MASCO CORP /DE/, 10-Q filed on 10/25/2016
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2016
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, 2016 
Document Fiscal Year Focus
2016 
Document Fiscal Period Focus
Q3 
Amendment Flag
false 
Entity Common Stock, Shares Outstanding (in shares)
328,307,161 
Entity Current Reporting Status
Yes 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $)
In Millions, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash investments
$ 1,041 
$ 1,468 
Short-term bank deposits
182 
248 
Receivables
1,054 
853 
Prepaid expenses and other
87 
72 
Inventories:
 
 
Finished goods
422 
358 
Raw material
243 
238 
Work in process
93 
91 
Total
758 
687 
Total current assets
3,122 
3,328 
Property and equipment, net
1,049 
1,027 
Goodwill
841 
839 
Other intangible assets, net
155 
160 
Other assets
206 
310 
Total assets
5,373 
5,664 
Current liabilities:
 
 
Notes payable
1,004 
Accounts payable
866 
749 
Accrued liabilities
642 
650 
Total current liabilities
1,511 
2,403 
Long-term debt
2,993 
2,403 
Other liabilities
766 
800 
Total liabilities
5,270 
5,606 
Commitments and contingencies
   
   
Masco Corporation’s shareholders’ equity:
 
 
Common shares, par value $1 per share Authorized shares: 1,400,000,000; Issued and outstanding: 2016 – 324,500,000; 2015 – 330,500,000
325 
330 
Preferred shares authorized: 1,000,000; Issued and outstanding: 2016 and 2015 – None
Paid-in capital
Retained deficit
(253)
(300)
Accumulated other comprehensive loss
(170)
(165)
Total Masco Corporation’s shareholders’ deficit
(98)
(135)
Noncontrolling interest
201 
193 
Total equity
103 
58 
Total liabilities and equity
$ 5,373 
$ 5,664 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) (USD $)
Sep. 30, 2016
Dec. 31, 2015
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)
324,500,000 
330,500,000 
Common shares, shares outstanding (in shares)
324,500,000 
330,500,000 
Preferred shares, shares authorized (in shares)
1,000,000 
1,000,000 
Preferred shares, shares issued (in shares)
Preferred shares, shares outstanding (in shares)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Income Statement [Abstract]
 
 
 
 
Net sales
$ 1,877 
$ 1,839 
$ 5,598 
$ 5,427 
Cost of sales
1,263 
1,250 
3,715 
3,706 
Gross profit
614 
589 
1,883 
1,721 
Selling, general and administrative expenses
345 
331 
1,045 
1,019 
Operating profit
269 
258 
838 
702 
Other income (expense), net:
 
 
 
 
Interest expense
(43)
(54)
(186)
(171)
Other, net
(6)
(2)
Total other income (expense), net
(42)
(60)
(181)
(173)
Income from continuing operations before income taxes
227 
198 
657 
529 
Income tax expense
(81)
(77)
(229)
(219)
Income from continuing operations
146 
121 
428 
310 
Loss from discontinued operations, net
(1)
Net income
146 
121 
428 
309 
Less: Net income attributable to noncontrolling interest
12 
10 
35 
29 
Net income attributable to Masco Corporation
134 
111 
393 
280 
Basic:
 
 
 
 
Income from continuing operations (in dollars per share)
$ 0.41 
$ 0.33 
$ 1.18 
$ 0.81 
Income (loss) from discontinued operations, net (in dollars per share)
$ 0.00 
$ 0.00 
$ 0.00 
$ 0.00 
Net income (in dollars per share)
$ 0.41 
$ 0.33 
$ 1.18 
$ 0.81 
Diluted:
 
 
 
 
Income from continuing operations (in dollars per share)
$ 0.40 
$ 0.32 
$ 1.17 
$ 0.81 
Income (loss) from discontinued operations, net (in dollars per share)
$ 0.00 
$ 0.00 
$ 0.00 
$ 0.00 
Net income (in dollars per share)
$ 0.40 
$ 0.32 
$ 1.17 
$ 0.80 
Amounts attributable to Masco Corporation:
 
 
 
 
Income from continuing operations
134 
111 
393 
281 
Net income attributable to Masco Corporation
$ 134 
$ 111 
$ 393 
$ 280 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 146 
$ 121 
$ 428 
$ 309 
Less: Net income attributable to noncontrolling interest
12 
10 
35 
29 
Net income attributable to Masco Corporation
134 
111 
393 
280 
Other comprehensive income (loss), net of tax
 
