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Item 7.
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Management's Discussion and Analysis of Financial Condition and Results of Operations.
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The financial and business analysis below provides information which we believe is relevant to an assessment and understanding of our consolidated financial position, results of operations and cash flows. This financial and business analysis should be read in conjunction with the consolidated financial statements and related notes.
The following discussion and certain other sections of this Report contain statements that reflect our views about our future performance and constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "believe," "anticipate," "appear," "may," "will," "should," "intend," "plan," "estimate," "expect," "assume," "seek," "forecast" and similar references to future periods. Our views about future performance involve risks and uncertainties that are difficult to predict and, accordingly, our actual results may differ materially from the results discussed in our forward-looking statements. We caution you against relying on any of these forward-looking statements.
In addition to the various factors included in the "Executive Level Overview," "Critical Accounting Policies and Estimates" and "Outlook for the Company" sections, our future performance may be affected by the levels of home improvement activity and new home construction, our ability to maintain our strong brands and to develop and introduce new and improved products, our ability to maintain our competitive position in our industries, our reliance on key customers, our ability to achieve the anticipated benefits of our strategic initiatives, our ability to improve our under-performing U.S. window business, the cost and availability of raw materials, our dependence on third party suppliers, and risks associated with international operations and global strategies. These and other factors are discussed in detail in Item 1A "Risk Factors" of this Report. Any forward-looking statement made by us speaks only as of the date on which it was made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise.
Executive Level Overview
We design, manufacture and distribute branded home improvement and building products. These products are sold for home improvement and new home construction through home center retailers, mass merchandisers, hardware stores, homebuilders, distributors and other outlets for consumers and contractors and direct to the consumer.
2016
Results
Net sales were positively affected by increased sales volume resulting from increased repair and remodel activity and new home construction, and favorable product mix in the U.S. and Europe. Such increases were partially offset by foreign currency translation, primarily due to the stronger U.S. dollar compared to the British Pound and Euro and net selling price decreases in North America. Our results of operations were positively affected by increased sales volume, a more favorable relationship between selling prices and commodity costs, operational efficiencies, and cost savings initiatives. Such increases were partially offset by an increase in warranty costs resulting from a change in our estimate of expected future warranty claim costs and an increase in certain variable expenses, such as strategic growth investments, as well as ERP system implementation and higher insurance costs.
Our Plumbing Products segment benefited from increased sales volume, a favorable relationship between selling prices and commodity costs and benefits associated with cost savings initiatives, and was negatively impacted by an increase in certain variable expenses, such as strategic growth investments and higher insurance costs, as well as unfavorable product mix. The Decorative Architectural Products segment benefited from increased sales volume of paints and other coating products and builder's hardware, partially offset by an unfavorable relationship betwen selling prices and commodity costs of paints and other coating products. Our Cabinetry Products segment benefited from operational efficiencies resulting from business rationalization activities and other cost savings initiatives, a positive product mix and a more favorable relationship between selling prices and commodity costs, and was negatively impacted by decreased sales volume. Our Windows and Other Specialty Products segment was negatively affected by increased warranty costs and certain other expenses, such as higher labor costs and ERP system implementation costs, and was positively impacted by a more favorable relationship between selling prices and commodity costs of windows.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We regularly review our estimates and assumptions, which are based upon historical experience, as well as current economic conditions and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.
Note A to the consolidated financial statements includes our accounting policies, estimates and methods used in the preparation of our consolidated financial statements.
We believe that the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition and Receivables
We recognize revenue as title to products and risk of loss is transferred to customers or when services are rendered. We record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. We monitor our customer receivable balances and the credit worthiness of our customers on an on-going basis and maintain allowances for doubtful accounts receivable for estimated losses resulting from the inability of customers to make required payments. Allowances are estimated based upon specific customer balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon historical collection, return and write-off activity.
Goodwill and Other Intangible Assets
We record the excess of purchase cost over the fair value of net tangible assets of acquired companies as goodwill or other identifiable intangible assets. In the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, we complete the impairment testing of goodwill utilizing a discounted cash flow method. We selected the discounted cash flow methodology because we believe that it is comparable to what would be used by market participants. We have defined our reporting units and completed the impairment testing of goodwill at the operating segment level, as defined by GAAP.
Determining market values using a discounted cash flow method requires us to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in different outcomes. In estimating future cash flows, we rely on internally generated five-year forecasts for sales and operating profits, including capital expenditures, and, currently, a one to three percent long-term assumed annual growth rate of cash flows for periods after the five-year forecast. We generally develop these forecasts based upon, among other things, recent sales data for existing products, planned timing of new product launches, estimated repair and remodel activity and estimated housing starts. Our assumptions included a relatively stable U.S. Gross Domestic Product growing at 2.3 percent and a euro zone Gross Domestic Product growing at 1.4 percent annually over the five-year forecast.
We utilize our weighted average cost of capital of approximately 8.5 percent as the basis to determine the discount rate to apply to the estimated future cash flows. Our weighted average cost of capital is unchanged as compared to
2015
. In
2016
, based upon our assessment of the risks impacting each of our businesses, we applied a risk premium to increase the discount rate to a range of 10.5 percent to 13.5 percent for our reporting units.
If the carrying amount of a reporting unit exceeds its fair value, we measure the possible goodwill impairment based upon an allocation of the estimate of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets (Step Two Analysis). The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit's recorded goodwill exceeds the implied fair value of goodwill.
In the fourth quarter of
2016
, we estimated that future discounted cash flows projected for all of our reporting units were greater than the carrying values. Accordingly, we did not recognize any impairment charges for goodwill. A 10 percent decrease in the estimated fair value of our reporting units would not have resulted in any additional analysis of goodwill impairment for any reporting unit.
We review our other indefinite-lived intangible assets for impairment annually, in the fourth quarter, or as events occur or circumstances change that indicate the assets may be impaired without regard to the business unit. We consider the implications of both external (e.g., market growth, competition and local economic conditions) and internal (e.g., product sales and expected product growth) factors and their potential impact on cash flows related to the intangible asset in both the near- and long-term. In
2016
, we did not recognize any impairment charges for other indefinite-lived intangible assets.
Employee Retirement Plans
We froze all future benefit accruals under substantially all of our domestic and foreign qualified and domestic non-qualified defined-benefit pension plans several years ago.
Accounting for defined-benefit pension plans involves estimating the cost of benefits to be provided in the future, based upon vested years of service, and attributing those costs over the time period each employee works. We develop our pension costs and obligations from actuarial valuations. Inherent in these valuations are key assumptions regarding inflation, expected return on plan assets, mortality rates and discount rates for obligations and expenses. We consider current market conditions, including changes in interest rates, in selecting these assumptions. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in different reported pension costs and obligations within our consolidated financial statements.
In December
2016
, our discount rate decreased for obligations to an average of
3.5
percent from
4.0
percent. The discount rate for obligations is based upon the expected duration of each defined-benefit pension plan's liabilities matched to the December 31,
2016
Towers Watson Rate Link curve. The discount rates we use for our defined-benefit pension plans ranged from
1.5
percent to
4.0
percent, with the most significant portion of the liabilities having a discount rate for obligations of
3.8
percent or higher. The assumed asset return was primarily
7.25
percent, reflecting the expected long-term return on plan assets based upon an analysis of expected and historical rates of return of various asset classes utilizing the current and long-term asset allocation of the plan assets.
Our net underfunded amount for our qualified defined-benefit pension plans, which is the difference between the projected benefit obligation and plan assets, decreased to
$338 million
at December 31,
2016
from
$401 million
at December 31,
2015
. Our projected benefit obligation for our unfunded, non-qualified, defined-benefit pension plans was
$170 million
at December 31,
2016
compared with
$174 million
at December 31,
2015
. These unfunded plans are not subject to the funding requirements of the Pension Protection Act of 2006. In accordance with the Pension Protection Act, the Adjusted Funding Target Attainment Percentage for the various defined-benefit pension plans ranges from 76 percent to 109 percent.
The decrease in our projected benefit obligations was partially driven by lump sum payouts of certain long-term qualified pension obligations as well as a change to the MP 2016 Mortality Improvement Scale, which decreased our long-term pension liabilities. The decrease was partially offset by a lower discount rate compared to the prior year. During
2016
, we contributed $100 million to our qualified defined-benefit pension plans, including $51 million to a previously unfunded pension plan. Additionally, our qualified defined-benefit pension plan assets had a net gain of
8.3
percent in
2016
. Refer to Note M to the consolidated financial statements for additional information.
We expect pension expense for our qualified defined-benefit pension plans to be $22 million in
2017
compared with $25 million in
2016
. If we assumed that the future return on plan assets was one-half percent lower than the assumed asset return and the discount rate decreased by 50 basis points, the 2017 pension expense would increase by $4 million. We expect pension expense for our non-qualified defined-benefit pension plans to be $8 million in
2017
, compared to $9 million in
2016
.
We anticipate that we will be required to contribute approximately $21 million in
2017
to our qualified and non-qualified defined-benefit plans. Refer to Note M to the consolidated financial statements for further information regarding the funding of our plans.
Income Taxes
Deferred taxes are recognized based on the future tax consequences of differences between the financial statement carrying value of assets and liabilities and their respective tax basis. 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 we can place on projected taxable income to support the recovery of the deferred tax assets.
In the third quarter of
2014
, we recorded a $517 million tax benefit from the release of the valuation allowance against our U.S. Federal and certain state deferred tax assets due primarily to a return to sustainable profitability in our U.S. operations. In reaching this conclusion, we considered the continued improvement in both the new home construction market and repair and remodel activity in the U.S. and our progress on strategic initiatives to reduce costs and expand our product leadership positions which contributed to the continued improvement in our U.S. operations over the past few years. In the fourth quarter of
2014
, we recorded an additional $12 million tax benefit from the release of the valuation allowances against certain U.K. and Mexican deferred tax assets primarily resulting from a return to sustainable profitability in these jurisdictions.
We continue to maintain a valuation allowance on certain state and foreign deferred tax assets as of December 31,
2016
. Should we determine that we would not be able to realize our remaining deferred tax assets in these jurisdictions in the future, an adjustment to the valuation allowance would be recorded in the period such determination is made. The need to maintain a valuation allowance against deferred tax assets may cause greater volatility in our effective tax rate.
The current accounting guidance allows the recognition of only those income tax positions that have a greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. We believe that there is an increased potential for volatility in our effective tax rate because this threshold allows changes in the income tax environment and the inherent complexities of income tax law in a substantial number of jurisdictions to affect the computation of our liability for uncertain tax positions to a greater extent.
While we believe we have adequately provided for our uncertain tax positions, amounts asserted by taxing authorities could vary from our liability for uncertain tax positions. Accordingly, additional provisions for tax-related matters, including interest and penalties, could be recorded in income tax expense in the period revised estimates are made or the underlying matters are settled or otherwise resolved.
The potential for comprehensive tax reform in 2017, if implemented, may have a significant impact on our effective tax rate or taxes paid due to certain business provisions such as the denial of net interest expense deductions or the imposition of a tax on imports.
Warranty
We offer full and limited warranties on certain products with warranty periods ranging up to the lifetime of the product to the original consumer purchaser. At the time of sale, we accrue a warranty liability for the estimated future cost to provide products, parts or services to repair or replace products in satisfaction of warranty obligations. Our estimate of future costs to service our warranty obligations is based upon the information available and includes a number of factors, such as the warranty coverage, the warranty period, historical experience specific to the nature, frequency and average cost to service the claim, along with industry and demographic trends.
Certain factors and related assumptions in determining our warranty liability involve judgments and estimates and are sensitive to changes in the aforementioned factors. We believe that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates thereby requiring adjustments to previously established accruals. Refer to Note U to the consolidated financial statements for additional information.
A significant portion of our business is at the consumer retail level through home center retailers and other major retailers. A consumer may return a product to a retail outlet that is a warranty return. However, certain retail outlets do not distinguish between warranty and other types of returns when they claim a return deduction from us. Our revenue recognition policy takes into account this type of return when recognizing revenue, and deductions are recorded at the time of sale.
Litigation
We are subject to claims, charges, litigation and other proceedings in the ordinary course of our business. Liabilities and costs associated with these matters require estimates and judgments based upon our professional knowledge and experience and that of our legal counsel. When estimates of our exposure in these matters meet the criteria for recognition under accounting guidance, amounts are recorded as charges to earnings. The ultimate resolution of these exposures may differ due to subsequent developments.
Corporate Development Strategy
We expect to maintain a balanced growth strategy pursuing organic growth by maximizing the full potential of our existing core businesses and complementing our existing business with smaller, strategic acquisitions, particularly in the Plumbing Products and Decorative Architectural Products segment. Longer-term, we may seek larger, strategic acquisitions as our company continues to grow.
In addition, we actively manage our portfolio of companies by divesting of those businesses that do not align with our long-term growth strategy. We will continue to review all of our businesses to determine which businesses may not be core to our long-term growth strategy.
Liquidity and Capital Resources
Historically, we have largely funded our growth through cash provided by our operations, long-term bank debt and the issuance of notes in the financial markets, and by the issuance of our common stock, including issuances for certain mergers and acquisitions. Maintaining high levels of liquidity and focusing on cash generation are among our financial strategies.
Our total debt as a percent of total capitalization was 104 percent and 98 percent at
December 31, 2016
and
2015
, respectively. Refer to Note K to the consolidated financial statements for additional information.
On
March 17, 2016
, we issued $400 million of
3.5%
Notes due April 1, 2021 and $500 million of
4.375%
Notes due April 1, 2026. We received proceeds of $896 million, net of discount, for the issuance of these Notes. The Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On April 15, 2016, proceeds from the debt issuances, together with cash on hand, were used to repay and early retire all of our
$1 billion
,
6.125%
Notes which were due on October 3, 2016 and all of our
$300 million
,
5.85%
Notes which were due on March 15, 2017. In connection with these early retirements, we incurred $40 million of debt extinguishment costs, which we recorded as interest expense.
On June 15, 2015, we repaid and retired all of our $500 million, 4.8% Notes on the scheduled retirement date.
On March 24, 2015, we issued $500 million of 4.45% Notes due April 1, 2025. These Notes are senior indebtedness and are redeemable at our option.
On March 28, 2013, we entered into a credit agreement (the "Credit Agreement") with a bank group, with an aggregate commitment of $1.25 billion and a maturity date of March 28, 2018. On May 29, 2015 and August 28, 2015, we amended the Credit Agreement with the bank group (the "Amended Credit Agreement"). The Amended Credit Agreement reduces the aggregate commitment to $750 million and extends the maturity date to May 29, 2020. Under the Amended Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional $375 million with the current bank group or new lenders. Refer to Note K to the consolidated financial statements for additional information.
The Amended Credit Agreement contains financial covenants requiring us to maintain (A) a maximum net leverage ratio, as adjusted for certain items, of 4.0 to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, equal to or greater than 2.5 to 1.0. We were in compliance with all covenants and had no borrowings under our Amended Credit Agreement at
December 31, 2016
. We expect to remain in compliance with these covenants through at least the next year.
We had cash, cash investments and short-term bank deposits of approximately $1.2 billion at
December 31, 2016
. Our cash and cash investments consist of overnight interest bearing money market demand accounts, time deposit accounts, and money market mutual funds containing government securities and treasury obligations. While we attempt to diversify these investments in a prudent manner to minimize risk, it is possible that future changes in the financial markets could affect the security or availability of these investments. Our short-term bank deposits consist of time deposits with maturities of 12 months or less.
Of the $1.2 billion and $1.7 billion of cash, cash investments and short-term bank deposits we held at
December 31, 2016
and
2015
, respectively, $618 million and $630 million, respectively, is held in our foreign subsidiaries. If these funds were needed for our operations in the U.S., their repatriation into the U.S. would not result in significant additional U.S. income tax or foreign withholding tax, as we have recorded such taxes on substantially all undistributed foreign earnings, except for those that are legally restricted.
We utilize derivative and hedging instruments to manage our exposure to currency fluctuations, primarily related to the European euro, British pound and the U.S. dollar; commodity cost fluctuations, primarily zinc and copper; and interest rate fluctuations, primarily related to debt issuances. We review our hedging program, derivative positions and overall risk management on a regular basis. Beginning in 2016, we decided to significantly reduce our utilization of derivative and hedging activity for commodity cost fluctuations by settling positions at their scheduled maturity while not entering into new transactions.
In the third quarter of 2016, we increased our quarterly dividend to $.10 per common share from $.095 per common share. During 2016, we repurchased nearly 15 million shares of our common stock for cash aggregating $459 million.
Our current ratio was 2.0 to 1 and 1.4 to 1 at
December 31, 2016
and
2015
, respectively. The increase in the current ratio was due to the net debt reduction of $400 million during 2016 resulting from the refinancing of our debt, which reduced current liabilities by approximately $1 billion at
December 31, 2016
compared to
December 31, 2015
.
Cash Flows
Significant sources and (uses) of cash in the past three years are summarized as follows, in millions:
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|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net cash from operating activities
|
$
|
726
|
|
|
$
|
699
|
|
|
$
|
602
|
|
|
Retirement of notes
|
(1,300
|
)
|
|
(500
|
)
|
|
—
|
|
|
Purchase of Company common stock
|
(459
|
)
|
|
(456
|
)
|
|
(158
|
)
|
|
Cash dividends paid
|
(128
|
)
|
|
(126
|
)
|
|
(117
|
)
|
|
Dividends paid to noncontrolling interest
|
(31
|
)
|
|
(36
|
)
|
|
(34
|
)
|
|
Capital expenditures
|
(180
|
)
|
|
(158
|
)
|
|
(128
|
)
|
|
Debt extinguishment costs
|
(40
|
)
|
|
—
|
|
|
—
|
|
|
Acquisition of businesses, net of cash acquired
|
—
|
|
|
(41
|
)
|
|
(2
|
)
|
|
Cash distributed to TopBuild Corp.
|
—
|
|
|
(63
|
)
|
|
—
|
|
|
Issuance of TopBuild Corp. debt
|
—
|
|
|
200
|
|
|
—
|
|
|
Issuance of notes, net of issuance costs
|
889
|
|
|
497
|
|
|
—
|
|
|
Proceeds from disposition of:
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
—
|
|
|
18
|
|
|
16
|
|
|
Financial investments, net
|
32
|
|
|
9
|
|
|
63
|
|
|
Decrease in debt, net
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
|
Proceeds (purchases) of short-term bank deposits, net
|
40
|
|
|
26
|
|
|
(20
|
)
|
|
Effect of exchange rate changes on cash and cash investments
|
(34
|
)
|
|
(15
|
)
|
|
(45
|
)
|
|
Other, net
|
8
|
|
|
31
|
|
|
(15
|
)
|
|
Cash (decrease) increase
|
$
|
(478
|
)
|
|
$
|
85
|
|
|
$
|
160
|
|
Our working capital days were as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
Receivable days
|
49
|
|
|
46
|
|
|
Inventory days
|
54
|
|
|
52
|
|
|
Accounts Payable days
|
70
|
|
|
69
|
|
|
Working capital (receivables plus inventories, less accounts payable) as a percentage of net sales
|
11.3
|
%
|
|
11.1
|
%
|
Net cash provided by operations of
$726 million
consisted primarily of net income adjusted for non-cash and certain other items, including depreciation and amortization expense of
$134 million
, deferred income taxes of
$130 million
and other non-cash items, including stock-based compensation expense and amortization expense related to in-store displays, partially offset by changes in working capital and contributions to our defined-benefit pension plans.
Net cash used for financing activities was
$1,046 million
, primarily due to the early retirement of all of our $1 billion, 6.125% Notes which were due October 3, 2016 and all of our $300 million, 5.85% Notes which were due March 15, 2017,
$459 million
for the repurchase and retirement of Company common stock (as part of our strategic initiative to drive shareholder value, and includes 1.1 million shares repurchased to offset the dilutive impact of long-term stock awards granted in 2016),
$128 million
for cash dividends paid,
$40 million
for debt extinguishment costs and
$31 million
for dividends paid to noncontrolling interest. This usage was partially offset by the issuance of $400 million of 3.5% Notes due April 1, 2021 and $500 million of 4.375% Notes due April 1, 2026.
