MASCO CORP /DE/, 10-Q filed on 10/30/2018
Quarterly Report
v3.10.0.1
Document and Entity Information
9 Months Ended
Sep. 30, 2018
shares
Document and Entity Information [Abstract]  
Entity Registrant Name MASCO CORP /DE/
Entity Central Index Key 0000062996
Current Fiscal Year End Date --12-31
Entity Filer Category Large Accelerated Filer
Document Type 10-Q
Document Period End Date Sep. 30, 2018
Document Fiscal Year Focus 2018
Document Fiscal Period Focus Q3
Amendment Flag false
Entity Common Stock, Shares Outstanding (in shares) 305,498,347
v3.10.0.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
$ in Millions
Sep. 30, 2018
Dec. 31, 2017
Current Assets:    
Cash and cash investments $ 569 $ 1,194
Short-term bank deposits 0 108
Receivables 1,298 1,066
Prepaid expenses and other 118 111
Inventories:    
Finished goods 578 402
Raw material 318 277
Work in process 109 105
Total inventories 1,005 784
Total current assets 2,990 3,263
Property and equipment, net 1,211 1,129
Goodwill 896 841
Other intangible assets, net 412 187
Other assets 101 114
Total assets 5,610 5,534
Current Liabilities:    
Accounts payable 1,040 824
Notes payable 2 116
Accrued liabilities 711 727
Total current liabilities 1,753 1,667
Long-term debt 2,971 2,969
Other liabilities 679 715
Total liabilities 5,403 5,351
Commitments and contingencies (Note P)
Masco Corporation's shareholders' equity:    
Common shares, par value $1 per share Authorized shares: 1,400,000,000; Issued and outstanding: 2018 – 303,100,000; 2017 – 310,400,000 303 310
Preferred shares authorized: 1,000,000; Issued and outstanding: 2018 and 2017 – None 0 0
Paid-in capital 0 0
Retained deficit (154) (298)
Accumulated other comprehensive loss (113) (65)
Total Masco Corporation's shareholders' equity (deficit) 36 (53)
Noncontrolling interest 171 236
Total equity 207 183
Total liabilities and equity $ 5,610 $ 5,534
v3.10.0.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares
Sep. 30, 2018
Dec. 31, 2017
Statement of Financial Position [Abstract]    
Common share, par value (in dollars per share) $ 1 $ 1
Common shares, shares authorized (in shares) 1,400,000,000 1,400,000,000
Common shares, shares issued (in shares) 303,100,000 310,400,000
Common shares, shares outstanding (in shares) 303,100,000 310,400,000
Preferred shares, shares authorized (in shares) 1,000,000 1,000,000
Preferred shares, shares issued (in shares) 0 0
Preferred shares, shares outstanding (in shares) 0 0
v3.10.0.1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Income Statement [Abstract]        
Net sales $ 2,101 $ 1,945 $ 6,318 $ 5,789
Cost of sales 1,434 1,288 4,282 3,781
Gross profit 667 657 2,036 2,008
Selling, general and administrative expenses 367 348 1,134 1,070
Operating profit 300 309 902 938
Other income (expense), net:        
Interest expense (38) (43) (117) (239)
Other, net 0 (2) (11) 37
Total other income (expense), net (38) (45) (128) (202)
Income before income taxes 262 264 774 736
Income tax expense 71 100 198 248
Net income 191 164 576 488
Less: Net income attributable to noncontrolling interest 11 12 36 35
Net income attributable to Masco Corporation $ 180 $ 152 $ 540 $ 453
Basic:        
Net income (in dollars per share) $ 0.59 $ 0.48 $ 1.74 $ 1.42
Diluted:        
Net income (in dollars per share) $ 0.58 $ 0.48 $ 1.73 $ 1.41
v3.10.0.1
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Statement of Comprehensive Income [Abstract]        
Net income $ 191 $ 164 $ 576 $ 488
Less: Net income attributable to noncontrolling interest 11 12 36 35
Net income attributable to Masco Corporation 180 152 540 453
Other comprehensive income (loss), net of tax (Note L):        
Cumulative translation adjustment 1 33 (14) 119
Interest rate swaps 0 0 1 2
Pension and other post-retirement benefits 4 4 12 11
Other comprehensive income (loss), net of tax 5 37 (1) 132
Less: Other comprehensive income (loss) attributable to noncontrolling interest 0 6 (12) 24