 
 
 
Cumulative translation adjustment
(1)
(17)
(10)
(70)
Interest rate swaps
Pension and other post-retirement benefits
11 
Realized gain on available-for-sale securities
(1)
Other comprehensive income (loss)
(13)
(1)
(58)
Less: Other comprehensive income (loss) attributable to noncontrolling interest
(1)
(10)
Other comprehensive income (loss) attributable to Masco Corporation
(12)
(5)
(48)
Total comprehensive income
148 
108 
427 
251 
Less: Total comprehensive income attributable to the noncontrolling interest
14 
39 
19 
Total comprehensive income attributable to Masco Corporation
$ 134 
$ 99 
$ 388 
$ 232 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
Cash provided by operations
$ 569 
$ 581 
Increase in receivables
(245)
(245)
Increase in inventories
(73)
(41)
Increase in accounts payable and accrued liabilities, net
131 
127 
Net cash from operating activities
382 
422 
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
Retirement of notes
(1,300)
(500)
Purchase of Company common stock
(242)
(407)
Cash dividends paid
(95)
(94)
Dividend payment to noncontrolling interest
(31)
(36)
Cash distributed to TopBuild Corp.
(63)
Issuance of TopBuild Corp. debt
200 
Issuance of notes, net of issuance costs
889 
497 
Issuance of Company common stock
Excess tax benefit from stock-based compensation
21 
32 
Decrease in debt, net
(2)
(1)
Credit Agreement and other financing costs
(3)
Net cash for financing activities
(759)
(373)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
Capital expenditures
(117)
(112)
Acquisition of companies, net of cash acquired
(41)
Proceeds from disposition of:
 
 
Short-term bank deposits
223 
251 
Other financial investments
14 
Property and equipment
13 
Purchases of:
 
 
Short-term bank deposits
(151)
(225)
Other, net
(9)
(37)
Net cash for investing activities
(40)
(144)
Effect of exchange rate changes on cash and cash investments
(10)
(9)
CASH AND CASH INVESTMENTS:
 
 
Decrease for the period
(427)
(104)
At January 1
1,468 
1,383 
At September 30
$ 1,041 
$ 1,279 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (USD $)
In Millions, unless otherwise specified
Total
Common Shares ($1 par value)
Paid-In Capital
Retained Earnings (Deficit)
Accumulated Other Comprehensive Loss
Noncontrolling Interest
Balance at Dec. 31, 2014
$ 1,128 
$ 345 
$ 0 
$ 690 
$ (111)
$ 204 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income (loss)
251 
 
 
280 
(48)
19 
Shares issued
(9)
(12)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(407)
(15)
(29)
(363)
 
 
Surrendered (non-cash)
(18)
(1)
 
(17)
 
 
Cash dividends declared
(94)
 
 
(94)
 
 
Dividend payment to noncontrolling interest
(36)
 
 
 
 
(36)
Stockholders' Equity Note, Spinoff Transaction
(828)
 
 
(828)
 
 
Stock-based compensation
41 
 
41 
 
 
 
Balance at Sep. 30, 2015
28 
332 
(332)
(159)
187 
Balance at Dec. 31, 2015
58 
330 
(300)
(165)
193 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income (loss)
427 
 
 
393 
(5)
39 
Shares issued
(24)
(27)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(252)
(8)
(8)
(236)
 
 
Surrendered (non-cash)
(14)
 
 
(14)
 
 
Cash dividends declared
(96)
 
 
(96)
 
 
Dividend payment to noncontrolling interest
(31)
 
 
 
 
(31)
Stock-based compensation
35 
 
35 
 
 
 
Balance at Sep. 30, 2016
$ 103 
$ 325 
$ 0 
$ (253)
$ (170)
$ 201 
Accounting Policies
Accounting Policies
ACCOUNTING POLICIES
 
In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly our financial position as at September 30, 2016, and our results of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2016 and 2015, and cash flows and changes in shareholders’ equity for the nine-month periods ended September 30, 2016 and 2015.  The condensed consolidated balance sheet at December 31, 2015 was derived from audited financial statements.
 
Reclassification. Certain prior year amounts have been reclassified to conform to the 2016 presentation in the condensed consolidated financial statements. 

Revision of Previously Issued Financial Statements. We have revised the previously reported balances on our condensed 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 condensed consolidated statements of operations or condensed consolidated statements of cash flows. This revision is not considered material to our prior period financial statements.
 
