investments
(27)
(2)
CASH AND CASH INVESTMENTS:
 
 
Increase (decrease) for the period
59 
(29)
At January 1
1,223 
1,040 
At September 30
$ 1,282 
$ 1,011 
CONDENSED 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
Noncontrolling Interest
Total
Balance at Dec. 31, 2012
$ 349 
$ 16 
$ (102)
$ 59 
$ 212 
$ 534 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income
 
 
240 
22 
34 
296 
Shares issued
(3)
 
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(2)
(11)
(22)
 
 
(35)
Surrendered (non-cash)
(1)
(19)
 
 
 
(20)
Cash dividends declared
 
(14)
(67)
 
 
(81)
Dividend payment to noncontrolling interest
 
 
 
 
(34)
(34)
Stock-based compensation
 
39 
 
 
 
39 
Balance at Sep. 30, 2013
349 
49 
81 
212 
699 
Balance at Dec. 31, 2013
349 
16 
79 
115 
228 
787 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income
 
 
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 
Accounting Policies
Accounting Policies

A.       In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as at September 30, 2014 and the results of operations for the three months and nine months ended September 30, 2014 and 2013 and cash flows for the nine months ended September 30, 2014 and 2013.  The condensed consolidated balance sheet at December 31, 2013 was derived from audited financial statements.

 

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 the Company for annual periods beginning January 1, 2017.  The Company is currently evaluating the impact the adoption of this new standard will have on its 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 the Company beginning January 1, 2015, with early adoption allowed for new disposals not previously classified as discontinued operations.

 

Revision of Previously Issued Financial Statements.  During the first quarter ended March 31, 2014, the Company identified an error in the accounting for certain of its 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 three-month and nine-month periods ended September 30, 2013 consolidated statement of operations and prior year consolidated balance sheet 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.  Other historic periods will be revised, as detailed below, in our future filings. This error is not considered material to any prior period financial statement.

 

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

 

The following table presents the impact of the revisions on the Company’s previously issued full-year consolidated statement of operations (in millions):

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

As reported

 

$

(239

)

$

(229

)

$

(177

)

Correction

 

16

 

 

9

 

As revised

 

$

(223

)

$

(229

)

$

(168

)

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, before income taxes

 

 

 

 

 

 

 

As reported

 

$

434

 

$

73

 

$

(392

)

Correction

 

16

 

 

9

 

As revised

 

$

450

 

$

73

 

$

(383

)

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

 

 

 

 

 

As reported

 

$

323

 

$

(18

)

$

(352

)

Correction

 

16

 

 

9

 

As revised

 

$

339

 

$

(18

)

$

(343

)

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

As reported

 

$

313

 

$

(79

)

$

(533

)

Correction

 

16

 

 

9

 

As revised

 

$

329

 

$

(79

)

$

(524

)

 

The following table presents the impact of the revisions on the Company’s previously issued quarterly consolidated statements of operations (in millions):

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

Dec. 31

 

Sep. 30

 

June 30

 

Mar. 31

 

Dec. 31

 

Sep. 30

 

June 30

 

Mar. 31

 

 

 

2013

 

2012

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

(71

)

$

(58

)

$

(57

)

$

(53

)

$

(57

)

$

(57

)

$

(66

)

$

(49

)

Correction

 

3

 

6

 

1

 

6

 

4

 

7

 

(2

)

(9

)

As revised

 

$

(68

)

$

(52

)

$

(56

)

$

(47

)

$

(53

)

$

(50

)

$

(68

)

$

(58

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

70

 

$

154

 

$

131

 

$

79

 

$

(26

)

$

51

 

$

(12

)

$

60

 

Correction

 

3

 

6

 

1

 

6

 

4

 

7

 

(2

)

(9

)

As revised

 

$

73

 

$

160

 

$

132

 

$

85

 

$

(22

)

$

58

 

$

(14

)

$

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

50

 

$

116

 

$

92

 

$

65

 

$

(63

)

$

35

 

$

(43

)

$

53

 

Correction

 

3

 

6

 

1

 

6

 

4

 

7

 

(2

)

(9

)

As revised

 

$

53

 

$

122

 

$

93

 

$

71

 

$

(59

)

$

42

 

$

(45

)

$

44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

56

 

$

114

 

$

87

 

$

56

 

$

(80

)

$

24

 

$

(67

)

$

44

 

Correction

 

3

 

6

 

1

 

6

 