Other comprehensive income attributable to Masco Corporation 5 31 11 108
Total comprehensive income 196 201 575 620
Less: Total comprehensive income attributable to noncontrolling interest 11 18 24 59
Total comprehensive income attributable to Masco Corporation $ 185 $ 183 $ 551 $ 561
v3.10.0.1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
$ in Millions
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:    
Cash provided by operations $ 729 $ 749
Increase in receivables (182) (232)
Increase in inventories (62) (136)
Increase in accounts payable and accrued liabilities, net 169 86
Net cash from operating activities 654 467
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:    
Retirement of notes (114) (535)
Purchase of Company common stock (354) (312)
Cash dividends paid (98) (96)
Dividends paid to noncontrolling interest (89) (35)
Issuance of notes, net of issuance costs 0 593
Decrease in debt, net (1) 0
Debt extinguishment costs 0 (104)
Proceeds from the exercise of stock options 8 0
Employee withholding taxes paid on stock-based compensation (38) (29)
Net cash for financing activities (686) (518)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:    
Capital expenditures (160) (113)
Acquisition of business, net of cash acquired (549) 0
Proceeds from disposition of:    
Business, net of cash disposed 0 128
Short-term bank deposits 108 206
Other financial investments 4 6
Property and equipment 3 6
Purchases of short-term bank deposits 0 (65)
Other, net (7) (11)
Net cash (for) from investing activities (601) 157
Effect of exchange rate changes on cash and cash investments 8 45
CASH AND CASH INVESTMENTS:    
(Decrease) increase for the period (625) 151
At January 1 1,194 990
At September 30 $ 569 $ 1,141
v3.10.0.1
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) - USD ($)
$ in Millions
Total
Common Shares ($1 par value)
Paid-In Capital
Retained (Deficit) Earnings
Accumulated Other Comprehensive (Loss) Income
Noncontrolling Interest
Increase (Decrease) in Stockholders' Equity            
Cumulative effect of adoption of new revenue recognition accounting standard | Accounting Standards Update 2014-09 $ 6     $ 6    
Balance at Dec. 31, 2016 (103) $ 318 $ 0 (381) $ (235) $ 195
Balance (Accounting Standards Update 2014-09) at Dec. 31, 2016 (97) 318 0 (375) (235) 195
Increase (Decrease) in Stockholders' Equity            
Total comprehensive income 620     453 108 59
Shares issued (14) 2 (16)      
Shares retired:            
Repurchased (312) (8) (6) (298)    
Surrendered (non-cash) (15) (1)   (14)    
Cash dividends declared (96)     (96)    
Noncontrolling Interest, Decrease from Distributions to Noncontrolling Interest Holders (35)         (35)
Stock-based compensation 22   22      
Balance at Sep. 30, 2017 73 311 0 (330) (127) 219
Increase (Decrease) in Stockholders' Equity            
Cumulative effect of adoption of new revenue recognition accounting standard | Accounting Standards Update 2018-02 0     59 (59)  
Balance at Dec. 31, 2017 183 310 0 (298) (65) 236
Increase (Decrease) in Stockholders' Equity            
Total comprehensive income 575     540 11 24
Shares issued (11) 2 (5) (8)    
Shares retired:            
Repurchased (354) (9) (18) (327)    
Surrendered (non-cash) (19)   (19)    
Cash dividends declared (101)     (101)    
Noncontrolling Interest, Decrease from Distributions to Noncontrolling Interest Holders (89)         (89)
Stock-based compensation 23   23      
Balance at Sep. 30, 2018 $ 207 $ 303 $ 0 $ (154) $ (113) $ 171
v3.10.0.1
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Parenthetical) - $ / shares
Sep. 30, 2018
Dec. 31, 2017
Statement of Stockholders' Equity [Abstract]    
Common share, par value (in dollars per share) $ 1 $ 1
v3.10.0.1
Accounting Policies
9 Months Ended
Sep. 30, 2018
Accounting Policies [Abstract]  
Accounting Policies
ACCOUNTING POLICIES
 