Recently Issued 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,” that requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. In August 2015, the FASB 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 2014, the FASB issued a new standard for revenue recognition, Accounting Standards Codification 606 (“ASC 606”).  The purpose of ASC 606 is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability across industries. ASC 606 is effective for us for annual periods beginning January 1, 2018.  We are currently evaluating the impact the adoption of this new standard will have on our results of operations. 

In 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. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
    
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 to be limited to the reclassification of certain items within our statement of cash flows, which we intend to adopt retrospectively.



A. ACCOUNTING POLICIES (Concluded)
    
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. ASC 2016-15 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 statement of cash flows.
Discontinued Operations
Discontinued Operations
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. We completed the spin off on June 30, 2015 at which time we accounted for it as a discontinued operation. Losses from this discontinued operation were included in loss from discontinued operations, net, in the condensed consolidated statement of operations for the three-month and nine-month periods ended September 30, 2015.
 
The major classes of line items constituting loss from discontinued operations, net, were as follows, in millions:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$

 
$

 
$

 
$
762

Cost of sales

 

 

 
603

Gross profit

 

 

 
159

Selling, general and administrative expenses

 

 

 
148

Income from discontinued operations
$

 
$

 
$

 
$
11

Loss on disposal of discontinued operations, net 

 
(1
)
 

 
(1
)
(Loss) income before income tax

 
(1
)
 

 
10

Income tax benefit (expense) (A)

 
1

 

 
(11
)
Loss from discontinued operations, net
$

 
$

 
$

 
$
(1
)
 
(A) The unusual relationship between income tax expense and income before income tax for the nine-month period ended September 30, 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:
 
Nine Months Ended
September 30,
 
2016
 
2015
Depreciation and amortization
$

 
$
6

Capital expenditures
$

 
$
7

 
In conjunction with the spin off, we entered into a Transition Services Agreement with TopBuild under which we provide administrative services to TopBuild subsequent to the separation.  The fees for services rendered under the Transition Services Agreement are not material to our results of operations.
Goodwill and Other Intangible Assets
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, 2016, by segment, were as follows, in millions: 
 
Gross Goodwill At September 30, 2016
 
Accumulated
Impairment
Losses
 
Net Goodwill At September 30, 2016
Plumbing Products
$
528

 
$
(340
)
 
$
188

Decorative Architectural Products
294

 
(75
)
 
219

Cabinetry Products
240

 
(59
)
 
181

Windows and Other Specialty Products
987

 
(734
)
 
253

Total
$
2,049

 
$
(1,208
)
 
$
841

 
Gross Goodwill At December 31, 2015
 
Accumulated
Impairment
Losses
 
Net Goodwill At December 31, 2015
 
Other(A)
 
Net Goodwill At September 30, 2016
Plumbing Products
$
525

 
$
(340
)
 
$
185

 
$
3

 
$
188

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

 
$
2

 
$
841

 
 
(A)    Other principally includes the effect of foreign currency translation.
 
The carrying value of our other indefinite-lived intangible assets was $136 million and $137 million at September 30, 2016 and December 31, 2015, respectively, and principally included registered trademarks. The carrying value of our definite-lived intangible assets was $19 million (net of accumulated amortization of $17 million) and $23 million (net of accumulated amortization of $49 million) at September 30, 2016 and December 31, 2015, respectively, and principally included customer relationships.
Depreciation and Amortization
Depreciation and Amortization
DEPRECIATION AND AMORTIZATION
 
Depreciation and amortization expense, including discontinued operations, was $100 million for both of the nine-month periods ended September 30, 2016 and 2015.
Fair Value of Financial Investments
Fair Value of Financial Investments
FAIR VALUE OF FINANCIAL INVESTMENTS
 
We have maintained investments in available-for-sale securities, equity method investments and a number of private equity funds, principally as part of our tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses. Financial investments were as follows, in millions:
 
September 30, 2016
 
December 31, 2015
Prepaid expenses and other:
 
 
 
Auction rate securities
$
12

 
$

 
 
 
 
Other assets:
 
 
 
Auction rate securities

 
22

Equity method investments
14

 
13

Private equity funds
7

 
10

Other investments
3

 
3

Total
$
36

 
$
48


 

E. FAIR VALUE OF FINANCIAL INVESTMENTS (Concluded)

Recurring Fair Value Measurements.  Our auction rate securities are measured at fair value on a recurring basis, and have been estimated using a discounted cash flow model (Level 3 input).  The significant inputs in the discounted cash flow model used to value the auction rate securities include: expected maturity of auction rate securities, discount rate used to determine the present value of expected cash flows and the assumptions for credit defaults, since the auction rate securities are backed by credit default swap agreements.
 
