MASCO CORP /DE/, 10-Q filed on 7/25/2019
Quarterly Report
v3.19.2
Cover Page
6 Months Ended
Jun. 30, 2019
shares
Cover page.  
Document Type 10-Q
Document Quarterly Report true
Document Period End Date Jun. 30, 2019
Document Transition Report false
Entity File Number 1-5794
Entity Registrant Name MASCO CORP /DE/
Entity Incorporation, State or Country Code DE
Entity Tax Identification Number 38-1794485
Entity Address, Address Line One 17450 College Parkway,
Entity Address, City or Town Livonia,
Entity Address, State or Province MI
Entity Address, Postal Zip Code 48152
City Area Code 313
Local Phone Number 274-7400
Title of 12(b) Security Common Stock, $1.00 par value
Trading Symbol MAS
Security Exchange Name NYSE
Entity Current Reporting Status Yes
Entity Interactive Data Current Yes
Entity Filer Category Large Accelerated Filer
Entity Small Business false
Entity Emerging Growth Company false
Entity Shell Company false
Entity Common Stock, Shares Outstanding (in shares) 289,456,006
Entity Central Index Key 0000062996
Current Fiscal Year End Date --12-31
Document Fiscal Year Focus 2019
Document Fiscal Period Focus Q2
Amendment Flag false
v3.19.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
$ in Millions
Jun. 30, 2019
Dec. 31, 2018
Current Assets:    
Cash and cash investments $ 325 $ 559
Receivables 1,423 1,153
Prepaid expenses and other 120 108
Inventories:    
Finished goods 572 520
Raw material 298 325
Work in process 105 101
Total inventories 975 946
Total current assets 2,843 2,766
Property and equipment, net 1,212 1,223
Operating lease right-of-use assets 228  
Goodwill 891 898
Other intangible assets, net 387 406
Other assets 92 100
Total assets 5,653 5,393
Current Liabilities:    
Accounts payable 1,023 926
Notes payable 231 8
Accrued liabilities 699 750
Total current liabilities 1,953 1,684
Long-term debt 2,771 2,971
Other liabilities 858 669
Total liabilities 5,582 5,324
Commitments and contingencies (Note O)
Masco Corporation's shareholders' equity:    
Common shares, par value $1 per share Authorized shares: 1,400,000,000; Issued and outstanding: 2019 – 287,400,000; 2018 – 293,900,000 287 294
Preferred shares authorized: 1,000,000; Issued and outstanding: 2019 and 2018 – None 0 0
Paid-in capital 0 0
Retained deficit (261) (278)
Accumulated other comprehensive loss (117) (127)
Total Masco Corporation's shareholders' deficit (91) (111)
Noncontrolling interest 162 180
Total equity 71 69
Total liabilities and equity $ 5,653 $ 5,393
v3.19.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares
Jun. 30, 2019
Dec. 31, 2018
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) 287,400,000 293,900,000
Common shares, shares outstanding (in shares) 287,400,000 293,900,000
Preferred shares, shares authorized (in shares) 1,000,000 1,000,000
Preferred shares, shares issued (in shares) 0 0
Preferred shares, shares outstanding (in shares) 0 0
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Income Statement [Abstract]        
Net sales $ 2,275 $ 2,297 $ 4,183 $ 4,217
Cost of sales 1,493 1,547 2,802 2,848
Gross profit 782 750 1,381 1,369
Selling, general and administrative expenses 390 392 762 767
Impairment charges for goodwill and other intangible assets 0 0 16 0
Operating profit 392 358 603 602
Other income (expense), net:        
Interest expense (41) (38) (80) (79)
Other, net (4) (8) (8) (11)
Total other income (expense), net (45) (46) (88) (90)
Income before income taxes 347 312 515 512
Income tax expense 95 88 136 127
Net income 252 224 379 385
Less: Net income attributable to noncontrolling interest 12 13 23 25
Net income attributable to Masco Corporation $ 240 $ 211 $ 356 $ 360
Basic:        
Net income (in dollars per share) $ 0.82 $ 0.69 $ 1.22 $ 1.16
Diluted:        
Net income (in dollars per share) $ 0.82 $ 0.68 $ 1.21 $ 1.15
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Statement of Comprehensive Income [Abstract]        
Net income $ 252 $ 224 $ 379 $ 385
Less: Net income attributable to noncontrolling interest 12 13 23 25
Net income attributable to Masco Corporation 240 211 356 360
Other comprehensive income (loss), net of tax (Note K):        
Cumulative translation adjustment 5 (57) 2 (15)
Interest rate swaps 1   1  
Interest rate swaps   1   1
Pension and other post-retirement benefits 4 3 8 8
Other comprehensive income (loss), net of tax 10 (53) 11 (6)
Less: Other comprehensive income (loss) attributable to noncontrolling interest 4 (19) 1 (12)
Other comprehensive income (loss) attributable to Masco Corporation 6 (34) 10 6
Total comprehensive income 262 171 390 379
Less: Total comprehensive income (loss) attributable to noncontrolling interest 16 (6) 24 13
Total comprehensive income attributable to Masco Corporation $ 246 $ 177 $ 366 $ 366
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
$ in Millions
6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:    
Cash provided by operations $ 510 $ 499
Increase in receivables (285) (322)
Increase in inventories (28) (72)
Increase in accounts payable and accrued liabilities, net 16 188
Net cash from operating activities 213 293
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:    
Retirement of notes 0 (114)
Purchase of Company common stock (289) (265)
Cash dividends paid (70) (65)
Dividends paid to noncontrolling interest (42) (89)
Proceeds from the exercise of stock options 13 0
Employee withholding taxes paid on stock-based compensation (16) (33)
Increase (decrease) in debt, net 20 (1)
Credit Agreement and other financing costs (2) 0
Net cash for financing activities (386) (567)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:    
Capital expenditures (71) (103)
Acquisition of business, net of cash acquired 0 (548)
Proceeds from disposition of:    
Short-term bank deposits 0 108
Proceeds from Sale and Maturity of Other Investments 1 3
Property and equipment 15 1
Other, net (8) (5)
Net cash for investing activities (63) (544)
Effect of exchange rate changes on cash and cash investments 2 8
CASH AND CASH INVESTMENTS:    
Decrease for the period (234) (810)
At January 1 559 1,194
At June 30 $ 325 $ 384
v3.19.2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) - USD ($)
$ in Millions
Total
Common Shares ($1 par value)
Paid-In Capital
Retained (Deficit) Earnings
Accumulated Other Comprehensive (Loss) Income
Noncontrolling Interest
Balance at Dec. 31, 2017 $ 183 $ 310 $ 0 $ (298) $ (65) $ 236
Increase (Decrease) in Stockholders' Equity            
Reclassification of disproportionate tax effects (Refer to Note K) 0     59 (59)  
Total comprehensive income 208     149 40 19
Shares issued (13) 2 (7) (8)    
Shares retired:            
Repurchased (150) (4)   (146)    
Surrendered (non-cash) (19)     (19)    
Cash dividends declared (33)     (33)    
Stock-based compensation 7   7      
Balance at Mar. 31, 2018 183 308 0 (296) (84) 255
Balance at Dec. 31, 2017 183 310 0 (298) (65) 236
Increase (Decrease) in Stockholders' Equity            
Total comprehensive income 379          
Balance at Jun. 30, 2018 126 305 0 (221) (118) 160
Balance at Mar. 31, 2018 183 308 0 (296) (84) 255
Increase (Decrease) in Stockholders' Equity            
Total comprehensive income 171     211 (34) (6)
Shares issued (1)   (1)      
Shares retired:            
Repurchased (115) (3) (8) (104)    
Cash dividends declared (32)     (32)    
Dividends paid to noncontrolling interest (89)         (89)
Stock-based compensation 9   9      
Balance at Jun. 30, 2018 126 305 0 (221) (118) 160
Balance at Dec. 31, 2018 69 294 0 (278) (127) 180
Increase (Decrease) in Stockholders' Equity            
Total comprehensive income 128     116 4 8
Shares issued 5 1 4      
Shares retired:            
Repurchased (122) (3) (11) (108)    
Surrendered (non-cash) (10) (1)   (9)    
Cash dividends declared (35)     (35)    
Stock-based compensation 7   7      
Balance at Mar. 31, 2019 42 291 0 (314) (123) 188
Balance at Dec. 31, 2018 69 294 0 (278) (127) 180
Increase (Decrease) in Stockholders' Equity            
Total comprehensive income 390          
Shares retired:            
Repurchased (289)          
Balance at Jun. 30, 2019 71 287 0 (261) (117) 162
Balance at Mar. 31, 2019 42 291 0 (314) (123) 188
Increase (Decrease) in Stockholders' Equity            
Total comprehensive income 262     240 6 16
Shares issued 2 1 1      
Shares retired:            
Repurchased (167) (5) (10) (152)    
Cash dividends declared (35)     (35)    
Dividends paid to noncontrolling interest (42)         (42)
Stock-based compensation 9   9      
Balance at Jun. 30, 2019 $ 71 $ 287 $ 0 $ (261) $ (117) $ 162
v3.19.2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Parenthetical) - $ / shares
Jun. 30, 2019
Dec. 31, 2018
Jun. 30, 2018
Statement of Stockholders' Equity [Abstract]      
Common share, par value (in dollars per share) $ 1 $ 1 $ 1
v3.19.2
Accounting Policies
6 Months Ended
Jun. 30, 2019
Accounting Policies [Abstract]  
Accounting Policies ACCOUNTING POLICIES
 
