MASCO CORP /DE/, 10-Q filed on 4/30/2014
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2014
Apr. 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
Mar. 31, 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
 
356,545,600 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q1 
 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Mar. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash investments
$ 906 
$ 1,223 
Short-term bank deposits
305 
321 
Receivables
1,215 
1,004 
Prepaid expenses and other
154 
155 
Inventories:
 
 
Finished goods
455 
398 
Raw material
273 
268 
Work in process
110 
99 
Total
838 
765 
Total current assets
3,418 
3,468 
Property and equipment, net
1,232 
1,252 
Goodwill
1,903 
1,903 
Other intangible assets, net
150 
149 
Other assets
177 
185 
Total assets
6,880 
6,957 
Current liabilities:
 
 
Notes payable
Accounts payable
954 
902 
Accrued liabilities
760 
874 
Total current liabilities
1,720 
1,782 
Long-term debt
3,421 
3,421 
Deferred income taxes and other
938 
967 
Total liabilities
6,079 
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 - 349,400,000; 2013 - 349,500,000
349 
349 
Preferred shares authorized: 1,000,000; issued and outstanding: 2014 - None; 2013 - None
   
   
Paid-in capital
 
16 
Retained earnings
98 
79 
Accumulated other comprehensive income
115 
115 
Total Masco Corporation's shareholders' equity
562 
559 
Noncontrolling interest
239 
228 
Total equity
801 
787 
Total liabilities and equity
$ 6,880 
$ 6,957 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical)
Mar. 31, 2014
Dec. 31, 2013
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
Common shares, shares authorized
1,400,000,000 
1,400,000,000 
Common shares, shares issued
349,400,000 
349,500,000 
Common shares, shares outstanding
349,400,000 
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
Mar. 31, 2014
Mar. 31, 2013
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Net sales
$ 1,965 
$ 1,876 
Cost of sales
1,418 
1,368 
Gross profit
547 
508 
Selling, general and administrative expenses
395 
376 
Operating profit
152 
132 
Other income (expense), net:
 
 
Interest expense
(56)
(60)
Other, net
(3)
13 
Total other income (expense), net
(59)
(47)
Income from continuing operations before income taxes
93 
85 
Income taxes
14 
Income from continuing operations
88 
71 
Loss from discontinued operations
(2)
(9)
Net income
86 
62 
Less: Net income attributable to noncontrolling interest
12 
Net income attributable to Masco Corporation
74 
53 
Basic:
 
 
Income from continuing operations (in dollars per share)
$ 0.21 
$ 0.17 
Loss from discontinued operations (in dollars per share)
$ (0.01)
$ (0.03)
Net income (in dollars per share)
$ 0.21 
$ 0.15 
Diluted:
 
 
Income from continuing operations (in dollars per share)
$ 0.21 
$ 0.17 
Loss from discontinued operations (in dollars per share)
$ (0.01)
$ (0.03)
Net income (in dollars per share)
$ 0.21 
$ 0.15 
Amounts attributable to Masco Corporation:
 
 
Income from continuing operations
76 
62 
Loss from discontinued operations
(2)
(9)
Net income attributable to Masco Corporation
$ 74 
$ 53 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Net income
$ 86 
$ 62 
Less: Net income attributable to noncontrolling interest
12 
Net income attributable to Masco Corporation
74 
53 
Other comprehensive income (loss), net of tax:
 
 
Cumulative translation adjustment
(4)
(36)
Unrecognized pension prior service cost and net gain
Other comprehensive loss
(1)
(31)
Less: Other comprehensive loss attributable to noncontrolling interest
(1)
(8)
Other comprehensive income (loss) attributable to Masco Corporation
 
(23)
Total comprehensive income
85 
31 
Less: Total comprehensive income attributable to noncontrolling interest
11 
Total comprehensive income attributable to Masco Corporation
$ 74 
$ 30 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
Cash provided by operations
$ 121 
$ 130 
Increase in receivables
(227)
(263)
Increase in inventories
(75)
(43)
Decrease in accounts payable and accrued liabilities, net
(63)
(34)
Net cash for operating activities
(244)
(210)
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
Purchase of Company common stock
(39)
(35)
Cash dividends paid
(27)
(26)
New Credit Agreement costs
 
(4)
Net cash for financing activities
(66)
(65)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
Capital expenditures
(26)
(31)
Acquisition of companies, net of cash acquired
(2)
(5)
Proceeds from disposition of:
 
 
Other financial investments
Property and equipment
Short-term bank deposits
84 
172 
Purchases of:
 