In the second quarter of 2016, $10 million of our auction rate securities were called by our counterparty and redeemed at a value that approximated our recorded basis. Our investments in auction rate securities had a recorded basis of $12 million and $22 million at September 30, 2016 and December 31, 2015, respectively, which included cost basis of $10 million and $19 million and pre-tax unrealized gains of $2 million and $3 million at each respective date.
 
Non-Recurring Fair Value Measurements.  During the nine-month periods ended September 30, 2016 and 2015, we did not measure any financial investments at fair value on a non-recurring basis, as there was no other-than-temporary decline in the estimated value of these investments.
 
We did not have any transfers between Level 1 and Level 2 financial assets in the nine-month periods ended September 30, 2016 or 2015.
    
Realized Gains (Losses).  Income from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Realized gains from auction rate securities
$

 
$

 
$
1

 
$

Realized gains from private equity funds
1

 
1

 
2

 
5

Equity investment income, net

 

 
1

 
2

Total income from financial investments, net
$
1

 
$
1

 
$
4

 
$
7


 
Fair Value of Debt.  The fair value of our short-term and long-term fixed-rate debt instruments is based principally upon modeled market prices for the same or similar issues or the current rates available to us for debt with similar terms and remaining maturities.  The aggregate estimated market value of short-term and long-term debt at September 30, 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.
Derivative Instruments and Hedging Activities
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 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 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.

Foreign Currency Contracts.  Our net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, and investments in subsidiaries.  To mitigate this risk, we, including certain of our European operations, entered into foreign currency forward contracts and foreign currency exchange contracts.
F. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Concluded)

Gains (losses) related to foreign currency forward and exchange contracts are recorded in our condensed consolidated statements of operations in other, net, within other income (expense), net.  In the event that the counterparties fail to meet the terms of the foreign currency forward or exchange contracts, our exposure is limited to the aggregate foreign currency rate differential with such institutions.

Metals Contracts.  We have entered into several contracts to manage our exposure to increases in the price of copper and zinc.  Gains (losses) related to these contracts are recorded in our condensed consolidated statements of operations in cost of sales.
 
The pre-tax gains (losses) included in our condensed consolidated statements of operations are as follows, in millions:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Foreign currency contracts:
 

 
 

 
 

 
 

Exchange contracts
$

 
$

 
$

 
$
3

Forward contracts

 
1

 

 
(3
)
Metals contracts
1

 
(9
)
 
5

 
(14
)
Interest rate swaps

 

 
(1
)
 
(1
)
Total gain (loss)
$
1

 
$
(8
)
 
$
4

 
$
(15
)


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, 2016
 
Notional
Amount
 
Balance Sheet
Foreign currency contracts:
 

 
 

Exchange contracts
$
7

 
 

Accrued liabilities
 

 
$

Forward contracts
28

 
 

Accrued liabilities
 

 
(1
)
Other liabilities
 
 
(1
)
Metals contracts
13

 
 

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 (significant other observable inputs).
Warranty Liability
Warranty Liability
WARRANTY LIABILITY
 
Changes in our warranty liability were as follows, in millions: 
 
Nine Months Ended
September 30, 2016
 
Twelve Months Ended December 31, 2015
Balance at January 1
$
152

 
$
135

Accruals for warranties issued during the period
48

 
56

Accruals related to pre-existing warranties
36

 
15

Settlements made (in cash or kind) during the period
(43
)
 
(50
)
Other, net (including currency translation)
(1
)
 
(4
)
Balance at end of period
$
192

 
$
152



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.
Debt
Debt
DEBT

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 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 reduced 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 Euro and certain other currencies. Borrowings under the revolver denominated in euros are limited to $500 million, equivalent. We can also borrow swingline loans up to $75 million and obtain letters of credit of up to $100 million; any outstanding letters of credit under the Amended Credit Agreement reduce our borrowing capacity. At September 30, 2016, 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 greatest 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.