In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to fairly state our financial position at June 30, 2019, our results of operations and comprehensive income (loss) for the three-month and six-month periods ended June 30, 2019 and 2018, cash flows for the six-month period ended June 30, 2019 and changes in shareholders' equity for the three-month and six-month periods ended June 30, 2019 and 2018. The condensed consolidated balance sheet at December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Leases. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets (“ROU assets”), accrued liabilities and other liabilities on our condensed consolidated balance sheet. Finance lease ROU assets are included in property and equipment, net, notes payable, and long-term debt on our condensed consolidated balance sheet.
ROU assets represent our right to use an underlying asset for the duration of the lease term while lease liabilities represent our obligation to make lease payments in exchange for the right to use an underlying asset. ROU assets and lease liabilities are measured based on the present value of fixed lease payments over the lease term at the commencement date. The ROU asset also includes any lease payments made prior to the commencement date and initial direct costs incurred, and is reduced by any lease incentives received. We review our ROU assets as events occur or circumstances change that would indicate the carrying amount of the ROU assets are not recoverable and exceed their fair values. If the carrying amount of the ROU asset is not recoverable from its undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value.
As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate on the commencement date of the lease as the discount rate in determining the present value of future lease payments. We determine the incremental borrowing rate for each lease by using the current yields of our uncollateralized, publicly traded debts with maturity periods similar to the respective lease term, adjusted to a collateralized basis based on third-party data. Our lease terms may include options to extend or terminate the lease when there are relevant economic incentives present that make it reasonably certain that we will exercise that option. We account for any non-lease components separately from lease components.
For operating leases, lease expense for future fixed lease payments is recognized on a straight-line basis over the lease term. For finance leases, lease expense for future fixed lease payments is recognized using the effective interest rate method over the lease term. Variable lease payments are recognized as lease expense in the period incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Recently Adopted Accounting Pronouncements. In February 2016, the Financial Accounting Standards Board ("FASB") issued a new standard for leases, ASC 842, which changes the accounting model for identifying and accounting for leases. We adopted ASC 842 on January 1, 2019 using the optional transition method, which allows for initial application of the new standard beginning at the adoption date. We elected the package of practical expedients that allows us to forgo reassessing a) whether any existing contracts are or contain leases, b) the lease classification for any existing leases, and c) whether initial direct costs for any existing leases are capitalized. We also elected the practical expedient to use hindsight with respect to lease renewals, terminations, and purchase options when determining the lease term and in assessing impairment of the assets related to leases existing at the time of adoption. As a result of the standard, we recorded $236 million of operating lease ROU assets, $45 million of short-term operating lease liabilities, and $214 million of long-term operating lease liabilities on the date of adoption. Our accounting for finance leases remained unchanged. The standard did not impact our condensed consolidated statements of operations or statements of cash flows.

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. We adopted ASU 2017-12 on January 1, 2019. The adoption of the standard did not impact our financial position or results of operations.

A. ACCOUNTING POLICIES (Concluded)

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

Recently Issued Accounting Pronouncements.  In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which modifies the methodology for recognizing loss impairments on certain types of financial instruments, including receivables. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure. Additionally, ASU 2016-13 amends the current available-for-sale security other-than-temporary impairment model for debt securities. ASU 2016-13 is effective for us for annual periods beginning January 1, 2020. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which allows for the capitalization of certain implementation costs incurred in a hosting arrangement that is a service contract. ASU 2018-15 allows for either retrospective adoption or prospective adoption to all implementation costs incurred after the date of adoption. ASU 2018-15 is effective for us for annual periods beginning January 1, 2020. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
v3.19.2
Acquisitions
6 Months Ended
Jun. 30, 2019
Business Combinations [Abstract]  
Acquisitions ACQUISITIONS

On March 9, 2018, we acquired substantially all of the net assets of The L.D. Kichler Co. ("Kichler"), a leader in decorative residential and light commercial lighting products, ceiling fans and LED lighting systems. This business expands our product offerings to our customers. The results of this acquisition for the period from the acquisition date are included in the condensed consolidated financial statements and are reported in the Decorative Architectural Products segment. The purchase price, net of $2 million cash acquired, consisted of $549 million paid with cash on hand. Since the acquisition, we revised the allocation of the purchase price to identifiable assets and liabilities based on analysis of information as of the acquisition date that was made available in the year after acquisition. The initial and final allocations of the fair value of the acquisition of Kichler is summarized in the following table, in millions.
 
Initial
 
Final
Receivables
$
101

 
$
100

Inventories
173

 
166

Other current assets
5

 
5

Property and equipment
33

 
33

Goodwill
46

 
64

Other intangible assets
243

 
240

Accounts payable
(24
)
 
(24
)
Accrued liabilities
(25
)
 
(30
)
Other liabilities
(4
)
 
(5
)
Total
$
548

 
$
549



The goodwill acquired, which is generally tax deductible, is related primarily to the operational and financial synergies we expect to derive from combining Kichler's operations into our business, as well as the assembled workforce. The other intangible assets acquired consist of $59 million of indefinite-lived intangible assets, which is related to trademarks, and $181 million of definite-lived intangible assets. The definite-lived intangible assets consist of $145 million related to customer relationships, which is being amortized on a straight-line basis over 20 years, and $36 million of other definite-lived intangible assets, which is being amortized over a weighted average amortization period of 3 years.
v3.19.2
Revenue
6 Months Ended
Jun. 30, 2019
Revenues [Abstract]  
Revenue REVENUE

Our revenues are derived primarily from sales to customers in North America and Internationally, principally Europe. Net sales from these geographic markets, by segment, were as follows, in millions:
 
Three Months Ended June 30, 2019
 
Plumbing Products
 
Decorative Architectural Products
 
Cabinetry Products
 
Windows and Other Specialty Products
 
Total
Primary geographic markets:
 
 
 
 
 
 
 
 
 
North America
$
661

 
$
827

 
$
251

 
$
152

 
$
1,891

International, principally Europe
351

 

 

 
33

 
384

Total
$
1,012

 
$
827

 
$
251

 
$
185

 
$
2,275


 
Six Months Ended June 30, 2019
 
Plumbing Products
 
Decorative Architectural Products
 
Cabinetry Products
 
Windows and Other Specialty Products
 
Total
Primary geographic markets:
 
 
 
 
 
 
 
 
 
North America
$
1,259

 
$
1,400

 
$
488

 
$
279

 
$
3,426

International, principally Europe
693

 

 

 
64

 
757

Total
$
1,952

 
$
1,400

 
$
488

 
$
343

 
$
4,183


 
Three Months Ended June 30, 2018
 
Plumbing Products
 
Decorative Architectural Products
 
Cabinetry Products
 
Windows and Other Specialty Products
 
Total
Primary geographic markets:
 
 
 
 
 
 
 
 
 
North America
$
647

 
$
806

 
$
268

 
$
151

 
$
1,872

International, principally Europe
385

 

 

 
40

 
425

Total
$
1,032

 
$
806

 
$
268

 
$
191

 
$
2,297


 
Six Months Ended June 30, 2018
 
Plumbing Products
 
Decorative Architectural Products
 
Cabinetry Products
 
Windows and Other Specialty Products
 
Total
Primary geographic markets:
 
 
 
 
 
 
 
 
 
North America
$
1,252

 
$
1,351

 
$
485

 
$
300

 
$
3,388

International, principally Europe
751

 

 

 
78

 
829

Total
$
2,003

 
$
1,351

 
$
485

 
$
378

 
$
4,217



Our contract asset balance was $14 million at both June 30, 2019 and December 31, 2018. Our contract liability balance was $14 million and $41 million at June 30, 2019 and December 31, 2018, respectively.

We (reversed) recognized $(1) million and $3 million of revenue for the three-month periods ended June 30, 2019 and 2018, respectively, related to performance obligations settled in previous quarters of the same year. We recognized $1 million of revenue for both the three-month and six-month periods ended June 30, 2019 and $3 million of revenue for both the three-month and six-month periods ended June 30, 2018 related to performance obligations settled in previous years.
v3.19.2
Leases (Notes)
6 Months Ended
Jun. 30, 2019
Leases [Abstract]  
Leases LEASES
We have operating and finance leases primarily for corporate offices, manufacturing facilities, warehouses, vehicles, and equipment. Our leases have remaining lease terms up to 14 years, some of which may include one or more renewal options with terms to extend the lease for up to an additional 20 years, and some of which may include options to terminate the leases prior to their expiration.
The components of lease cost were as follows, in millions:
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease cost
$
15

 
$
31

Short-term lease cost
2

 
4

Variable lease cost
1

 
2

Finance lease cost:
 
 
 
Amortization of right-of-use assets

 
1

Interest on lease liabilities
1

 
1


Supplemental cash flow information related to leases was as follows, in millions:
 
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows for operating leases
$
29

Operating cash flows for finance leases
1

Financing cash flows for finance leases
1

 
 
ROU assets obtained in exchange for new lease obligations:
 
Operating leases
$
17

Finance leases


    
Certain other information related to leases was as follows:
 
At June 30, 2019
Weighted-average remaining lease term:
 
Operating leases
9 years

Finance leases
10 years

 
 
Weighted-average discount rate:
 
Operating leases
4.5
%
Finance leases
3.4
%

Supplemental balance sheet information related to leases was as follows, in millions:
 
At June 30, 2019
 
Operating Leases
 
Finance Leases
Property and equipment, net
$

 
$
36

Notes payable

 
7

Accrued liabilities
46

 

Long-term debt

 
29

Other liabilities
206

 


Gross ROU assets under finance leases recorded within property and equipment, net were $47 million, and accumulated amortization associated with these leases was $11 million, at June 30, 2019.
D. LEASES (Concluded)
At June 30, 2019, future maturities of lease liabilities (under ASC 842) were as follows, in millions:
 
Operating Leases
 
Finance Leases
Year ending December 31,
 
 
 
2019 (excluding the six months ended June 30, 2019)
$
28

 
$
7

2020
53

 
3

2021
45

 
3

2022
36

 
3

2023
25

 
4

Thereafter
127

 
23

Total lease payments
314

 
43

Less: imputed interest
(62
)
 
(7
)
Total
$
252

 
$
36


At December 31, 2018, future minimum operating lease payments (under ASC 840) were as follows, in millions: 2019 – $55 million; 2020 – $47 million; 2021 – $40 million; 2022 – $30 million; 2023 – $20 million; 2024 and beyond – $99 million.
Leases LEASES
We have operating and finance leases primarily for corporate offices, manufacturing facilities, warehouses, vehicles, and equipment. Our leases have remaining lease terms up to 14 years, some of which may include one or more renewal options with terms to extend the lease for up to an additional 20 years, and some of which may include options to terminate the leases prior to their expiration.
The components of lease cost were as follows, in millions:
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease cost
$
15

 
$
31

Short-term lease cost
2

 
4

Variable lease cost
1

 
2

Finance lease cost:
 
 
 
Amortization of right-of-use assets

 
1

Interest on lease liabilities
1

 
1


Supplemental cash flow information related to leases was as follows, in millions:
 
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows for operating leases
$
29

Operating cash flows for finance leases
1

Financing cash flows for finance leases
1

 
 
ROU assets obtained in exchange for new lease obligations:
 
Operating leases
$
17

Finance leases


    
Certain other information related to leases was as follows:
 
At June 30, 2019
Weighted-average remaining lease term:
 
Operating leases
9 years

Finance leases
10 years

 
 
Weighted-average discount rate:
 
Operating leases
4.5
%
Finance leases
3.4
%

Supplemental balance sheet information related to leases was as follows, in millions:
 
At June 30, 2019
 
Operating Leases
 
Finance Leases
Property and equipment, net
$

 
$
36

Notes payable

 
7

Accrued liabilities
46

 

Long-term debt

 
29

Other liabilities
206

 


Gross ROU assets under finance leases recorded within property and equipment, net were $47 million, and accumulated amortization associated with these leases was $11 million, at June 30, 2019.
D. LEASES (Concluded)
At June 30, 2019, future maturities of lease liabilities (under ASC 842) were as follows, in millions:
 
Operating Leases
 
Finance Leases
Year ending December 31,
 
 
 
2019 (excluding the six months ended June 30, 2019)
$
28

 
$
7

2020
53

 
3

2021
45

 
3

2022
36

 
3

2023
25

 
4

Thereafter
127

 
23

Total lease payments
314

 
43

Less: imputed interest
(62
)
 
(7
)
Total
$
252

 
$
36


At December 31, 2018, future minimum operating lease payments (under ASC 840) were as follows, in millions: 2019 – $55 million; 2020 – $47 million; 2021 – $40 million; 2022 – $30 million; 2023 – $20 million; 2024 and beyond – $99 million.
v3.19.2
Depreciation and Amortization
6 Months Ended
Jun. 30, 2019
Depreciation, Depletion and Amortization [Abstract]  
Depreciation and Amortization DEPRECIATION AND AMORTIZATION
 
Depreciation and amortization expense was $82 million and $74 million for the six-month periods ended June 30, 2019 and 2018, respectively.
v3.19.2
Goodwill and Other Intangible Assets
6 Months Ended
Jun. 30, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets GOODWILL AND OTHER INTANGIBLE ASSETS
 
The changes in the carrying amount of goodwill for the six-month period ended June 30, 2019, by segment, were as follows, in millions: 
 
Gross Goodwill At June 30, 2019
 
Accumulated
Impairment
Losses
 
Net Goodwill At June 30, 2019
Plumbing Products
$
568

 
$
(340
)
 
$
228

Decorative Architectural Products
358

 
(75
)
 
283

Cabinetry Products
181

 

 
181

Windows and Other Specialty Products
717

 
(518
)
 
199

Total
$
1,824

 
$
(933
)
 
$
891

 
Gross Goodwill At December 31, 2018
 
Accumulated
Impairment
Losses
 
Net Goodwill At December 31, 2018
 
Pre-Tax Impairment Charges
 
Net Goodwill At June 30, 2019
Plumbing Products
$
568

 
$
(340
)
 
$
228

 
$

 
$
228

Decorative Architectural Products
358

 
(75
)
 
283

 

 
283

Cabinetry Products
181

 

 
181

 

 
181

Windows and Other Specialty Products
717

 
(511
)
 
206

 
(7
)
 
199

Total
$
1,824

 
$
(926
)
 
$
898

 
$
(7
)
 
$
891





 
    

F. GOODWILL AND OTHER INTANGIBLE ASSETS (Concluded)

In the first quarter of 2019 we recognized a $7 million non-cash goodwill impairment charge in our Windows and Other Specialty Products segment, related to a decline in the long-term outlook of our windows and doors business in the United Kingdom. We did not recognize a tax benefit as a result of this impairment.

The carrying value of our other indefinite-lived intangible assets was $190 million and $199 million at June 30, 2019 and December 31, 2018, respectively, and principally included registered trademarks. During the first quarter of 2019, we recognized a $9 million impairment charge related to a registered trademark in our Decorative Architectural Products segment due to a change in the long-term net sales projections of lighting products. The carrying value of our definite-lived intangible assets was $197 million (net of accumulated amortization of $41 million) and $207 million (net of accumulated amortization of $29 million) at June 30, 2019 and December 31, 2018, respectively, and principally included customer relationships.
v3.19.2
Warranty Liability
6 Months Ended
Jun. 30, 2019
Product Warranties Disclosures [Abstract]  
Warranty Liability WARRANTY LIABILITY
 
Changes in our warranty liability were as follows, in millions: 
 
Six Months Ended
June 30, 2019
 
Twelve Months Ended December 31, 2018
Balance at January 1
$
217

 
$
205

Accruals for warranties issued during the period
38

 
78

Accruals related to pre-existing warranties
(2
)
 
(1
)
Settlements made (in cash or kind) during the period
(34
)
 
(65
)
Other, net (including currency translation)
(1
)
 

Balance at end of period
$
218

 
$
217


v3.19.2
Debt
6 Months Ended
Jun. 30, 2019
Debt Disclosure [Abstract]  
Debt DEBT

On April 16, 2018, we repaid and retired all of our $114 million, 6.625% Notes on the scheduled repayment date.

On March 13, 2019, we entered into a credit agreement (the “Credit Agreement”) with a bank group, with an aggregate commitment of $1.0 billion and a maturity date of March 13, 2024. Under the Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional $500 million with the current bank group or new lenders. Upon entry into the Credit Agreement, our credit agreement dated March 28, 2013, as amended, with an aggregate commitment of $750 million, was terminated.

The Credit Agreement provides for an unsecured revolving credit facility available to us and one of our foreign subsidiaries, in U.S. dollars, European euros, British Pounds Sterling, Canadian dollars and certain other currencies for revolving credit loans, swingline loans and letters of credit. Borrowings under the revolving credit loans denominated in any agreed upon currency other than U.S. dollars are limited to $500 million, equivalent. We can also borrow swingline loans up to $100 million and obtain letters of credit of up to $25 million; outstanding letters of credit under the Credit Agreement reduce our borrowing capacity. At June 30, 2019, we had no outstanding standby letters of credit under the Credit Agreement.

Revolving credit loans bear interest under the Credit Agreement, at our option, at (A) a rate per annum equal to the greater of (i) the JPMorgan Chase Bank, N.A. prime rate, (ii) the Federal Reserve Bank of New York effective rate plus 0.50% and (iii) adjusted LIBO Rate plus 1.0% (the "Alternative Base Rate"); plus an applicable margin based upon our then-applicable corporate credit ratings; or (B) adjusted LIBO Rate 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 adjusted LIBO Rate plus an applicable margin based upon our then-applicable corporate credit ratings.

The 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 Credit Agreement, there must not be any default in our covenants in the Credit Agreement (i.e., in addition to the two financial covenants, principally limitations on subsidiary debt, negative pledge restrictions, legal compliance requirements and maintenance of properties and insurance) and our representations and warranties in the Credit Agreement must be true in all material respects on the date of borrowing (i.e., principally no material adverse change or litigation likely to result in a material adverse change, since December 31, 2018, no material ERISA or environmental non-compliance, and no material tax deficiency). We were in compliance with all covenants and no borrowings were outstanding at June 30, 2019

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 our short-term and long-term debt at June 30, 2019 was approximately $3.2 billion, compared with the aggregate carrying value of $3.0 billion. The aggregate estimated market value was approximately $3.0 billion at December 31, 2018, which equaled the aggregate carrying value of short-term and long-term debt at that date.
v3.19.2
Stock-Based Compensation
6 Months Ended
Jun. 30, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-Based Compensation STOCK-BASED COMPENSATION
 
Our 2014 Long Term Stock Incentive Plan provides for the issuance of stock-based incentives in various forms to our employees and non-employee Directors. At June 30, 2019, outstanding stock-based incentives were in the form of long-term stock awards, stock options, restricted stock units, phantom stock awards and stock appreciation rights.
    
Pre-tax compensation expense for these stock-based incentives was as follows, in millions: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Long-term stock awards
$
7

 
$
7

 
$
12

 
$
12

Stock options
1

 
1

 
2

 
2

Restricted stock units
1

 
1

 
2

 
2

Phantom stock awards and stock appreciation rights
1

 
(1
)
 
2

 
(1
)
Total
$
10

 
$
8

 
$
18

 
$
15


    
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 632,280 shares of long-term stock awards in the six-month period ended June 30, 2019.

    


















I. STOCK-BASED COMPENSATION (Continued)
    
Our long-term stock award activity was as follows, shares in millions: 
 
Six Months Ended June 30,
 
2019
 
2018
Unvested stock award shares at January 1
2

 
3

Weighted average grant date fair value
$
30

 
$
24

 
 
 
 
Stock award shares granted
1

 
1

Weighted average grant date fair value
$
36

 
$
42

 
 
 
 
Stock award shares vested
1

 
1

Weighted average grant date fair value
$
25

 
$
21

 
 
 
 
Stock award shares forfeited

 

Weighted average grant date fair value
$
31

 
$
30

 
 
 
 
Unvested stock award shares at June 30
2

 
3

Weighted average grant date fair value
$
34

 
$
30



At June 30, 2019 and 2018, there was $55 million and $56 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 June 30, 2019 and 2018.

The total market value (at the vesting date) of stock award shares which vested during the six-month periods ended June 30, 2019 and 2018 was $30 million and $54 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 561,280 shares of stock options in the six-month period ended June 30, 2019 with a grant date weighted average exercise price of approximately $36 per share. In the six-month period ended June 30, 2019, 42,570 stock options were forfeited (including options that expired unexercised).



















I. STOCK-BASED COMPENSATION (Continued)

Our stock option activity was as follows, shares in millions: 
 
 
Six Months Ended June 30,
 
 
2019
 
 
2018
Option shares outstanding, January 1
 
4

 
 
5

Weighted average exercise price
$
21

 
$
16

 
 
 
 
 
 
Option shares granted
 
1

 
 

Weighted average exercise price
$
36

 
$
42

 
 
 
 
 
 
Option shares exercised
 
1

 
 
1

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

 
$
36 million

Weighted average exercise price
$
11

 
$
12

 
 
 
 
 
 
Option shares forfeited
 

 
 

Weighted average exercise price
$
36

 
$
31

 
 
 
 
 
 
Option shares outstanding, June 30
 
4

 
 
4

Weighted average exercise price
$
25

 
$
19

Weighted average remaining option term (in years)
 
6

 
 
5

 
 
 
 
 
 
Option shares vested and expected to vest, June 30
 
4

 
 
4

Weighted average exercise price
$
25

 
$
19

Aggregate intrinsic value (A)
$
52 million

 
$
82 million

Weighted average remaining option term (in years)
 
6

 
 
5

 
 
 
 
 
 
Option shares exercisable (vested), June 30
 
2

 
 
3

Weighted average exercise price
$
20

 
$
15

Aggregate intrinsic value (A)
$
45 million

 
$
74 million

Weighted average remaining option term (in years)
 
4

 
 
4

 
 
(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 June 30, 2019 and 2018, there was $11 million and $10 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 June 30, 2019 and 2018.











I. 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: 
 
Six Months Ended June 30,
 
2019
 
2018
Weighted average grant date fair value
$
8.81

 
$
12.52

Risk-free interest rate
2.57
%
 
2.71
%
Dividend yield
1.35
%
 
1.00
%
Volatility factor
25.00
%
 
29.00
%
Expected option life
6 years

 
6 years



Restricted Stock Units. Under our Long Term Incentive Program, we grant 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 our Organization and Compensation Committee of the Board of Directors for the performance period and the recipient's continued employment through the share award date. We granted 126,680 restricted stock units in the six-month period ended June 30, 2019, with a grant date fair value of approximately $39 per share, and 113,260 restricted stock units in the six-month period ended June 30, 2018, with a grant date fair value of approximately $42 per share. During the six-month period ended June 30, 2018, 11,600 restricted stock units were forfeited.
v3.19.2
Employee Retirement Plans
6 Months Ended
Jun. 30, 2019
Retirement Benefits [Abstract]  
Employee Retirement Plans EMPLOYEE RETIREMENT PLANS
 
Net periodic pension cost for our defined-benefit pension plans, with the exception of service cost, is recorded in other income (expense), net, in our condensed consolidated statement of operations. Net periodic pension cost for our defined-benefit pension plans was as follows, in millions: 
 
Three Months Ended June 30,
 
2019
 
2018
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Interest cost
$
9

 
$
2

 
$
10

 
$
2

Expected return on plan assets
(11
)
 

 
(12
)
 

Amortization of net loss
6

 

 
5

 

Net periodic pension cost
$
4

 
$
2

 
$
3

 
$
2


 
Six Months Ended June 30,
 
2019
 
2018
 
Qualified
 
Non-Qualified
 
Qualified
 
Non-Qualified
Service cost
$
1

 
$

 
$
1

 
$

Interest cost
19

 
3

 
20

 
3

Expected return on plan assets
(22
)
 

 
(24
)
 

Amortization of net loss
10

 
1

 
9

 
1

Net periodic pension cost
$
8

 
$
4

 
$
6

 
$
4


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.
v3.19.2
Reclassifications From Accumulated Other Comprehensive Loss
6 Months Ended
Jun. 30, 2019
Comprehensive Income (Loss), Net of Tax, Attributable to Parent [Abstract]  
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 June 30,
 
Six Months Ended June 30,
 
Statement of Operations Line Item
2019
 
2018
 
2019
 
2018
 
Amortization of defined-benefit pension and other post-retirement benefits:
 

 
 

 
 

 
 

 
 
Actuarial losses, net
$
6

 
$
5

 
$
11

 
$
10

 
Other income (expense), net
Tax (benefit)
(2
)
 
(2
)
 
(3
)
 
(2
)
 
 
Net of tax
$
4

 
$
3

 
$
8

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
1

 
$
1

 
$
1

 
$
1

 
Interest expense
Tax (benefit)

 

 

 

 
 
Net of tax
$
1

 
$
1

 
$
1

 
$
1

 
 

 
In addition to the above amounts, as of March 31, 2018, we adopted ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." As a result of the adoption, we reclassified $59 million of the disproportionate tax benefit relating to various defined-benefit plans from accumulated other comprehensive loss to retained deficit in 2018.
v3.19.2
Segment Information
6 Months Ended
Jun. 30, 2019
Segment Reporting [Abstract]  
Segment Information SEGMENT INFORMATION
 
Information by segment and geographic area was as follows, in millions: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
Net Sales (A)
 
Operating Profit (Loss)
 
Net Sales(A)
 
Operating Profit (Loss)
Operations by segment:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Plumbing Products
$
1,012

 
$
1,032

 
$
198

 
$
194

 
$
1,952

 
$
2,003

 
$
351

 
$
357

Decorative Architectural Products
827

 
806

 
173

 
145

 
1,400

 
1,351

 
246

 
234

Cabinetry Products
251

 
268

 
33

 
33

 
488

 
485

 
53

 
39

Windows and Other Specialty Products
185

 
191

 
7

 
8

 
343

 
378

 
(4
)
 
12

Total
$
2,275

 
$
2,297

 
$
411

 
$
380

 
$
4,183

 
$
4,217

 
$
646

 
$
642

Operations by geographic area:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
North America
$
1,891

 
$
1,872

 
$
364

 
$
323

 
$
3,426

 
$
3,388

 
$
566

 
$
541

International, principally Europe
384

 
425

 
47

 
57

 
757

 
829

 
80

 
101

Total
$
2,275

 
$
2,297

 
411

 
380

 
$
4,183

 
$
4,217

 
646

 
642

General corporate expense, net
 

 
 

 
(19
)
 
(22
)
 
 
 
 
 
(43
)
 
(40
)
Operating profit
 

 
 

 
392

 
358

 
 
 
 
 
603

 
602

Other income (expense), net
 

 
 

 
(45
)
 
(46
)
 
 
 
 
 
(88
)
 
(90
)
Income before income taxes
 

 
 

 
$
347

 
$
312

 
 
 
 
 
$
515

 
$
512

 
 
(A)
Inter-segment sales were not material.
v3.19.2
Other Income (Expense), Net
6 Months Ended
Jun. 30, 2019
Other Income and Expenses [Abstract]  
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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Income from cash and cash investments and short-term bank deposits
$

 
$

 
$
1

 
$
2

Equity investment income, net

 
2

 

 
2

Foreign currency transaction gains (losses)
2

 
(5
)
 
2

 
(6
)
Net periodic pension and post-retirement benefit cost
(6
)
 
(5
)
 
(11
)
 
(9
)
Total other, net
$
(4
)
 
$
(8
)
 
$
(8
)
 
$
(11
)

v3.19.2
Income Per Common Share
6 Months Ended
Jun. 30, 2019
Earnings Per Share [Abstract]  
Income Per Common Share INCOME PER COMMON SHARE
 
Reconciliations of the numerators and denominators used in the computations of basic and diluted income per common share were as follows, in millions: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Numerator (basic and diluted):
 

 
 

 
 

 
 

Net income
$
240

 
$
211

 
$
356

 
$
360

Less: Allocation to unvested restricted stock awards
2

 
1

 
2

 
3

Net income available to common shareholders
$
238

 
$
210

 
$
354

 
$
357

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic common shares (based upon weighted average)
289

 
306

 
291

 
308

Add: Stock option dilution
1

 
3

 
1

 
3

Diluted common shares
290

 
309

 
292

 
311


 
For the three-month and six-month periods ended June 30, 2019 and 2018, we allocated dividends and undistributed earnings to the unvested restricted stock awards.
 
Additionally, 1.3 million and 1.2 million common shares for the three-month and six-month periods ended June 30, 2019, respectively, and 675,000 and 606,000 common shares for the three-month and six-month periods ended June 30, 2018, respectively, related to stock options and 20,000 common shares related to restricted stock units for the three-month and six-month periods ended June 30, 2019 were excluded from the computation of diluted income 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. In the first six months of 2019, we repurchased and retired 7.7 million shares of our common stock (including 0.6 million shares to offset the dilutive impact of long-term stock awards granted in the first half of the year), for approximately $289 million. At June 30, 2019, we had $347 million remaining under the 2017 authorization.