In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to fairly state our financial position at September 30, 2018, our results of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2018 and 2017, and cash flows and changes in shareholders' equity for the nine-month periods ended September 30, 2018 and 2017. The condensed consolidated balance sheet at December 31, 2017 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
 
Reclassification. Certain prior year amounts have been reclassified to conform to the 2018 presentation in the condensed consolidated financial statements. 

Income Tax Effects within Accumulated Other Comprehensive Income (Loss). 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 income (loss). Generally, a disproportionate tax effect will be eliminated and recognized in income tax expense (benefit) when the circumstances upon which it is premised cease to exist.
    
The disproportionate tax effect related to various defined-benefit pension plans will be eliminated from accumulated other comprehensive income (loss) at the termination of the related pension plans. The disproportionate tax effect relating to our interest rate swap hedge, which was terminated in 2012, will be eliminated from accumulated other comprehensive income (loss) upon the maturity of the related debt in March 2022.
 
Recently Adopted Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board ("FASB") issued a new standard for revenue recognition, Accounting Standards Codification ("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. We adopted ASC 606 on January 1, 2018, under the full retrospective method of adoption. As a result of this adoption, net sales increased by $9 million and $19 million for the three-month and nine-month periods ended September 30, 2017, respectively, and operating profit (and income before income taxes) increased by $7 million and $11 million for the three-month and nine-month periods ended September 30, 2017, respectively, from what was previously reported. For full year 2017 and 2016, net sales decreased by $2 million and increased by $4 million, respectively, and operating profit (and income before income taxes) decreased by $1 million and increased by $2 million, respectively, from what was previously reported. We additionally have recasted our previously reported segment operating results at the end of this section.

In January 2016, the FASB issued 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. We adopted ASU 2016-01 on January 1, 2018. The adoption of this standard did not have a material impact on our financial position or results of operations.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory," which no longer allows the tax effects of intra-entity asset transfers (intercompany sales) of assets other than inventory to be deferred until the transferred asset is sold to a third party or otherwise recovered through use. The new standard requires the tax expense from the sale of the asset in the seller's tax jurisdiction and the corresponding basis differences in the buyer's jurisdiction to be recognized when the transfer occurs even though the pre-tax effects of the transaction are eliminated in consolidation. We adopted ASU 2016-16 on January 1, 2018. The adoption of this standard did not have a material impact on our financial position or results of operations.





A. ACCOUNTING POLICIES (Continued)

In March 2017, the FASB issued ASU 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which modifies the presentation of net periodic pension and post-retirement benefit cost ("net benefit cost") in the income statement and the components eligible for capitalization as assets. ASU 2017-07 requires retrospective application for certain aspects of the standard. We adopted ASU 2017-07 on January 1, 2018. As a result of the adoption, we reclassified $7 million and $22 million of net benefit cost from operating profit to other income (expense), net, within our results of operations for the three-month and nine-month periods ended September 30, 2017, respectively. For full year 2017 and 2016, we reclassified $26 million and $32 million, respectively, of net benefit cost from operating profit to other income (expense), net, within our results of operations. We additionally have recasted our previously reported segment operating results at the end of this section. The adoption of the standard did not impact income before income taxes.
    
In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting," which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. We adopted ASU 2017-09 on January 1, 2018. The adoption of this standard did not impact our financial position or results of operations; however, modification accounting is now required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions.

In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which permits a company to reclassify from accumulated other comprehensive income (loss) to retained earnings the disproportionate tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“2017 Act”). We early adopted ASU 2018-02 on March 31, 2018. As a result of the adoption, in the first quarter of 2018 we decreased accumulated other comprehensive income (loss) and increased retained earnings (deficit) by the $59 million disproportionate tax effect caused by the 2017 Act.
    
Impact of Adoption of ASC 606 and ASU 2017-07. The recasted impact of the adoptions of ASC 606 and ASU 2017-07 to our previously reported operating results and basic and diluted income per share was as follows, in millions (except per common share data):
 
Year Ended December 31, 2016
 
Net Sales
 
Operating Profit (Loss)
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
Operations by segment:
 
 
 
 
 
 
 
Plumbing Products
$
3,526

 
$
3,529

 
$
642

 
$
654

Decorative Architectural Products
2,092

 
2,092

 
430

 
433

Cabinetry Products
970

 
970

 
93

 
97

Windows and Other Specialty Products
769

 
770

 
(3
)
 
(3
)
Total
$
7,357

 
$
7,361

 
1,162

 
1,181

General corporate expense, net
 
 
 
 
(109
)
 
(94
)
Operating profit
 
 
 
 
$
1,053

 
$
1,087

 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
December 31, 2016
 
 
 
 
 
As Reported
 
As Recasted
Net income attributable to Masco Corporation
 
 
 
 
$
491

 
$
493

Income per common share attributable to Masco Corporation:
 
 
 
 
Basic:
 
 
 
 
$
1.49

 
$
1.49

Diluted:
 
 
 
 
$
1.47

 
$
1.48




A. ACCOUNTING POLICIES (Continued)
 
Three Months Ended March 31, 2017
 
Net Sales
 
Operating Profit (Loss)
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
Operations by segment:
 