H. 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 had no borrowing under the Amended Credit Agreement at September 30, 2016.
Stock-Based Compensation
Stock-Based Compensation
STOCK-BASED COMPENSATION
 
Our 2014 Long Term Stock Incentive Plan (the “2014 Plan”) provides for the issuance of stock-based incentives in various forms to our employees and non-employee Directors.  At September 30, 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: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Long-term stock awards
$
5

 
$
6

 
$
17

 
$
19

Stock options
1

 
1

 
2

 
5

Phantom stock awards and stock appreciation rights
4

 

 
6

 
6

Total
$
10

 
$
7

 
$
25

 
$
30

Income tax benefit (37 percent tax rate)
$
4

 
$
3

 
$
9

 
$
11


 
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 provided we continue the practice of repurchasing and retiring an equal number of shares in the open market.  We granted 1,050,380 shares of long-term stock awards in the nine-month period ended September 30, 2016.

I. STOCK-BASED COMPENSATION (Continued)

Our long-term stock award activity was as follows, shares in millions: 
 
Nine Months Ended
September 30,
 
2016
 
2015
Unvested stock award shares at January 1
5

 
6

Weighted average grant date fair value
$
17

 
$
18

 
 
 
 
Stock award shares granted
1

 
1

Weighted average grant date fair value
$
26

 
$
26

 
 
 
 
Stock award shares vested
2

 
2

Weighted average grant date fair value
$
16

 
$
17

 
 
 
 
Stock award shares forfeited

 

Weighted average grant date fair value
$
20

 
$
18

 
 
 
 
Forfeitures upon spin off (A) 

 
1

Weighted average grant date fair value
$

 
$
20

 
 
 
 
Modification upon spin off (B) 

 
1

 
 
 
 
Unvested stock award shares at September 30
4

 
5

Weighted average grant date fair value
$
20

 
$
17

 

(A)                  In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.
(B)                  Subsequent to the separation of TopBuild, we modified our outstanding equity awards to employees and non-employee Directors such that all individuals received an equivalent fair value both before and after the separation.  The modification to the outstanding stock awards was made pursuant to existing anti-dilution provisions in our 2014 Plan and 2005 Long Term Incentive Plan.

At September 30, 2016 and 2015, there was $49 million and $47 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 both September 30, 2016 and 2015.
 
The total market value (at the vesting date) of stock award shares which vested during the nine-month periods ended September 30, 2016 and 2015 was $43 million and $54 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 of stock option shares in the nine-month period ended September 30, 2016 with a grant date exercise price approximating $26 per share. In the nine-month period ended September 30, 2016, no stock option shares were forfeited (including options that expired unexercised).
I. STOCK-BASED COMPENSATION (Continued)

Our stock option activity was as follows, shares in millions: 
 
 
Nine Months Ended
September 30,
 
 
2016
 
 
2015
Option shares outstanding, January 1
 
12

 
 
18

Weighted average exercise price (A)
$
17

 
$
21

 
 
 
 
 
 
Option shares granted
 

 
 

Weighted average exercise price
$
26

 
$
26

 
 
 
 
 
 
Option shares exercised
 
5

 
 
3

Aggregate intrinsic value on date of exercise (B) 
$
64 million

 
$
32 million

Weighted average exercise price
$
21

 
$
17

 
 
 
 
 
 
Option shares forfeited
 

 
 
3

Weighted average exercise price
$

 
$
29

 
 
 
 
 
 
Forfeitures upon spin off (C) 
 

 
 

Weighted average exercise price
$

 
$
19

 
 
 
 
 
 
Modification upon spin off (A) 
 

 
 
2

 
 
 
 
 
 
Option shares outstanding, September 30
 
7

 
 
14

Weighted average exercise price
$
15

 
$
17

Weighted average remaining option term (in years)
 
4

 
 
4

 
 
 
 
 
 
Option shares vested and expected to vest, September 30
 
7

 
 
14

Weighted average exercise price
$
15

 
$
17

Aggregate intrinsic value (B) 
$
137 million

 
$
111 million

Weighted average remaining option term (in years)
 
4

 
 
4

 
 
 
 
 
 
Option shares exercisable (vested), September 30
 
6

 
 
12

Weighted average exercise price
$
13

 
$
18

Aggregate intrinsic value (B) 
$
117 million

 
$
96 million

Weighted average remaining option term (in years)
 
3

 
 
3

 
 
(A)
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. The modification contributed to the lower exercise price.
(B)
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.
(C)
In connection with the spin off of TopBuild, TopBuild employees forfeited their outstanding Masco equity awards.

I. STOCK-BASED COMPENSATION (Concluded)

At September 30, 2016 and 2015, there was $7 million and $6 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average remaining vesting period of three years at September 30, 2016 and two years at September 30, 2015.