In September 2014, our Board of Directors authorized the repurchase of up to 50 million shares for retirement of our common stock in open-market transactions or otherwise, replacing the previous Board of Directors authorization established in 2007. At December 31,
2016
, we had remaining authorization from our Board of Directors to repurchase up to an additional
12.9 million
shares of our common stock. Consistent with past practice and as part of our strategic initiative, we expect to repurchase the remainder of these shares in
2017
. The timing of these share repurchases will depend on market conditions. Some of these shares will be purchased to offset any dilution from long-term stock awards granted as part of our compensation programs.
Net cash used for investing activities was
$124 million
, and included
$180 million
for capital expenditures, partially offset by
$40 million
net proceeds from the sale of short-term bank deposits and
$32 million
cash receive
d from financial investments, primarily related to the early redemption of our auction rate securities.
We continue to invest in our manufacturing and distribution operations to increase our productivity, improve customer service and support new product innovation. Capital expenditures for
2016
were
$180 million
, compared with
$158 million
for
2015
and
$128 million
for
2014
. For
2017
, capital expenditures, excluding any potential
2017
acquisitions, are expected to be approximately $200 million. Depreciation and amortization expense for
2016
totaled
$134 million
, compared with
$133 million
for
2015
and
$167 million
for
2014
. For
2017
, depreciation and amortization expense, excluding any potential
2017
acquisitions, is expected to be approximately $130 million. Amortization expense totaled $10 million, $11 million and $10 million in
2016
,
2015
and
2014
, respectively.
Costs of environmental responsibilities and compliance with existing environmental laws and regulations have not had, nor do we expect them to have, a material effect on our capital expenditures, financial position or results of operations.
We believe that our present cash balance and cash flows from operations are sufficient to fund our near-term working capital and other investment needs. We believe that our longer-term working capital and other general corporate requirements will be satisfied through cash flows from operations and, to the extent necessary, from bank borrowings and future financial market activities.
Consolidated Results of Operations
We report our financial results in accordance with GAAP in the United States. However, we believe that certain non-GAAP performance measures and ratios, used in managing the business, may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, our reported results under GAAP.
Sales and Operations
Net sales for
2016
were
$7.4 billion
, which increased three percent compared with
2015
. Excluding acquisitions and the unfavorable effect of currency translation, net sales increased four percent compared to
2015
. The following table reconciles reported net sales to net sales excluding acquisitions and the effect of currency translation, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
2016
|
|
2015
|
|
Net sales, as reported
|
$
|
7,357
|
|
|
$
|
7,142
|
|
|
Acquisitions
|
(6
|
)
|
|
—
|
|
|
Net sales, excluding acquisitions
|
7,351
|
|
|
7,142
|
|
|
Currency translation
|
68
|
|
|
—
|
|
|
Net sales, excluding acquisitions and the effect of currency translation
|
$
|
7,419
|
|
|
$
|
7,142
|
|
Net sales for
2016
were positively affected by increased sales volume of plumbing products, paints and other coating products and builders' hardware, which, in aggregate, increased sales by approximately five percent compared to
2015
. Net sales for
2016
were also positively affected by favorable product mix of cabinets and windows, and net selling price increases of North American windows and North American and international plumbing products, which, in aggregate, increased sales approximately one percent. Net sales for
2016
were negatively affected by lower sales volume of cabinets and lower net selling prices of paints and other coating products, which, in aggregate, decreased sales by approximately two percent.
Net sales for
2015
were positively affected by increased sales volume of plumbing products, paints and other coating products, windows and builders' hardware, which, in aggregate, increased sales by approximately four percent compared to
2014
. Net sales for
2015
were also positively affected by net selling price increases of plumbing products, cabinets and windows, which, in aggregate, increased sales approximately one percent. Product mix of North American cabinets and windows also positively affected
2015
net sales. Net sales for
2015
were negatively affected by lower sales volume of cabinets and lower net selling prices of paints and other coating products.
Net sales for
2014
were positively affected by increased sales volume of North American plumbing products, paints and other coating products, builders' hardware and North American windows. Net sales for
2014
were also positively affected by net selling prices for cabinets, international plumbing products, and windows. Net sales for
2014
were negatively affected by lower sales volume of cabinets and by lower net selling prices of paints and other coating products.
Our gross profit margins were
33.4
percent,
31.5
percent and
29.4
percent in
2016
,
2015
and
2014
, respectively. The
2016
and
2015
gross profit margins were positively affected by increased sales volume, a more favorable relationship between selling prices and commodity costs, and the benefits associated with business rationalization and other cost savings initiatives.
2016 gross profit margins were negatively impacted by an increase in warranty costs resulting from a change in our estimate of expected future warranty claim costs.
Selling, general and administrative expenses as a percent of sales were
19.1
percent in
2016
compared with
18.7
percent in
2015
and
19.2
percent in
2014
. Selling, general and administrative expenses as a percent of sales in
2016
reflect certain variable expenses, such as strategic growth investments, as well as ERP system implementation and higher insurance costs. Selling, general and administrative expenses as a percent of sales in 2015 reflect increased sales and the effect of cost containment measures.
The following table reconciles reported operating profit to operating profit, as adjusted to exclude certain items, dollars in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Operating profit, as reported
|
$
|
1,053
|
|
|
$
|
914
|
|
|
$
|
721
|
|
|
Rationalization charges
|
22
|
|
|
18
|
|
|
64
|
|
|
Income from litigation settlements
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
Gain from sale of property and equipment
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
Operating profit, as adjusted
|
$
|
1,075
|
|
|
$
|
927
|
|
|
$
|
776
|
|
|
Operating profit margins, as reported
|
14.3
|
%
|
|
12.8
|
%
|
|
10.3
|
%
|
|
Operating profit margins, as adjusted
|
14.6
|
%
|
|
13.0
|
%
|
|
11.1
|
%
|
Operating profit margins in
2016
and
2015
were positively affected by increased sales volume, a more favorable relationship between selling prices and commodity costs and the benefits associated with business rationalizations and other cost savings initiatives. Operating profit margin in 2016 was negatively impacted by an increase in warranty costs resulting from a change in expected future warranty claim costs and certain variable expenses, such as strategic growth investments, as well as ERP system implementation and higher insurance costs. Operating profit in 2015 was negatively affected by foreign currency translation.
Other Income (Expense), Net
Other, net, for
2016
included net gains of
$5 million
from distributions from private equity funds,
$3 million
from the redemption of auction rate securities and
$2 million
of earnings from equity investments. Other, net for
2016
also included losses from the disposition of other investments of
$3 million
, realized foreign currency losses of $3 million and other miscellaneous items.
Other, net, for
2015
included net gains of
$6 million
from distributions from private equity funds and
$2 million
of earnings from equity investments. Other, net, for
2015
also included realized foreign currency losses of
$14 million
and other miscellaneous items.
Other, net, for
2014
included net gains of
$4 million
from distributions from private equity funds and realized foreign currency gains of
$5 million
and other miscellaneous items. Income from financial investments, net, for
2014
included losses from equity investments, net, of $2 million.
Interest expense was
$229 million
in
2016
and
$225 million
in
2015
and
2014
. Interest expense increased in 2016 due primarily to the $40 million of additional interest expense in connection with the early retirement of debt, partially offset by the interest savings due to the discharge of indebtedness.
Income and Earnings Per Common Share from Continuing Operations (Attributable to Masco Corporation)
Income and diluted income per common share from continuing operations for
2016
were
$491 million
and
$1.47
per common share, respectively. Income and diluted income per common share from continuing operations for
2015
were
$357 million
and
$1.03
per common share, respectively. Income and diluted income per common share from continuing operations for
2014
were
$821 million
and
$2.28
per common share, respectively.
Our effective tax rate on income from continuing operations was 36 percent tax expense, 43 percent tax expense and 71 percent tax benefit in
2016
,
2015
and
2014
, respectively. The 2016 effective tax rate includes a $14 million charge to tax expense from the elimination of a disproportionate tax effect resulting from our auction rate securities being called by our counterparty during 2016. This charge was offset by a $13 million tax benefit from the recognition of a deferred tax asset on certain German net operating losses primarily resulting from a return to sustainable profitability. Refer to Note S to the consolidated financial statements for additional information.
Compared to our normalized tax rate of 36 percent, the variance in
2015
is due primarily to a $21 million valuation allowance against certain deferred tax assets of TopBuild recorded as a non-cash charge to income tax expense. The TopBuild deferred tax assets have been impaired by our decision to spin off TopBuild into a separate company that on a stand-alone basis as of June 30, 2015, the spin off date, was unlikely to be able to realize the value of such deferred tax assets as a result of its history of losses.
The
2015
effective tax rate also includes a $19 million charge to income tax expense to recognize the required taxes on substantially all undistributed foreign earnings, except for those that are legally restricted. This charge was
the result of our determination that we may need to repatriate earnings from certain foreign subsidiaries that were previously considered permanently reinvested in order to provide greater flexibility in the execution of our capital management strategy.
The variance from our normalized tax rate in
2014
is due primarily to changes in the U.S. Federal valuation allowance and reversal of an accrual for uncertain tax positions.
Outlook for the Company
We continue to successfully execute against our long-term growth strategies by leveraging our brand portfolio, industry-leading positions, and Masco Operating System, our methodology to drive growth and productivity. We believe we will continue to see strong demand for our market-leading products, as the fundamentals for long-term demand in both repair and remodel and new home construction continue to be positive. We believe that our strong financial position, together with our current strategy of investing in our industry-leading branded building products, our continued focus on innovation and our commitment to operational excellence and disciplined capital allocation will allow us to drive long-term growth and create value for our shareholders.
Business Segment and Geographic Area Results
The following table sets forth our net sales and operating profit (loss) information by business segment and geographic area, dollars in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
Change
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
vs.
2015
|
|
2015
vs.
2014
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plumbing Products
|
$
|
3,526
|
|
|
$
|
3,341
|
|
|
$
|
3,308
|
|
|
6
|
%
|
|
1
|
%
|
|
Decorative Architectural Products
|
2,092
|
|
|
2,020
|
|
|
1,998
|
|
|
4
|
%
|
|
1
|
%
|
|
Cabinetry Products
|
970
|
|
|
1,025
|
|
|
999
|
|
|
(5
|
)%
|
|
3
|
%
|
|
Windows and Other Specialty Products
|
769
|
|
|
756
|
|
|
701
|
|
|
2
|
%
|
|
8
|
%
|
|
Total
|
$
|
7,357
|
|
|
$
|
7,142
|
|
|
$
|
7,006
|
|
|
3
|
%
|
|
2
|
%
|
|
North America
|
$
|
5,834
|
|
|
$
|
5,645
|
|
|
$
|
5,377
|
|
|
3
|
%
|
|
5
|
%
|
|
International, principally Europe
|
1,523
|
|
|
1,497
|
|
|
1,629
|
|
|
2
|
%
|
|
(8
|
)%
|
|
Total
|
$
|
7,357
|
|
|
$
|
7,142
|
|
|
$
|
7,006
|
|
|
3
|
%
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Operating Profit (Loss): (A)
|
|
|
|
|
|
|
|
|
|
Plumbing Products
|
$
|
642
|
|
|
$
|
512
|
|
|
$
|
512
|
|
|
Decorative Architectural Products
|
430
|
|
|
403
|
|
|
360
|
|
|
Cabinetry Products
|
93
|
|
|
51
|
|
|
(62
|
)
|
|
Windows and Other Specialty Products
|
(3
|
)
|
|
57
|
|
|
47
|
|
|
Total
|
$
|
1,162
|
|
|
$
|
1,023
|
|
|
$
|
857
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
961
|
|
|
$
|
841
|
|
|
$
|
643
|
|
|
International, principally Europe
|
201
|
|
|
182
|
|
|
214
|
|
|
Total
|
1,162
|
|
|
1,023
|
|
|
857
|
|
|
General corporate expense, net
|
(109
|
)
|
|
(109
|
)
|
|
(145
|
)
|
|
Income from litigation settlements
|
—
|
|
|
—
|
|
|
9
|
|
|
Total operating profit
|
$
|
1,053
|
|
|
$
|
914
|
|
|
$
|
721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Operating Profit (Loss) Margin: (A)
|
|
|
|
|
|
|
|
|
|
Plumbing Products
|
18.2
|
%
|
|
15.3
|
%
|
|
15.5
|
%
|
|
Decorative Architectural Products
|
20.6
|
%
|
|
20.0
|
%
|
|
18.0
|
%
|
|
Cabinetry Products
|
9.6
|
%
|
|
5.0
|
%
|
|
(6.2
|
)%
|
|
Windows and Other Specialty Products
|
(0.4
|
)%
|
|
7.5
|
%
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
North America
|
16.5
|
%
|
|
14.9
|
%
|
|
12.0
|
%
|
|
International, principally Europe
|
13.2
|
%
|
|
12.2
|
%
|
|
13.1
|
%
|
|
Total
|
15.8
|
%
|
|
14.3
|
%
|
|
12.2
|
%
|
|
|
|
|
|
|
|
|
Total operating profit margin, as reported
|
14.3
|
%
|
|
12.8
|
%
|
|
10.3
|
%
|
|
|
|
|
(A)
|
Before general corporate expense, net, and certain income from litigation settlements; refer to Note P to the consolidated financial statements for additional information.
|
Business Segment Results Discussion
Changes in operating profit margins in the following Business Segment and Geographic Area Results discussion exclude general corporate expense, net, and income from litigation settlements.
Business Rationalizations and Other Initiatives
Over the last several years, we have taken several actions focused on the strategic rationalization of our businesses including business consolidations, plant closures, headcount reductions and other cost savings initiatives. For the years ended
December 31, 2016
,
2015
and
2014
, we incurred net pre-tax costs and charges related to these initiatives of
$22 million
,
$18 million
, and
$64 million
, respectively.
We continue to realize the benefits of our business rationalizations and continuous improvement initiatives across our enterprise and expect to identify additional opportunities to improve our business operations, although we do not anticipate that the costs and charges related to our ongoing commitment to continuous improvement will be as significant as they have been in prior years.
During
2016
, our Plumbing Products segment incurred costs of
$13 million
primarily related to plant closure costs in Canada and at our international operations, as well as severance costs across multiple businesses. Our Cabinetry Products segment continued to incur costs and charges of
$8 million
primarily related to cost savings initiatives in North America. Lastly, our Windows and Other Specialty Products segment incurred costs of $1 million related to severance at our U.S. windows business.
During
2015
, our Plumbing Products segment incurred costs of
$9 million
primarily related to severance and other cost savings initiatives across multiple businesses. Our Cabinetry Products segment continued to incur costs and charges of
$5 million
primarily related to cost savings initiatives in North America. Our corporate office incurred
$4 million
in costs primarily related to severance actions.
During
2014
, our North American cabinet business incurred costs and charges of
$31 million
primarily related to actions taken to sell two previously idled manufacturing facilities. Our corporate office incurred
$27 million
in costs primarily related to severance actions. Finally, we incurred $6 million of costs and charges across our business units related to other cost savings initiatives.
Plumbing Products
Sales
Net sales of Plumbing Products increased six percent in 2016 compared to 2015, primarily due to increased sales volume of both North American and international operations, partially offset by foreign currency translation, which reduced sales by one percent compared to 2015.
Net sales in this segment increased one percent in 2015 compared to 2014. Net sales increased primarily due to increased sales volume of both North American and international operations, which increased sales by five percent, and net selling price increases primarily related to international operations, which increased sales by two percent. An acquisition also positively impacted sales by one percent compared to 2014. Foreign currency translation reduced sales by seven percent compared to 2014, primarily due to the stronger U.S. dollar. Excluding the impact of foreign currency translation, segment sales increased by eight percent in 2015 compared to 2014.
Net sales in this segment increased in 2014 primarily due to increased sales volume of both North American and International operations. This segment was also positively affected by increased net selling prices of International plumbing products.
Operating Results
Operating margins in the Plumbing Products segment in 2016 were positively impacted by increased sales volume, a favorable relationship between selling prices and commodity costs (including the positive impact of the metal hedge contracts), and the benefits associated with business rationalization and other cost savings initiatives. Such increases were partially offset by an increase in certain variable expenses, such as strategic growth investments and higher insurance costs, as well as unfavorable product mix.
Operating margins in this segment in 2015 were negatively impacted by unfavorable product mix, as well as an increase in certain variable expenses, such as trade show and marketing expenses and legal-related expenses. Such decreases were partially offset by increased sales volume and a favorable relationship between selling prices and commodity costs (including the negative impact of the metal hedge contracts). Although operating margins were not
significantly impacted, foreign currency translation, primarily due to a stronger U.S. dollar, negatively impacted operating profit by six percent compared to 2014.
Operating margins in this segment in 2014 were positively affected by increased sales volume, a more favorable relationship between selling prices and commodity costs (including the positive impact of the metal hedge contracts), lower business rationalization expenses and the benefits associated with business rationalization activities and other cost savings initiatives.
Decorative Architectural Products
Sales
Net sales of Decorative Architectural Products increased four percent in 2016 compared to 2015. Net sales increased primarily due to increased sales volume of paints and other coating products related to our BEHR PRO
®
business and core-DIY products, as well as builder's hardware. Such increases were partially offset by lower net selling prices of paints and other coating products.
Net sales in this segment increased in 2015, primarily due to increased sales volume of paints and other coating products related to the expansion of the BEHR PRO business and increased sales volume of builders' hardware. Such increases were partially offset by lower net selling prices of paints and other coating products and an unfavorable currency impact of Canadian paints and other coating products sales.
Net sales in this segment increased in 2014, primarily due to increased sales volume of paints and other coating products related to new product introductions and other growth initiatives and increased sales volume of builders' hardware, partially offset by lower net selling prices of paints and other coating products.
Operating Results
Operating margins in the Decorative Architectural Products segment reflect increased sales volume of paints and other coating products and builders' hardware, partially offset by an unfavorable relationship between selling prices and commodity costs of paints and other coating products.
Operating margins in this segment in 2015 reflect operational efficiencies due to benefits associated with cost savings initiatives, a more favorable relationship between selling prices and commodity costs and increased sales volume of paints and other coating products and builders' hardware. Such increases were partially offset by an increase in advertising and display expenses. Operating margins were also negatively impacted by unfavorable currency effects from our Canadian operating results due to the stronger U.S. dollar in 2015.
Operating margins in this segment in 2014 reflect a less favorable relationship between selling prices and commodity costs, a less favorable product mix of paints and other coating products and costs for new product introductions and advertising. Such decreases more than offset the benefits associated with cost savings initiatives.
Cabinetry Products
Sales
Net sales of Cabinetry Products decreased five percent in 2016 compared to 2015. Net sales decreased primarily due to lower sales volume of cabinets resulting from our deliberate exit of certain lower margin business in the direct-to-builder channel in the U.S. and other accounts in the U.K., which, in aggregate, decreased sales by 10 percent compared to 2015, and a stronger U.S. dollar which decreased sales by one percent compared to 2015. Such decreases were partially offset by a favorable product mix of North American and international cabinets and net selling price increases of North American cabinets, which, in aggregate, increased sales by six percent compared to 2015.
Net sales in this segment increased three percent in 2015 compared to 2014. Net sales increased primarily due to a favorable product mix and net selling price increases of North American and international cabinets, which, in aggregate, increased sales by six percent compared to 2014. Net sales decreased due to decreased sales volumes in both North America and international cabinets, which on a combined basis decreased sales by three percent compared to 2014.
Net sales in this segment in 2014 decreased primarily due to lower sales volume and a less favorable product mix of North American operations. Such decreases were partially offset by increased net selling prices in North America and increased sales volume and a more favorable product mix of international cabinets.