 
 
 
 
 
 
Plumbing Products
$
863

 
$
872

 
$
156

 
$
162

Decorative Architectural Products
505

 
496

 
101

 
94

Cabinetry Products
231

 
231

 
16

 
16

Windows and Other Specialty Products
178

 
179

 
6

 
8

Total
$
1,777

 
$
1,778

 
279

 
280

General corporate expense, net
 
 
 
 
(26
)
 
(23
)
Operating profit
 
 
 
 
$
253

 
$
257

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
March 31, 2017
 
 
 
 
 
As Reported
 
As Recasted
Net income attributable to Masco Corporation
 
 
 
 
$
140

 
$
138

Income per common share attributable to Masco Corporation:
 
 
 
 
Basic:
 
 
 
 
$
0.44

 
$
0.43

Diluted:
 
 
 
 
$
0.43

 
$
0.43


 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
Net Sales
 
Operating Profit (Loss)
 
Net Sales
 
Operating Profit (Loss)
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
Operations by segment:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Plumbing Products
$
949

 
$
949

 
$
198

 
$
200

 
$
1,812

 
$
1,821

 
$
354

 
$
362

Decorative Architectural Products
653

 
661

 
141

 
149

 
1,158

 
1,157

 
242

 
243

Cabinetry Products
251

 
251

 
30

 
31

 
482

 
482

 
46

 
47

Windows and Other Specialty Products
204

 
205

 
18

 
18

 
382

 
384

 
24

 
26

Total
$
2,057

 
$
2,066

 
387

 
398

 
$
3,834

 
$
3,844

 
666

 
678

General corporate expense, net
 

 
 

 
(30
)
 
(26
)
 
 
 
 
 
(56
)
 
(49
)
Operating profit
 

 
 

 
$
357

 
$
372

 
 
 
 
 
$
610

 
$
629

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2017
 
 
 
 
 
 
 
 
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
Net income attributable to Masco Corporation
 
$
158

 
$
163

 
$
298

 
$
301

Income per common share attributable to Masco Corporation:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
$
0.50

 
$
0.51

 
$
0.93

 
$
0.94

Diluted:
 
 
 
 
 
 
 
 
$
0.49

 
$
0.51

 
$
0.92

 
$
0.93







A. ACCOUNTING POLICIES (Continued)
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
Net Sales
 
Operating Profit (Loss)
 
Net Sales
 
Operating Profit (Loss)
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
Operations by segment:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Plumbing Products
$
951

 
$
950

 
$
175

 
$
175

 
$
2,763

 
$
2,771

 
$
529

 
$
537

Decorative Architectural Products
553

 
562

 
104

 
112

 
1,711

 
1,719

 
346

 
355

Cabinetry Products
229

 
229

 
19

 
20

 
711

 
711

 
65

 
67

Windows and Other Specialty Products
203

 
204

 
23

 
24

 
585

 
588

 
47

 
50

Total
$
1,936

 
$
1,945

 
321

 
331

 
$
5,770

 
$
5,789

 
987

 
1,009

General corporate expense, net
 

 
 

 
(26
)
 
(22
)
 
 
 
 
 
(82
)
 
(71
)
Operating profit
 

 
 

 
$
295

 
$
309

 
 
 
 
 
$
905

 
$
938

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
 
 
 
 
 
 
 
 
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
Net income attributable to Masco Corporation
 
$
148

 
$
152

 
$
446

 
$
453

Income per common share attributable to Masco Corporation:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
$
0.47

 
$
0.48

 
$
1.40

 
$
1.42

Diluted:
 
 
 
 
 
 
 
 
$
0.46

 
$
0.48

 
$
1.38

 
$
1.41


 
Three Months Ended December 31, 2017
 
Year Ended December 31, 2017
 
Net Sales
 
Operating Profit (Loss)
 
Net Sales
 
Operating Profit (Loss)
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
Operations by segment:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Plumbing Products
$
972

 
$
961

 
$
169

 
$
165

 
$
3,735

 
$
3,732

 
$
698

 
$
702

Decorative Architectural Products
494

 
487

 
88

 
83

 
2,205

 
2,206

 
434

 
438

Cabinetry Products
223

 
223

 
25

 
25

 
934

 
934

 
90

 
92

Windows and Other Specialty Products
185

 
182

 
5

 
4

 
770

 
770

 
52

 
54

Total
$
1,874

 
$
1,853

 
287

 
277

 
$
7,644

 
$
7,642

 
1,274

 
1,286

General corporate expense, net
 

 
 