The weighted average grant date fair value of option shares granted and the assumptions used to estimate those values using a Black-Scholes option pricing model were as follows: 
 
Nine Months Ended
September 30,
 
2016
 
2015
Weighted average grant date fair value
$
6.43

 
$
9.67

Risk-free interest rate
1.41
%
 
1.75
%
Dividend yield
1.49
%
 
1.32
%
Volatility factor
29.00
%
 
42.00
%
Expected option life
6 years

 
6 years

Employee Retirement Plans
Employee Retirement Plans
EMPLOYEE RETIREMENT PLANS
 
Net periodic pension cost for our defined-benefit pension plans was as follows, in millions: 
 
Three Months Ended September 30,
 
2016
 
2015
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Service cost
$
1

 
$

 
$

 
$

Interest cost
13

 
1

 
13

 
1

Expected return on plan assets
(15
)
 

 
(12
)
 

Amortization of net loss
5

 
1

 
5

 
1

Net periodic pension cost
$
4

 
$
2

 
$
6

 
$
2

 
Nine Months Ended September 30,
 
2016
 
2015
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Service cost
$
2

 
$

 
$
2

 
$

Interest cost
34

 
5

 
36

 
5

Expected return on plan assets
(34
)
 

 
(35
)
 

Amortization of net loss
12

 
2

 
14

 
2

Net periodic pension cost
$
14

 
$
7

 
$
17

 
$
7



In the second quarter of 2016, we contributed $51 million to certain qualified defined-benefit pension plans, which was not included in our previous 2016 expected contributions. At September 30, 2016, we now expect to contribute a total of approximately $96 million to our qualified defined-benefit pension plans in 2016.    

We froze all future benefit accruals under substantially all of our domestic qualified and foreign and domestic non-qualified defined benefit pension plans several years ago.
Reclassifications From Accumulated Other Comprehensive Loss
Reclassifications From Accumulated Other Comprehensive Loss
RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE LOSS
 
The reclassifications from accumulated other comprehensive loss to the condensed consolidated statements of operations were as follows, in millions: 
 
 
Amounts Reclassified
 
 
Accumulated Other Comprehensive Loss
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Statement of Operations Line Item
 
2016
 
2015
 
2016
 
2015
 
Amortization of defined benefit pension and other postretirement benefits:
 
 

 
 

 
 

 
 

 
 
Actuarial losses, net
 
$
6

 
$
6

 
$
14

 
$
16

 
Selling, general and administrative expenses
Tax (benefit)
 
(3
)
 
(2
)
 
(5
)
 
(5
)
 
 
Net of tax
 
$
3

 
$
4

 
$
9

 
$
11

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$

 
$
1

 
$
1

 
Interest expense
Tax (benefit)
 

 

 

 

 
 
Net of tax
 
$

 
$

 
$
1

 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
$

 
$

 
$
(1
)
 
$

 
Other, net
Tax expense
 

 

 

 

 
 
Net of tax
 
$

 
$

 
$
(1
)
 
$

 
 
Segment Information
Segment Information
SEGMENT INFORMATION
 
Information by segment and geographic area was as follows, in millions: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
Net Sales(A)
 
Operating Profit (Loss)
 
Net Sales(A)
 
Operating Profit (Loss)
Operations by segment (B):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Plumbing Products
$
899

 
$
853

 
$
174

 
$
137

 
$
2,635

 
$
2,495

 
$
491

 
$
386

Decorative Architectural Products
536

 
527

 
111

 
102

 
1,649

 
1,600

 
355

 
318

Cabinetry Products
239

 
253

 
19


21

 
736


771

 
77

 
32

Windows and Other Specialty Products
203

 
206

 
(10
)
 
23

 
578

 
561

 
(9
)
 
50

Total
$
1,877

 
$
1,839

 
$
294

 
$
283

 
$
5,598

 
$
5,427

 
$
914

 
$
786

Operations by geographic area:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

North America
$
1,497

 
$
1,462

 
$
235

 
$
234

 
$
4,445

 
$
4,298

 
$
749

 
$
645

International, principally Europe
380

 
377

 
59

 
49

 
1,153

 
1,129

 
165

 
141

Total
$
1,877

 
$
1,839

 
294

 
283

 
$
5,598

 
$
5,427

 
914

 
786

General corporate expense, net
 

 
 

 
(25
)
 
(25
)
 
 

 
 

 
(76
)
 
(84
)
Operating profit
 

 
 

 
269

 
258

 
 

 
 

 
838

 
702

Other income (expense), net
 

 
 

 
(42
)
 
(60
)
 
 
 
 
 
(181
)
 
