MASCO CORP /DE/, 10-Q filed on 10/24/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
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, 2017 
Document Fiscal Year Focus
2017 
Document Fiscal Period Focus
Q3 
Amendment Flag
false 
Entity Common Stock, Shares Outstanding (in shares)
314,565,292 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $)
In Millions, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash investments
$ 1,141 
$ 990 
Short-term bank deposits
77 
201 
Receivables
1,128 
917 
Prepaid expenses and other
96 
114 
Inventories:
 
 
Finished goods
478 
366 
Raw material
280 
254 
Work in process
108 
92 
Total inventories
866 
712 
Total current assets
3,308 
2,934 
Property and equipment, net
1,097 
1,060 
Goodwill
801 
832 
Other intangible assets, net
156 
154 
Other assets
121 
157 
Total assets
5,483 
5,137 
Current liabilities:
 
 
Accounts payable
916 
800 
Notes payable
117 
Accrued liabilities
675 
658 
Total current liabilities
1,708 
1,460 
Long-term debt
2,969 
2,995 
Other liabilities
746 
785 
Total liabilities
5,423 
5,240 
Commitments and contingencies (Note N)
   
   
Masco Corporation’s shareholders’ equity:
 
 
Common shares, par value $1 per share Authorized shares: 1,400,000,000; Issued and outstanding: 2017 – 311,500,000; 2016 – 318,000,000
311 
318 
Preferred shares authorized: 1,000,000; Issued and outstanding: 2017 and 2016 – None
Paid-in capital
Retained deficit
(343)
(381)
Accumulated other comprehensive loss
(127)
(235)
Total Masco Corporation’s shareholders’ deficit
(159)
(298)
Noncontrolling interest
219 
195 
Total equity
60 
(103)
Total liabilities and equity
$ 5,483 
$ 5,137 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) (USD $)
Sep. 30, 2017
Dec. 31, 2016
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)
311,500,000 
318,000,000 
Common shares, shares outstanding (in shares)
311,500,000 
318,000,000 
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, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Income Statement [Abstract]
 
 
 
 
Net sales
$ 1,936 
$ 1,877 
$ 5,770 
$ 5,598 
Cost of sales
1,286 
1,263 
3,775 
3,715 
Gross profit
650 
614 
1,995 
1,883 
Selling, general and administrative expenses
355 
345 
1,090 
1,045 
Operating profit
295 
269 
905 
838 
Other income (expense), net:
 
 
 
 
Interest expense
(43)
(43)
(239)
(186)
Other, net
58 
Total other income (expense), net
(39)
(42)
(181)
(181)
Income before income taxes
256 
227 
724 
657 
Income tax expense
96 
81 
243 
229 
Net income
160 
146 
481 
428 
Less: Net income attributable to noncontrolling interest
12 
12 
35 
35 
Net income attributable to Masco Corporation
$ 148 
$ 134 
$ 446 
$ 393 
Basic:
 
 
 
 
Net income (in dollars per share)
$ 0.47 
$ 0.41 
$ 1.40 
$ 1.18 
Diluted:
 
 
 
 
Net income (in dollars per share)
$ 0.46 
$ 0.40 
$ 1.38 
$ 1.17 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 160 
$ 146 
$ 481 
$ 428 
Less: Net income attributable to noncontrolling interest
12 
12 
35 
35 
Net income attributable to Masco Corporation
148 
134 
446 
393 
Other comprehensive income (loss), net of tax (Note J):
 
 
 
 
Cumulative translation adjustment
33 
(1)
119 
(10)
Interest rate swaps
Pension and other post-retirement benefits
11 
Realized gain on available-for-sale securities
(1)
Other comprehensive income (loss)
37 
132 
(1)
Less: Other comprehensive income attributable to noncontrolling interest
24 
Other comprehensive income (loss) attributable to Masco Corporation
31 
108 
(5)
Total comprehensive income
197 
148 
613 
427 
Less: Total comprehensive income attributable to the noncontrolling interest
18 
14 
59 
39 
Total comprehensive income attributable to Masco Corporation
$ 179 
$ 134 
$ 554 
$ 388 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
Cash provided by operations
$ 745 
$ 670 
Increase in receivables
(227)
(245)
Increase in inventories
(143)
(73)
Increase in accounts payable and accrued liabilities, net
92 
131 
Net cash from operating activities
467 
483 
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
Retirement of notes
(535)
(1,300)
Purchase of Company common stock
(312)
(242)
Cash dividends paid
(96)
(95)
Dividends paid to noncontrolling interest
(35)
(31)
Issuance of notes, net of issuance costs
593 
889 
Debt extinguishment costs
(104)
(40)
Issuance of Company common stock
Employee withholding taxes paid on stock-based compensation
(29)
(40)
Decrease in debt, net
(2)
Net cash for financing activities
(518)
(860)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
Capital expenditures
(113)
(117)
Proceeds from disposition of:
 