 
(23
)
 
(21
)
 
 
 
 
 
(105
)
 
(92
)
Operating profit
 

 
 

 
$
264

 
$
256

 
 
 
 
 
$
1,169

 
$
1,194

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 31, 2017
 
Year Ended
December 31, 2017
 
 
 
 
 
 
 
 
 
As Reported
 
As Recasted
 
As Reported
 
As Recasted
Net income attributable to Masco Corporation
 
$
87

 
$
80

 
$
533

 
$
533

Income per common share attributable to Masco Corporation:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
$
0.28

 
$
0.25

 
$
1.68

 
$
1.68

Diluted:
 
 
 
 
 
 
 
 
$
0.27

 
$
0.25

 
$
1.66

 
$
1.66



A. ACCOUNTING POLICIES (Concluded)
    
Recently Issued Accounting Pronouncements. In February 2016, the FASB issued a new standard for leases, 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. We currently anticipate adopting the new standard using the optional transition method which allows for initial application of the new standard beginning at the adoption date. We expect this standard to increase our total assets and total liabilities; however, we are currently evaluating the magnitude of the impact. We do not expect the standard to have a material impact on our results of operations. In preparation for the adoption of the standard, we have procured a third-party software to track and manage our leases, substantially loaded lease data into the software, and trained our business units on the new standard and the use of the software.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which modifies the methodology for recognizing loss impairments on certain types of financial instruments, including receivables. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure. Additionally, ASU 2016-13 amends the current available-for-sale security other-than-temporary impairment model for debt securities. ASU 2016-13 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.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which improves and simplifies accounting rules around hedge accounting and better portrays the economic results of an entity's risk management activities in its financial statements. ASU 2017-12 is effective for us for annual periods beginning January 1, 2019. We do not expect the adoption of the standard will impact our financial position or results of operations.

In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment awards issued to employees. ASU 2018-07 is effective for us for annual periods beginning January 1, 2019. We do not expect the adoption of the standard will impact our financial position or results of operations.

In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which allows for the capitalization of certain implementation costs incurred in a hosting arrangement that is a service contract. ASU 2018-15 allows for either retrospective adoption or prospective adoption to all implementation costs incurred after the date of adoption. ASU 2018-15 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.
v3.10.0.1
Acquisitions
9 Months Ended
Sep. 30, 2018
Business Combinations [Abstract]  
Acquisitions
ACQUISITIONS

On March 9, 2018, we acquired substantially all of the net assets of The L.D. Kichler Co. ("Kichler"), a leader in decorative residential and light commercial lighting products, ceiling fans and LED lighting systems. This business expands our product offerings to our customers. The results of this acquisition for the period from the acquisition date are included in the condensed consolidated financial statements and are reported in the Decorative Architectural Products segment. For the three-month and nine-month periods ended September 30, 2018, we recorded $104 million and $239 million, respectively, of net sales as a result of this acquisition. The purchase price, net of $2 million cash acquired, consisted of $549 million paid with cash on hand.
    
During the second and third quarters of 2018, we revised the allocation of the purchase price to identifiable assets and liabilities based on analysis of information as of the acquisition date that has been made available through September 30, 2018.  Receipt of additional information to complete such analysis and finalization of the valuation is still in process, and, as a result, the allocation will continue to be updated through the measurement period, if necessary. The preliminary allocation of the fair value of the acquisition of Kichler is summarized in the following table, in millions.

 
Initial
 
Revised
Receivables
$
101

 
$
101

Inventories
173

 
169

Other current assets
5

 
5

Property and equipment
33

 
33

Goodwill
46

 
59

Other intangible assets
243

 
240

Accounts payable
(24
)
 
(24
)
Accrued liabilities
(25
)
 
(29
)
Other liabilities
(4
)
 
(5
)
Total
$
548

 
$
549



The goodwill acquired, which is generally tax deductible, is related primarily to the operational and financial synergies we expect to derive from combining Kichler's operations into our business, as well as the assembled workforce. The other intangible assets acquired consist of $59 million of indefinite-lived intangible assets, which is related to trademarks, and $181 million of definite-lived intangible assets. The definite-lived intangible assets consist of $145 million related to customer relationships, which is being amortized on a straight-line basis over 20 years, and $36 million of other definite-lived intangible assets, which is being amortized over a weighted average amortization period of 3 years.
v3.10.0.1
Divestitures
9 Months Ended
Sep. 30, 2018
Discontinued Operations and Disposal Groups [Abstract]  
Divestitures
DIVESTITURES