Operating Results
Operating margins in the Cabinetry Products segment in 2016 were positively affected by operational efficiencies due to the benefits associated with business rationalization activities and other cost savings initiatives, a favorable product mix, and a more favorable relationship between selling prices and commodity costs primarily at our North American cabinets business. This increase was partially offset by decreased sales volume in North American and international cabinets.
Operating margins in this segment in 2015 were positively affected by operational efficiencies due to the benefits associated with business rationalization activities and other cost savings initiatives and decreased business rationalization expenses. Operating margins were also positively affected by a more favorable relationship between selling prices and commodity costs and a favorable product mix.
Operating margins in this segment in 2014 were negatively affected by lower North American sales volume and the related under-absorption of fixed costs as well as increased business rationalization expenses. Operating margins were also negatively affected by a less favorable product mix. Such declines more than offset a more favorable relationship between selling prices and commodity costs and the benefits associated with business rationalization activities and other cost savings initiatives.
Windows and Other Specialty Products
Sales
Net sales of Windows and Other Specialty Products increased two percent in 2016 compared to 2015. Net sales increased primarily due to increased net selling prices of North American windows and a favorable product mix of North American and international windows, which, on a combined basis, increased sales by four percent compared to 2015. An acquisition positively impacted sales by one percent compared to 2015. These increases were partially offset by a stronger U.S. dollar which decreased sales by three percent compared to 2015.
Net sales in this segment increased eight percent in 2015 compared to 2014. Net sales increased primarily due to increased sales volume and a favorable product mix of North American windows in the Western U.S., which, on a combined basis, increased sales by seven percent compared to 2014. An acquisition positively impacted sales by one percent compared to 2014. This segment was also positively affected by net selling price increases, increased sales volume and a favorable product mix of our U.K. windows business compared to 2014. A stronger U.S. dollar decreased sales by two percent compared to 2014.
Net sales in this segment increased in 2014 primarily due to more favorable product mix, increased net selling prices and increased sales volume of North American windows in the Western U.S. This segment was also positively affected by a more favorable product mix and increased net selling prices of our U.K. windows business. A weaker U.S. dollar also increased sales. Such increases were partially offset by lower sales volume and lower net selling prices of staple gun tackers and other fastening tools.
Operating Results
Operating margins in the Windows and Other Specialty Products segment decreased in 2016 due to an increase in warranty costs primarily resulting from a change in our estimate of future warranty claim costs, as well as increases in certain other expenses, such as higher labor costs and ERP system implementation costs at our North American windows business. Such costs were partially offset by a more favorable relationship between selling prices and commodity costs of U.S. windows.
Operating margins in this segment in 2015 reflect higher sales volume and favorable product mix of windows in the Western U.S., and a more favorable relationship between selling prices and commodity costs of windows in the U.S. and U.K. Such increases were partially offset by an increase in certain expenses, such as advertising and ERP system implementation costs in 2015.
Operating margins in this segment in 2014 reflect a more favorable relationship between selling prices and commodity costs, a more favorable product mix of U.S. and U.K. windows and increased sales volume in the Western U.S. Such positive results were partially offset by lower sales volume and lower net selling prices of staple gun tackers and other fastening tools.
Geographic Area Results Discussion
North America
Sales
North American net sales in
2016
were positively impacted by increased sales volume of paints and other coating products, plumbing products and builders' hardware, which more than offset decreased sales volume of cabinets. In aggregate, sales volume increased North American sales by three percent compared to
2015
. A favorable product mix of cabinets and windows, in aggregate, increased sales by one percent compared to
2015
. Increased net selling prices of windows, plumbing products and cabinets, in aggregate, also increased sales by one percent compared to
2015
. Such increases were partially offset by lower net selling prices of paints and other coating products.
North American net sales in
2015
were positively impacted by increased sales volume of plumbing products, paints and other coating products, windows and builders' hardware which more than offset negative sales volume of cabinets. In aggregate, sales volume increased North American sales by approximately four percent compared to
2014
. Net sales were also positively impacted by a favorable product mix of North American cabinets and windows, which in aggregate, increased sales by approximately one percent compared to
2014
. Net sales were also positively affected by increased selling prices of cabinets, plumbing products and windows, which increased sales by approximately one percent compared to
2014
. An acquisition also positively impacted sales by one percent compared to
2014
. Such increases were partially offset by foreign currency translation, primarily due to the stronger U.S. dollar and lower selling prices of paints and other coating products.
North American net sales in
2014
were positively impacted by increased sales volume of plumbing products, paints and other coating products, builders' hardware and windows. Net sales were also positively affected by increased selling prices of cabinets and windows. Such increases were partially offset by lower sales volume of cabinets and lower selling prices of paints and other coating products.
Operating Results
Operating margins from North American operations in
2016
were positively affected by the benefits associated with business rationalization and other cost savings initiatives. North American operations were also positively affected by increased sales volume, a more favorable relationship between selling prices and commodity costs, as well as a favorable product mix. Such increases were partially offset by an increase in warranty costs and certain other expenses, such as higher labor costs, ERP system implementation costs, strategic growth investments and insurance costs.
Operating margins from North American operations in
2015
were positively affected by increased sales volume, as well as a more favorable relationship between selling prices and commodity costs. North American operations were also positively affected by the benefits associated with past business rationalization and other cost savings initiatives and decreased business rationalization expenses.
Operating margins from North American operations in
2014
were positively affected by increased sales volume, as well as a more favorable relationship between selling prices and commodity costs. North American operations were also positively affected by the benefits associated with past business rationalization and other cost savings initiatives.
International, Principally Europe
Sales
Net sales from International operations increased by two percent in
2016
compared to
2015
. In local currencies (including sales in foreign currencies outside their respective functional currencies), net sales increased six percent compared to
2015
, due primarily to increased sales volume of plumbing products, which increased sales by six percent compared to 2015. Net sales were also positively impacted by a favorable product mix of cabinets and windows, and increased net selling prices for plumbing products, which, in aggregate, increased sales by one percent compared to 2015. These increases were partially offset by lower sales volume for cabinets, which decreased sales by one percent compared to 2015.
Net sales from International operations decreased by eight percent in
2015
compared to 2014, due primarily to a stronger U.S. dollar in
2015
. In local currencies, net sales increased five percent compared to
2014
, primarily due to increased selling prices and sales volume for plumbing products. An acquisition also positively impacted net sales by one percent compared to
2014
, partially offset by lower sales volumes for cabinets.
Net sales from International operations increased in
2014
, primarily due to increased selling prices and sales volume for plumbing products, a more favorable product mix of cabinets and windows and a weaker U.S. dollar.
Operating Results
Operating margins from International operations in
2016
were positively affected by increased sales volume and a more favorable relationship between selling prices and commodity costs of plumbing products. These increases were partially offset by certain variable expenses, including strategic growth investments.
Operating margins from International operations in
2015
were negatively affected by unfavorable product mix and increased costs to support future sales growth initiatives, partially offset by a more favorable relationship between selling prices and commodity costs, primarily related to plumbing products. Although operating margins were not significantly impacted, foreign currency translation, primarily due to a stronger U.S. dollar, negatively impacted operating profit by 14 percent compared to
2014
.
Operating margins from International operations in
2014
were positively affected by a more favorable relationship between selling prices and commodity costs, primarily related to plumbing products.
Other Matters
Commitments and Contingencies
Litigation
Information regarding our legal proceedings is set forth in Note U to the consolidated financial statements, which is incorporated herein by reference.
Other Commitments
We enter into contracts, which include reasonable and customary indemnifications that are standard for the industries in which we operate. Such indemnifications include claims made against builders by homeowners for issues relating to our products and workmanship. In conjunction with divestitures and other transactions, we occasionally provide reasonable and customary indemnifications. We have never had to pay a material amount related to these indemnifications, and we evaluate the probability that amounts may be incurred and we appropriately record an estimated liability when probable.
Recently Issued Accounting Pronouncements
Refer to Note A to the consolidated financial statements for discussion of recently issued accounting pronouncements, which is incorporated herein by reference.
Contractual Obligations
The following table provides payment obligations related to current contracts at
December 31, 2016
, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
2017
|
|
2018-2019
|
|
2020-2021
|
|
Beyond
2021
|
|
Other (D)
|
|
Total
|
|
Debt
(A)
|
$
|
2
|
|
|
$
|
116
|
|
|
$
|
902
|
|
|
$
|
1,999
|
|
|
$
|
—
|
|
|
$
|
3,019
|
|
|
Interest
(A)
|
168
|
|
|
324
|
|
|
259
|
|
|
586
|
|
|
—
|
|
|
1,337
|
|
|
Operating leases
|
44
|
|
|
60
|
|
|
35
|
|
|
50
|
|
|
—
|
|
|
189
|
|
|
Currently payable income taxes
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
Private equity funds
(B)
|
2
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
Purchase commitments
(C)
|
249
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
250
|
|
|
Uncertain tax positions, including interest and penalties
(D)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
55
|
|
|
55
|
|
|
Total
|
$
|
472
|
|
|
$
|
504
|
|
|
$
|
1,196
|
|
|
$
|
2,635
|
|
|
$
|
55
|
|
|
$
|
4,862
|
|
|
|
|
|
(A)
|
We assumed that all debt would be held to maturity.
|
|
|
|
|
(B)
|
There is no schedule for the capital commitments to the private equity funds; such allocation was estimated.
|
|
|
|
|
(C)
|
Excludes contracts that do not require volume commitments and open or pending purchase orders.
|
|
|
|
|
(D)
|
Due to the high degree of uncertainty regarding the timing of future cash outflows associated with uncertain tax positions, we are unable to make a reasonable estimate for the period beyond the next year in which cash settlements may occur with applicable tax authorities.
|
Refer to Note M to the consolidated financial statements for defined-benefit plan obligations.
|
|
|
|
Item 8.
|
Financial Statements and Supplementary Data.
|
Management's Report on Internal Control Over Financial Reporting
The management of Masco Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Masco Corporation's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The management of Masco Corporation assessed the effectiveness of the Company's internal control over financial reporting as of
December 31, 2016
using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control – Integrated Framework." Based on this assessment, management has determined that the Company's internal control over financial reporting was effective as of
December 31, 2016
.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, performed an audit of the Company's consolidated financial statements and of the effectiveness of Masco Corporation's internal control over financial reporting as of
December 31, 2016
. Their report expressed an unqualified opinion on the effectiveness of Masco Corporation's internal control over financial reporting as of
December 31, 2016
and expressed an unqualified opinion on the Company's
2016
consolidated financial statements. This report appears under 'Item 8. Financial Statements and Supplementary Data' under the heading "Report of Independent Registered Public Accounting Firm."
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Masco Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) (1) present fairly, in all material respects, the financial position of Masco Corporation and its subsidiaries at
December 31, 2016
and
2015
, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2016
in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016
, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 9, 2017
Financial Statements and Supplementary Data
MASCO CORPORATION and Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
at December 31, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions, Except Share Data)
|
|
|
|
2016
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash and cash investments
|
$
|
990
|
|
|
$
|
1,468
|
|
|
Short-term bank deposits
|
201
|
|
|
248
|
|
|
Receivables
|
917
|
|
|
853
|
|
|
Inventories
|
712
|
|
|
687
|
|
|
Prepaid expenses and other
|
114
|
|
|
72
|
|
|
Total current assets
|
2,934
|
|
|
3,328
|
|
|
Property and equipment, net
|
1,060
|
|
|
1,027
|
|
|
Goodwill
|
832
|
|
|
839
|
|
|
Other intangible assets, net
|
154
|
|
|
160
|
|
|
Other assets
|
157
|
|
|
310
|
|
|
Total Assets
|
$
|
5,137
|
|
|
$
|
5,664
|
|
|
|
|
|
|
|
LIABILITIES and EQUITY
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
Accounts payable
|
$
|
800
|
|
|
$
|
749
|
|
|
Notes payable
|
2
|
|
|
1,004
|
|
|
Accrued liabilities
|
658
|
|
|
650
|
|
|
Total current liabilities
|
1,460
|
|
|
2,403
|
|
|
Long-term debt
|
2,995
|
|
|
2,403
|
|
|
Other liabilities
|
785
|
|
|
800
|
|
|
Total Liabilities
|
5,240
|
|
|
5,606
|
|
|
|
|
|
|
|
Commitments and contingencies (Note U)
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
Masco Corporation's shareholders' equity Common shares authorized: 1,400,000,000; issued and outstanding:
2016 – 318,000,000; 2015 – 330,500,000
|
318
|
|
|
330
|
|
|
Preferred shares authorized: 1,000,000; issued and outstanding:
2016 and 2015 – None
|
—
|
|
|
—
|
|
|
Paid-in capital
|
—
|
|
|
—
|
|
|
Retained deficit
|
(381
|
)
|
|
(300
|
)
|
|
Accumulated other comprehensive loss
|
(235
|
)
|
|
(165
|
)
|
|
Total Masco Corporation's shareholders' deficit
|
(298
|
)
|
|
(135
|
)
|
|
Noncontrolling interest
|
195
|
|
|
193
|
|
|
Total Equity
|
(103
|
)
|
|
58
|
|
|
Total Liabilities and Equity
|
$
|
5,137
|
|
|
$
|
5,664
|
|
See notes to consolidated financial statements.
MASCO CORPORATION and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31,
2016
,
2015
and
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions, Except Per Common Share Data)
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net sales
|
$
|
7,357
|
|
|
$
|
7,142
|
|
|
$
|
7,006
|
|
|
Cost of sales
|
4,901
|
|
|
4,889
|
|
|
4,946
|
|
|
Gross profit
|
2,456
|
|
|
2,253
|
|
|
2,060
|
|
|
Selling, general and administrative expenses
|
1,403
|
|
|
1,339
|
|
|
1,347
|
|
|
Income from litigation settlements
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
Impairment charge for other intangible assets
|
—
|
|
|
—
|
|
|
1
|
|
|
Operating profit
|
1,053
|
|
|
914
|
|
|
721
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(229
|
)
|
|
(225
|
)
|
|
(225
|
)
|
|
Other, net
|
6
|
|
|
—
|
|
|
11
|
|
|
|
(223
|
)
|
|
(225
|
)
|
|
(214
|
)
|
|
Income from continuing operations before income taxes
|
830
|
|
|
689
|
|
|
507
|
|
|
Income tax expense (benefit)
|
296
|
|
|
293
|
|
|
(361
|
)
|
|
Income from continuing operations
|
534
|
|
|
396
|
|
|
868
|
|
|
(Loss) income from discontinued operations, net
|
—
|
|
|
(2
|
)
|
|
35
|
|
|
Net income
|
534
|
|
|
394
|
|
|
903
|
|
|
Less: Net income attributable to noncontrolling interest
|
43
|
|
|
39
|
|
|
47
|
|
|
Net income attributable to Masco Corporation
|
$
|
491
|
|
|
$
|
355
|
|
|
$
|
856
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share attributable to Masco Corporation:
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
1.49
|
|
|
$
|
1.04
|
|
|
$
|
2.31
|
|
|
(Loss) income from discontinued operations, net
|
—
|
|
|
(0.01
|
)
|
|
0.10
|
|
|
Net income
|
$
|
1.49
|
|
|
$
|
1.03
|
|
|
$
|
2.40
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
1.47
|
|
|
$
|
1.03
|
|
|
$
|
2.28
|
|
|
(Loss) income from discontinued operations, net
|
—
|
|
|
(0.01
|
)
|
|
0.10
|
|
|
Net income
|
$
|
1.47
|
|
|
$
|
1.02
|
|
|
$
|
2.38
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Masco Corporation:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
491
|
|
|
$
|
357
|
|
|
$
|
821
|
|
|
(Loss) income from discontinued operations, net
|
—
|
|
|
(2
|
)
|
|
35
|
|
|
Net income
|
$
|
491
|
|
|
$
|
355
|
|
|
$
|
856
|
|
See notes to consolidated financial statements.
MASCO CORPORATION and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
for the years ended December 31,
2016
,
2015
and
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net income
|
$
|
534
|
|
|
$
|
394
|
|
|
$
|
903
|
|
|
Less: Net income attributable to noncontrolling interest
|
43
|
|
|
39
|
|
|
47
|
|
|
Net income attributable to Masco Corporation
|
$
|
491
|
|
|
$
|
355
|
|
|
$
|
856
|
|
|
Other comprehensive income (loss), net of tax (Note O):
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
$
|
(78
|
)
|
|
$
|
(96
|
)
|
|
$
|
(124
|
)
|
|
Interest rate swaps
|
1
|
|
|
2
|
|
|
1
|
|
|
Pension and other post-retirement benefits
|
(15
|
)
|
|
26
|
|
|
(140
|
)
|
|
Realized loss on available-for-sale securities
|
12
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive (loss)
|
(80
|
)
|
|
(68
|
)
|
|
(263
|
)
|
|
Less: Other comprehensive income (loss) attributable to the noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
$
|
(10
|
)
|
|
$
|
(16
|
)
|
|
$
|
(31
|
)
|
|
Pension and other post-retirement benefits
|
—
|
|
|
2
|
|
|
(6
|
)
|
|
|
(10
|
)
|
|
(14
|
)
|
|
(37
|
)
|
|
Other comprehensive (loss) attributable to Masco Corporation
|
$
|
(70
|
)
|
|
$
|
(54
|
)
|
|
$
|
(226
|
)
|
|
Total comprehensive income
|
$
|
454
|
|
|
$
|
326
|
|
|
$
|
640
|
|
|
Less: Total comprehensive income attributable to noncontrolling interest
|
33
|
|
|
25
|
|
|
10
|
|
|
Total comprehensive income attributable to Masco Corporation
|
$
|
421
|
|
|
$
|
301
|
|
|
$
|
630
|
|
See notes to consolidated financial statements.
MASCO CORPORATION and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31,
2016
,
2015
and
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
2016
|
|
2015
|
|
2014
|
|
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
534
|
|
|
$
|
394
|
|
|
$
|
903
|
|
|
Depreciation and amortization
|
134
|
|
|
133
|
|
|
167
|
|
|
Display amortization
|
25
|
|
|
20
|
|
|
15
|
|
|
Deferred income taxes
|
130
|
|
|
212
|
|
|
(406
|
)
|
|
(Gain) on disposition of investments, net
|
(4
|
)
|
|
(7
|
)
|
|
(2
|
)
|
|
Pension and other postretirement benefits
|
(78
|
)
|
|
(18
|
)
|
|
(36
|
)
|
|
Impairment of property and equipment, net
|
—
|
|
|
2
|
|
|
27
|
|
|
Stock-based compensation
|
29
|
|
|
41
|
|
|
47
|
|
|
(Increase) in receivables
|
(120
|
)
|
|
(104
|
)
|
|
(81
|
)
|
|
(Increase) decrease in inventories
|
(39
|
)
|
|
17
|
|
|
(75
|
)
|
|
Increase in accounts payable and accrued liabilities, net
|
71
|
|
|
82
|
|
|
63
|
|
|
Other items, net
|
44
|
|
|
(73
|
)
|
|
(20
|
)
|
|
Net cash from operating activities
|
726
|
|
|
699
|
|
|
602
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Retirement of notes
|
(1,300
|
)
|
|
(500
|
)
|
|
—
|
|
|
Purchase of Company common stock
|
(459
|
)
|
|
(456
|
)
|
|
(158
|
)
|
|
Cash dividends paid
|
(128
|
)
|
|
(126
|
)
|
|
(117
|
)
|
|
Dividends paid to noncontrolling interest
|
(31
|
)
|
|
(36
|
)
|
|
(34
|
)
|
|
Cash distributed to TopBuild Corp.
|
—
|
|
|
(63
|
)
|
|
—
|
|
|
Issuance of TopBuild Corp. debt
|
—
|
|
|
200
|
|
|
—
|
|
|
Issuance of notes, net of issuance costs
|
889
|
|
|
497
|
|
|
—
|
|
|
Debt extinguishment costs
|
(40
|
)
|
|
—
|
|
|
—
|
|
|
Increase in debt
|
3
|
|
|
4
|
|
|
4
|
|
|
Issuance of Company common stock
|
1
|
|
|
2
|
|
|
1
|
|
|
Excess tax benefit from stock-based compensation
|
23
|
|
|
75
|
|
|
13
|
|
|
Payment of debt
|
(4
|
)
|
|
(4
|
)
|
|
(6
|
)
|
|
Credit Agreement and other financing costs
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
Net cash for financing activities
|
(1,046
|
)
|
|
(410
|
)
|
|
(297
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
(180
|
)
|
|
(158
|
)
|
|
(128
|
)
|
|
Acquisition of businesses, net of cash acquired
|
—
|
|
|
(41
|
)
|
|
(2
|
)
|
|
Proceeds from disposition of:
|
|
|
|
|
|
|
|
|
|
Short-term bank deposits
|
251
|
|
|
279
|
|
|
379
|
|
|
Property and equipment
|
—
|
|
|
18
|
|
|
16
|
|
|
Other financial investments
|
32
|
|
|
10
|
|
|
64
|
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
|
Short-term bank deposits
|
(211
|
)
|
|
(253
|
)
|
|
(399
|
)
|
|
Other financial investments
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Other, net
|
(16
|
)
|
|
(43
|
)
|
|
(29
|
)
|
|
Net cash for investing activities
|
(124
|
)
|
|
(189
|
)
|
|
(100
|
)
|
|
Effect of exchange rate changes on cash and cash investments
|
(34
|
)
|
|
(15
|
)
|
|
(45
|
)
|
|
CASH AND CASH INVESTMENTS:
|
|
|
|
|
|
|
|
|
|
(Decrease) increase for the year
|
(478
|
)
|
|
85
|
|
|
160
|
|
|
At January 1
|
1,468
|
|
|
1,383
|
|
|
1,223
|
|
|
At December 31
|
$
|
990
|
|
|
$
|
1,468
|
|
|
$
|
1,383
|
|
See notes to consolidated financial statements.