 
Business, net of cash disposed
128 
Short-term bank deposits
206 
223 
Other financial investments
14 
Property and equipment
Purchases of:
 
 
Short-term bank deposits
(65)
(151)
Other, net
(11)
(9)
Net cash from (for) investing activities
157 
(40)
Effect of exchange rate changes on cash and cash investments
45 
(10)
CASH AND CASH INVESTMENTS:
 
 
Increase (decrease) for the period
151 
(427)
At January 1
990 
1,468 
At September 30
$ 1,141 
$ 1,041 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (USD $)
In Millions, unless otherwise specified
Total
Common Shares ($1 par value)
Paid-In Capital
Retained Deficit
Accumulated Other Comprehensive Loss
Noncontrolling Interest
Balance at Dec. 31, 2015
$ 58 
$ 330 
$ 0 
$ (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)
 
 
Dividends paid to noncontrolling interest
(31)
 
 
 
 
(31)
Stock-based compensation
35 
 
35 
 
 
 
Balance at Sep. 30, 2016
103 
325 
(253)
(170)
201 
Balance at Dec. 31, 2016
(103)
318 
(381)
(235)
195 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Total comprehensive income (loss)
613 
 
 
446 
108 
59 
Shares issued
(14)
(16)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(312)
(8)
(6)
(298)
 
 
Surrendered (non-cash)
(15)
(1)
 
(14)
 
 
Cash dividends declared
(96)
 
 
(96)
 
 
Dividends paid to noncontrolling interest
(35)
 
 
 
 
(35)
Stock-based compensation
22 
 
22 
 
 
 
Balance at Sep. 30, 2017
$ 60 
$ 311 
$ 0 
$ (343)
$ (127)
$ 219 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Parenthetical)
Sep. 30, 2017
Dec. 31, 2016
Statement of Stockholders' Equity [Abstract]
 
 
Common share, par value (in dollars per share)
$ 1 
$ 1 
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 fairly state our financial position at September 30, 2017, our results of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2017 and 2016, and cash flows and changes in shareholders' equity for the nine-month periods ended September 30, 2017 and 2016. The condensed consolidated balance sheet at December 31, 2016 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 2017 presentation in the condensed consolidated financial statements. 
 
Recently Adopted Accounting Pronouncements. In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value, as opposed to the lower of cost or market. We adopted ASU 2015-11 on January 1, 2017. The adoption of the new standard did not have an impact on our financial position or results of operations.

In March 2016, the FASB issued 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, simplifies the accounting requirements for forfeitures and employers' tax withholding requirements, and modifies the presentation of certain items on the statement of cash flows. We adopted ASU 2016-09 on January 1, 2017, using the retrospective options for reclassifying excess tax benefit from stock-based compensation and employee withholding taxes paid on stock-based compensation within our statements of cash flows. The adoption of the remaining requirements did not have an impact on our financial position or results of operation. As a result of this adoption, we increased cash flows from (for) operating activities and decreased cash flows from (for) financing activities by $61 million for the nine-month period ended September 30, 2016. For full year 2016 and 2015, we currently estimate increasing cash flows from (for) operating activities and decreasing cash flows from (for) financing activities by $62 million and $111 million, respectively. Subsequent to adoption, tax effects related to employee share-based payments will be recorded to income tax expense, thus increasing the volatility in our effective tax rate.

In January 2017, the FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We early adopted ASU 2017-04 effective January 1, 2017. The adoption of the new standard did not have an impact on our financial position or results of operations.

Recently Issued Accounting Pronouncements.  In May 2014, the 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. The standard allows for either a full retrospective or modified retrospective method of adoption. We will adopt this standard on its effective date, January 1, 2018, under the full retrospective method of adoption. We do not expect the adoption will have a material impact on our financial position or results of operations. We have finalized our accounting policy, trained our business units on the new standard and are currently evaluating our internal controls under the new standard. We have not experienced significant issues in our implementation process.

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. ASU 2016-01 is effective for us for annual periods beginning January 1, 2018. The adoption of this standard is not expected to have a material impact on our financial position or results of operations.
    
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 and requires retrospective application. We expect this standard to increase our total assets and total liabilities; however, we are currently evaluating the magnitude of the impact the adoption of this new standard will have on our financial position and results of operations.