(173
)
Income from continuing operations before income taxes
 

 
 

 
$
227

 
$
198

 
 

 
 

 
$
657

 
$
529

 
 
(A)
Inter-segment sales were not material.
(B)
In the first quarter of 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.
Severance Costs
Severance Costs
SEVERANCE COSTS
 
We recorded charges related to severance of $1 million and $5 million for the three-month and nine-month periods ended September 30, 2016, respectively, and $1 million and $8 million for the three-month and nine-month periods ended September 30, 2015, respectively. Such 2016 charges are reflected in the condensed consolidated statements of operations in selling, general and administrative expenses and cost of sales while 2015 charges are principally reflected in selling, general and administrative expenses.
Other Income (Expense), Net
Other Income (Expense), Net
OTHER INCOME (EXPENSE), NET
 
Other, net, which is included in other income (expense), net, was as follows, in millions: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Income from cash and cash investments
$
1

 
$
1

 
$
3

 
$
2

Income from financial investments, net (Note E)
1

 
1

 
4

 
7

Foreign currency transaction losses
(3
)
 
(8
)
 
(1
)
 
(13
)
Other items, net
2

 

 
(1
)
 
2

Total other, net
$
1

 
$
(6
)
 
$
5

 
$
(2
)
Earnings Per Common Share
Earnings Per Common Share
EARNINGS PER COMMON SHARE
 
Reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per common share were as follows, in millions: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Numerator (basic and diluted):
 

 
 

 
 

 
 

Income from continuing operations
$
134

 
$
111

 
$
393

 
$
281

Less: Allocation to unvested restricted stock awards
2

 
2

 
5

 
4

Income from continuing operations attributable to common shareholders
132

 
109

 
388

 
277

 
 
 
 
 
 
 
 
Loss from discontinued operations, net

 

 

 
(1
)
Less: Allocation to unvested restricted stock awards

 

 

 

Loss from discontinued operations attributable to common shareholders

 

 

 
(1
)
 
 
 
 
 
 
 
 
Net income available to common shareholders
$
132

 
$
109

 
$
388

 
$
276

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic common shares (based upon weighted average)
326

 
335

 
328

 
340

Add: Stock option dilution
3

 
3

 
4

 
4

Diluted common shares
329

 
338

 
332

 
344


 
For the three-month and nine-month periods ended September 30, 2016 and 2015, we allocated dividends and undistributed earnings to the unvested restricted stock awards.
 
Additionally, 609,000 common shares for the nine-month period ended September 30, 2016 and 4 million and 6 million common shares for the three-month and nine-month periods ended September 30, 2015, respectively, related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.

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. In the first nine months of 2016, we repurchased and retired 8.3 million shares of our common stock (including 1.1 million shares to offset the dilutive impact of long-term stock awards granted in the first half of the year), for approximately $252 million of which $242 million was paid in cash during the first nine months of 2016. At September 30, 2016, we had 19.4 million shares remaining under the authorization.

On the basis of amounts paid (declared), cash dividends per common share were $0.095 ($0.100) and $0.285 ($0.290) for the three-month and nine-month periods ended September 30, 2016, respectively, and $0.090 ($0.095) and $0.270 ($0.275) for the three-month and nine-month periods ended September 30, 2015, respectively.
Other Commitments and Contingencies
Other Commitments and Contingencies
OTHER COMMITMENTS AND CONTINGENCIES
 
We are subject to claims, charges, litigation and other proceedings in the ordinary course of our business, including those arising from or related to contractual matters, intellectual property, personal injury, environmental matters, product liability, product recalls, construction defect, insurance coverage, personnel and employment disputes, anti-trust 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.
Income Taxes
Income Taxes
INCOME TAXES
 
Our effective tax rate was 36 percent and 35 percent for the three-month and nine-month periods ended September 30, 2016, respectively, and 39 percent and 41 percent for the three-month and nine-month periods ended September 30, 2015, respectively.  The decrease in the 2016 rates results primarily from the tax benefit of the domestic production deduction which allows a deduction for certain qualified production activities within the U.S. This deduction was not available in 2015 due to the utilization of our U.S. Federal loss carryforward. Additionally, the decrease in the nine-month rate is impacted by an $18 million valuation allowance against the deferred tax assets of TopBuild recorded as a non-cash charge to income tax expense in the second quarter of 2015. The TopBuild deferred tax assets have been impaired by our decision to spin off TopBuild into a separate company that on a stand-alone basis as of June 30, 2015, the spin off date, was unlikely to be able to realize the value of such deferred tax assets as a result of its history of losses.
Accounting Policies (Policies)
Reclassification. Certain prior year amounts have been reclassified to conform to the 2016 presentation in the condensed consolidated financial statements. 
Recently Issued 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,” that requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. In August 2015, the FASB 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 2014, the FASB issued a new standard for revenue recognition, Accounting Standards Codification 606 (“ASC 606”).  The purpose of ASC 606 is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability across industries. ASC 606 is effective for us for annual periods beginning January 1, 2018.  We are currently evaluating the impact the adoption of this new standard will have on our results of operations. 