In the second quarter of 2017 we divested of Arrow Fastener Co., LLC ("Arrow"), a manufacturer and distributor of fastening tools, for proceeds of $128 million. In connection with the divestiture we recognized a gain of $2 million and $51 million for the three-month and nine-month periods ended September 30, 2017, respectively, included in other, net, within other income (expense), net in our condensed consolidated statement of operations. The results of this business are included within income before income taxes in the condensed consolidated statement of operations and reported as part of our Windows and Other Specialty Products segment prior to the date of the divestiture.
v3.10.0.1
Revenue
9 Months Ended
Sep. 30, 2018
Revenues [Abstract]  
Revenue
REVENUE

We recognize revenue as control of our products is transferred to our customers, which is generally at the time of shipment or upon delivery based on the contractual terms with our customers, or when services are completed. Control over certain of our custom-made window products transfers to our customers as production is completed, and revenue is recognized over the production period for these products, as our products do not have an alternative use and we have an enforceable right to payment during the production period. The production period of our custom-made window products generally does not lapse days, and for these products we currently recognize revenue based on the output of production, which is a faithful depiction of the transfer of these products to our customers. Our customers' payment terms generally range from 30 to 65 days of fulfilling our performance obligations and recognizing revenue.

We consider shipping and handling activities performed by us as activities to fulfill the sales of our products. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales. We capitalize incremental costs of obtaining a contract and expense the costs on a straight-line basis over the contractual period if the cost is recoverable, the cost would not have been incurred without the contract and the term of the contract is greater than one year; otherwise, we expense the amounts as incurred. We do not adjust the promised amount of consideration for the effects of a financing component if the period between when we transfer our products or services and when our customers pay for our products or services is expected to be one year or less.

Our revenues are derived primarily from sales to customers in North America and Internationally, principally Europe. Net sales from these geographic markets, by segment, were as follows, in millions:
 
Three Months Ended September 30, 2018
 
Plumbing Products
 
Decorative Architectural Products
 
Cabinetry Products
 
Windows and Other Specialty Products
 
Total
Primary geographic markets:
 
 
 
 
 
 
 
 
 
North America
$
653

 
$
673

 
$
239

 
$
159

 
$
1,724

International, principally Europe
339

 

 

 
38

 
377

Total
$
992

 
$
673

 
$
239

 
$
197

 
$
2,101

 
Nine Months Ended September 30, 2018
 
Plumbing Products
 
Decorative Architectural Products
 
Cabinetry Products
 
Windows and Other Specialty Products
 
Total
Primary geographic markets:
 
 
 
 
 
 
 
 
 
North America
$
1,905

 
$
2,024

 
$
724

 
$
459

 
$
5,112

International, principally Europe
1,090

 

 

 
116

 
1,206

Total
$
2,995

 
$
2,024

 
$
724

 
$
575

 
$
6,318


 
Three Months Ended September 30, 2017
 
Plumbing Products
 
Decorative Architectural Products
 
Cabinetry Products
 
Windows and Other Specialty Products
 
Total
Primary geographic markets:
 
 
 
 
 
 
 
 
 
North America
$
599

 
$
562

 
$
216

 
$
161

 
$
1,538

International, principally Europe
351

 

 
13

 
43

 
407

Total
$
950

 
$
562

 
$
229

 
$
204

 
$
1,945





D. REVENUE (Concluded)
 
Nine Months Ended September 30, 2017
 
Plumbing Products
 
Decorative Architectural Products
 
Cabinetry Products
 
Windows and Other Specialty Products
 
Total
Primary geographic markets:
 
 
 
 
 
 
 
 
 
North America
$
1,761

 
$
1,719

 
$
673

 
$
465

 
$
4,618

International, principally Europe
1,010

 

 
38

 
123

 
1,171

Total
$
2,771

 
$
1,719

 
$
711

 
$
588

 
$
5,789



We provide customer programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. These customer programs and incentives are considered variable consideration. We include in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period. We recognized an increase to revenue of $2 million and $4 million for the three-month and nine-month periods ended September 30, 2018, respectively, and $4 million and $7 million for the three-month and nine-month periods ended September 30, 2017, respectively, of variable consideration related to performance obligations settled in previous periods.
    
Certain product sales include a right of return. We estimate future product returns at the time of sale based on historical experience and record a corresponding refund liability. We additionally record an asset, based on historical experience, for the amount of product we expect to return to inventory as a result of the return, which is recorded in prepaid expenses and other in the condensed consolidated balance sheets.