A. ACCOUNTING POLICIES (Concluded)

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. 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 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. ASU 2016-16 is effective for us for annual periods beginning January 1, 2018. The adoption of this standard is not expected to have a material impact on our financial position or results of operations.

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 is effective for us for annual periods beginning January 1, 2018. We do not expect the adoption of the new standard will have a material impact on our financial position or results of operations. For full year 2016, we expect $31 million of expense to be retrospectively reclassified from operating profit to other income (expense), net, within our results of operations. For the nine-month period ended September 30, 2017, we expect $22 million of expense to be retrospectively reclassified from operating profit to other income (expense), net, within our results of operations.

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. ASU 2017-09 is effective for us for annual periods beginning January 1, 2018, and is applied prospectively. Upon adoption, modification accounting is 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 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 are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
Divestitures
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.
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, 2017, by segment, were as follows, in millions: 
 
Gross Goodwill At September 30, 2017
 
Accumulated
Impairment
Losses
 
Net Goodwill At September 30, 2017
Plumbing Products
$
534

 
$
(340
)
 
$
194

Decorative Architectural Products
294

 
(75
)
 
219

Cabinetry Products
240

 
(59
)
 
181

Windows and Other Specialty Products
718

 
(511
)
 
207

Total
$
1,786

 
$
(985
)
 
$
801

 
Gross Goodwill At December 31, 2016
 
Accumulated
Impairment
Losses
 
Net Goodwill At December 31, 2016
 
Other(A)
 
Divestitures (B)
 
Net Goodwill At September 30, 2017
Plumbing Products
$
519

 
$
(340
)
 
$
179

 
$
15

 
$

 
$
194

Decorative Architectural Products
294

 
(75
)
 
219

 

 

 
219

Cabinetry Products
240

 
(59
)
 
181

 

 

 
181

Windows and Other Specialty
     Products
987

 
(734
)
 
253

 
1

 
(47
)
 
207

Total
$
2,040

 
$
(1,208
)
 
$
832

 
$
16

 
$
(47
)
 
$
801

 
 
(A)    Other principally includes the effect of foreign currency translation.
(B)
Divestitures includes the disposition of Arrow in the second quarter of 2017 and is comprised of $270 million of gross goodwill and $223 million of accumulated impairment losses.
 
The carrying value of our other indefinite-lived intangible assets was $136 million at both September 30, 2017 and December 31, 2016, and principally included registered trademarks. The carrying value of our definite-lived intangible assets was $20 million (net of accumulated amortization of $10 million) and $18 million (net of accumulated amortization of $16 million) at September 30, 2017 and December 31, 2016, respectively, and principally included customer relationships.
Depreciation and Amortization
Depreciation and Amortization
DEPRECIATION AND AMORTIZATION
 
Depreciation and amortization expense was $95 million and $100 million for the nine-month periods ended September 30, 2017 and 2016, respectively.
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 may include interest rate swap agreements, foreign currency contracts and metals 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 approximately $2 million loss was recognized in our consolidated statement of operations in other, net. The remaining loss of approximately $23 million from the termination of these swaps is being amortized as an increase to interest expense over the remaining term of the debt, through March 2022. At September 30, 2017, the balance remaining in accumulated other comprehensive loss was $9 million (pre-tax).





E. 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 statements of operations in other income (expense), net. In the event that the counterparties fail to meet the terms of the foreign currency forward or exchange contracts, our exposure is limited to the aggregate foreign currency rate differential with such institutions.

Metals Contracts.  From time to time, we have entered into contracts to manage our exposure to increases in the prices 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,
 
2017
 
2016
 
2017
 
2016
Foreign currency contracts:
 

 
 

 
 

 
 

Exchange contracts
$
(1
)
 
$

 
$
(1
)
 
$

Forward contracts
1

 

 
1

 

Metals contracts

 
1

 

 
5

Interest rate swaps

 

 
(3
)
 
(1
)
Total gain (loss)
$

 
$
1

 
$
(3
)
 
$
4



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, 2017
 
Notional
Amount
 
Balance Sheet
Foreign currency contracts:
 

 
 

Exchange contracts
$
2

 
 

Accrued liabilities
 

 
$

Forward contracts
4

 
 

Receivables
 

 


 
At December 31, 2016
 
Notional
Amount
 
Balance Sheet
Foreign currency contracts:
 

 
 

Forward contracts
$
21

 
 

Accrued liabilities
 

 
$
(2
)
Metals contracts
1

 
 

Accrued liabilities
 

 