4

 

7

 

(2

)

(9

)

As revised

 

$

59

 

$

120

 

$

88

 

$

62

 

$

(76

)

$

31

 

$

(69

)

$

35

 

 

The following table presents the impact of the revisions on the Company’s previously issued consolidated balance sheets (in millions):

 

 

 

As of

 

 

 

 

 

Dec. 31

 

Sep. 30

 

June 30

 

Mar. 31

 

As of

 

 

 

2013

 

Dec. 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

161 

 

$

166 

 

$

173 

 

$

182 

 

$

184 

 

Correction

 

24 

 

21 

 

15 

 

14 

 

 

As revised

 

$

185 

 

$

187 

 

$

188 

 

$

196 

 

$

192 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

6,933 

 

$

7,059 

 

$

7,062 

 

$

6,779 

 

$

6,875 

 

Correction

 

24 

 

21 

 

15 

 

14 

 

 

As revised

 

$

6,957 

 

$

7,080 

 

$

7,077 

 

$

6,793 

 

$

6,883 

 

 

Discontinued Operations
Discontinued Operations

B.        In the first quarter of 2013, the Company determined that Tvilum, its Danish ready-to-assemble cabinet business, was no longer core to its long-term growth strategy and, accordingly, the Company embarked on a plan for disposition.  The disposition of Tvilum was completed in the fourth quarter of 2013.  The Company has accounted for this business as a discontinued operation.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2013

 

September 30, 2013

 

 

 

 

 

 

 

Net Sales

 

$

75

 

$

194

 

 

 

 

 

 

 

Operating loss from discontinued operations

 

$

 

$

(8

)

Impairment of assets

 

 

(10

)

Loss on disposal of discontinued operations, net

 

(2

)

(2

)

Loss before income tax

 

(2

)

(20

)

Income tax benefit

 

 

(4

)

Loss from discontinued operations, net

 

$

(2

)

$

(16

)

 

During the first quarter of 2013, the Company estimated the fair value of the business held for sale, using unobservable inputs (Level 3).  After considering the deferred gains reported in Accumulated Other Comprehensive Income, the Company recorded an impairment of $10 million in the first quarter of 2013.

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

C.        The changes in the carrying amount of goodwill for the nine months ended September 30, 2014, by segment, were as follows, in millions:

 

 

 

Gross Goodwill

 

Accumulated

 

Net Goodwill

 

 

 

At

 

Impairment

 

At

 

 

 

Sep. 30, 2014

 

Losses

 

Sep. 30, 2014

 

Cabinets and Related Products

 

$

240

 

$

(59

)

$

181

 

Plumbing Products

 

538

 

(340

)

198

 

Installation and Other Services

 

1,806

 

(762

)

1,044

 

Decorative Architectural Products

 

294

 

(75

)

219

 

Other Specialty Products

 

983

 

(734

)

249

 

Total

 

$

3,861

 

$

(1,970

)

$

1,891

 

 

 

 

Gross Goodwill

 

Accumulated

 

Net Goodwill

 

 

 

Net Goodwill

 

 

 

At

 

Impairment

 

At

 

 

 

At

 

 

 

Dec. 31, 2013

 

Losses

 

Dec. 31, 2013

 

Other(A)

 

Sep. 30, 2014

 

Cabinets and Related Products

 

$

240

 

$

(59

)

$

181

 

$

 

$

181

 

Plumbing Products

 

550

 

(340

)

210

 

(12

)

198

 

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

 

$

(12

)

$

1,891

 

 

 

(A)

Other principally includes the effect of foreign currency translation.

 

Other indefinite-lived intangible assets were $132 million and $133 million at September 30, 2014 and December 31, 2013, respectively, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $15 million (net of accumulated amortization of $65 million) at September 30, 2014 and $16 million (net of accumulated amortization of $62 million) at December 31, 2013, and principally included customer relationships and non-compete agreements.

Depreciation and Amortization Expense
Depreciation and Amortization Expense

D.                        Depreciation and amortization expense, including discontinued operations, was $125 million and $143 million, including accelerated depreciation (relating to business rationalization initiatives) of $1 million and $12 million for the nine months ended September 30, 2014 and 2013, respectively.