MASCO CORPORATION and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31,
2016
,
2015
and
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions, Except Per Share Data)
|
|
|
Total
|
|
Common
Shares
($1 par value)
|
|
Paid-In
Capital
|
|
Retained
Earnings (Deficit)
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Noncontrolling
Interest
|
|
Balance, January 1, 2014
|
$
|
787
|
|
|
$
|
349
|
|
|
$
|
16
|
|
|
$
|
79
|
|
|
$
|
115
|
|
|
$
|
228
|
|
|
Total comprehensive income (loss)
|
640
|
|
|
|
|
|
|
|
|
856
|
|
|
(226
|
)
|
|
10
|
|
|
Shares issued
|
(6
|
)
|
|
3
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares retired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchased
|
(158
|
)
|
|
(7
|
)
|
|
(28
|
)
|
|
(123
|
)
|
|
|
|
|
|
|
|
Surrendered (non-cash)
|
(15
|
)
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
(122
|
)
|
|
|
|
|
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
Dividends paid to noncontrolling interest
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
Stock-based compensation
|
36
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
$
|
1,128
|
|
|
$
|
345
|
|
|
$
|
—
|
|
|
$
|
690
|
|
|
$
|
(111
|
)
|
|
$
|
204
|
|
|
Total comprehensive income (loss)
|
326
|
|
|
|
|
|
|
|
|
355
|
|
|
(54
|
)
|
|
25
|
|
|
Shares issued
|
(15
|
)
|
|
3
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares retired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchased
|
(456
|
)
|
|
(17
|
)
|
|
(65
|
)
|
|
(374
|
)
|
|
|
|
|
|
|
|
Surrendered (non-cash)
|
(18
|
)
|
|
(1
|
)
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
Cash dividends declared
|
(126
|
)
|
|
|
|
|
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
Dividends paid to noncontrolling interest
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
Separation of TopBuild Corp.
|
(828
|
)
|
|
|
|
|
|
|
|
(828
|
)
|
|
|
|
|
|
|
|
Stock-based compensation
|
83
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
$
|
58
|
|
|
$
|
330
|
|
|
$
|
—
|
|
|
$
|
(300
|
)
|
|
$
|
(165
|
)
|
|
$
|
193
|
|
|
Total comprehensive income (loss)
|
454
|
|
|
|
|
|
|
|
|
491
|
|
|
(70
|
)
|
|
33
|
|
|
Shares issued
|
(24
|
)
|
|
3
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares retired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchased
|
(459
|
)
|
|
(15
|
)
|
|
(14
|
)
|
|
(430
|
)
|
|
|
|
|
|
|
|
Surrendered (non-cash)
|
(14
|
)
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
Cash dividends declared
|
(128
|
)
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
Dividends paid to noncontrolling interest
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
Stock-based compensation
|
41
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
$
|
(103
|
)
|
|
$
|
318
|
|
|
$
|
—
|
|
|
$
|
(381
|
)
|
|
$
|
(235
|
)
|
|
$
|
195
|
|
See notes to consolidated financial statements.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
Principles of Consolidation.
The consolidated financial statements include the accounts of Masco Corporation and all majority-owned subsidiaries. All significant intercompany transactions have been eliminated. We consolidate the assets, liabilities and results of operations of variable interest entities for which we are the primary beneficiary.
Use of Estimates and Assumptions in the Preparation of Financial Statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates and assumptions.
Revenue Recognition.
We recognize revenue as title to products and risk of loss is transferred to customers or when services are rendered, net of applicable provisions for discounts, returns and allowances. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales.
Customer Promotion Costs.
We record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and certain co-operative advertising arrangements, promotions and other volume-based incentives. In-store displays that are owned by us and used to market our products are included in other assets in the consolidated balance sheets and are amortized using the straight-line method over the expected useful life of
three
to
five years
; related amortization expense is classified as a selling expense in the consolidated statements of operations.
Foreign Currency.
The financial statements of our foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at exchange rates as of the balance sheet dates. Revenues and expenses are translated at average exchange rates in effect during the year. The resulting cumulative translation adjustments have been recorded in the accumulated other comprehensive income (loss) component of shareholders' equity. Realized foreign currency transaction gains and losses are included in the consolidated statements of operations in other income (expense), net.
Cash and Cash Investments.
We consider all highly liquid investments with an initial maturity of three months or less to be cash and cash investments.
Short-Term Bank Deposits.
We invest a portion of our foreign excess cash in short-term bank deposits. These highly liquid investments have original maturities between three and twelve months and are valued at cost, which approximates fair value at
December 31, 2016
and
2015
. These short-term bank deposits are classified in the current assets section of our consolidated balance sheets, and interest income related to short-term bank deposits is recorded in our consolidated statements of operations in other income (expense), net.
Receivables.
We do significant business with a number of customers, including certain home center retailers and homebuilders. We monitor our exposure for credit losses on our customer receivable balances and the credit worthiness of our customers on an on-going basis and record related allowances for doubtful accounts. Allowances are estimated based upon specific customer balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon historical collection, return and write-off activity. During downturns in our markets, declines in the financial condition and creditworthiness of customers impacts the credit risk of the receivables involved and we have incurred additional bad debt expense related to customer defaults. A separate allowance is recorded for customer incentive rebates and is generally based upon sales activity. Receivables are presented net of certain allowances (including allowances for doubtful accounts) of
$40 million
and
$41 million
at
December 31, 2016
and
2015
, respectively.
Property and Equipment.
Property and equipment, including significant improvements to existing facilities, are recorded at cost. Upon retirement or disposal, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the consolidated statements of operations. Maintenance and repair costs are charged against earnings as incurred.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Continued)
We review our property and equipment as events occur or circumstances change that would more likely than not reduce the fair value of the property and equipment below the carrying amount. If the carrying amount of property and equipment is not recoverable from its undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, we evaluate the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.
Depreciation.
Depreciation expense is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements,
2
to
10
percent, and machinery and equipment,
5
to
33
percent. Depreciation expense was
$124 million
,
$116 million
and
$132 million
in
2016
,
2015
and
2014
, respectively.
Goodwill and Other Intangible Assets.
We perform our annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We have defined our reporting units and completed the impairment testing of goodwill at the operating segment level. Our operating segments are reporting units that engage in business activities, for which discrete financial information, including five-year forecasts, are available. We compare the fair value of the reporting units to the carrying value of the reporting units for goodwill impairment testing. Fair value is determined using a discounted cash flow method, which includes significant unobservable inputs (Level 3 inputs), and requires us to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in different outcomes. In estimating future cash flows, we rely on internally generated five-year forecasts for sales and operating profits, including capital expenditures, and, currently, a
one
to
three
percent long-term assumed annual growth rate of cash flows for periods after the
five
-year forecast. We utilize our weighted average cost of capital of approximately
8.5 percent
as the basis to determine the discount rate to apply to the estimated future cash flows. In
2016
, based upon our assessment of the risks impacting each of our businesses, we applied a risk premium to increase the discount rate to a range of
10.5 percent
to
13.5 percent
for our reporting units.
If the carrying amount of a reporting unit exceeds its fair value, we measure the possible goodwill impairment based upon an allocation of the estimate of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets (Step Two Analysis). The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit's recorded goodwill exceeds the implied fair value of goodwill.
We review our other indefinite-lived intangible assets for impairment annually in the fourth quarter of each year, or as events occur or circumstances change that indicate the assets may be impaired without regard to the business unit. We consider the implications of both external (e.g., market growth, competition and local economic conditions) and internal (e.g., product sales and expected product growth) factors and their potential impact on cash flows related to the intangible asset in both the near- and long-term.
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We evaluate the remaining useful lives of amortizable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization. Refer to Note H to the consolidated financial statements for additional information regarding goodwill and other intangible assets, net.
Fair Value Accounting.
We follow accounting guidance for our financial investments and liabilities, which defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements. We also follow this guidance for our non-financial investments and liabilities.
The fair value of financial investments and liabilities is determined at each balance sheet date and future declines in market conditions, the future performance of the underlying investments or new information could affect the recorded values of our investments in available-for-sale securities, private equity funds and other investments.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Continued)
We use derivative financial instruments to manage certain exposure to fluctuations in earnings and cash flows resulting from changes in foreign currency exchange rates, commodity costs and interest rate exposures. Derivative financial instruments are recorded in the consolidated balance sheets as either an asset or liability measured at fair value, netted by counterparty, where the right of offset exists. The gain or loss is recognized in determining current earnings during the period of the change in fair value. We currently do not have any derivative instruments for which we have designated hedge accounting.
Warranty.
We offer full and limited warranties on certain products with warranty periods ranging up to the lifetime of the product to the original consumer purchaser. At the time of sale, we accrue a warranty liability for the estimated future cost to provide products, parts or services to repair or replace products in satisfaction of warranty obligations. Our estimate of future costs to service our warranty obligations is based upon the information available and includes a number of factors, such as the warranty coverage, the warranty period, historical experience specific to the nature, frequency and average cost to service the claim, along with industry and demographic trends.
Certain factors and related assumptions in determining our warranty liability involve judgments and estimates and are sensitive to changes in the aforementioned factors. We believe that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates thereby requiring adjustments to previously established accruals. Refer to Note U to the consolidated financial statements for additional information on our warranty accrual.
A significant portion of our business is at the consumer retail level through home center retailers and other major retailers. A consumer may return a product to a retail outlet that is a warranty return. However, certain retail outlets do not distinguish between warranty and other types of returns when they claim a return deduction from us. Our revenue recognition policy takes into account this type of return when recognizing revenue, and deductions are recorded at the time of sale.
Insurance Reserves.
We provide for expenses associated with workers' compensation and product liability obligations when such amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change that would affect the estimated liability. Any obligations expected to be settled within 12 months are recorded in accrued liabilities; all other obligations are recorded in other liabilities.
Stock-Based Compensation.
We measure compensation expense for stock awards at the market price of our common stock at the grant date. Such expense is recognized ratably over the shorter of the vesting period of the stock awards, typically
5
to
10
years, or the length of time until the grantee becomes retirement-eligible at age 65.
We measure compensation expense for stock options using a Black-Scholes option pricing model. Such expense is recognized ratably over the shorter of the vesting period of the stock options, typically
five years
, or the length of time until the grantee becomes retirement-eligible at age 65. We utilize the shortcut method to determine the tax windfall pool associated with stock options.
Noncontrolling Interest.
We owned 68 percent of Hansgrohe SE at both
December 31, 2016
and
2015
. The aggregate noncontrolling interest, net of dividends, at
December 31, 2016
and
2015
has been recorded as a component of equity on our consolidated balance sheets.
Interest and Penalties on Uncertain Tax Positions.
We record interest and penalties on our uncertain tax positions in income tax expense (benefit).
Reclassifications.
Certain prior year amounts have been reclassified to conform to the
2016
presentation in the consolidated financial statements. In our consolidated statements of cash flows, the cash flows from discontinued operations are not separately classified.
Revision of Previously Issued Financial Statements.
We have revised the previously reported balances on our consolidated balance sheet as of December 31, 2015 to correct the classification for warranty claims not expected to be settled within the next year. Accrued liabilities decreased and other liabilities increased from the amounts previously reported by
$102 million
. This revision had no effect on our consolidated statements of operations or consolidated statements of cash flows. This revision is not considered material to our prior period financial statements.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Continued)
Recently Adopted Accounting Pronouncements.
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2015-02 (“ASU 2015-02”) “Consolidation (Topic 810) — Amendments to the Consolidations Analysis,” which modifies certain aspects of both the variable interest entities and voting interest entities models. We adopted ASU 2015-02 on January 1, 2016. The adoption of the new standard did not have an impact on our financial position or our results of operations.
In April 2015, the FASB issued Accounting Standards Update 2015‑03 (“ASU 2015-03”) “Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs,” which requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. In August 2015, the FASB issued ASU 2015-15 to clarify that debt issuance costs related to line-of-credit arrangements may remain classified as an asset. We retrospectively adopted both ASU 2015-03 and ASU 2015-15 on January 1, 2016. As a result of the retrospective adoption of the standards, we reclassified
$15 million
of debt issuance costs from other assets to long-term debt, and
$1 million
of debt issuance costs from other assets to notes payable, as of December 31, 2015.
In May 2015, the FASB issued Accounting Standards Update 2015-07 (“ASU 2015-07”), “Fair Value Measurement (Topic 820) Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent),” in which investments measured at fair value using the net asset value ("NAV") per share method (or its equivalent) as a practical expedient are removed from the fair value hierarchy and are separately presented to permit reconciliation of total pension plan assets. We retrospectively adopted ASU 2015-07 on December 31, 2016. As a result of the adoption, we have removed from the fair value hierarchies (in Note M) the defined-benefit pension plan assets valued using the NAV per share method (or its equivalent) as a practical expedient as of December 31, 2016 and 2015. We have separately presented the value of these assets to permit reconciliation to total pension assets.
In August 2016, the FASB issued Accounting Standards Update 2016-15 (“ASU 2016-15”), “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments,” which is intended to reduce diversity in practice as to how certain transactions are classified in the statement of cash flows. We retrospectively adopted this guidance on December 31, 2016. As a result of the adoption of this standard, we reclassified
$40 million
of debt extinguishment costs from operating activities to financing activities in our statement of cash flows for the year ended December 31, 2016. There was no impact to our statements of cash flows for the years ended December 31, 2015 and 2014.
Recently Issued Accounting Pronouncements.
In May 2014, 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. The standard allows for either a full retrospective or modified retrospective method of adoption. We are finalizing our assessment of the impact of the adoption; however, currently, we do not expect the adoption will have a material impact on our financial position and results of operations. We currently anticipate adopting this standard on its effective date, January 1, 2018, under the full retrospective method of adoption. We have not experienced significant issues in our implementation process and we do not anticipate significant changes to our accounting policies.
In January 2016, the FASB issued Accounting Standards Update 2016-01 (“ASU 2016-01”), “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is effective for us for annual periods beginning January 1, 2018. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
In February 2016, the FASB issued a new standard for leases, Accounting Standards Codification 842 (“ASC 842”), which changes the accounting model for identifying and accounting for leases. ASC 842 is effective for us for annual periods beginning January 1, 2019 and requires retrospective application. We expect this standard to increase our total assets and total liabilities; however, we are currently evaluating the magnitude of the impact the adoption of this new standard will have on our financial position and results of operations.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Concluded)
In March 2016, the FASB issued Accounting Standards Update 2016-09 (“ASU 2016-09”), “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which requires the tax effects related to share-based payments to be recorded through the income statement and simplifies the accounting requirements for forfeitures and employers' tax withholding requirements. ASU 2016-09 is effective for us for annual periods beginning January 1, 2017. We anticipate the impact of the adoption of this ASU will be limited to the reclassification of certain items within our statements of cash flows, which we intend to adopt retrospectively. We expect an increase to our cash flows from (for) operating activities and a decrease to our cash flows from (for) financing activities. Subsequent to adoption, we anticipate volatility in our effective tax rate as any windfall or shortfall tax benefits related to our stock-based compensation incentives will be recorded directly into our results of operations.
In January 2017, the FASB issued Accounting Standards Update 2017-04 ("ASU 2017-04"), "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for us for annual periods beginning January 1, 2020. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. DISCONTINUED OPERATIONS
The presentation of discontinued operations includes a component or group of components that we have or intend to dispose of, and represents a strategic shift that has (or will have) a major effect on our operations and financial results. For spin off transactions, discontinued operations treatment is appropriate following the completion of the spin off.
On
September 30, 2014
, we announced a plan to spin off
100 percent
of our Installation and Other Services businesses into an independent, publicly-traded company named TopBuild Corp. ("TopBuild") through a tax-free distribution of the stock of TopBuild to our stockholders. We initiated the spin off as TopBuild was no longer considered core to our long-term growth strategy in branded building products. On June 30, 2015, immediately prior to the effective time of the spin off, TopBuild paid a cash distribution to us of
$200 million
using the proceeds of its new debt financing arrangement. This transaction was reported as a financing activity in the consolidated statements of cash flows. We have accounted for the spin off of TopBuild as a discontinued operation. Losses from this discontinued operation were included in (loss) income from discontinued operations, net, in the consolidated statements of operations.
The major classes of line items constituting pre-tax (loss) profit of the discontinued operations, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2016
|
|
2015
|
|
2014
|
|
Net sales
(1)
|
$
|
—
|
|
|
$
|
762
|
|
|
$
|
1,515
|
|
|
Cost of sales
(1)
|
—
|
|
|
603
|
|
|
1,188
|
|
|
Gross profit
(1)
|
—
|
|
|
159
|
|
|
327
|
|
|
Selling, general and administrative expenses
(1)
|
—
|
|
|
148
|
|
|
259
|
|
|
Income from discontinued operations
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
68
|
|
|
Other discontinued operations results:
|
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued operations, net
(2)
|
—
|
|
|
(1
|
)
|
|
(6
|
)
|
|
Income before income tax
|
—
|
|
|
10
|
|
|
62
|
|
|
Income tax expense
(3)
|
—
|
|
|
(12
|
)
|
|
(27
|
)
|
|
(Loss) income from discontinued operations, net
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
35
|
|
|
|
|
|
(1)
|
Net sales, cost of sales, gross profit, and selling, general and administrative expenses reflect the results of TopBuild.
|
|
|
|
|
(2)
|
Included in loss on disposal of discontinued operations, net in 2014 are additional costs and charges related to the 2013 sale of Tvilum, our Danish ready-to-assemble cabinet business.
|
|
|
|
|
(3)
|
The unusual relationship between income tax expense and income before income tax for 2015 resulted primarily from certain non-deductible transaction costs related to the spin off of TopBuild.
|
Other selected financial information for TopBuild during the period owned by us, was as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2016
|
|
2015
|
|
2014
|
|
Depreciation and amortization
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
26
|
|
|
Capital expenditures
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
13
|
|
We did not have any assets or liabilities related to discontinued operations at either
December 31, 2016
or
2015
.