 
The fair value of each foreign currency derivative contract 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, 2017
 
Twelve Months Ended December 31, 2016
Balance at January 1
$
192

 
$
152

Accruals for warranties issued during the period
43

 
66

Accruals related to pre-existing warranties
6

 
33

Settlements made (in cash or kind) during the period
(43
)
 
(56
)
Other, net (including currency translation)
1

 
(3
)
Balance at end of period
$
199

 
$
192



In the second and third quarters of 2016, a business unit in the Windows and Other Specialty Products segment recorded $10 million and $21 million, respectively, for increases in its estimate of expected future warranty claims relating to previously sold windows and doors. The change in estimate resulted from the adoption of an improved warranty valuation model and the availability of additional information used to support the estimate of costs to service claims and recent warranty claims trends, including a shift to increased costs to repair.
Debt
Debt
DEBT

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 reduced the aggregate commitment to $750 million and extended 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, 2017, 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.





G. 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 have been made at September 30, 2017

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 of short-term and long-term debt was approximately $3.4 billion, compared with the aggregate carrying value of $3.1 billion, at September 30, 2017. The aggregate estimated market value of short-term and long-term debt was approximately $3.3 billion, compared with the aggregate carrying value of $3.0 billion, at December 31, 2016.
Stock-Based Compensation
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, 2017, 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 were as follows, in millions: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Long-term stock awards
$
6

 
$
5

 
$
19

 
$
17

Stock options

 
1

 
2

 
2

Restricted stock units

 

 
1

 

Phantom stock awards and stock appreciation rights
2

 
4

 
7

 
6

Total
$
8

 
$
10

 
$
29

 
$
25


    
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 819,000 shares of long-term stock awards in the nine-month period ended September 30, 2017.
H. STOCK-BASED COMPENSATION (Continued)

Our long-term stock award activity was as follows, shares in millions: 
 
Nine Months Ended September 30,
 
2017
 
2016
Unvested stock award shares at January 1
4

 
5

Weighted average grant date fair value
$
20

 
$
17

 
 
 
 
Stock award shares granted
1

 
1

Weighted average grant date fair value
$
34

 
$
26

 
 
 
 
Stock award shares vested
2

 
2

Weighted average grant date fair value
$
18

 
$
16

 
 
 
 
Stock award shares forfeited

 

Weighted average grant date fair value
$
24

 
$
20

 
 
 
 
Unvested stock award shares at September 30
3

 
4

Weighted average grant date fair value
$
24

 
$
20



At September 30, 2017 and 2016, there was $50 million and $49 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, 2017 and 2016.     
    
The total market value (at the vesting date) of stock award shares which vested during the nine-month periods ended September 30, 2017 and 2016 was $45 million and $43 million, respectively.
 
Stock Options.  Stock options are granted to certain 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 397,350 shares of stock options in the nine-month period ended September 30, 2017 with a grant date weighted-average exercise price of approximately $34 per share. In the nine-month period ended September 30, 2017, no stock option shares were forfeited (including options that expired unexercised).



















H. STOCK-BASED COMPENSATION (Continued)

Our stock option activity was as follows, shares in millions: 
 
 
Nine Months Ended September 30,
 
 
2017
 
 
2016
Option shares outstanding, January 1
 
7

 
 
12

Weighted average exercise price
$
15

 
$
17

 
 
 
 
 
 
Option shares granted
 

 
 

Weighted average exercise price
$
34

 
$
26

 
 
 
 
 
 
Option shares exercised
 
1

 
 
5

Aggregate intrinsic value on date of exercise (A) 
$
36 million

 
$
64 million

Weighted average exercise price
$
15

 
$
21

 
 
 
 
 
 
Option shares forfeited
 

 
 

Weighted average exercise price
$

 
$

 
 
 
 
 
 
Option shares outstanding, September 30
 
6

 
 
7

Weighted average exercise price
$
16

 
$
15

Weighted average remaining option term (in years)
 
4

 
 
4

 
 
 
 
 
 
Option shares vested and expected to vest, September 30
 
6

 
 
7

Weighted average exercise price
$
16

 
$
15

Aggregate intrinsic value (A) 
$
132 million

 
$
137 million

Weighted average remaining option term (in years)
 
4

 
 
4

 
 
 
 
 
 
Option shares exercisable (vested), September 30
 
4

 
 
6

Weighted average exercise price
$
13

 
$
13

Aggregate intrinsic value (A) 
$
115 million

 
$
117 million

Weighted average remaining option term (in years)
 
3

 
 
3

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

At September 30, 2017 and 2016, there was $8 million and $7 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 both September 30, 2017 and 2016.