In 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. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
    
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 to be limited to the reclassification of certain items within our statement of cash flows, which we intend to adopt retrospectively.



A. ACCOUNTING POLICIES (Concluded)
    
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. ASC 2016-15 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 statement of cash flows.
Discontinued Operations (Tables)
Schedules of major classes of line items constituting pre-tax profit (loss) of discontinued operations, carrying amount of major classes of assets and liabilities, and other selected financial information during the period owned
The major classes of line items constituting loss from discontinued operations, net, were as follows, in millions:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$

 
$

 
$

 
$
762

Cost of sales

 

 

 
603

Gross profit

 

 

 
159

Selling, general and administrative expenses

 

 

 
148

Income from discontinued operations
$

 
$

 
$

 
$
11

Loss on disposal of discontinued operations, net 

 
(1
)
 

 
(1
)
(Loss) income before income tax

 
(1
)
 

 
10

Income tax benefit (expense) (A)

 
1

 

 
(11
)
Loss from discontinued operations, net
$

 
$

 
$

 
$
(1
)
 
(A) The unusual relationship between income tax expense and income before income tax for the nine-month period ended September 30, 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:
 
Nine Months Ended
September 30,
 
2016
 
2015
Depreciation and amortization
$

 
$
6

Capital expenditures
$

 
$
7

Goodwill and Other Intangible Assets (Tables)
Schedule of changes in carrying amount of goodwill
The changes in the carrying amount of goodwill for the nine-month period ended September 30, 2016, by segment, were as follows, in millions: 
 
Gross Goodwill At September 30, 2016
 
Accumulated
Impairment
Losses
 
Net Goodwill At September 30, 2016
Plumbing Products
$
528

 
$
(340
)
 
$
188

Decorative Architectural Products
294

 
(75
)
 
219

Cabinetry Products
240

 
(59
)
 
181

Windows and Other Specialty Products
987

 
(734
)
 
253

Total
$
2,049

 
$
(1,208
)
 
$
841

 
Gross Goodwill At December 31, 2015
 
Accumulated
Impairment
Losses
 
Net Goodwill At December 31, 2015
 
Other(A)
 
Net Goodwill At September 30, 2016
Plumbing Products
$
525

 
$
(340
)
 
$
185

 
$
3

 
$
188

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

 
$
2

 
$
841

 
 
(A)    Other principally includes the effect of foreign currency translation.
Fair Value of Financial Investments (Tables)
Financial investments were as follows, in millions:
 
September 30, 2016
 
December 31, 2015
Prepaid expenses and other:
 
 
 
Auction rate securities
$
12

 
$

 
 
 
 
Other assets:
 
 
 
Auction rate securities

 
22

Equity method investments
14

 
13

Private equity funds
7

 
10

Other investments
3

 
3

Total
$
36

 
$
48

Income from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Realized gains from auction rate securities
$

 
$

 
$
1

 
$

Realized gains from private equity funds
1

 
1

 
2

 
5

Equity investment income, net

 

 
1

 
2

Total income from financial investments, net
$
1

 
$
1

 
$
4

 
$
7

Derivative Instruments and Hedging Activities (Tables)
The pre-tax gains (losses) included in our condensed consolidated statements of operations are as follows, in millions:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Foreign currency contracts:
 

 
 

 
 

 
 

Exchange contracts
$

 
$

 
$

 
$
3

Forward contracts

 
1

 

 
(3
)
Metals contracts
1

 
(9
)
 
5

 
(14
)
Interest rate swaps

 

 
(1
)
 
(1
)
Total gain (loss)
$
1

 
$
(8
)
 
$
4

 
$
(15
)
The notional amounts being hedged and the fair value of those derivative instruments are as follows, in millions:
 
At September 30, 2016
 
Notional
Amount
 
Balance Sheet
Foreign currency contracts:
 

 
 

Exchange contracts
$
7