 
Short-term bank deposits
(69)
(72)
Other, net
 
(4)
Net cash (for) from investing activities
(6)
70 
Effect of exchange rate changes on cash and cash investments
(1)
(7)
CASH AND CASH INVESTMENTS:
 
 
Decrease for the period
(317)
(212)
At January 1
1,223 
1,040 
At March 31
$ 906 
$ 828 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
In Millions, unless otherwise specified
Total
Common Shares ($1 par value)
Paid-In Capital
Retained (Deficit) Earnings
Accumulated Other Comprehensive Income
Noncontrolling Interest
Balance at Dec. 31, 2012
$ 542 
$ 349 
$ 16 
$ (94)
$ 59 
$ 212 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income
31 
 
 
53 
(23)
Shares issued
(7)
(9)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(35)
(2)
(11)
(22)
 
 
Surrendered (non-cash)
(10)
 
(10)
 
 
 
Cash dividends declared
(26)
 
 
(26)
 
 
Stock-based compensation
14 
 
14 
 
 
 
Balance at Mar. 31, 2013
509 
349 
 
(89)
36 
213 
Balance at Dec. 31, 2013
787 
349 
16 
79 
115 
228 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income
85 
 
 
74 
 
11 
Shares issued
(3)
(5)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(39)
(2)
(9)
(28)
 
 
Surrendered (non-cash)
(14)
 
(14)
 
 
 
Cash dividends declared
(27)
 
 
(27)
 
 
Stock-based compensation
12 
 
12 
 
 
 
Balance at Mar. 31, 2014
$ 801 
$ 349 
 
$ 98 
$ 115 
$ 239 
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 March 31, 2014 and the results of operations for the three months ended March 31, 2014 and 2013 and cash flows for the three months ended March 31, 2014 and 2013.  The condensed consolidated balance sheet at December 31, 2013 was derived from audited financial statements.

 

Certain prior-year amounts have been reclassified to conform to the 2014 presentation in the condensed consolidated financial statements.

 

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 first quarter 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

 

8

 

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

 

8

 

As revised

 

$

6,957

 

$

7,080

 

$

7,077

 

$

6,793

 

$

6,883

 

 

Revision of Previously Issued Financial Statements.  As previously disclosed, during the third quarter ended September 30, 2013, the Company identified an error related to the classification of cash and cash investments.  Foreign short-term bank deposits with terms ranging from three months to twelve months were incorrectly classified as cash and cash investments rather than short-term bank deposits.  The statement of cash flows for the three months ended March 31, 2013 has been revised.  Other historic periods will be revised, as detailed below, in our future filings. These classification errors were not considered material to any prior period financial statements.

 

This revision had no effect on our consolidated results of operations.

 

The following table presents the impact of the revisions on the Company’s previously issued consolidated balance sheets and statements of cash flows (all cash flow figures are year-to-date, in millions).

 

 

 

Mar. 31,

 

June 30,

 

 

 

2013

 

2013

 

 

 

 

 

 

 

Cash and cash investments

 

 

 

 

 

As reported

 

$

1,032

 

$

1,223

 

As revised

 

$

828

 

$

1,028

 

 

 

 

 

 

 

Short-term bank deposits

 

 

 

 

 

As reported

 

 

 

As revised

 

$

204

 

$

195

 

 

 

 

 

 

 

Net cash (for) from investing activities

 

 

 

 

 

As reported

 

$

(30

)

$

(51

)

As revised

 

$

70

 

$

62

 

 

The revisions did not significantly impact the effect of exchange rate changes on cash and cash investments in either quarter above.  These changes will be reflected in the revised statements of cash flows, in future filings.

 

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

 

 

 

March 31, 2013

 

 

 

 

 

Net Sales

 

$

59

 

Operating loss from discontinued operations

 

$

(3

)

Impairment of assets

 

(10

)

Loss on disposal of discontinued operations, net

 

 

Loss before income tax

 

(13

)

Income tax benefit

 

(4

)

Loss from discontinued operations

 

$

(9

)

 

In the first quarter of 2014, the Company recognized $2 million of additional expenses related to prior discontinued operations.

 

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 three months ended March 31, 2014, by segment, were as follows, in millions:

 

 

 

Gross Goodwill

 

Accumulated

 

Net Goodwill

 

 

 

 

 

 

 

At

 

Impairment

 

At

 

 

 

 

 

 

 

Mar. 31, 2014

 

Losses

 

Mar. 31, 2014

 

 

 

 

 

Cabinets and Related Products

 

$

240

 

$

(59

)

$

181

 

 

 

 

 

Plumbing Products

 

550

 

(340

)

210

 

 

 

 

 

Installation and Other Services

 

1,806

 

(762

)

1,044

 

 

 

 

 

Decorative Architectural Products

 

294

 

(75

)

219

 

 

 

 

 

Other Specialty Products

 

983

 

(734

)

249

 

 

 

 

 

Total

 

$

3,873

 

$

(1,970

)

$

1,903

 

 

 

 

 

 

 

 

Gross Goodwill

 

Accumulated

 

Net Goodwill

 

 

 

Net Goodwill

 

 

 

At

 

Impairment

 

At

 

 

 

At

 

 

 

Dec. 31, 2013

 

Losses

 

Dec. 31, 2013

 

Other(A)

 

Mar. 31, 2014

 

Cabinets and Related Products

 

$

240

 

$

(59

)

$

181

 

$

 

$

181

 

Plumbing Products

 

550

 

(340

)

210

 

 

210

 

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

 

$

 

$

1,903

 

 

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

 

Other indefinite-lived intangible assets were $133 million at both March 31, 2014 and December 31, 2013, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $17 million (net of accumulated amortization of $63 million) at March 31, 2014 and $16 million (net of accumulated amortization of $62 million) at December 31, 2013, and principally included customer relationships and non-compete agreements.

 

Depreciation and Amortization Expense
Depreciation and Amortization Expense

D.                        Depreciation and amortization expense, including discontinued operations, was $43 million and $51 million, including accelerated depreciation (relating to business rationalization initiatives) of $1 million and $4 million for the three months ended March 31, 2014 and 2013, respectively.

 

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:

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Equity method investments

 

$

68

 

$

70

 

Total equity method investments

 

68

 

70

 

 

 

 

 

 

 

Auction rate securities

 

22

 

22

 

Total recurring investments

 

22

 

22

 

 

 

 

 

 

 

Private equity funds

 

17

 

18

 

Other investments

 

3

 

3

 

Total non-recurring investments

 

20

 

21

 

 

 

 

 

 

 

Total

 

$

110

 

$

113

 

 

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 March 31, 2014 and December 31, 2013.

 

Non-Recurring Fair Value Measurements.  During the three months ended March 31, 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.

 

The Company did not have any transfers between Level 1 and Level 2 financial assets in the three months ended March 31, 2014 or 2013.

 

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

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Realized gains from private equity funds

 

$

1

 

$

3

 

Equity investments (loss) income, net

 

(2

)

7

 

Total income from financial investments

 

$

(1

)

$

10

 

 

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 March 31, 2014 was approximately $3.8 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

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Foreign Currency Contracts

 

 

 

 

 

Exchange Contracts

 

$

(2

)

$

7

 

Forward Contracts

 

(1

)

2

 

Metals Contracts

 

(3

)

(4

)

 

 

 

 

 

 

Total (loss) gain

 

$

(6

)

$

5

 

 

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 March 31, 2014

 

 

 

Notional

 

 

 

 

 

 

 

Amount

 

Assets

 

Liabilities

 

Foreign Currency Contracts

 

 

 

 

 

 

 

Exchange Contracts

 

$

83

 

 

 

 

 

Current liabilities

 

 

 

$

 

$

1

 

Forward Contracts

 

67

 

 

 

 

 

Current liabilities

 

 

 

 

1

 

 

 

 

 

 

 

 

 

Metals Contracts

 

54

 

 

 

 

 

Current liabilities

 

 

 

 

4

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

 

$

6

 

 

 

 

At December 31, 2013

 

 

 

Notional

 

 

 

 

 

 

 

Amount

 

Assets

 

Liabilities

 

Foreign Currency Contracts

 

 

 

 

 

 

 

Exchange Contracts

 

$

53

 

 

 

 

 

Current liabilities

 

 

 

$

 

$

2

 

Forward Contracts

 

88

 

 

 

 

 

Current liabilities

 

 

 

 

1

 

 

 

 

 

 

 

 

 

Metals Contracts

 

48

 

 

 

 

 

Current liabilities

 

 

 

 

2

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

 

$

5

 

 

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:

 

 

 

Three Months Ended

 

Twelve Months Ended

 

 

 

March 31, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Balance at January 1

 

$

124

 

$

118

 

Accruals for warranties issued during the period

 

11

 

42

 

Accruals related to pre-existing warranties

 

2

 

6

 

Settlements made (in cash or kind) during the period

 

(11

)

(42

)

Other, net

 

 

 

Balance at end of period

 

$

126

 

$

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 March 31, 2014, the Company had additional borrowing capacity, subject to availability, of up to $1.2 billion.  Additionally, at March 31, 2014, the Company could absorb a reduction to shareholders’ equity of approximately $796 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 March 31, 2014.

 

Stock-Based Compensation
Stock-Based Compensation

I.                            The Company’s 2005 Long Term Stock Incentive Plan (the “2005 Plan”) provides for the issuance of stock-based incentives in various forms to employees and non-employee Directors of the Company.  At March 31, 2014, outstanding stock-based incentives were in the form of long-term stock awards, stock options, phantom stock awards and stock appreciation rights.  Pre-tax compensation expense and the related income tax benefit for these stock-based incentives were as follows, in millions:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Long-term stock awards

 

$

11

 

$

9

 

Stock options

 

1

 

5

 

Phantom stock awards and stock appreciation rights

 

 

3

 

 

 

 

 

 

 

Total

 

$

12

 

$

17

 

 

 

 

 

 

 

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

 

$

4

 

$

6

 

 

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 1,582,210 shares of long-term stock awards in the three months ended March 31, 2014.

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Unvested stock award shares at January 1

 

8

 

8

 

Weighted average grant date fair value

 

$

17

 

$

16

 

 

 

 

 

 

 

Stock award shares granted

 

1

 

2

 

Weighted average grant date fair value

 

$

22

 

$

20

 

 

 

 

 

 

 

Stock award shares vested

 

2

 

2

 

Weighted average grant date fair value

 

$

17

 

$

16

 

 

 

 

 

 

 

Stock award shares forfeited

 

 

 

Weighted average grant date fair value

 

$

18

 

$

18

 

 

 

 

 

 

 

Unvested stock award shares at March 31

 

7

 

8

 

Weighted average grant date fair value

 

$

18

 

$

17

 

 

At both March 31, 2014 and 2013, there was $94 million of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of four years in both 2014 and 2013.

 

The total market value (at the vesting date) of stock award shares which vested during the three months ended March 31, 2014 and 2013 was $45 million and $32 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.  These options generally become exercisable (vest ratably) over five years beginning on the first anniversary from the date of grant and expire no later than 10 years after the grant date.

 

The Company granted 332,750 of stock option shares in the three months ended March 31, 2014 with a grant date exercise price approximating $22 per share. In the first three months of 2014, 121,850 stock option shares were forfeited (including options that expired unexercised).

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Option shares outstanding, January 1

 

 

24

 

 

30

 

Weighted average exercise price

 

22

 

21

 

 

 

 

 

 

 

 

 

Option shares granted

 

 

 

 

1

 

Weighted average exercise price

 

22

 

20

 

 

 

 

 

 

 

 

 

Option shares exercised

 

 

1

 

 

2

 

Aggregate intrinsic value on date of exercise (A) 

 

10 million

 

17 million

 

Weighted average exercise price

 

16

 

11

 

 

 

 

 

 

 

Option shares forfeited

 

 

 

 

 

Weighted average exercise price

 

27

 

19

 

 

 

 

 

 

 

 

 

Option shares outstanding, March 31

 

 

23

 

 

29

 

Weighted average exercise price

 

22

 

22

 

Weighted average remaining option term (in years)

 

 

4

 

 

4

 

 

 

 

 

 

 

 

Option shares vested and expected to vest, March 31

 

 

23

 

 

29

 

Weighted average exercise price

 

22

 

22

 

Aggregate intrinsic value (A) 

 

93 million

 

82 million

 

Weighted average remaining option term (in years)

 

 

4

 

 

4

 

 

 

 

 

 

 

Option shares exercisable (vested), March 31

 

 

20

 

 

23

 

Weighted average exercise price

 

23

 

24

 

Aggregate intrinsic value (A) 

 

72 million

 

45 million

 

Weighted average remaining option term (in years)

 

 

3

 

 

4

 

 

(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 March 31, 2014 and 2013, there was $11 million and $17 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average remaining vesting period of three years and two years at March 31, 2014 and 2013, respectively.

 

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:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Weighted average grant date fair value

 

$

9.53

 

$

8.33

 

Risk-free interest rate

 

1.91

%

1.20

%

Dividend yield

 

1.34

%

1.47

%

Volatility factor

 

49.00

%

49.00

%

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 March 31,

 

 

 

2014

 

2013

 

 

 

Qualified

 

Non-Qualified

 

Qualified

 

Non-Qualified

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1

 

$

 

$

1

 

$

 

Interest cost

 

13

 

2

 

11

 

1

 

Expected return on plan assets

 

(12

)

 

(10

)

 

Amortization of net loss

 

3

 

 

4

 

1

 

Net periodic pension cost

 

$

5

 

$

2

 

6

 

2

 

 

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

 

 

 

Accumulated Other

 

Reclassified

 

 

 

Comprehensive

 

March 31,

 

 

 

Income (Loss)

 

2014

 

2013

 

Financial Statement Line Item

 

 

 

 

 

 

 

 

 

Amortization of defined benefit pension:

 

 

 

 

 

 

 

Actuarial losses, net

 

$

3

 

$

5

 

Selling, general & administrative expense

 

 

 

 

 

Income tax expense

 

 

 

$

3

 

$

5

 

Net of tax

 

 

Segment Information
Segment Information

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

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

Net Sales(A)

 

Operating Profit (Loss)

 

 

 

 

 

 

 

 

 

 

 

The Company’s operations by segment were:

 

 

 

 

 

 

 

 

 

Cabinets and Related Products

 

$

237

 

$

236

 

$

(12

)

$

(4

)

Plumbing Products

 

800

 

762

 

119

 

86

 

Installation and Other Services

 

335

 

312

 

(4

)

(4

)

Decorative Architectural Products

 

441

 

432

 

76

 

89

 

Other Specialty Products

 

152

 

134

 

5

 

(1

)

Total

 

$

1,965

 

$

1,876

 

$

184

 

$

166

 

 

 

 

 

 

 

 

 

 

 

The Company’s operations by geographic area were:

 

 

 

 

 

 

 

 

 

North America

 

$

1,556

 

$

1,510

 

$

129

 

$

140

 

International, principally Europe

 

409

 

366

 

55

 

26

 

Total

 

$

1,965

 

$

1,876

 

184

 

166

 

 

 

 

 

 

 

 

 

 

 

General corporate expense, net

 

 

 

 

 

(32

)

(34

)

Operating profit, as reported

 

 

 

 

 

152

 

132

 

Other income (expense), net

 

 

 

 

 

(59

)

(47

)

Income from continuing operations before income taxes

 

 

 

 

 

$

93

 

$

85

 

 

(A)                   Inter-segment sales were not material.

Severance Costs
Severance Costs

M.                     The Company recorded charges related to severance of $2 million and $4 million for the three months ended March 31, 2014 and 2013, respectively.  Such charges are principally reflected in the condensed consolidated statement of operations in selling, general and administrative expenses.

 

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

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Income from cash and cash investments

 

$

1

 

$

1

 

Income from financial investments (Note E)

 

(1

)

10

 

Other items, net

 

(3

)

2

 

Total other net

 

$

(3

)

$

13

 

 

Other items, net, included $(2) million and $3 million of currency (losses) gains for the three months ended March 31, 2014 and 2013, respectively.

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

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Numerator (basic and diluted):

 

 

 

 

 

Income from continuing operations

 

$

76

 

$

62

 

Less: Allocation to unvested restricted stock awards

 

1

 

1

 

Income from continuing operations attributable to common shareholders

 

$

75

 

$

61

 

 

 

 

 

 

 

Loss from discontinued operations, net

 

(2

)

(9

)

Less: Allocation to unvested restricted stock awards

 

 

 

Loss from discontinued operations attributable to common shareholders

 

(2

)

(9

)

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

73

 

$

52

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Basic common shares (based upon weighted average)

 

351

 

350

 

Add:

 

 

 

 

 

Stock option dilution

 

3

 

2

 

Diluted common shares

 

354

 

352

 

 

For the three months ended March 31, 2014 and 2013, the Company allocated dividends and undistributed earnings to the unvested restricted stock awards (participating securities).

 

Additionally, 11 million and 15 million common shares for the three months ended March 31, 2014 and 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 three months of 2014, the Company granted 1.6 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. At March 31, 2014, the Company had 20.9 million shares of its common stock remaining under the July 2007 Board of Directors’ repurchase authorization.

 

On the basis of amounts paid (declared), cash dividends per common share were $.075 ($.075) for both the three months ended March 31, 2014 and 2013.

 

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 outcome of these matters is not likely to have a material adverse effect on us.  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.                        Our effective tax rate was 5 percent and 16 percent for the three months ended March 31, 2014 and 2013, respectively, 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 includes a $15 million and $12 million state income tax benefit on uncertain tax positions primarily due to the expiration of applicable statutes of limitation for the three months ended March 31, 2014 and 2013, respectively.

 

As a result of expirations of applicable statutes of limitations in various jurisdictions expected to transpire or occur within the next 12 months, the Company anticipates that it is reasonably possible that the liability for uncertain tax positions could be reduced by approximately $3 million.

 

Accounting Policies (Policies)
Revision of Previously Issued Financial Statements

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 first quarter 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