H. STOCK-BASED COMPENSATION (Concluded)

The weighted average grant date fair value of option shares granted and the assumptions used to estimate those values using a Black-Scholes option pricing model were as follows: 
 
Nine Months Ended September 30,
 
2017
 
2016
Weighted average grant date fair value
$
9.68

 
$
6.43

Risk-free interest rate
2.16
%
 
1.41
%
Dividend yield
1.19
%
 
1.49
%
Volatility factor
30.00
%
 
29.00
%
Expected option life
6 years

 
6 years



Restricted Stock Units. In March 2017, our Organization and Compensation Committee ("Compensation Committee") of the Board of Directors approved a Long Term Incentive Program ("LTIP Program"), replacing our previous Long Term Cash Incentive Plan. Under the LTIP Program, we granted restricted stock units to certain senior executives. These restricted stock units will vest and share awards will be issued at no cost to the employees, subject to our achievement of specified return on invested capital performance goals over a three-year period that have been established by the Compensation Committee for the performance period and the employee's continued employment through the share award date. Restricted stock units are granted at a target number; based on our performance, the number of restricted stock units that vest can be adjusted downward to zero and upward to a maximum of 200%. We granted 124,780 restricted stock units in the nine-month period ended September 30, 2017, with a grant date fair value of approximately $34 per share. No restricted stock units were forfeited in the nine-month period ended September 30, 2017.
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,
 
2017
 
2016
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Service cost
$
1

 
$

 
$
1

 
$

Interest cost
11

 
2

 
13

 
1

Expected return on plan assets
(12
)
 

 
(15
)
 

Amortization of net loss
5

 
1

 
5

 
1

Net periodic pension cost
$
5

 
$
3

 
$
4

 
$
2

 
Nine Months Ended September 30,
 
2017
 
2016
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Service cost
$
2

 
$

 
$
2

 
$

Interest cost
36

 
5

 
34

 
5

Expected return on plan assets
(36
)
 

 
(34
)
 

Amortization of net loss
15

 
2

 
12

 
2

Net periodic pension cost
$
17

 
$
7

 
$
14

 
$
7


    
As of January 1, 2010, substantially all of our domestic and foreign qualified and domestic non-qualified defined benefit pension plans were frozen to future benefit accruals.
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
 
2017
 
2016
 
2017
 
2016
 
Amortization of defined benefit pension and other postretirement benefits:
 
 

 
 

 
 

 
 

 
 
Actuarial losses, net
 
$
6

 
$
6

 
$
17

 
$
14

 
Selling, general and administrative expenses
Tax (benefit)
 
(2
)
 
(3
)
 
(6
)
 
(5
)
 
 
Net of tax
 
$
4

 
$
3

 
$
11

 
$
9

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$

 
$
3

 
$
1

 
Interest expense
Tax (benefit)
 

 

 
(1
)
 

 
 
Net of tax
 
$

 
$

 
$
2

 
$
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,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
Net Sales(A)
 
Operating Profit (Loss)
 
Net Sales(A)
 
Operating Profit (Loss)
Operations by segment:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Plumbing Products
$
951

 
$
899

 
$
175

 
$
174

 
$
2,763

 
$
2,635

 
$
529

 
$
491

Decorative Architectural Products
553

 
536

 
104

 
111

 
1,711

 
1,649

 
346

 
355

Cabinetry Products
229

 
239

 
19

 
19

 
711

 
736

 
65

 
77

Windows and Other Specialty Products
203

 
203

 
23

 
(10
)
 
585

 
578

 
47

 
(9
)
Total
$
1,936

 
$
1,877

 
$
321

 
$
294

 
$
5,770

 
$
5,598

 
$
987

 
$
914

Operations by geographic area:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
North America
$
1,529

 
$
1,497

 
$
266

 
$
235

 
$
4,600

 
$
4,445

 
$
835

 
$
749

International, principally Europe
407

 
380

 
55

 
59

 
1,170

 
1,153

 
152

 
165

Total
$
1,936

 
$
1,877

 
321

 
294

 
$
5,770

 
$
5,598

 
987

 
914

General corporate expense, net
 

 
 

 
(26
)
 
(25
)
 
 
 
 
 
(82
)
 
(76
)
Operating profit
 

 
 

 
295

 
269

 
 
 
 
 
905

 
838

Other income (expense), net
 

 
 

 
(39
)
 
(42
)
 
 
 
 
 
(181
)
 
(181
)
Income before income taxes
 

 
 

 
$
256

 
$
227

 
 
 
 
 
$
724

 
$
657

 
 