We record contract assets for items for which we have satisfied our performance obligation but our receipt of payment is contingent upon delivery or other circumstances other than the passage of time. Our contract assets are recorded in prepaid expenses and other in our condensed consolidated balance sheets. Our contract assets generally
become unconditional and are reclassified to receivables in the quarter subsequent to each balance sheet date. Our contract asset balance was $15 million and $11 million at September 30, 2018 and December 31, 2017, respectively.
    
We record contract liabilities primarily for deferred revenue. Our contract liabilities are recorded in accrued liabilities in our condensed consolidated balance sheets. Our contract liabilities are generally recognized to net sales in the immediately subsequent reporting period. Our contract liability balance was $18 million and $32 million at September 30, 2018 and December 31, 2017, respectively.
v3.10.0.1
Depreciation and Amortization
9 Months Ended
Sep. 30, 2018
Depreciation, Depletion and Amortization [Abstract]  
Depreciation and Amortization
DEPRECIATION AND AMORTIZATION
 
Depreciation and amortization expense was $115 million and $95 million for the nine-month periods ended September 30, 2018 and 2017, respectively.
v3.10.0.1
Goodwill and Other Intangible Assets
9 Months Ended
Sep. 30, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets
GOODWILL AND OTHER INTANGIBLE ASSETS
 
The changes in the carrying amount of goodwill for the nine-month period ended September 30, 2018, by segment, were as follows, in millions: 
 
Gross Goodwill At September 30, 2018
 
Accumulated
Impairment
Losses
 
Net Goodwill At September 30, 2018
Plumbing Products
$
571

 
$
(340
)
 
$
231

Decorative Architectural Products
353

 
(75
)
 
278

Cabinetry Products
181

 

 
181

Windows and Other Specialty Products
717

 
(511
)
 
206

Total
$
1,822

 
$
(926
)
 
$
896

 
Gross Goodwill At December 31, 2017
 
Accumulated
Impairment
Losses
 
Net Goodwill At December 31, 2017
 
Additions (A)
 
Other (B)
 
Net Goodwill At September 30, 2018
Plumbing Products
$
574

 
$
(340
)
 
$
234

 
$

 
$
(3
)
 
$
231

Decorative Architectural Products
294

 
(75
)
 
219

 
59

 

 
278

Cabinetry Products
181

 

 
181

 

 

 
181

Windows and Other Specialty Products
718

 
(511
)
 
207

 

 
(1
)
 
206

Total
$
1,767

 
$
(926
)
 
$
841

 
$
59

 
$
(4
)
 
$
896

 
 
(A)    Additions consist of acquisitions.
(B)
Other consists of the effect of foreign currency translation.
 
The carrying value of our other indefinite-lived intangible assets was $199 million and $140 million at September 30, 2018 and December 31, 2017, respectively, and principally included registered trademarks. The carrying value of our definite-lived intangible assets was $213 million (net of accumulated amortization of $24 million) and $47 million (net of accumulated amortization of $10 million) at September 30, 2018 and December 31, 2017, respectively, and principally included customer relationships. The increases in our indefinite-lived intangible assets and definite-lived intangible assets are primarily a result of our acquisition of Kichler.
v3.10.0.1
Derivative Instruments and Hedging Activities
9 Months Ended
Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities
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 may include interest rate swap agreements and foreign currency contracts. 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 an approximate $2 million loss was recognized in our consolidated statement of operations in other, net, within other income (expense), 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 September 30, 2018, the balance remaining in accumulated other comprehensive loss was $7 million (pre-tax).





G. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Concluded)

Foreign Currency Contracts. Our net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, and investments in subsidiaries. To mitigate this risk, we, including certain of our European operations, enter into foreign currency forward contracts and foreign currency exchange contracts.
    
Gains (losses) related to foreign currency forward and exchange contracts are recorded in our condensed consolidated statement 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.