 

As a result of business rationalization initiatives, at September 30, 2014, the Company decided to sell two facilities within its Cabinets and Related Products segment.  At September 30, 2014, the net book value of those facilities was approximately $10 million, included in property and equipment, net in the condensed consolidated balance sheet as of September 30, 2014.  In the third quarter of 2014, the Company 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 and Liabilities
Fair Value of Financial Investments and Liabilities

E.        The Company has maintained investments in available-for-sale securities and a number of private equity funds, principally as part of its tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses.  Financial investments included in other assets were as follows, in millions:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Equity method investments

 

$

61 

 

$

70 

 

Total equity method investments

 

61 

 

70 

 

 

 

 

 

 

 

Auction rate securities

 

22 

 

22 

 

Total recurring investments

 

22 

 

22 

 

 

 

 

 

 

 

Private equity funds

 

15 

 

18 

 

Other investments

 

 

 

Total non-recurring investments

 

19 

 

21 

 

 

 

 

 

 

 

 

 

Total

 

$

102 

 

$

113 

 

 

The Company did not have any transfers between Level 1 and Level 2 financial assets in the three months or nine months ended September 30, 2014 or 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 the Company’s 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.

 

Recurring Fair Value Measurements.  The fair value of the auction rate securities held by the Company have been estimated, on a recurring basis, using a discounted cash flow model (Level 3 input).  The significant inputs in the discounted cash flow model used to value the auction rate securities include:  expected maturity of auction rate securities, discount rate used to determine the present value of expected cash flows and the assumptions for credit defaults, since the auction rate securities are backed by credit default swap agreements.

 

The Company’s 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, 2014 and December 31, 2013.

 

Non-Recurring Fair Value Measurements.  During the three months and nine months ended September 30, 2014 and 2013, the Company 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 private equity funds.

 

Realized Gains (Losses) and Impairment Charges.  Income (loss) 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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Realized gains from private equity funds

 

$

 

$

 

$

4

 

$

7

 

Equity investment (loss) income, net

 

 

6

 

(2

)

13

 

Income from other investments, net

 

 

 

 

1

 

Total income from financial investments

 

$

 

$

6

 

$

2

 

$

21

 

 

Fair Value of Debt.  The fair value of the Company’s 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 the Company for debt with similar terms and remaining maturities.  The aggregate estimated market value of short-term and long-term debt at September 30, 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.        The Company is exposed to global market risk as part of its normal daily business activities.  To manage these risks, the Company enters into various derivative contracts.  These contracts include interest rate swap agreements, foreign currency exchange contracts and metals contracts intended to hedge the Company’s exposure to copper and zinc.  The Company reviews its hedging program, derivative positions and overall risk management on a regular basis.

 

Foreign Currency Contracts.  The Company’s 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 the year, the Company, including certain European operations, enters into foreign currency forward contracts and foreign currency exchange contracts.

 

Gains (losses) related to foreign currency forward and exchange contracts are recorded in the Company’s condensed 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, the Company’s exposure is limited to the aggregate foreign currency rate differential with such institutions.

 

Metals Contracts.  The Company has entered into several contracts to manage its exposure to increases in the price of copper and zinc.  (Losses) gains related to these contracts are recorded in the Company’s condensed consolidated statements of operations in cost of sales.

 

The pre-tax (losses) gains included in the Company’s condensed consolidated statements of operations is as follows, in millions:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Foreign Currency Contracts

 

 

 

 

 

 

 

 

 

Exchange Contracts

 

$

5

 

$

(4

)

$

2

 

$

3

 

Forward Contracts

 

1

 

(1

)

 

1

 

Metal Contracts

 

 

3

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

Total gain (loss)

 

$

6

 

$

(2

)

$

2

 

$

(2

)

 

The Company presents its derivatives, net by counterparty due to the right of offset under master netting arrangements in current assets or current liabilities in the condensed consolidated balance sheet.  The notional amounts being hedged and the fair value of those derivative instruments, on a gross basis, are as follows, in millions:

 

 

 

At September 30, 2014

 

 

 

Notional

 

 

 

 

 

 

 

Amount

 

Assets

 

Liabilities

 

Foreign Currency Contracts

 

 

 

 

 

 

 

Exchange Contracts

 

$

76 

 

 

 

 

 

Current assets

 

 

 

$

 

$

 

Forward Contracts

 

 

 

 

 

 

 

Current assets

 

64 

 

 

 

 

 

 

 

 

 

 

 

Metals Contracts

 

 

 

 

 

 

 

Current assets

 

61 

 

 

 

Total

 

 

 

$

 

$

 

 

 

 