(A)
Inter-segment sales were not material.
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,
 
2017
 
2016
 
2017
 
2016
Gain on sale of business
$
2

 
$

 
$
51

 
$

Income from cash and cash investments and short-term bank deposits
1

 
1

 
3

 
3

Equity investment income, net

 

 
1

 
1

Realized gain from auction rate securities

 

 

 
1

Realized gains from private equity funds

 
1

 
2

 
2

Impairment of private equity funds
(2
)
 

 
(2
)
 

Foreign currency transaction gains (losses)
3

 
(3
)
 
3

 
(1
)
Other items, net

 
2

 

 
(1
)
Total other, net
$
4

 
$
1

 
$
58

 
$
5

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,
 
2017
 
2016
 
2017
 
2016
Numerator (basic and diluted):
 

 
 

 
 

 
 

Net income
$
148

 
$
134

 
$
446

 
$
393

Less: Allocation to unvested restricted stock awards
1

 
2

 
4

 
5

Net income available to common shareholders
$
147

 
$
132

 
$
442

 
$
388

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic common shares (based upon weighted average)
313

 
326

 
315

 
328

Add: Stock option dilution
3

 
3

 
4

 
4

Diluted common shares
316

 
329

 
319

 
332


 
For the three-month and nine-month periods ended September 30, 2017 and 2016, we allocated dividends and undistributed earnings to the unvested restricted stock awards.
 
Additionally, 397,000 and 339,000 common shares for the three-month and nine-month periods ended September 30, 2017, respectively, and 609,000 common shares for the nine-month period ended September 30, 2016, related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.

In May 2017, our Board of Directors authorized the repurchase, for retirement, of up to $1.5 billion of shares of our common stock in open-market transactions or otherwise, replacing the previous Board of Directors authorization established in 2014. In the first nine months of 2017, we repurchased and retired 8.0 million shares of our common stock (including 0.8 million shares to offset the dilutive impact of long-term stock awards granted in the first nine months of the year), for approximately $312 million. As part of the repurchases, in August 2017, we agreed to purchase a total of $150 million of common stock with an immediate delivery of 3.3 million shares under an accelerated stock repurchase transaction. This transaction will be completed in October 2017, at which time we anticipate we will receive, at no cost to us, an additional 0.7 million shares of our common stock resulting from expected changes in the volume weighted average stock price of our common stock over the term of the transaction. At September 30, 2017, we had $1.3 billion remaining under the 2017 authorization.

On the basis of amounts paid (declared), cash dividends per common share were $0.100 ($0.105) and $0.300 ($0.305) for the three-month and nine-month periods ended September 30, 2017, respectively, and $0.095 ($0.100) and $0.285 ($0.290) for the three-month and nine-month periods ended September 30, 2016, 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
 
Effective January 1, 2017 we adopted ASU 2016-09, which requires the tax effects related to employee share-based payments to be recorded to income tax expense, thus increasing the volatility in our effective tax rate.

Our effective tax rate was 38 percent and 36 percent for the three-month periods ended September 30, 2017 and 2016, respectively. The increase in the rate is primarily due to a change in the mix of earnings from lower to higher tax jurisdictions.

Our effective tax rate was 34 percent and 35 percent for the nine-month periods ended September 30, 2017 and 2016, respectively.  The decrease in the rate is primarily due to income tax benefits on employee share-based payments, partially offset by a change in the mix of earnings from lower to higher tax jurisdictions.
Accounting Policies (Policies)
Reclassification. Certain prior year amounts have been reclassified to conform to the 2017 presentation in the condensed consolidated financial statements. 
Recently Adopted Accounting Pronouncements. In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value, as opposed to the lower of cost or market. We adopted ASU 2015-11 on January 1, 2017. The adoption of the new standard did not have an impact on our financial position or results of operations.

In March 2016, the FASB issued 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, simplifies the accounting requirements for forfeitures and employers' tax withholding requirements, and modifies the presentation of certain items on the statement of cash flows. We adopted ASU 2016-09 on January 1, 2017, using the retrospective options for reclassifying excess tax benefit from stock-based compensation and employee withholding taxes paid on stock-based compensation within our statements of cash flows. The adoption of the remaining requirements did not have an impact on our financial position or results of operation. As a result of this adoption, we increased cash flows from (for) operating activities and decreased cash flows from (for) financing activities by $61 million for the nine-month period ended September 30, 2016. For full year 2016 and 2015, we currently estimate increasing cash flows from (for) operating activities and decreasing cash flows from (for) financing activities by $62 million and $111 million, respectively. Subsequent to adoption, tax effects related to employee share-based payments will be recorded to income tax expense, thus increasing the volatility in our effective tax rate.