The pre-tax gains (losses) included in our condensed consolidated statements of operations were as follows, in millions:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Foreign currency contracts:
 

 
 

 
 

 
 

Exchange contracts
$

 
$
(1
)
 
$
1

 
$
(1
)
Forward contracts
(1
)
 
1

 
(1
)
 
1

Interest rate swaps

 

 
(1
)
 
(3
)
Total loss
$
(1
)
 
$

 
$
(1
)
 
$
(3
)


We present our derivatives net by counterparty, due to the right of offset under master netting arrangements in the condensed consolidated balance sheets. The notional amounts being hedged and the fair value of those derivative instruments are as follows, in millions:
 
At September 30, 2018
 
Notional
Amount
 
Balance Sheet
Foreign currency contracts:
 

 
 

Exchange contracts
$
6

 
 

Receivables
 

 
$

Forward contracts
73

 
 

Receivables
 
 

Other assets
 
 

Accrued liabilities
 

 

Other liabilities
 
 

 
At December 31, 2017
 
Notional
Amount
 
Balance Sheet
Foreign currency contracts:
 

 
 

Exchange contracts
$
14

 
 

Accrued liabilities
 

 
$

Forward contracts
43

 
 

Receivables
 

 

Accrued liabilities
 

 


 
The fair value of all foreign currency contracts is estimated on a recurring basis, quarterly, using Level 2 inputs (significant other observable inputs).
v3.10.0.1
Warranty Liability
9 Months Ended
Sep. 30, 2018
Product Warranties Disclosures [Abstract]  
Warranty Liability
WARRANTY LIABILITY
 
Changes in our warranty liability were as follows, in millions: 
 
Nine Months Ended
September 30, 2018
 
Twelve Months Ended December 31, 2017
Balance at January 1
$
205

 
$
192

Accruals for warranties issued during the period
60

 
63

Accruals related to pre-existing warranties
1

 
9

Settlements made (in cash or kind) during the period
(49
)
 
(59
)
Other, net (including currency translation)
1

 

Balance at end of period
$
218

 
$
205

v3.10.0.1
Debt
9 Months Ended
Sep. 30, 2018
Debt Disclosure [Abstract]  
Debt
DEBT
    
On April 16, 2018, we repaid and retired all of our $114 million, 6.625% Notes on the scheduled repayment date.    

On June 21, 2017, we issued $300 million of 3.5% Notes due November 15, 2027 and $300 million of 4.5% Notes due May 15, 2047. We received proceeds of $599 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 June 27, 2017, proceeds from the debt issuances, together with cash on hand, were used to repay and early retire $299 million of our 7.125% Notes due March 15, 2020, $74 million of our 5.95% Notes due March 15, 2022, $62 million of our 7.75% Notes due August 1, 2029, and $100 million of our 6.5% Notes due August 15, 2032. In connection with these early retirements, we incurred a loss on debt extinguishment of $107 million, which was recorded as interest expense.

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; outstanding letters of credit under the Amended Credit Agreement reduce our borrowing capacity. At September 30, 2018, we had no 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.






I. DEBT (Concluded)

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 were outstanding at September 30, 2018

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, which are Level 1 inputs. The aggregate estimated market value was approximately $3.0 billion at September 30, 2018, which equaled the aggregate carrying value of short-term and long-term debt at that date. The aggregate estimated market value of short-term and long-term debt was approximately $3.3 billion, compared with the aggregate carrying value of $3.1 billion, at December 31, 2017.
v3.10.0.1
Stock-Based Compensation
9 Months Ended
Sep. 30, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-Based Compensation
STOCK-BASED COMPENSATION
 
Our 2014 Long Term Stock Incentive Plan provides for the issuance of stock-based incentives in various forms to our employees and non-employee Directors. At September 30, 2018, outstanding stock-based incentives were in the form of long-term stock awards, stock options, restricted stock units, phantom stock awards and stock appreciation rights.    

Pre-tax compensation expense for these stock-based incentives was as follows, in millions: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Long-term stock awards
$
5

 
$
6

 
$
17

 
$
19

Stock options
1

 

 
3

 
2

Restricted stock units
1

 

 
3

 
1

Phantom stock awards and stock appreciation rights
1

 
2

 

 
7

Total
$
8

 
$
8

 
$
23

 
$
29


    
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 644,580 shares of long-term stock awards in the nine-month period ended September 30, 2018.


















J. STOCK-BASED COMPENSATION (Continued)

Our long-term stock award activity was as follows, shares in millions: 
 
Nine Months Ended September 30,
 
2018
 
2017
Unvested stock award shares at January 1
3

 
4

Weighted average grant date fair value
$
24

 
$
20

 
 
 
 
Stock award shares granted
1

 
1

Weighted average grant date fair value
$
42

 
$
34

 
 
 
 
Stock award shares vested
2

 
2

Weighted average grant date fair value
$
21

 
$
18

 
 
 
 
Stock award shares forfeited

 

Weighted average grant date fair value
$
31

 
$
24