In conjunction with the spin off, we entered into a Transition Services Agreement with TopBuild under which we provided administrative services to TopBuild subsequent to the separation. This agreement terminated on June 30, 2016. The fees for services rendered under the Transition Services Agreement are not material to our results of operations.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. ACQUISITIONS
In the second quarter of 2015, we acquired a U.K. window business for approximately
$16 million
in cash in the Windows and Other Specialty Products segment. This acquisition will support our U.K. window business' growth strategy by expanding its product offerings into timber-alternative windows and doors.
In the first quarter of 2015, we acquired an aquatic fitness business for approximately
$25 million
in cash in the Plumbing Products segment. This acquisition will allow our spa business to expand its wellness products platform, open new channels of distribution and access a new customer base.
These acquisitions are not material to us. The results of these acquisitions are included in the consolidated financial statements from the date of their respective acquisition.
D. INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
At December 31
|
|
|
2016
|
|
2015
|
|
Finished goods
|
$
|
366
|
|
|
$
|
358
|
|
|
Raw material
|
254
|
|
|
238
|
|
|
Work in process
|
92
|
|
|
91
|
|
|
Total
|
$
|
712
|
|
|
$
|
687
|
|
Inventories, which include purchased parts, materials, direct labor and applied manufacturing overhead, are stated at the lower of cost or net realizable value, with cost determined by use of the first-in, first-out method.
E. FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES
Accounting Policy.
We follow accounting guidance that defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements for financial investments and liabilities. The guidance defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." Further, it defines a fair value hierarchy, as follows: Level 1 inputs as quoted prices in active markets for identical assets or liabilities; Level 2 inputs as observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities or other inputs that are observable or can be corroborated by market data; and Level 3 inputs as unobservable inputs that are supported by little or no market activity and that are financial instruments whose value is determined using pricing models or instruments for which the determination of fair value requires significant management judgment or estimation.
Financial investments that are available to be traded on readily accessible stock exchanges (domestic or foreign) are considered to have active markets and have been valued using Level 1 inputs. Financial investments that are not available to be traded on a public market or have limited secondary markets, or contain provisions that limit the ability to sell the investment are considered to have inactive markets and have been valued using Level 2 or 3 inputs. We incorporated credit risk into the valuations of financial investments by estimating the likelihood of non-performance by the counterparty to the applicable transactions. The estimate included the length of time relative to the contract, financial condition of the counterparty and current market conditions. The criteria for determining if a market was active or inactive were based on the individual facts and circumstances.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES (Continued)
Financial Investments.
We have maintained investments in available-for-sale securities, equity method investments, and a number of private equity funds and other private investments, principally as part of our tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses.
Financial investments included in other assets were as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31
|
|
|
2016
|
|
2015
|
|
Auction rate securities
|
$
|
—
|
|
|
$
|
22
|
|
|
Total recurring investments
|
—
|
|
|
22
|
|
|
Equity method investments
|
13
|
|
|
13
|
|
|
Private equity funds
|
5
|
|
|
10
|
|
|
Other investments
|
—
|
|
|
3
|
|
|
Total
|
$
|
18
|
|
|
$
|
48
|
|
Auction Rate Securities.
During 2016,
all
of our auction rate securities were called by our counterparties and redeemed at values that approximated our recorded basis. Our investments in available-for-sale securities included cost basis of
$19 million
and pre-tax unrealized gains of
$3 million
and had a recorded basis of
$22 million
at December 31,
2015
.
Equity Method Investments.
Investments in private equity fund partnerships, joint ventures and less than majority-owned subsidiaries in which we have significant influence are accounted for under the equity method. Our consolidated statements of operations include our proportionate share of the net income (loss) of our equity method investees. When we record our proportionate share of net income (loss), it increases (decreases) our equity income in our consolidated statement of operations and our carrying value of that investment on our consolidated balance sheet.
During the fourth quarter of 2014, we sold our investment in the private equity fund, Long Point Capital Fund II L.P. (accounted for as an equity method investment) for proceeds of
$48 million
, which approximated net book value. Such proceeds are included in the consolidated statements of cash flows in proceeds from other financial investments, in the investing activities section.
Private Equity Funds and Other Investments.
Our investments in private equity funds and other private investments, where we do not have significant influence, are carried at cost. During 2016, we abandoned our interest in a private investment, resulting in a
$3 million
loss recorded to our other investments.
Recurring Fair Value Measurements.
For financial investments measured at fair value on a recurring basis at each reporting period, the unrealized gains or losses (that are deemed to be temporary) are recognized, net of tax effect, through shareholders' equity, as a component of other comprehensive income (loss). Realized gains and losses and charges for other-than-temporary impairments are included in determining net income, with related purchase costs based upon specific identification.
For the year ended December 31, 2016, all our Level 3 investments were redeemed due to the early redemption of all our auction rate securities which reduced our Level 3 investments by
$22 million
.
Non-Recurring Fair Value Measurements.
It is not practicable for us to estimate the fair value of equity method investments or private equity funds and other private investments where we do not have significant influence, because there are no quoted market prices and sufficient information is not readily available for us to utilize a valuation model to determine the fair value for each fund. Due to the significant unobservable inputs, the fair value measurements used to evaluate impairment are a Level 3 input. These investments are evaluated, on a non-recurring basis, for potential other-than-temporary impairment when impairment indicators are present, or when an event or change in circumstances has occurred, that may have a significant adverse effect on the fair value of the investment.
There were
no
financial investments measured for impairment on a non-recurring basis during
2016
,
2015
or
2014
.
We did not have any transfers between Level 1 and Level 2 financial assets in
2016
or
2015
.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES (Concluded)
Realized Gains (Losses).
Income from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Realized gains from auction rate securities
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Equity investment income (loss), net
|
2
|
|
|
2
|
|
|
(2
|
)
|
|
Realized gains from private equity funds
|
5
|
|
|
6
|
|
|
4
|
|
|
Loss from other investments
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
Income from financial investments, net
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
2
|
|
Fair value of debt.
The fair value of our short-term and long-term fixed-rate debt instruments is based principally upon modeled market prices for the same or similar issues or the current rates available to us for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at
December 31, 2016
was approximately
$3.3 billion
, compared with the aggregate carrying value of
$3.0 billion
. The aggregate estimated market value of short-term and long-term debt at
December 31, 2015
was approximately
$3.6 billion
, compared with the aggregate carrying value of
$3.4 billion
.
F. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to global market risk as part of our normal daily business activities. To manage these risks, we enter into various derivative contracts. These contracts include interest rate swap agreements, foreign currency contracts and metals contracts intended to hedge our exposure to copper and zinc. We review our hedging program, derivative positions and overall risk management on a regular basis.
Interest Rate Swap Agreements.
In 2012, in connection with the issuance of
$400 million
of debt, we terminated the interest rate swap hedge relationships that we had entered into in 2011. These interest rate swaps were designated as cash flow hedges and effectively fixed interest rates on the forecasted debt issuance to variable rates based on 3-month LIBOR. Upon termination, the ineffective portion of the cash flow hedges of approximately
$2 million
loss was recognized in our consolidated statement of operations in other, net. The remaining loss of approximately
$23 million
from the termination of these swaps is being amortized as an increase to interest expense over the remaining term of the debt, through March 2022. At
December 31, 2016
, the balance remaining in accumulated other comprehensive loss was
$13 million
(pre-tax).
Foreign Currency Contracts.
Our net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, and investments in subsidiaries. To mitigate this risk, we, including certain European operations, entered into foreign currency forward contracts and foreign currency exchange contracts.
Gains (losses) related to foreign currency forward and exchange contracts are recorded in our consolidated statements of operations in other income (expense), net. In the event that the counterparties fail to meet the terms of the foreign currency forward or exchange contracts, our exposure is limited to the aggregate foreign currency rate differential with such institutions.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Concluded)
Metals Contracts.
We have entered into several contracts to manage our exposure to increases in the price of copper and zinc. Gains (losses) related to these contracts are recorded in our consolidated statements of operations in cost of sales.
The pre-tax gains (losses) included in our consolidated statements of operations are as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
Exchange contracts
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
5
|
|
|
Forward contracts
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
Metals contracts
|
5
|
|
|
(17
|
)
|
|
(3
|
)
|
|
Interest rate swaps
|
(2
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
Total
|
$
|
3
|
|
|
$
|
(18
|
)
|
|
$
|
—
|
|
We present our derivatives net by counterparty, due to the right of offset under master netting arrangements in the consolidated balance sheets. The notional amounts being hedged and the fair value of those derivative instruments are as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
Notional Amount
|
|
Balance Sheet
|
|
Foreign currency contracts
|
|
|
|
|
|
Forward contracts
|
$
|
21
|
|
|
|
|
Accrued liabilities
|
|
|
$
|
(2
|
)
|
|
Metals contracts
|
1
|
|
|
|
|
Accrued liabilities
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
Notional Amount
|
|
Balance Sheet
|
|
Foreign currency contracts:
|
|
|
|
|
|
|
Exchange contracts
|
$
|
39
|
|
|
|
|
|
Receivables
|
|
|
|
$
|
1
|
|
|
Forward contracts
|
30
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
(2
|
)
|
|
Other liabilities
|
|
|
|
(1
|
)
|
|
Metals contracts
|
50
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
(10
|
)
|
The fair value of all foreign currency and metals derivative contracts is estimated on a recurring basis, quarterly, using Level 2 inputs.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
At December 31
|
|
|
|
2016
|
|
2015
|
|
Land and improvements
|
$
|
111
|
|
|
$
|
115
|
|
|
Buildings
|
712
|
|
|
672
|
|
|
Machinery and equipment
|
1,795
|
|
|
1,787
|
|
|
|
2,618
|
|
|
2,574
|
|
|
Less: Accumulated depreciation
|
(1,558
|
)
|
|
(1,547
|
)
|
|
Total
|
$
|
1,060
|
|
|
$
|
1,027
|
|
We lease certain equipment and plant facilities under noncancellable operating leases. Rental expense recorded in the consolidated statements of operations totaled approximately
$63 million
,
$60 million
and
$63 million
during
2016
,
2015
and
2014
, respectively.
At
December 31, 2016
, future minimum lease payments were as follows, in millions:
|
|
|
|
|
|
|
|
2017
|
$
|
44
|
|
|
2018
|
35
|
|
|
2019
|
25
|
|
|
2020
|
19
|
|
|
2021
|
16
|
|
|
2022 and beyond
|
50
|
|
During 2014, we decided to sell
two
facilities in our Cabinetry Products segment, and we recorded a charge of
$28 million
, included in cost of sales in the consolidated statement of operations, to reflect the estimated fair value of those two facilities. Fair value was estimated using a market approach, considering the estimated fair values for other comparable buildings in the areas where the facilities are located (Level 3 inputs). These facilities were sold in 2015.
H. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill, by segment, were as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Goodwill At December 31, 2016
|
|
Accumulated
Impairment
Losses
|
|
Net Goodwill At December 31, 2016
|
|
Plumbing Products
|
$
|
519
|
|
|
$
|
(340
|
)
|
|
$
|
179
|
|
|
Decorative Architectural Products
|
294
|
|
|
(75
|
)
|
|
219
|
|
|
Cabinetry Products
|
240
|
|
|
(59
|
)
|
|
181
|
|
|
Windows and Other Specialty Products
|
987
|
|
|
(734
|
)
|
|
253
|
|
|
Total
|
$
|
2,040
|
|
|
$
|
(1,208
|
)
|
|
$
|
832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Goodwill At December 31, 2015
|
|
Accumulated
Impairment
Losses
|
|
Net Goodwill At December 31, 2015
|
|
Additions (A)
|
|
Other (B)
|
|
Net Goodwill At December 31, 2016
|
|
Plumbing Products
|
$
|
525
|
|
|
$
|
(340
|
)
|
|
$
|
185
|
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
$
|
179
|
|
|
Decorative Architectural Products
|
294
|
|
|
(75
|
)
|
|
219
|
|
|
—
|
|
|
—
|
|
|
219
|
|
|
Cabinetry Products
|
240
|
|
|
(59
|
)
|
|
181
|
|
|
—
|
|
|
—
|
|
|
181
|
|
|
Windows and Other Specialty Products
|
988
|
|
|
(734
|
)
|
|
254
|
|
|
—
|
|
|
(1
|
)
|
|
253
|
|
|
Total
|
$
|
2,047
|
|
|
$
|
(1,208
|
)
|
|
$
|
839
|
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
|
$
|
832
|
|
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. GOODWILL AND OTHER INTANGIBLE ASSETS (Concluded)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Goodwill At December 31, 2014
|
|
Accumulated
Impairment
Losses
|
|
Net Goodwill At December 31, 2014
|
|
Additions (A)
|
|
Other (B)
|
|
Net Goodwill At December 31, 2015
|
|
Plumbing Products
|
$
|
531
|
|
|
$
|
(340
|
)
|
|
$
|
191
|
|
|
$
|
8
|
|
|
$
|
(14
|
)
|
|
$
|
185
|
|
|
Decorative Architectural Products
|
294
|
|
|
(75
|
)
|
|
219
|
|
|
—
|
|
|
—
|
|
|
219
|
|
|
Cabinetry Products
|
240
|
|
|
(59
|
)
|
|
181
|
|
|
—
|
|
|
—
|
|
|
181
|
|
|
Windows and Other Specialty Products
|
983
|
|
|
(734
|
)
|
|
249
|
|
|
6
|
|
|
(1
|
)
|
|
254
|
|
|
Total
|
$
|
2,048
|
|
|
$
|
(1,208
|
)
|
|
$
|
840
|
|
|
$
|
14
|
|
|
$
|
(15
|
)
|
|
$
|
839
|
|
|
|
|
|
(A)
|
Additions consist of acquisitions.
|
|
|
|
|
(B)
|
Other principally includes the effect of foreign currency translation.
|
We completed our annual impairment testing of goodwill and other indefinite-lived intangible assets in the fourth quarters of
2016
,
2015
and
2014
. There was no impairment of goodwill for any of our reporting units for any of these years.
Other indefinite-lived intangible assets were
$136 million
and
$137 million
at
December 31, 2016
and
2015
, respectively, and principally included registered trademarks. In
2016
and
2015
, the impairment test indicated there was no impairment of other indefinite-lived intangible assets for any of our business units. In
2014
, we recognized an insignificant impairment charge for other indefinite-lived intangible assets. As a result of our 2015 acquisitions, other indefinite lived intangible assets increased by
$7 million
as of the acquisition dates.
The carrying value of our definite-lived intangible assets was
$18 million
(net of accumulated amortization of
$16 million
) at
December 31, 2016
and
$23 million
(net of accumulated amortization of
$49 million
) at
December 31, 2015
and principally included customer relationships with a weighted average amortization period of
10 years
in
2016
and
2015
. Amortization expense related to the definite-lived intangible assets of continuing operations was
$4 million
,
$6 million
and
$4 million
in
2016
,
2015
and
2014
, respectively. As a result of our 2015 acquisitions, definite-lived intangible assets increased by
$17 million
as of the acquisition dates.
At
December 31, 2016
, amortization expense related to the definite-lived intangible assets during each of the next five years was as follows: 2017 –
$3 million
; 2018 –
$2 million
; 2019 –
$2 million
, 2020 –
$2 million
and 2021 –
$2 million
.
I. OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
At December 31
|
|
|
|
2016
|
|
2015
|
|
Financial investments (Note E)
|
$
|
18
|
|
|
$
|
48
|
|
|
In-store displays, net
|
42
|
|
|
56
|
|
|
Deferred tax assets (Note S)
|
68
|
|
|
184
|
|
|
Other
|
29
|
|
|
22
|
|
|
Total
|
$
|
157
|
|
|
$
|
310
|
|
In-store displays are amortized using the straight-line method over the expected useful life of
three
to
five years
; we recognized amortization expense related to in-store displays of
$25 million
,
$20 million
and
$15 million
in
2016
,
2015
and
2014
, respectively. Cash spent for displays was
$11 million
,
$43 million
and
$30 million
in
2016
,
2015
and
2014
, respectively, and are included in other, net within investing activities on the consolidated statements of cash flows.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. ACCRUED LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
At December 31
|
|
|
|
2016
|
|
2015
|
|
Salaries, wages and commissions
|
$
|
191
|
|
|
$
|
171
|
|
|
Advertising and sales promotion
|
146
|
|
|
132
|
|
|
Interest
|
51
|
|
|
62
|
|
|
Warranty (Note U)
|
56
|
|
|
50
|
|
|
Employee retirement plans
|
52
|
|
|
48
|
|
|
Insurance reserves
|
41
|
|
|
44
|
|
|
Property, payroll and other taxes
|
19
|
|
|
25
|
|
|
Dividends payable
|
32
|
|
|
32
|
|
|
Other
|
70
|
|
|
86
|
|
|
Total
|
$
|
658
|
|
|
$
|
650
|
|
K. DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
At December 31
|
|
|
|
2016
|
|
2015
|
|
Notes and debentures:
|
|
|
|
|
|
|
6.125%, due October 3, 2016
|
$
|
—
|
|
|
$
|
1,000
|
|
|
5.850%, due March 15, 2017
|
—
|
|
|
300
|
|
|
6.625%, due April 15, 2018
|
114
|
|
|
114
|
|
|
7.125%, due March 15, 2020
|
500
|
|
|
500
|
|
|
3.500%, due April 1, 2021
|
399
|
|
|
—
|
|
|
5.950%, due March 15, 2022
|
400
|
|
|
400
|
|
|
4.450%, due April 1, 2025
|
500
|
|
|
500
|
|
|
4.375%, due April 1, 2026
|
498
|
|
|
—
|
|
|
7.750%, due August 1, 2029
|
296
|
|
|
296
|
|
|
6.500%, due August 15, 2032
|
300
|
|
|
300
|
|
|
Other
|
9
|
|
|
13
|
|
|
Prepaid debt issuance costs
|
(19
|
)
|
|
(16
|
)
|
|
|
2,997
|
|
|
3,407
|
|
|
Less: Current portion
|
2
|
|
|
1,004
|
|
|
Total long-term debt
|
$
|
2,995
|
|
|
$
|
2,403
|
|
All of the notes and debentures above are senior indebtedness and, other than the
6.625%
notes due 2018 and the
7.75%
notes due 2029, are redeemable at our option.
On
March 17, 2016
, we issued
$400 million
of
3.5%
Notes due April 1, 2021 and
$500 million
of
4.375%
Notes due April 1, 2026. We received proceeds of
$896 million
, net of discount, for the issuance of these Notes. The Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On April 15, 2016, proceeds from the debt issuances, together with cash on hand, were used to repay and early retire all of our
$1 billion
,
6.125%
Notes which were due on October 3, 2016 and all of our
$300 million
,
5.85%
Notes which were due on March 15, 2017. In connection with these early retirements, we incurred
$40 million
of debt extinguishment costs, which we recorded as interest expense.
On
June 15, 2015
, we repaid and retired all of our
$500 million
,
4.8%
Notes on the scheduled retirement date.
On
March 24, 2015
, we issued
$500 million
of
4.45%
Notes due April 1, 2025.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. DEBT (Concluded)
On March 28, 2013, we entered into a credit agreement (the "Credit Agreement") with a bank group, with an aggregate commitment of
$1.25 billion
and a maturity date of
March 28, 2018
. On
May 29, 2015
and August 28, 2015, we amended the Credit Agreement with the bank group (the "Amended Credit Agreement"). The Amended Credit Agreement reduces the aggregate commitment to
$750 million
and extends the maturity date to May 29, 2020. Under the Amended Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional
$375 million
with the current bank group or new lenders.
The Amended Credit Agreement provides for an unsecured revolving credit facility available to us and one of our foreign subsidiaries, in U.S. dollars, European euros and certain other currencies. Borrowings under the revolver denominated in euros are limited to
$500 million
, equivalent. We can also borrow swingline loans up to
$75 million
and obtain letters of credit of up to
$100 million
; any outstanding letters of credit under the Amended Credit Agreement reduce our borrowing capacity. At
December 31, 2016
, we had
no
of outstanding standby letters of credit under the Amended Credit Agreement.
Revolving credit loans bear interest under the Amended Credit Agreement, at our option, at (A) a rate per annum equal to the greater of (i) the
prime rate
, (ii) the
Federal Funds effective rate
plus
0.50%
and (iii)
LIBOR
plus
1.0%
(the "Alternative Base Rate"); plus an applicable margin based upon our then-applicable corporate credit ratings; or (B)
LIBOR
plus an applicable margin based upon our then-applicable corporate credit ratings. The foreign currency revolving credit loans bear interest at a rate equal to
LIBOR
plus an applicable margin based upon our then-applicable corporate credit ratings.
The Amended Credit Agreement contains financial covenants requiring us to maintain (A) a maximum net leverage ratio, as adjusted for certain items, of
4.0
to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, equal to or greater than
2.5
to 1.0.
In order for us to borrow under the Amended Credit Agreement, there must not be any default in our covenants in the Amended Credit Agreement (i.e., in addition to the two financial covenants, principally limitations on subsidiary debt, negative pledge restrictions, legal compliance requirements and maintenance of properties and insurance) and our representations and warranties in the Amended Credit Agreement must be true in all material respects on the date of borrowing (i.e., principally no material adverse change or litigation likely to result in a material adverse change, since December 31, 2014, in each case, no material ERISA or environmental non-compliance, and no material tax deficiency). We were in compliance with all covenants and
no
borrowings have been made at
December 31, 2016
.
At
December 31, 2016
, the debt maturities during each of the next five years were as follows:
2017
–
$2 million
;
2018
–
$115 million
;
2019
–
$1 million
;
2020
–
$501 million
and
2021
–
$401 million
.
Interest paid was
$198 million
,
$216 million
and
$220 million
in
2016
,
2015
and
2014
, respectively. The amount paid in 2016 excludes
$40 million
of debt extinguishment costs related to the early retirement of debt.
L. STOCK-BASED COMPENSATION
Our 2014 Long Term Stock Incentive Plan (the "2014 Plan") replaced the 2005 Long Term Stock Incentive Plan in May 2014 and provides for the issuance of stock-based incentives in various forms to employees and non-employee Directors of the Company. At
December 31, 2016
, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Long-term stock awards
|
$
|
23
|
|
|
$
|
23
|
|
|
$
|
33
|
|
|
Stock options
|
2
|
|
|
5
|
|
|
4
|
|
|
Phantom stock awards and stock appreciation rights
|
4
|
|
|
11
|
|
|
6
|
|
|
Total
|
$
|
29
|
|
|
$
|
39
|
|
|
$
|
43
|
|
|
Income tax benefit (37 percent tax rate)
|
$
|
11
|
|
|
$
|
14
|
|
|
$
|
16
|
|
At
December 31, 2016
,
16.3 million
shares of our common stock were available under the 2014 Plan for the granting of stock options and other long-term stock incentive awards.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. STOCK-BASED COMPENSATION (Continued)
Long-Term Stock Awards.
Long-term stock awards are granted to our key employees and non-employee Directors and do not cause net share dilution inasmuch as we continue the practice of repurchasing and retiring an equal number of shares in the open market. We granted
1,055,380
shares of long-term stock awards during
2016
.
Our long-term stock award activity was as follows, shares in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Unvested stock award shares at January 1
|
5
|
|
|
6
|
|
|
8
|
|
|
Weighted average grant date fair value
|
$
|
17
|
|
|
$
|
18
|
|
|
$
|
17
|
|
|
Stock award shares granted
|
1
|
|
|
1
|
|
|
1
|
|
|
Weighted average grant date fair value
|
$
|
26
|
|
|
$
|
26
|
|
|
$
|
22
|
|
|
Stock award shares vested
|
2
|
|
|
2
|
|
|
2
|
|
|
Weighted average grant date fair value
|
$
|
16
|
|
|
$
|
17
|
|
|
$
|
17
|
|
|
Stock award shares forfeited
|
—
|
|
|
—
|
|
|
1
|
|
|
Weighted average grant date fair value
|
$
|
20
|
|
|
$
|
18
|
|
|
$
|
19
|
|
|
Forfeitures upon spin off
(A)
|
—
|
|
|
1
|
|
|
—
|
|
|
Weighted average grant date fair value
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
Modification upon spin off
(B)
|
—
|
|
|
1
|
|
|
—
|
|
|
Unvested stock award shares at December 31
|
4
|
|
|
5
|
|
|
6
|
|
|
Weighted average grant date fair value
|
$
|
20
|
|
|
$
|
17
|
|
|
$
|
18
|
|
|
|
|
|
(A)
|
In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.
|
|
|
|
|
(B)
|
Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee Directors such that all individuals received an equivalent fair value both before and after the separation. The modification to the outstanding stock awards was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan.
|
At
December 31, 2016
,
2015
and
2014
, there was
$43 million
,
$42 million
and
$60 million
, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of
three years
at
December 31, 2016
,
2015
and
2014
.
The total market value (at the vesting date) of stock award shares which vested during
2016
,
2015
and
2014
was
$43 million
,
$54 million
and
$50 million
, respectively.
Stock Options.
Stock options are granted to our key employees. The exercise price equals the market price of our common stock at the grant date. These options generally become exercisable (vest ratably) over
five years
beginning on the first anniversary from the date of grant and expire no later than
10 years
after the grant date.
We granted
474,500
shares of stock options during
2016
with a grant date weighted-average exercise price of approximately
$26
per share. During
2016
,
no
stock option shares were forfeited (including options that expired unexercised).
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. STOCK-BASED COMPENSATION (Continued)
Our stock option activity was as follows, shares in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Option shares outstanding, January 1
|
12
|
|
|
18
|
|
|
24
|
|
|
Weighted average exercise price
|
$
|
17
|
|
|
$
|
21
|
|
|
$
|
22
|
|
|
Option shares granted
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted average exercise price
|
$
|
26
|
|
|
$
|
26
|
|
|
$
|
22
|
|
|
Option shares exercised
|
5
|
|
|
5
|
|
|
2
|
|
|
Aggregate intrinsic value on date of exercise
(A)
|
$
|
64
|
million
|
|
$
|
50
|
million
|
|
$
|
22
|
million
|
|
Weighted average exercise price
|
$
|
21
|
|
|
$
|
17
|
|
|
$
|
16
|
|
|
Option shares forfeited
|
—
|
|
|
3
|
|
|
4
|
|
|
Weighted average exercise price
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
28
|
|
|
Forfeitures upon spin off
(B)
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted average exercise price
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
Modifications upon spin off
(C)
|
—
|
|
|
2
|
|
|
—
|
|
|
Option shares outstanding, December 31
|
7
|
|
|
12
|
|
|
18
|
|
|
Weighted average exercise price
|
$
|
15
|
|
|
$
|
17
|
|
|
$
|
21
|
|
|
Weighted average remaining option term (in years)
|
4
|
|
3
|
|
4
|
|
Option shares vested and expected to vest, December 31
|
7
|
|
|
12
|
|
|
18
|
|
|
Weighted average exercise price
|
$
|
15
|
|
|
$
|
17
|
|
|
$
|
21
|
|
|
Aggregate intrinsic value
(A)
|
$
|
118
|
million
|
|
$
|
133
|
million
|
|
$
|
110
|
million
|
|
Weighted average remaining option term (in years)
|
4
|
|
3
|
|
4
|
|
Option shares exercisable (vested), December 31
|
6
|
|
|
10
|
|
|
15
|
|
|
Weighted average exercise price
|
$
|
13
|
|
|
$
|
18
|
|
|
$
|
22
|
|
|
Aggregate intrinsic value
(A)
|
$
|
102
|
million
|
|
$
|
113
|
million
|
|
$
|
84
|
million
|
|
Weighted average remaining option term (in years)
|
3
|
|
3
|
|
3
|
|
|
|
|
(A)
|
Aggregate intrinsic value is calculated using our stock price at each respective date, less the exercise price (grant date price) multiplied by the number of shares.
|
|
|
|
|
(B)
|
In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.
|
|
|
|
|
(C)
|
Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee Directors such that all individuals received an equivalent fair value both before and after the separation. The modification to the outstanding options was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan.
|
At
December 31, 2016
,
2015
and
2014
, there was
$6 million
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
3 years
at
December 31, 2016
, and
2 years
at both
2015
and
2014
.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. STOCK-BASED COMPENSATION (Concluded)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Weighted average grant date fair value
|
$
|
6.43
|
|
|
$
|
9.67
|
|
|
$
|
9.53
|
|
|
Risk-free interest rate
|
1.41
|
%
|
|
1.75
|
%
|
|
1.91
|
%
|
|
Dividend yield
|
1.49
|
%
|
|
1.32
|
%
|
|
1.34
|
%
|
|
Volatility factor
|
29.00
|
%
|
|
42.00
|
%
|
|
49.00
|
%
|
|
Expected option life
|
6 years
|
|
|
6 years
|
|
|
6 years
|
|
The following table summarizes information for stock option shares outstanding and exercisable at
December 31, 2016
, shares in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Shares Outstanding
|
|
Option Shares Exercisable
|
|
|
Range of
Prices
|
|
Number of
Shares
|
|
Weighted
Average
Remaining
Option
Term
|
|
Weighted
Average
Exercise
Price
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
$
|
7 - 18
|
|
5
|
|
3 Years
|
|
$12
|
|
5
|
|
$12
|
|
$
|
20 - 23
|
|
1
|
|
8 Years
|
|
$22
|
|
—
|
|
$21
|
|
$
|
26 - 27
|
|
1
|
|
5 Years
|
|
$26
|
|
1
|
|
$27
|
|
$
|
7 - 27
|
|
7
|
|
4 Years
|
|
$15
|
|
6
|
|
$13
|
Phantom Stock Awards and Stock Appreciation Rights ("SARs").
We grant phantom stock awards and SARs to certain non-U.S. employees.
Phantom stock awards are linked to the value of our common stock on the date of grant and are settled in cash upon vesting, typically over
5
to
10 years
. We account for phantom stock awards as liability-based awards; the compensation expense is initially measured as the market price of our common stock at the grant date and is recognized over the vesting period. The liability is remeasured and adjusted at the end of each reporting period until the awards are fully-vested and paid to the employees. We recognized expense of
$2 million
related to phantom stock awards in
2016
, and
$5 million
in both
2015
and
2014
. In
2016
,
2015
and
2014
, we granted
140,710
shares,
134,560
shares and
183,530
shares, respectively, of phantom stock awards with an aggregate fair value of
$4 million
each year, and paid
$5 million
,
$6 million
and
$5 million
of cash in
2016
,
2015
and
2014
, respectively, to settle phantom stock awards.
SARs are linked to the value of our common stock on the date of grant and are settled in cash upon exercise. We account for SARs using the fair value method, which requires outstanding SARs to be classified as liability-based awards and valued using a Black-Scholes option pricing model at the grant date; such fair value is recognized as compensation expense over the vesting period, typically
five years
. The liability is remeasured and adjusted at the end of each reporting period until the SARs are exercised and payment is made to the employees or the SARs expire. We recognized expense of
$2 million
,
$6 million
and
$1 million
related to SARs in
2016
,
2015
and
2014
, respectively. During
2016
,
2015
and
2014
, we did not grant any SARs.
Information related to phantom stock awards and SARs was as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phantom
Stock
Awards
|
|
Stock
Appreciation
Rights
|
|
|
At December 31,
|
|
At December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Accrued compensation cost liability
|
$
|
10
|
|
|
$
|
13
|
|
|
$
|
8
|
|
|
$
|
10
|
|
|
Unrecognized compensation cost
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Equivalent common shares
|
—
|
|
|
1
|
|
|
1
|
|
|
1
|
|
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
M. EMPLOYEE RETIREMENT PLANS
We sponsor qualified defined-benefit and defined-contribution retirement plans for most of our employees. In addition to our qualified defined-benefit pension plans, we have unfunded non-qualified defined-benefit pension plans covering certain employees, which provide for benefits in addition to those provided by the qualified pension plans. Substantially all salaried employees participate in non-contributory defined-contribution retirement plans, to which payments are determined annually by the Organization and Compensation Committee of the Board of Directors.
In addition, we participate in
one
regional multi-employer pension plan, principally related to building trades, which is not considered significant to us.
Pre-tax expense related to our retirement plans was as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Defined-contribution plans
|
$
|
58
|
|
|
$
|
52
|
|
|
$
|
43
|
|
|
Defined-benefit pension plans
|
34
|
|
|
32
|
|
|
25
|
|
|
|
$
|
92
|
|
|
$
|
84
|
|
|
$
|
68
|
|
We froze all future benefit accruals under substantially all our domestic and foreign qualified and domestic non-qualified defined benefit pension plans several years ago.
Changes in the projected benefit obligation and fair value of plan assets, and the funded status of our defined-benefit pension plans were as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Qualified
|
|
Non-Qualified
|
|
Qualified
|
|
Non-Qualified
|
|
Changes in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at January 1
|
$
|
1,059
|
|
|
$
|
174
|
|
|
$
|
1,145
|
|
|
$
|
190
|
|
|
Service cost
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
Interest cost
|
41
|
|
|
7
|
|
|
41
|
|
|
7
|
|
|
Actuarial (gain) loss, net
|
50
|
|
|
1
|
|
|
(61
|
)
|
|
(11
|
)
|
|
Foreign currency exchange
|
(29
|
)
|
|
—
|
|
|
(23
|
)
|
|
—
|
|
|
Benefit payments
|
(69
|
)
|
|
(12
|
)
|
|
(46
|
)
|
|
(12
|
)
|
|
Projected benefit obligation at December 31
|
$
|
1,055
|
|
|
$
|
170
|
|
|
$
|
1,059
|
|
|
$
|
174
|
|
|
Changes in fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1
|
$
|
658
|
|
|
$
|
—
|
|
|
$
|
691
|
|
|
$
|
—
|
|
|
Actual return on plan assets
|
58
|
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
|
Foreign currency exchange
|
(20
|
)
|
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
Company contributions
|
100
|
|
|
12
|
|
|
38
|
|
|
12
|
|
|
Expenses, other
|
(10
|
)
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
Benefit payments
|
(69
|
)
|
|
(12
|
)
|
|
(46
|
)
|
|
(12
|
)
|
|
Fair value of plan assets at December 31
|
$
|
717
|
|
|
$
|
—
|
|
|
$
|
658
|
|
|
$
|
—
|
|
|
Funded status at December 31:
|
$
|
(338
|
)
|
|
$
|
(170
|
)
|
|
$
|
(401
|
)
|
|
$
|
(174
|
)
|
Amounts in our consolidated balance sheets were as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
At December 31, 2015
|
|
|
Qualified
|
|
Non-Qualified
|
|
Qualified
|
|
Non-Qualified
|
|
Other assets
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
Accrued liabilities
|
(1
|
)
|
|
(12
|
)
|
|
(3
|
)
|
|
(12
|
)
|
|
Other liabilities
|
(339
|
)
|
|
(158
|
)
|
|
(399
|
)
|
|
(162
|
)
|
|
Total net liability
|
$
|
(338
|
)
|
|
$
|
(170
|
)
|
|
$
|
(401
|
)
|
|
$
|
(174
|
)
|
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
M. EMPLOYEE RETIREMENT PLANS (Continued)
Unrealized loss included in accumulated other comprehensive loss before income taxes was as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
At December 31, 2015
|
|
|
Qualified
|
|
Non-Qualified
|
|
Qualified
|
|
Non-Qualified
|
|
Net loss
|
$
|
519
|
|
|
$
|
54
|
|
|
$
|
501
|
|
|
$
|
56
|
|
|
Net transition obligation
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Net prior service cost
|
3
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
Total
|
$
|
523
|
|
|
$
|
54
|
|
|
$
|
504
|
|
|
$
|
56
|
|
Information for defined-benefit pension plans with an accumulated benefit obligation in excess of plan assets was as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31
|
|
|
2016
|
|
2015
|
|
|
Qualified
|
|
Non-Qualified
|
|
Qualified
|
|
Non-Qualified
|
|
Projected benefit obligation
|
$
|
1,044
|
|
|
$
|
170
|
|
|
$
|
1,045
|
|
|
$
|
174
|
|
|
Accumulated benefit obligation
|
$
|
1,044
|
|
|
$
|
170
|
|
|
$
|
1,045
|
|
|
$
|
174
|
|
|
Fair value of plan assets
|
$
|
704
|
|
|
$
|
—
|
|
|
$
|
643
|
|
|
$
|
—
|
|
The projected benefit obligation was in excess of plan assets for all of our qualified defined-benefit pension plans at
December 31, 2016
and
2015
which had an accumulated benefit obligation in excess of plan assets.
Net periodic pension cost for our defined-benefit pension plans was as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Qualified
|
|
Non-Qualified
|
|
Qualified
|
|
Non-Qualified
|
|
Qualified
|
|
Non-Qualified
|
|
Service cost
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
Interest cost
|
49
|
|
|
7
|
|
|
47
|
|
|
7
|
|
|
47
|
|
|
7
|
|
|
Expected return on plan assets
|
(44
|
)
|
|
—
|
|
|
(46
|
)
|
|
—
|
|
|
(45
|
)
|
|
—
|
|
|
Recognized net loss
|
17
|
|
|
2
|
|
|
18
|
|
|
3
|
|
|
11
|
|
|
2
|
|
|
Net periodic pension cost
|
$
|
25
|
|
|
$
|
9
|
|
|
$
|
22
|
|
|
$
|
10
|
|
|
$
|
16
|
|
|
$
|
9
|
|
We expect to recognize
$21 million
of pre-tax net loss from accumulated other comprehensive loss into net periodic pension cost in
2017
related to our defined-benefit pension plans. For plans in which almost all of the plan's participants are inactive, pre-tax net loss within other comprehensive income (loss) is amortized using the straight-line method over the remaining life expectancy of the inactive plan participants. For plans which do not have almost all inactive participants, pre-tax net loss within other comprehensive income (loss) is amortized using the straight-line method over the average remaining service period of the active employees expected to receive benefits from the plan.
Plan Assets.
Our qualified defined-benefit pension plan weighted average asset allocation, which is based upon fair value, was as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Equity securities
|
49
|
%
|
|
49
|
%
|
|
Debt securities
|
32
|
%
|
|
32
|
%
|
|
Other
|
19
|
%
|
|
19
|
%
|
|
Total
|
100
|
%
|
|
100
|
%
|
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
M. EMPLOYEE RETIREMENT PLANS (Continued)
For our qualified defined-benefit pension plans, we have adopted accounting guidance that defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements. Accounting guidance defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at
December 31, 2016
compared to
December 31, 2015
.
Common and Preferred Stocks and
Short-Term and Other Investments:
Valued at the closing price on the active market on which the individual securities are traded, or based on the active market for similar securities. Certain investments are valued based on NAV, which approximates fair value. Such basis is determined by referencing the respective fund's underlying assets. There are no unfunded commitments or other restrictions associated with these investments.
Private Equity and Hedge Funds:
Valued based on an estimated fair value using either a market approach or an income approach, each of which requires a significant degree of judgment. There is no active trading market for these investments and they are generally illiquid. Due to the significant unobservable inputs, the fair value measurements used to estimate fair value are a Level 3 input. Certain investments are valued based on NAV, which approximates fair value. Such basis is determined by referencing the respective fund's underlying assets. There are no unfunded commitments or other restrictions associated with these investments.
Corporate, Government and Other Debt Securities:
Valued based on either the closing price on the active market on which the individual securities are traded, or using pricing models maximizing the use of observable inputs for similar securities. This includes basing value on yields currently available on comparable securities of issuers with similar credit ratings. Certain investments are valued based on NAV, which approximates fair value. Such basis is determined by referencing the respective fund's underlying assets. There are no unfunded commitments or other restrictions associated with these investments.