In January 2017, the FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We early adopted ASU 2017-04 effective January 1, 2017. The adoption of the new standard did not have an impact on our financial position or results of operations.

Recently Issued Accounting Pronouncements.  In May 2014, the 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. The standard allows for either a full retrospective or modified retrospective method of adoption. We will adopt this standard on its effective date, January 1, 2018, under the full retrospective method of adoption. We do not expect the adoption will have a material impact on our financial position or results of operations. We have finalized our accounting policy, trained our business units on the new standard and are currently evaluating our internal controls under the new standard. We have not experienced significant issues in our implementation process.

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. ASU 2016-01 is effective for us for annual periods beginning January 1, 2018. The adoption of this standard is not expected to have a material impact on our financial position or results of operations.
    
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 and requires retrospective application. We expect this standard to increase our total assets and total liabilities; however, we are currently evaluating the magnitude of the impact the adoption of this new standard will have on our financial position and results of operations.


A. ACCOUNTING POLICIES (Concluded)

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. 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 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. ASU 2016-16 is effective for us for annual periods beginning January 1, 2018. The adoption of this standard is not expected to have a material impact on our financial position or results of operations.

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 is effective for us for annual periods beginning January 1, 2018. We do not expect the adoption of the new standard will have a material impact on our financial position or results of operations. For full year 2016, we expect $31 million of expense to be retrospectively reclassified from operating profit to other income (expense), net, within our results of operations. For the nine-month period ended September 30, 2017, we expect $22 million of expense to be retrospectively reclassified from operating profit to other income (expense), net, within our results of operations.

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. ASU 2017-09 is effective for us for annual periods beginning January 1, 2018, and is applied prospectively. Upon adoption, modification accounting is 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 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 are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

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, 2017, by segment, were as follows, in millions: 
 
Gross Goodwill At September 30, 2017
 
Accumulated
Impairment
Losses
 
Net Goodwill At September 30, 2017
Plumbing Products
$
534

 
$
(340
)
 
$
194

Decorative Architectural Products
294

 
(75
)
 
219

Cabinetry Products
240

 
(59
)
 
181

Windows and Other Specialty Products
718

 
(511
)
 
207

Total
$
1,786

 
$
(985
)
 
$
801

 
Gross Goodwill At December 31, 2016
 
Accumulated
Impairment
Losses
 
Net Goodwill At December 31, 2016
 
Other(A)
 
Divestitures (B)
 
Net Goodwill At September 30, 2017
Plumbing Products
$
519

 
$
(340
)
 
$
179

 
$
15

 
$

 
$
194

Decorative Architectural Products
294

 
(75
)
 
219

 

 

 
219

Cabinetry Products
240

 
(59
)
 
181

 

 

 
181

Windows and Other Specialty
     Products
987

 
(734
)
 
253

 
1

 
(47
)
 
207

Total
$
2,040

 
$
(1,208
)
 
$
832

 
$
16

 
$
(47
)
 
$
801

 
 
(A)    Other principally includes the effect of foreign currency translation.
(B)
Divestitures includes the disposition of Arrow in the second quarter of 2017 and is comprised of $270 million of gross goodwill and $223 million of accumulated impairment losses.
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,
 
2017
 
2016
 
2017
 
2016
Foreign currency contracts:
 

 
 

 
 

 
 

Exchange contracts
$
(1
)
 
$

 
$
(1
)
 
$

Forward contracts
1

 

 
1

 

Metals contracts

 
1

 

 
5

Interest rate swaps

 

 
(3
)
 
(1
)
Total gain (loss)
$

 
$
1

 
$
(3
)
 
$
4

The notional amounts being hedged and the fair value of those derivative instruments are as follows, in millions:
 
At September 30, 2017
 
Notional
Amount
 
Balance Sheet
Foreign currency contracts:
 

 
 

Exchange contracts
$
2

 
 

Accrued liabilities
 

 
$

Forward contracts
4

 
 

Receivables
 

 


 
At December 31, 2016
 
Notional
Amount
 
Balance Sheet
Foreign currency contracts:
 

 
 

Forward contracts
$
21

 
 

Accrued liabilities
 

 
$
(2
)
Metals contracts
1

 
 

Accrued liabilities
 

 

Warranty Liability (Tables)
Schedule of changes in the Company's warranty liability
Changes in our warranty liability were as follows, in millions: 
 