At December 31, 2013

 

 

 

Notional

 

 

 

 

 

 

 

Amount

 

Assets

 

Liabilities

 

Foreign Currency Contracts

 

 

 

 

 

 

 

Exchange Contracts

 

$

53 

 

 

 

 

 

Current liabilities

 

 

 

$

 

$

 

Forward Contracts

 

88 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Metals Contracts

 

48 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

 

$

 

 

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

Warranty
Warranty

G.       Changes in the Company’s warranty liability were as follows, in millions:

 

 

 

Nine Months Ended

 

Twelve Months Ended

 

 

 

September 30, 2014

 

December 31, 2013

 

Balance at January 1

 

$

124

 

$

118

 

Accruals for warranties issued during the period

 

36

 

42

 

Accruals related to pre-existing warranties

 

6

 

6

 

Settlements made (in cash or kind) during the period

 

(35

)

(42

)

Other, net

 

(3

)

 

Balance at end of period

 

$

128

 

$

124

 

 

Debt
Debt

H.        On March 28, 2013, the Company 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.

 

Based on the limitations of the debt to total capitalization ratio covenant in the Credit Agreement, at September 30, 2014, the Company had additional borrowing capacity, subject to availability, of up to $1.2 billion.  Additionally, at September 30, 2014, the Company could absorb a reduction to shareholders’ equity of approximately $859 million and remain in compliance with the debt to total capitalization covenant.

 

In order for the Company to borrow under the Credit Agreement, there must not be any default in the Company’s covenants in the Credit Agreement (i.e., in addition to the two financial covenants, principally limitations on subsidiary debt, negative pledge restrictions, legal compliance requirements and maintenance of properties and insurance) and the Company’s representations and warranties in the Credit Agreement must be true in all material respects on the date of borrowing (i.e., principally no material adverse change or litigation likely to result in a material adverse change, since December 31, 2012, in each case, no material ERISA or environmental non-compliance and no material tax deficiency).  The Company was in compliance with all covenants and no borrowings have been made at September 30, 2014.

Stock-Based Compensation
Stock-Based Compensation

I.The Company’s 2014 Long Term Stock Incentive Plan (and the prior plan that it replaced) provides for the issuance of stock-based incentives in various forms to employees and non-employee Directors of the Company.  At September 30, 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:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Long-term stock awards

 

$

 

$

 

$

30 

 

$

27 

 

Stock options

 

 

 

 

12 

 

Phantom stock awards and stock appreciation rights

 

 

 

 

 

Total

 

$

11 

 

$

12 

 

$

37 

 

$

45 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 

$

 

$

14 

 

$

17 

 

 

Long-Term Stock Awards.  Long-term stock awards are granted to key employees and non-employee Directors of the Company and do not cause net share dilution inasmuch as the Company continues the practice of repurchasing and retiring an equal number of shares in the open market.  The Company granted 1,680,220 shares of long-term stock awards in the nine months ended September 30, 2014.

 

The Company’s long-term stock award activity was as follows, shares in millions:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

Unvested stock award shares at January 1

 

 

 

Weighted average grant date fair value

 

$

17 

 

$

16 

 

 

 

 

 

 

 

Stock award shares granted

 

 

 

Weighted average grant date fair value

 

$

22 

 

$

20 

 

 

 

 

 

 

 

Stock award shares vested

 

 

 

Weighted average grant date fair value

 

$

17 

 

$

17 

 

 

 

 

 

 

 

Stock award shares forfeited

 

 

 

Weighted average grant date fair value

 

$

16 

 

$

17 

 

 

 

 

 

 

 

Unvested stock award shares at September 30

 

 

 

Weighted average grant date fair value

 

$

18 

 

$

17 

 

 

At September 30, 2014 and 2013, there was $68 million and $76 million of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of three years in both 2014 and 2013.

 

The total market value (at the vesting date) of stock award shares which vested during the nine months ended September 30, 2014 and 2013 was $50 million and $38 million, respectively.

 

Stock Options.  Stock options are granted to key employees of the Company.  The exercise price equals the market price of the Company’s common stock at the grant date.

 

The Company granted 332,750 of stock option shares in the nine months ended September 30, 2014 with a grant date exercise price approximating $22 per share. In the first nine months of 2014, 3,640,670 stock option shares were forfeited (including options that expired unexercised).

 

The Company’s stock option activity was as follows, shares in millions:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

Option shares outstanding, January 1

 

24 

 

30 

 

Weighted average exercise price

 

$

22 

 

$

21 

 

 

 

 

 

 

 

Option shares granted, including restoration options

 

 

 

Weighted average exercise price

 

$

22 

 

$

20 

 

 

 

 

 

 

 

Option shares exercised

 

 

 

Aggregate intrinsic value on date of exercise (A) 

 

$

17 million

 

$

22 million

 

Weighted average exercise price

 

$

16 

 

$

12 

 

 

 

 

 

 

 

Option shares forfeited

 

 

 

Weighted average exercise price

 

$

28 

 

$

23 

 

 

 

 

 

 

 

Option shares outstanding, September 30

 

19 

 

27 

 

Weighted average exercise price

 

$

21 

 

$

22 

 

Weighted average remaining option term (in years)

 

 

 

 

 

 

 

 

 

Option shares vested and expected to vest, September 30

 

19 

 

27 

 

Weighted average exercise price

 

$

21 

 

$

22 

 

Aggregate intrinsic value (A) 

 

$

102 million

 

$

91 million

 

Weighted average remaining option term (in years)

 

 

 

 

 

 

 

 

 

Option shares exercisable (vested), September 30

 

16 

 

22 

 

Weighted average exercise price

 

$

22 

 

$

24 

 

Aggregate intrinsic value (A) 

 

$

80 million

 

$

51 million

 

Weighted average remaining option term (in years)

 

 

 

 

 

(A)

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

 

At September 30, 2014 and 2013, there was $7 million and $10 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 two years at both September 30, 2014 and 2013.

 

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,

 

 

 

2014

 

2013

 

Weighted average grant date fair value

 

$

9.53 

 

$

8.35 

 

Risk-free interest rate

 

1.91 

%

1.22 

%

Dividend yield

 

1.34 

%

1.47 

%

Volatility factor

 

49.00 

%

49.07 

%

Expected option life

 

6 years

 

6 years

 

 

Employee Retirement Plans
Employee Retirement Plans

J.Net periodic pension cost for the Company’s defined-benefit pension plans was as follows, in millions:

 

 

 

Three Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

Qualified

 

Non-Qualified

 

Qualified

 

Non-Qualified

 

Service cost

 

$

1

 

$

 

$

1

 

$

 

Interest cost

 

12

 

2

 

10

 

2

 

Expected return on plan assets

 

(11

)

 

(10

)

 

Amortization of net loss

 

2

 

1

 

4

 

1

 

Net periodic pension cost

 

$

4

 

$

3

 

5

 

3

 

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

Qualified

 

Non-Qualified

 

Qualified

 

Non-Qualified

 

Service cost

 

$

3

 

$

 

$

3

 

$

 

Interest cost

 

38

 

6

 

32

 

5

 

Expected return on plan assets

 

(35

)

 

(30

)

 

Amortization of net loss

 

8

 

1

 

12

 

2

 

Net periodic pension cost

 

$

14

 

$

7

 

$

17

 

$

7

 

 

The Company participates in 21 regional multi-employer pension plans, principally related to building trades; none of the plans are considered significant to the Company.

 

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

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

K.        The reclassifications from accumulated other comprehensive income to the condensed consolidated statement of operations were as follows, in millions:

 

 

 

Amount Reclassified

 

 

 

Accumulated Other

 

Three Months

 

Nine Months

 

 

 

Comprehensive

 

Ended Sep. 30, 

 

Ended Sep. 30,

 

Income Statement

 

Income (Loss)

 

2014

 

2013

 

2014

 

2013

 

Line Item

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of defined benefit pension:

 

 

 

 

 

 

 

 

 

 

 

Actuarial losses, net

 

$

3

 

$

5

 

$

9

 

$

14

 

Selling, General & Administrative Expense

 

 

 

(3

)

 

(3

)

 

Income tax benefit

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

 

$

1

 

$

1

 

Interest expense

 

 

 

 

 

 

 

Income tax benefit

 

 

There was no tax effect for either the amortization of the actuarial losses or the interest rate swaps in 2013 due to the tax valuation allowance.

Segment Information
Segment Information

L.Information about the Company by segment and geographic area was as follows, in millions:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

 

 

Net Sales(A)

 

Operating Profit (Loss)

 

Net Sales(A)

 

Operating Profit (Loss)

 

The Company’s operations by segment were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cabinets and Related Products

 

$

266

 

$

262

 

$

(35

)

$

(2

)

$

756

 

$

763

 

$

(55

)

$

(4

)

Plumbing Products

 

855

 

820

 

141

 

118

 

2,504

 

2,384

 

399

 

306

 

Installation and Other Services

 

398

 

370

 

20

 

18

 

1,117

 

1,039

 

33

 

22

 

Decorative Architectural Products

 

523

 

522

 

91

 

93

 

1,560

 

1,519

 

280

 

286

 

Other Specialty Products

 

190

 

176

 

20

 

16

 

520

 

470

 

39

 

26

 

Total

 

$

2,232

 

$

2,150

 

$

237

 

$

243

 

$

6,457

 

$

6,175

 

$

696

 

$

636

 

The Company’s operations by geographic area were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

1,818

 

$

1,756

 

$

182

 

$

193

 

$

5,217

 

$

5,031

 

$

527

 

$

518

 

International, principally Europe

 

414

 

394

 

55

 

50

 

1,240

 

1,144

 

169

 

118

 

Total

 

$

2,232

 

$

2,150

 

237

 

243

 

$

6,457

 

$

6,175

 

696

 

636

 

General corporate expense, net

 

 

 

 

 

(35

)

(31

)

 

 

 

 

(102

)

(104

)

Operating profit

 

 

 

 

 

202

 

212

 

 

 

 

 

594

 

532

 

Other income (expense), net

 

 

 

 

 

(50

)

(52

)

 

 

 

 

(159

)

(155

)

Income from continuing operations before income taxes

 

 

 

 

 

$

152

 

$

160

 

 

 

 

 

$

435

 

$

377

 

 

 

(A)

Inter-segment sales were not material.

Severance Costs
Severance Costs

M.       As part of the Company’s continuing review of its operations to improve cost structure and business processes, actions were taken during 2014 and 2013 to respond to market conditions.  The Company recorded charges related to severance and early retirement programs of $13 million and $24 million for the three months and nine months ended September 30, 2014, respectively, and $4 million and $16 million for the three months and nine months ended September 30, 2013, respectively. Such charges are principally reflected in the statement of operations in selling, general and administrative expenses.  In 2014, $13 million and $20 million for the three months and nine months ended September 30, 2014, respectively, of the severance costs relate to corporate office actions and are included in general corporate expense, net.

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

N.       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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Income from cash and cash investments

 

$

1

 

$

1

 

$

2

 

$

3

 

Income from financial investments (Note E)

 

 

6

 

2

 

21

 

Currency gains (losses)

 

5

 

(1

)

5

 

 

Other items, net

 

1

 

 

1

 

(1

)

Total other net

 

$

7

 

$

6

 

$

10

 

$

23

 

 

Earnings Per Common Share
Earnings Per Common Share

O.       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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Numerator (basic and diluted):

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

542

 

$

111

 

$

758

 

$

256

 

Less: Allocation to unvested restricted stock awards

 

(11

)

(2

)

(15

)

(5

)

Income from continuing operations attributable to common shareholders

 

531

 

109

 

743

 

251

 

Income (loss) from discontinued operations, net

 

1

 

(2

)

(2

)

(16

)

Less: Allocation to unvested restricted stock awards

 

 

 

 

 

Income (loss) from discontinued operations attributable to common shareholders

 

1

 

(2

)

(2

)

(16

)

Net income available to common shareholders

 

$

532

 

$

107

 

$

741

 

$

235

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic common shares (based upon weighted average)

 

350

 

349

 

350

 

349

 

Add:

 

 

 

 

 

 

 

 

 

Stock option dilution

 

3

 

3

 

3

 

3

 

Diluted common shares

 

353

 

352

 

353

 

352

 

 

For the three months and nine months ended September 30, 2014 and 2013, the Company allocated dividends and undistributed earnings to the unvested restricted stock awards (participating securities).

 

Additionally, 8 million common shares for both the three months and nine months ended September 30, 2014 and 15 million and 14 million common shares for the three months and nine months ended September 30, 2013, respectively, 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 2014, the Company granted 1.7 million shares of long-term stock awards; to offset the dilutive impact of these awards, the Company also repurchased and retired 1.7 million shares of Company common stock, for cash aggregating approximately $39 million.

 

On September 30, 2014, the Company announced that its Board of Directors authorized the repurchase of up to 50 million shares for retirement of Company common stock in open-market transactions or otherwise, replacing the previous Board of Directors authorization established in 2007.

 

On the basis of amounts paid (declared), cash dividends per common share were $.090 ($.090) and $.24 ($.255) for the three months and nine months ended September 30, 2014, respectively, and $.075 ($.075) and $.225 ($.225) for the three months and nine months ended September 30, 2013, respectively.

Other Commitments and Contingencies
Other Commitments and Contingencies

P.        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 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

Q.       The accounting guidance for income taxes requires that the future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods.  Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period and projected future taxable income.

 

If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company’s three-year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance that can be placed on projected taxable income to support the recovery of the deferred tax assets.

 

In the fourth quarter of 2010, we recorded a $372 million valuation allowance against our U.S. Federal deferred tax assets as a non-cash charge to income tax expense. In reaching this conclusion, we considered the weaker retail sales of certain of our building products and the slower than anticipated recovery in the U.S. housing market which led to U.S. operating losses and significant U.S. goodwill impairment charges, that primarily occurred in the fourth quarter of 2010, causing us to be in a three-year cumulative U.S. loss position.

 

During 2012 and 2011, objective and verifiable negative evidence, such as U.S. operating losses and significant impairment charges for U.S. goodwill in 2011 and other intangible assets, continued to outweigh positive evidence necessary to reduce the valuation allowance. As a result, we recorded increases of $65 million and $89 million in the valuation allowance related to our U.S. Federal deferred tax assets as a non-cash charge to income tax expense in 2012 and 2011, respectively.

 

Although new home construction activity and retail sales of builder products strengthened during 2013 resulting in profitability in the Company’s U.S. operations, we continued to record a full valuation allowance against the U.S. Federal deferred tax assets as we remained in a three-year cumulative loss position throughout 2013.

 

In the third quarter of 2014, the Company recorded a $517 million tax benefit from the release of the valuation allowance against its U.S. Federal and certain state deferred tax assets due primarily to a return to sustainable profitability in its 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 achieving a cumulative three-year income position in the U.S. by the fourth quarter of 2014 as a result of seven consecutive quarters of U.S. pre-tax earnings.

 

As a result of the valuation allowance release in the third quarter of 2014, the net short-term deferred tax assets included in prepaid expenses and other on the condensed consolidated balance sheet as of September 30, 2014 was $265 million; such balance was $73 million at December 31, 2013.

 

It is reasonably possible that the continued improvements in certain of our businesses located in the U.S. and in Europe could result in the objective positive evidence necessary to warrant the additional reversal of all or a portion of the valuation allowance, up to approximately $35 million, by the end of 2015.

 

Excluding the $517 million valuation allowance release, our effective tax rate was 75 percent and 36 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 $51 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.

 

Our effective tax rate of 24 percent for both the three months and nine months ended September 30, 2013, primarily due to the decrease in the valuation allowance resulting from the partial utilization of our U.S. Federal net operating loss carryforward.  The effective tax rate for the nine months ended September 30, 2013 includes a $12 million state tax benefit on uncertain tax positions due primarily to the expiration of applicable statutes of limitation.

Accounting Policies (Policies)

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 the Company for annual periods beginning January 1, 2017.  The Company is currently evaluating the impact the adoption of this new standard will have on its 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 the Company beginning January 1, 2015, with early adoption allowed for new disposals not previously classified as discontinued operations.

Revision of Previously Issued Financial Statements.  During the first quarter ended March 31, 2014, the Company identified an error in the accounting for certain of its 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 three-month and nine-month periods ended September 30, 2013 consolidated statement of operations and prior year consolidated balance sheet 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.  Other historic periods will be revised, as detailed below, in our future filings. This error is not considered material to any prior period financial statement.

 

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

 

The following table presents the impact of the revisions on the Company’s previously issued full-year consolidated statement of operations (in millions):

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

As reported

 

$

(239

)

$

(229

)

$

(177

)

Correction

 

16

 

 

9

 

As revised

 

$

(223

)

$

(229

)

$

(168

)

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, before income taxes

 

 

 

 

 

 

 

As reported

 

$

434

 

$

73

 

$

(392

)

Correction

 

16

 

 

9

 

As revised

 

$

450

 

$

73

 

$

(383

)

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

 

 

 

 

 

As reported

 

$

323

 

$

(18

)

$

(352

)

Correction

 

16

 

 

9

 

As revised

 

$

339

 

$

(18

)

$

(343

)

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

As reported