Common Collective Trust Fund:
Valued based on an amortized cost basis, which approximates fair value. Such basis is determined by reference to the respective fund's underlying assets, which are primarily cash equivalents. There are no unfunded commitments or other restrictions associated with this fund.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table sets forth, by level within the fair value hierarchy, the qualified defined-benefit pension plan assets at fair value as of
December 31, 2016
and
2015
, as well as those valued at NAV, which approximates fair value, in millions.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
M. EMPLOYEE RETIREMENT PLANS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Measured at NAV
|
|
Total
|
|
Plan Assets
|
|
|
|
|
|
|
|
|
|
|
Common and Preferred Stocks:
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
142
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
118
|
|
|
$
|
260
|
|
|
International
|
74
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
90
|
|
|
Private Equity and Hedge Funds:
|
|
|
|
|
|
|
|
|
|
|
United States
|
—
|
|
|
—
|
|
|
37
|
|
|
—
|
|
|
37
|
|
|
International
|
—
|
|
|
—
|
|
|
24
|
|
|
32
|
|
|
56
|
|
|
Corporate Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
United States
|
27
|
|
|
28
|
|
|
—
|
|
|
2
|
|
|
57
|
|
|
International
|
—
|
|
|
26
|
|
|
—
|
|
|
17
|
|
|
43
|
|
|
Government and Other Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
United States
|
46
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
50
|
|
|
International
|
27
|
|
|
53
|
|
|
—
|
|
|
—
|
|
|
80
|
|
|
Common Collective Trust Fund –
United States
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Short-Term and Other Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
International
|
5
|
|
|
15
|
|
|
18
|
|
|
—
|
|
|
38
|
|
|
Total Plan Assets
|
$
|
323
|
|
|
$
|
130
|
|
|
$
|
79
|
|
|
$
|
185
|
|
|
$
|
717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Measured at NAV
|
|
Total
|
|
Plan Assets
|
|
|
|
|
|
|
|
|
|
|
Common and Preferred Stocks:
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
127
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
93
|
|
|
$
|
253
|
|
|
International
|
55
|
|
|
7
|
|
|
—
|
|
|
7
|
|
|
69
|
|
|
Private Equity and Hedge Funds:
|
|
|
|
|
|
|
|
|
|
|
United States
|
—
|
|
|
—
|
|
|
49
|
|
|
3
|
|
|
52
|
|
|
International
|
—
|
|
|
—
|
|
|
20
|
|
|
4
|
|
|
24
|
|
|
Corporate Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
United States
|
18
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|
International
|
—
|
|
|
32
|
|
|
—
|
|
|
16
|
|
|
48
|
|
|
Government and Other Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
United States
|
64
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
67
|
|
|
International
|
23
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
53
|
|
|
Common Collective Trust Fund – United States
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Short-Term and Other Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
International
|
2
|
|
|
21
|
|
|
19
|
|
|
—
|
|
|
42
|
|
|
Total Plan Assets
|
$
|
291
|
|
|
$
|
156
|
|
|
$
|
88
|
|
|
$
|
123
|
|
|
$
|
658
|
|
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
M. EMPLOYEE RETIREMENT PLANS (Continued)
Changes in the fair value of the qualified defined-benefit pension plan Level 3 assets, were as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Fair Value, January 1
|
$
|
88
|
|
|
$
|
97
|
|
|
Purchases
|
6
|
|
|
4
|
|
|
Sales
|
(19
|
)
|
|
(11
|
)
|
|
Transfers, net
|
—
|
|
|
—
|
|
|
Unrealized gains (losses)
|
4
|
|
|
(2
|
)
|
|
Fair Value, December 31
|
$
|
79
|
|
|
$
|
88
|
|
Assumptions.
Weighted-average major assumptions used in accounting for our defined-benefit pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Discount rate for obligations
|
3.50
|
%
|
|
4.00
|
%
|
|
3.80
|
%
|
|
Expected return on plan assets
|
7.25
|
%
|
|
7.25
|
%
|
|
7.25
|
%
|
|
Rate of compensation increase
|
—
|
|
|
—
|
|
|
—
|
|
|
Discount rate for net periodic pension cost
|
4.00
|
%
|
|
3.80
|
%
|
|
4.40
|
%
|
The discount rate for obligations for
2016
,
2015
and
2014
was based upon the expected duration of each defined-benefit pension plan's liabilities matched to the
December 31, 2016
,
2015
and
2014
Towers Watson Rate Link Curve. At
December 31, 2016
, such rates for our defined-benefit pension plans ranged from
1.5 percent
to
4.0 percent
, with the most significant portion of the liabilities having a discount rate for obligations of
3.8 percent
or higher. At
December 31, 2015
, such rates for our defined-benefit pension plans ranged from
2.0
percent to
4.3 percent
, with the most significant portion of the liabilities having a discount rate for obligations of
4.0 percent
or higher. The decrease in the weighted average discount rate from 2015 to 2016 is principally the result of lower long-term interest rates in the bond markets. At December 31, 2014, such rates for our defined‑benefit pension plans ranged from
2.0 percent
to
4.0 percent
, with the most significant portion of the liabilities having a discount rate for obligations of
3.7 percent
or higher. The increase in the weighted average discount rate from 2014 to 2015 was principally the result of higher long-term interest rates in the bond market.
For
2016
,
2015
and
2014
, we determined the expected long-term rate of return on plan assets of
7.25 percent
based upon an analysis of expected and historical rates of return of various asset classes utilizing the current and long-term target asset allocation of the plan assets. The projected asset return at
December 31, 2016
,
2015
and
2014
also considered near term returns, including current market conditions as well as that pension assets are long-term in nature. The actual annual rate of return on our pension plan assets was positive
8.3 percent
, negative
1.8 percent
and positive
3.6 percent
in
2016
,
2015
and
2014
, respectively. For the 10-year period ended
December 31, 2016
, the actual annual rate of return on our pension plan assets was
3.7 percent
. Although this rate of return is less than our current expected long-term rate of return on plan assets, we note that the 10-year period ended
December 31, 2016
includes one significant decline in the equity markets in
2008
(of negative
32.1 percent
). Accordingly, and based on our target allocation, we believe a
7.25 percent
expected long-term rate of return is reasonable.
The investment objectives seek to minimize the volatility of the value of our plan assets relative to pension liabilities and to ensure plan assets are sufficient to pay plan benefits. In
2016
, we substantially achieved targeted asset allocation:
50 percent
equities,
30 percent
fixed-income, and
20 percent
alternative investments (such as private equity, commodities and hedge funds).
The asset allocation of the investment portfolio was developed with the objective of achieving our expected rate of return and reducing volatility of asset returns, and considered the freezing of future benefits. The equity portfolios are invested in individual securities or funds that are expected to mirror broad market returns for equity securities. The fixed-income portfolio is invested in corporate bonds, bond index funds and U.S. Treasury securities. It is expected that the alternative investments would have a higher rate of return than the targeted overall long-term return of
7.25 percent
. However, these investments are subject to greater volatility, due to their nature, than a portfolio of equities and fixed-income investments, and would be less liquid than financial instruments that trade on public markets. This portfolio is expected to yield a long-term rate of return of
7.25 percent
.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
M. EMPLOYEE RETIREMENT PLANS (Concluded)
The fair value of our plan assets is subject to risk including significant concentrations of risk in our plan assets related to equity, interest rate and operating risk. In order to ensure plan assets are sufficient to pay benefits, a portion of plan assets is allocated to equity investments that are expected, over time, to earn higher returns with more volatility than fixed-income investments which more closely match pension liabilities. Within equity, risk is mitigated by targeting a portfolio that is broadly diversified by geography, market capitalization, manager mandate size, investment style and process.
In order to minimize asset volatility relative to the liabilities, a portion of plan assets are allocated to fixed-income investments that are exposed to interest rate risk. Rate increases generally will result in a decline in fixed-income assets, while reducing the present value of the liabilities. Conversely, rate decreases will increase fixed income assets, partially offsetting the related increase in the liabilities.
Potential events or circumstances that could have a negative effect on estimated fair value include the risks of inadequate diversification and other operating risks. To mitigate these risks, investments are diversified across and within asset classes in support of investment objectives. Policies and practices to address operating risks include ongoing manager oversight, plan and asset class investment guidelines and instructions that are communicated to managers, and periodic compliance and audit reviews to ensure adherence to these policies. In addition, we periodically seek the input of our independent advisor to ensure the investment policy is appropriate.
Other.
We sponsor certain post-retirement benefit plans that provide medical, dental and life insurance coverage for eligible retirees and dependents in the United States based upon age and length of service. Substantially all of these plans were frozen several years ago. The aggregate present value of the unfunded accumulated post-retirement benefit obligation was
$9 million
and
$10 million
at
December 31, 2016
and
2015
, respectively.
Cash Flows.
At
December 31, 2016
, we expect to contribute approximately
$45 million
to our domestic qualified defined-benefit pension plans in
2017
, which will exceed ERISA requirements. We also expect to contribute
$7 million
and
$12 million
to our foreign and non-qualified (domestic) defined-benefit pension plans, respectively, in
2017
.
At
December 31, 2016
, the benefits expected to be paid in each of the next five years, and in aggregate for the five years thereafter, relating to our defined-benefit pension plans, were as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
Plans
|
|
Non-Qualified
Plans
|
|
2017
|
$
|
49
|
|
|
$
|
12
|
|
|
2018
|
$
|
50
|
|
|
$
|
12
|
|
|
2019
|
$
|
50
|
|
|
$
|
12
|
|
|
2020
|
$
|
52
|
|
|
$
|
12
|
|
|
2021
|
$
|
52
|
|
|
$
|
12
|
|
|
2022 - 2026
|
$
|
272
|
|
|
$
|
58
|
|
N. SHAREHOLDERS' EQUITY
On
September 30, 2014
, we announced that our Board of Directors authorized the repurchase of up to
50 million
shares for retirement of our common stock in open-market transactions or otherwise, replacing the previous Board of Directors authorization established in 2007. At
December 31, 2016
, we have
12.9 million
shares remaining under the authorization.
During
2016
, we repurchased and retired
14.9 million
shares of our common stock for cash aggregating
$459 million
(including
1.1 million
shares to offset the dilutive impact of long-term stock awards granted in
2016
). During
2015
, we repurchased and retired
17.2 million
shares of our common stock for cash aggregating
$456 million
(including
741 thousand
shares to offset the dilutive impact of long-term stock awards granted in
2015
). During
2014
, we repurchased and retired
6.7 million
shares of our common stock for cash aggregating
$158 million
(including
1.7 million
shares to offset the dilutive impact of long-term stock awards granted in
2014
).
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. SHAREHOLDERS' EQUITY (Concluded)
On June 30, 2015, we completed the spin off of Top Build as an independent publicly traded company. As a result of the separation, our retained earnings decreased by
$828 million
in 2015.
On the basis of amounts paid (declared), cash dividends per common share were
$0.385
(
$0.390
) in
2016
,
$0.365
(
$0.370
) in
2015
and
$0.330
(
$0.345
) in
2014
.
Accumulated Other Comprehensive Loss.
The components of accumulated other comprehensive loss attributable to Masco Corporation were as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31
|
|
|
2016
|
|
2015
|
|
Cumulative translation adjustments, net
|
$
|
177
|
|
|
$
|
245
|
|
|
Unrealized loss on available-for-sale securities, net
|
—
|
|
|
(12
|
)
|
|
Unrealized loss on interest rate swaps, net
|
(15
|
)
|
|
(16
|
)
|
|
Unrecognized net loss and prior service cost, net
|
(397
|
)
|
|
(382
|
)
|
|
Accumulated other comprehensive loss
|
$
|
(235
|
)
|
|
$
|
(165
|
)
|
The cumulative translation adjustment, net, is reported net of income tax benefit of
$2 million
at both
December 31, 2016
and
2015
. The unrealized loss on available-for-sale securities, net, is reported net of income tax expense of
$14 million
at December 31, 2015. The
$14 million
of income tax expense was recognized into our consolidated statement of operations during 2016. Refer to Note S to the consolidated financial statements for additional information. The unrealized loss on interest rate swaps, net, is reported net of income tax expense of
$2 million
at both
December 31, 2016
and
2015
. The unrecognized net loss and prior service cost, net, is reported net of income tax benefit of
$164 million
and
$186 million
at
December 31, 2016
and
2015
, respectively.
O. RECLASSIFICATIONS FROM OTHER COMPREHENSIVE INCOME (LOSS)
The reclassifications from accumulated other comprehensive income (loss) to the consolidated statements of operations were as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
Comprehensive Income (Loss)
|
|
2016
|
|
2015
|
|
2014
|
|
Statement of Operations Line Item
|
|
Amortization of defined benefit pension and other postretirement benefits:
|
|
|
|
|
|
|
|
|
|
Actuarial losses, net
|
|
$
|
19
|
|
|
$
|
21
|
|
|
$
|
13
|
|
|
Selling, general and administrative expenses
|
|
Tax (benefit)
|
|
(7
|
)
|
|
(8
|
)
|
|
(5
|
)
|
|
|
|
Net of tax
|
|
$
|
12
|
|
|
$
|
13
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
Interest expense
|
|
Tax (benefit)
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
|
|
Net of tax
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other, net
|
|
Tax expense
|
|
15
|
|
|
—
|
|
|
—
|
|
|
|
|
Net of tax
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
The tax expense related to the available-for-sale securities includes
$14 million
related to the disproportionate tax effect that we recognized as a result of the redemption of all of our auction rate securities. Refer to Note S to the consolidated financial statements for additional information.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
P. SEGMENT INFORMATION
Our reportable segments are as follows:
Plumbing Products –
principally includes faucets; plumbing fittings and valves; showerheads and hand showers; bathtubs and shower enclosures; toilets; spas; and exercise pools.
Decorative Architectural Products –
principally includes paints and other coating products; and cabinet, door, window and other hardware.
Cabinetry Products –
principally includes assembled kitchen and bath cabinets; home office workstations; entertainment centers; and storage products.
Windows and Other Specialty Products –
principally includes windows; window frame components; patio doors; staple gun tackers; staples; and other fastening tools.
The above products are sold to the home improvement and new home construction markets through home center retailers, mass merchandisers, hardware stores, homebuilders, distributors and other outlets for consumers and contractors and direct to the customer.
Our operations are principally located in North America and Europe. Our country of domicile is the United States of America.
Corporate assets consist primarily of real property, equipment, cash and cash investments and other investments.
Our segments are based upon similarities in products and represent the aggregation of operating units, for which financial information is regularly evaluated by our corporate operating executive in determining resource allocation and assessing performance, and is periodically reviewed by the Board of Directors. Accounting policies for the segments are the same as those for us. We primarily evaluate performance based upon operating profit (loss) and, other than general corporate expense, allocate specific corporate overhead to each segment. The evaluation of segment operating profit (loss) also excludes the income from litigation settlements.
Information by segment and geographic area was as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
(1)(2)(3)(4)(5)
|
|
Operating Profit
(Loss) (5)(6)
|
|
Assets at
December 31 (8)
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Our operations by segment were:
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plumbing Products
|
$
|
3,526
|
|
|
$
|
3,341
|
|
|
$
|
3,308
|
|
|
$
|
642
|
|
|
$
|
512
|
|
|
$
|
512
|
|
|
$
|
2,009
|
|
|
$
|
1,972
|
|
|
$
|
1,989
|
|
|
Decorative Architectural Products
|
2,092
|
|
|
2,020
|
|
|
1,998
|
|
|
430
|
|
|
403
|
|
|
360
|
|
|
894
|
|
|
874
|
|
|
857
|
|
|
Cabinetry Products
|
970
|
|
|
1,025
|
|
|
999
|
|
|
93
|
|
|
51
|
|
|
(62
|
)
|
|
537
|
|
|
567
|
|
|
608
|
|
|
Windows and Other Specialty Products
|
769
|
|
|
756
|
|
|
701
|
|
|
(3
|
)
|
|
57
|
|
|
47
|
|
|
743
|
|
|
748
|
|
|
702
|
|
|
Total
|
$
|
7,357
|
|
|
$
|
7,142
|
|
|
$
|
7,006
|
|
|
$
|
1,162
|
|
|
$
|
1,023
|
|
|
$
|
857
|
|
|
$
|
4,183
|
|
|
$
|
4,161
|
|
|
$
|
4,156
|
|
|
Our operations by geographic area were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
5,834
|
|
|
$
|
5,645
|
|
|
$
|
5,377
|
|
|
$
|
961
|
|
|
$
|
841
|
|
|
$
|
643
|
|
|
$
|
3,001
|
|
|
$
|
2,925
|
|
|
$
|
2,861
|
|
|
International, principally Europe
|
1,523
|
|
|
1,497
|
|
|
1,629
|
|
|
201
|
|
|
182
|
|
|
214
|
|
|
1,182
|
|
|
1,236
|
|
|
1,295
|
|
|
Total, as above
|
$
|
7,357
|
|
|
$
|
7,142
|
|
|
$
|
7,006
|
|
|
1,162
|
|
|
1,023
|
|
|
857
|
|
|
4,183
|
|
|
4,161
|
|
|
4,156
|
|
|
General corporate expense, net
(6)
|
|
|
|
|
|
|
(109
|
)
|
|
(109
|
)
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
Income from litigation settlements
(7)
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit, as reported
|
|
|
|
|
|
|
1,053
|
|
|
914
|
|
|
721
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
|
|
|
|
(223
|
)
|
|
(225
|
)
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
830
|
|
|
$
|
689
|
|
|
$
|
507
|
|
|
|
|
|
|
|
|
|
|
|
Corporate assets
(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
954
|
|
|
1,503
|
|
|
1,576
|
|
|
Assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
1,476
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,137
|
|
|
$
|
5,664
|
|
|
$
|
7,208
|
|
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
P. SEGMENT INFORMATION (Concluded)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Additions (5)
|
|
Depreciation and
Amortization (5)
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Our operations by segment were:
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
Plumbing Products
|
$
|
110
|
|
|
$
|
87
|
|
|
$
|
65
|
|
|
$
|
57
|
|
|
$
|
56
|
|
|
$
|
63
|
|
|
Decorative Architectural Products
|
22
|
|
|
16
|
|
|
12
|
|
|
16
|
|
|
16
|
|
|
16
|
|
|
Cabinetry Products
|
8
|
|
|
6
|
|
|
9
|
|
|
21
|
|
|
24
|
|
|
33
|
|
|
Windows and Other Specialty Products
|
30
|
|
|
41
|
|
|
28
|
|
|
21
|
|
|
18
|
|
|
18
|
|
|
|
170
|
|
|
150
|
|
|
114
|
|
|
115
|
|
|
114
|
|
|
130
|
|
|
Unallocated amounts, principally related to corporate assets
|
10
|
|
|
1
|
|
|
1
|
|
|
19
|
|
|
13
|
|
|
11
|
|
|
Total
|
$
|
180
|
|
|
$
|
151
|
|
|
$
|
115
|
|
|
$
|
134
|
|
|
$
|
127
|
|
|
$
|
141
|
|
|
|
|
|
(1)
|
Included in net sales were export sales from the U.S. of
$226 million
,
$217 million
and
$228 million
in
2016
,
2015
and
2014
, respectively.
|
|
|
|
|
(2)
|
Excluded from net sales were intra-company sales between segments of less than
one percent
in
2016
,
2015
and
2014
.
|
|
|
|
|
(3)
|
Included in net sales were sales to one customer of
$2,480 million
,
$2,378 million
and
$2,310 million
in
2016
,
2015
and
2014
, respectively. Such net sales were included in each of our segments.
|
|
|
|
|
(4)
|
Net sales from our operations in the U.S. were
$5,605 million
,
$5,407 million
and
$5,112 million
in
2016
,
2015
and
2014
, respectively.
|
|
|
|
|
(5)
|
Net sales, operating profit (loss), property additions and depreciation and amortization expense for
2015
and
2014
excluded the results of businesses reported as discontinued operations.
|
|
|
|
|
(6)
|
General corporate expense, net included those expenses not specifically attributable to our segments.
|
|
|
|
|
(7)
|
The income from litigation settlements in 2014 relates to a business in our Decorative Architectural Products segment.
|
|
|
|
|
(8)
|
Long-lived assets of our operations in the U.S. and Europe were
$1,508 million
and
$417 million
,
$1,487 million
and
$427 million
, and
$1,470 million
and
$428 million
at
December 31, 2016
,
2015
and
2014
, respectively.
|
|
|
|
|
(9)
|
In 2016, we renamed our Cabinetry Products and Windows and Other Specialty Products segments. The name change did not impact the review of financial information by our corporate operating executive or the composition of the segments.
|
|
|
|
|
(10)
|
Corporate assets at December 31, 2014 has not been recasted for the impact of the adoption of Accounting Standards Update 2015-03, as amended by Accounting Standards Update 2015-15, which required the reclassification of certain debt issuance costs from an asset to a liability. Total debt issuance costs subject to reclassification would have been
$15 million
at December 31, 2014.
|
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Q. SEVERANCE COSTS
As part of our continuing review of our operations, actions were taken during
2016
,
2015
and
2014
to respond to market conditions. We recorded charges related to severance and early retirement programs of
$8 million
,
$12 million
and
$27 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, and were primarily paid when incurred. Such 2016 charges are reflected in the consolidated statement of operations in selling, general and administrative expenses and cost of sales, while 2015 and 2014 charges are principally reflected in selling, general and administrative expenses.
R. OTHER INCOME (EXPENSE), NET
Other, net, which is included in other income (expense), net, was as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Income from cash and cash investments and short-term bank deposits
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
Income from financial investments, net (Note E)
|
7
|
|
|
8
|
|
|
2
|
|
|
Foreign currency transaction (losses) gains
|
(3
|
)
|
|
(14
|
)
|
|
5
|
|
|
Other items, net
|
(2
|
)
|
|
3
|
|
|
1
|
|
|
Total other, net
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
11
|
|
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
S. INCOME TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Income from continuing operations before income taxes:
|
|
|
|
|
|
|
U.S.
|
$
|
614
|
|
|
$
|
496
|
|
|
$
|
270
|
|
|
Foreign
|
216
|
|
|
193
|
|
|
237
|
|
|
|
$
|
830
|
|
|
$
|
689
|
|
|
$
|
507
|
|
|
Income tax expense (benefit) on income from continuing operations:
|
|
|
|
|
|
|
Currently payable:
|
|
|
|
|
|
|
U.S. Federal
|
$
|
73
|
|
|
$
|
10
|
|
|
$
|
3
|
|
|
State and local
|
24
|
|
|
27
|
|
|
1
|
|
|
Foreign
|
69
|
|
|
56
|
|
|
67
|
|
|
Deferred:
|
|
|
|
|
|
|
U.S. Federal
|
140
|
|
|
192
|
|
|
(401
|
)
|
|
State and local
|
2
|
|
|
3
|
|
|
(21
|
)
|
|
Foreign
|
(12
|
)
|
|
5
|
|
|
(10
|
)
|
|
|
$
|
296
|
|
|
$
|
293
|
|
|
$
|
(361
|
)
|
|
Deferred tax assets at December 31:
|
|
|
|
|
|
|
Receivables
|
$
|
10
|
|
|
$
|
9
|
|
|
|
|
Inventories
|
17
|
|
|
17
|
|
|
|
|
Other assets, including stock-based compensation
|
58
|
|
|
78
|
|
|
|
|
Accrued liabilities
|
53
|
|
|
77
|
|
|
|
|
Long-term liabilities
|
280
|
|
|
266
|
|
|
|
|
Net operating loss carryforward
|
51
|
|
|
39
|
|
|
|
|
Tax credit carryforward
|
9
|
|
|
55
|
|
|
|
|
|
478
|
|
|
541
|
|
|
|
|
Valuation allowance
|
(45
|
)
|
|
(49
|
)
|
|
|
|
|
433
|
|
|
492
|
|
|
|
|
Deferred tax liabilities at December 31:
|
|
|
|
|
|
|
Property and equipment
|
127
|
|
|
104
|
|
|
|
|
Intangibles
|
222
|
|
|
212
|
|
|
|
|
Investment in foreign subsidiaries
|
15
|
|
|
8
|
|
|
|
|
Other
|
21
|
|
|
1
|
|
|
|
|
|
385
|
|
|
325
|
|
|
|
|
Net deferred tax asset at December 31
|
$
|
48
|
|
|
$
|
167
|
|
|
|
The net deferred tax asset consisted of net deferred tax assets (included in other assets) of
$68 million
and
$184 million
, and net deferred tax liabilities (included in other liabilities) of
$20 million
and
$17 million
, at
December 31, 2016
and
2015
, respectively.
The current portion of the state and local income tax includes an
$8 million
,
$5 million
and
$8 million
tax benefit from the reversal of an accrual for uncertain tax positions resulting primarily from the expiration of applicable statutes of limitations and favorable settlements on state audits in
2016
,
2015
and
2014
, respectively. The deferred portion of the state and local taxes includes a
$5 million
,
$(1) million
and
$(29) million
tax expense (benefit) resulting from a change in the valuation allowance against state and local deferred tax assets in
2016
,
2015
and
2014
, respectively. The deferred portion of the foreign taxes includes
$6 million
,
$12 million
and
$(6) million
tax expense (benefit) from a change in the valuation allowance against foreign deferred tax assets in
2016
,
2015
and
2014
, respectively.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
S. INCOME TAXES (Continued)
The accounting guidance for income taxes requires us to allocate our provision for income taxes between continuing operations and other categories of earnings, such as other comprehensive income (loss). Subsequent adjustments to deferred taxes originally recorded to other comprehensive income (loss) may reverse in a different category of earnings, such as continuing operations resulting in a disproportionate tax effect within accumulated other comprehensive loss.
We created a
$14 million
disproportionate tax effect in prior years as the result of allocating a deferred tax charge to other comprehensive income (loss) on the unrealized gain of certain available-for-sale securities that was later reversed through continuing operations by a valuation allowance adjustment, followed by the disposition of the securities while in
a
full valuation allowance position. Such disproportionate tax effect has remained in accumulated other comprehensive loss until such time as we cease to have an available-for-sale securities portfolio. In the fourth quarter of 2016 as a result of
our
final auction rate securities
being called by our counterparty and redeemed
, the disproportionate tax effect was eliminated by recording a
$14 million
charge to income tax expense included in continuing operations that was offset by a corresponding tax benefit included in other comprehensive income (loss).
In the fourth quarter of
2016
, we recorded a
$13 million
tax benefit from
the recognition of a deferred tax asset on
certain German net operating losses primarily resulting from a return to sustainable profitability.
During 2015 we recorded a
$21 million
valuation allowance against certain deferred tax assets related to TopBuild as a non-cash charge to income tax expense. The TopBuild deferred tax assets have been impaired by our decision to spin off TopBuild into a separate company that on a stand-alone basis as of
June 30, 2015
, the spin off date, was unlikely to be able to realize the value of such deferred tax assets as a result of its history of losses.
Our capital management strategy includes the repurchase of Masco common stock, the payment of dividends, the pay-down of debt and the funding of potential acquisitions both within and outside the U.S. In order to provide greater flexibility in the execution of our capital management strategy, we determined in the fourth quarter of 2015 that we may repatriate earnings from certain foreign subsidiaries that were previously considered permanently reinvested. As a result, we recorded a
$19 million
charge to income tax expense in 2015 to recognize the required taxes on foreign earnings, including those previously considered permanently reinvested. Our
December 31, 2016
and
2015
, deferred tax balances on investment in foreign subsidiaries reflects the impact of all taxable temporary differences, including those related to substantially all undistributed foreign earnings, except those that are legally restricted.
The tax benefit from certain stock-based compensation is not recognized as a deferred tax asset until the tax deduction reduces cash taxes. During
2015
, we recorded deferred tax assets of
$53 million
to paid-in capital related to additional net operating losses, previously not recognized, that were used to reduce cash taxes on our
2015
taxable income.
In the third quarter of 2014, we recorded a
$517 million
tax benefit from the release of the valuation allowance against our U.S. Federal and certain state deferred tax assets due primarily to a return to sustainable profitability in our U.S. operations. In reaching this conclusion, we considered the continued improvement in both the new home construction market and repair and remodel activity in the U.S. and our progress on strategic initiatives to reduce costs and expand our product leadership positions which contributed to the continued improvement in our U.S. operations over the past few years. We recorded an additional
$12 million
tax benefit during 2014 from the release of the valuation allowances against certain U.K. and Mexican deferred tax assets primarily resulting from a return to sustainable profitability in these jurisdictions.
We continue to maintain a valuation allowance on certain state and foreign deferred tax assets as of
December 31, 2016
. Should we determine that we would not be able to realize our remaining deferred tax assets in these jurisdictions in the future, an adjustment to the valuation allowance would be recorded in the period such determination is made.
Of the
$60 million
and
$94 million
deferred tax asset related to the net operating loss and tax credit carryforwards at
December 31, 2016
and
December 31, 2015
, respectively,
$35 million
and
$67 million
will expire between 2021 and 2036 and
$25 million
and
$27 million
are unlimited, respectively.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
S. INCOME TAXES (Continued)
A reconciliation of the U.S. Federal statutory tax rate to the income tax expense (benefit) on income from continuing operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
U.S. Federal statutory tax rate – expense
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
|
State and local taxes, net of U.S. Federal tax benefit
|
2
|
|
|
3
|
|
|
(2
|
)
|
|
Lower taxes on foreign earnings
|
(2
|
)
|
|
(1
|
)
|
|
(5
|
)
|
|
U.S. and foreign taxes on distributed and undistributed foreign earnings
|
1
|
|
|
3
|
|
|
—
|
|
|
Domestic production deduction
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
U.S. Federal valuation allowance
|
—
|
|
|
3
|
|
|
(98
|
)
|
|
Other, net
|
1
|
|
|
—
|
|
|
(1
|
)
|
|
Effective tax rate – expense (benefit)
|
36
|
%
|
|
43
|
%
|
|
(71
|
)%
|
Income taxes paid were
$190 million
,
$107 million
and
$80 million
in
2016
,
2015
and
2014
, respectively.
A reconciliation of the beginning and ending liability for uncertain tax positions, including related interest and penalties, is as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain
Tax Positions
|
|
Interest and
Penalties
|
|
Total
|
|
Balance at January 1, 2015
|
$
|
39
|
|
|
$
|
9
|
|
|
$
|
48
|
|
|
Current year tax positions:
|
|
|
|
|
|
|
Additions
|
10
|
|
|
—
|
|
|
10
|
|
|
Prior year tax positions:
|
|
|
|
|
|
|
Additions
|
1
|
|
|
—
|
|
|
1
|
|
|
Reductions
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Lapse of applicable statute of limitations
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
|
Interest and penalties recognized in income tax expense
|
—
|
|
|
1
|
|
|
1
|
|
|
Balance at December 31, 2015
|
$
|
43
|
|
|
$
|
10
|
|
|
$
|
53
|
|
|
Current year tax positions:
|
|
|
|
|
|
|
Additions
|
11
|
|
|
—
|
|
|
11
|
|
|
Reductions
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Prior year tax positions:
|
|
|
|
|
|
|
Additions
|
1
|
|
|
—
|
|
|
1
|
|
|
Reductions
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
Lapse of applicable statute of limitations
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
|
Interest and penalties recognized in income tax expense
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Balance at December 31, 2016
|
$
|
46
|
|
|
$
|
9
|
|
|
$
|
55
|
|
If recognized,
$30 million
and
$28 million
of the liability for uncertain tax positions at
December 31, 2016
and
2015
, respectively, net of any U.S. Federal tax benefit, would impact our effective tax rate.
Of the
$55 million
and
$53 million
total liability for uncertain tax positions (including related interest and penalties) at
December 31, 2016
and
2015
, respectively,
$54 million
and
$52 million
are recorded in other liabilities, respectively, and
$1 million
is recorded as a net offset to other assets at both dates.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
S. INCOME TAXES (Concluded)
We file income tax returns in the U.S. Federal jurisdiction, and various local, state and foreign jurisdictions. We continue to participate in the Compliance Assurance Program ("CAP"). CAP is a real-time audit of the U.S. Federal income tax return that allows the Internal Revenue Service ("IRS"), working in conjunction with us, to determine tax return compliance with the U.S. Federal tax law prior to filing the return. This program provides us with greater certainty about our tax liability for a given year within months, rather than years, of filing our annual tax return and greatly reduces the need for recording a liability for U.S. Federal uncertain tax positions. The IRS has completed their examination of our consolidated U.S. Federal tax returns through 2015. With few exceptions, we are no longer subject to state or foreign income tax examinations on filed returns for years before 2005.
As a result of tax audit closings, settlements and the expiration of applicable statutes of limitations in various jurisdictions within the next 12 months, we anticipate that it is reasonably possible the liability for uncertain tax positions could be reduced by approximately
$6 million
.
T. EARNINGS PER COMMON SHARE
Reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per common share were as follows, in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Numerator (basic and diluted):
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
491
|
|
|
$
|
357
|
|
|
$
|
821
|
|
|
Less: Allocation to unvested restricted stock awards
|
6
|
|
|
5
|
|
|
16
|
|
|
Income from continuing operations attributable to common shareholders
|
485
|
|
|
352
|
|
|
805
|
|
|
(Loss) income from discontinued operations, net
|
—
|
|
|
(2
|
)
|
|
35
|
|
|
Less: Allocation to unvested restricted stock awards
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(Loss) income from discontinued operations attributable to common shareholders
|
—
|
|
|
(2
|
)
|
|
34
|
|
|
Net income available to common shareholders
|
$
|
485
|
|
|
$
|
350
|
|
|
$
|
839
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Basic common shares (based upon weighted average)
|
326
|
|
|
338
|
|
|
349
|
|
|
Add: Stock option dilution
|
4
|
|
|
3
|
|
|
3
|
|
|
Diluted common shares
|
330
|
|
|
341
|
|
|
352
|
|
We follow accounting guidance regarding determining whether instruments granted in share-based payment transactions are participating securities. This accounting guidance clarifies that share-based payment awards that entitle their holders to receive non-forfeitable dividends prior to vesting should be considered participating securities. We have granted restricted stock awards that contain non-forfeitable rights to dividends on unvested shares; such unvested restricted stock awards are considered participating securities. As participating securities, the unvested shares are required to be included in the calculation of our basic earnings per common share, using the "two-class method." The two-class method of computing earnings per common share is an allocation method that calculates earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. For the years ended
December 31, 2016
,
2015
and
2014
, we allocated dividends and undistributed earnings to the participating securities.
Additionally,
338,000
common shares,
5 million
common shares and
7 million
common shares for
2016
,
2015
and
2014
, respectively, related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.
Common shares outstanding included on our balance sheet and for the calculation of earnings per common share do not include unvested stock awards (
4 million
common shares and
5 million
common shares at
December 31, 2016
and
2015
, respectively); shares outstanding for legal requirements included all common shares that have voting rights (including unvested stock awards).
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
U. OTHER COMMITMENTS AND CONTINGENCIES
Litigation.
We are subject to claims, charges, litigation and other proceedings in the ordinary course of our business, including those arising from or related to contractual matters, intellectual property, personal injury, environmental matters, product liability, product recalls, construction defect, insurance coverage, personnel and employment disputes, anti-trust issues 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.
Warranty.
Changes in our warranty liability were as follows, in millions:
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|
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|
|
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2016
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|
2015
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|
Balance at January 1
|
$
|
152
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|
|
$
|
135
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|
|
Accruals for warranties issued during the year
|
66
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|
|
56
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|
|
Accruals related to pre-existing warranties
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33
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|
15
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|
Settlements made (in cash or kind) during the year
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(56
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)
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|
(50
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)
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Other, net (including currency translation)
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(3
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)
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(4
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)
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Balance at December 31
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$
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192
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$
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152
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|
During 2016, a business in the Windows and Other Specialty Products segment recorded a
$31 million
increase as a change in estimate of expected future warranty claims resulting from recent warranty claim trends, including, among other items, the nature and type of claim and estimate of costs to service claims.
Investments.
With respect to our investments in private equity funds, we had, at
December 31, 2016
, commitments to contribute up to
$5 million
of additional capital to such funds representing our aggregate capital commitment to such funds less capital contributions made to date. We are contractually obligated to make additional capital contributions to certain of our private equity funds upon receipt of a capital call from the private equity fund. We have no control over when or if the capital calls will occur. Capital calls are funded in cash and generally result in an increase in the carrying value of our investment in the private equity fund when paid.
Other Matters.
We enter into contracts, which include reasonable and customary indemnifications that are standard for the industries in which we operate. Such indemnifications include customer claims against builders for issues relating to our products and workmanship. In conjunction with divestitures and other transactions, we occasionally provide reasonable and customary indemnifications relating to various items including: the enforceability of trademarks; legal and environmental issues; provisions for sales returns; and asset valuations. We have never had to pay a material amount related to these indemnifications and we evaluate the probability that amounts may be incurred and appropriately record an estimated liability when probable.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
V. INTERIM FINANCIAL INFORMATION (UNAUDITED)
Our quarterly results attributable to Masco Corporation were as follows:
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Quarters Ended
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(In Millions, Except Per Common Share Data)
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Total
Year
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December 31
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September 30
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|
June 30
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|
March 31
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2016
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Net sales
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$
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7,357
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$
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1,759
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$
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1,877
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$
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2,001
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$
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1,720
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Gross profit
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$
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2,456
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$
|
573
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$
|
614
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$
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700
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$
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569
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Income from continuing operations
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$
|
491
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|
$
|
98
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$
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134
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$
|
150
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$
|
109
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Net income
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$
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491
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|
$
|
98
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$
|
134
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$
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150
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$
|
109
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Earnings per common share:
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Basic:
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Income from continuing operations
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$
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1.49
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|
$
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0.30
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|
|
$
|
0.41
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|
|
$
|
0.45
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|
|
$
|
0.33
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|
Net income
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$
|
1.49
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|
|
$
|
0.30
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|
|
$
|
0.41
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|
|
$
|
0.45
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|
|
$
|
0.33
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|
Diluted:
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Income from continuing operations
|
$
|
1.47
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|
$
|
0.30
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|
|
$
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0.40
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|
|
$
|
0.45
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|
|
$
|
0.32
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Net income
|
$
|
1.47
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|
|
$
|
0.30
|
|
|
$
|
0.40
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|
|
$
|
0.45
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|
$
|
0.32
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|
2015
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Net sales
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$
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7,142
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$
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1,715
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$
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1,839
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|
$
|
1,929
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|
$
|
1,659
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Gross profit
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$
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2,253
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|
$
|
532
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$
|
589
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$
|
637
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$
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495
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Income from continuing operations
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$
|
357
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|
$
|
76
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|
$
|
111
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|
$
|
109
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|
$
|
61
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Net income
|
$
|
355
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|
|
$
|
75
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|
|
$
|
111
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|
$
|
105
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|
$
|
64
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|
Earnings per common share:
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Basic:
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Income from continuing operations
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$
|
1.04
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$
|
0.23
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$
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0.33
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$
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0.32
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$
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0.17
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Net income
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$
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1.03
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$
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0.22
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$
|
0.33
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$
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0.30
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$
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0.18
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Diluted:
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Income from continuing operations
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$
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1.03
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$
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0.22
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$
|
0.32
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|
$
|
0.31
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$
|
0.17
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Net income
|
$
|
1.02
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|
$
|
0.22
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|
$
|
0.32
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|
$
|
0.30
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|
|
$
|
0.18
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|
Earnings per common share amounts for the four quarters of
December 31, 2016
and
2015
may not total to the earnings per common share amounts for the years ended
December 31, 2016
and
2015
due to the allocation of income to participating securities.