Nine Months Ended
September 30, 2017
 
Twelve Months Ended December 31, 2016
Balance at January 1
$
192

 
$
152

Accruals for warranties issued during the period
43

 
66

Accruals related to pre-existing warranties
6

 
33

Settlements made (in cash or kind) during the period
(43
)
 
(56
)
Other, net (including currency translation)
1

 
(3
)
Balance at end of period
$
199

 
$
192

Stock-Based Compensation (Tables)
Pre-tax compensation expense for these stock-based incentives were as follows, in millions: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Long-term stock awards
$
6

 
$
5

 
$
19

 
$
17

Stock options

 
1

 
2

 
2

Restricted stock units

 

 
1

 

Phantom stock awards and stock appreciation rights
2

 
4

 
7

 
6

Total
$
8

 
$
10

 
$
29

 
$
25


Our long-term stock award activity was as follows, shares in millions: 
 
Nine Months Ended September 30,
 
2017
 
2016
Unvested stock award shares at January 1
4

 
5

Weighted average grant date fair value
$
20

 
$
17

 
 
 
 
Stock award shares granted
1

 
1

Weighted average grant date fair value
$
34

 
$
26

 
 
 
 
Stock award shares vested
2

 
2

Weighted average grant date fair value
$
18

 
$
16

 
 
 
 
Stock award shares forfeited

 

Weighted average grant date fair value
$
24

 
$
20

 
 
 
 
Unvested stock award shares at September 30
3

 
4

Weighted average grant date fair value
$
24

 
$
20

Our stock option activity was as follows, shares in millions: 
 
 
Nine Months Ended September 30,
 
 
2017
 
 
2016
Option shares outstanding, January 1
 
7

 
 
12

Weighted average exercise price
$
15

 
$
17

 
 
 
 
 
 
Option shares granted
 

 
 

Weighted average exercise price
$
34

 
$
26

 
 
 
 
 
 
Option shares exercised
 
1

 
 
5

Aggregate intrinsic value on date of exercise (A) 
$
36 million

 
$
64 million

Weighted average exercise price
$
15

 
$
21

 
 
 
 
 
 
Option shares forfeited
 

 
 

Weighted average exercise price
$

 
$

 
 
 
 
 
 
Option shares outstanding, September 30
 
6

 
 
7

Weighted average exercise price
$
16

 
$
15

Weighted average remaining option term (in years)
 
4

 
 
4

 
 
 
 
 
 
Option shares vested and expected to vest, September 30
 
6

 
 
7

Weighted average exercise price
$
16

 
$
15

Aggregate intrinsic value (A) 
$
132 million

 
$
137 million

Weighted average remaining option term (in years)
 
4

 
 
4

 
 
 
 
 
 
Option shares exercisable (vested), September 30
 
4

 
 
6

Weighted average exercise price
$
13

 
$
13

Aggregate intrinsic value (A) 
$
115 million

 
$
117 million

Weighted average remaining option term (in years)
 
3

 
 
3

 
 
(A)
Aggregate intrinsic value is calculated using our stock price at each respective date, less the exercise price (grant date price), multiplied by the number of shares.
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,
 
2017
 
2016
Weighted average grant date fair value
$
9.68

 
$
6.43

Risk-free interest rate
2.16
%
 
1.41
%
Dividend yield
1.19
%
 
1.49
%
Volatility factor
30.00
%
 
29.00
%
Expected option life
6 years

 
6 years

Employee Retirement Plans (Tables)
Schedule of net periodic pension cost for the Company's defined-benefit pension plans
Net periodic pension cost for our defined-benefit pension plans was as follows, in millions: 
 
Three Months Ended September 30,
 
2017
 
2016
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Service cost
$
1

 
$

 
$
1

 
$

Interest cost
11

 
2

 
13

 
1

Expected return on plan assets
(12
)
 

 
(15
)
 

Amortization of net loss
5

 
1

 
5

 
1

Net periodic pension cost
$
5

 
$
3

 
$
4

 
$
2

 
Nine Months Ended September 30,
 
2017
 
2016
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Service cost
$
2

 
$

 
$
2

 
$

Interest cost
36

 
5

 
34

 
5

Expected return on plan assets
(36
)
 

 
(34
)
 

Amortization of net loss
15

 
2

 
12

 
2

Net periodic pension cost
$
17

 
$
7

 
$
14

 
$
7

Reclassifications From Accumulated Other Comprehensive Loss (Tables)
Schedule of reclassifications from accumulated other comprehensive (loss) income to the condensed consolidated statements of operations
The reclassifications from accumulated other comprehensive loss to the condensed consolidated statements of operations were as follows, in millions: