Document
false--12-31Q220190000062996MASCO CORP /DE/P3Y200001111400000000140000000029390000028740000029390000028740000014000000300000010000003000000000P3YP3Y100000010000000000360000001700000082000000520000007400000045000000
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
 
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________

Commission file number: 1-5794
Masco Corporation
(Exact name of Registrant as Specified in its Charter)
Delaware
 
38-1794485
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
17450 College Parkway,
Livonia,
Michigan
48152
(Address of Principal Executive Offices)
(Zip Code)
(313) 274-7400
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $1.00 par value
MAS
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes    No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes    No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer 
 
Smaller reporting company 
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes    No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 
Class
 
Shares Outstanding at June 30, 2019
Common stock, par value $1.00 per share
 
289,456,006
 
 
 
 
 
 



MASCO CORPORATION

INDEX


 
 
Page No.
 
 
 
 
 
 
 
 
 






MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)


June 30, 2019 and December 31, 2018
(In Millions, Except Share Data)
 
 
June 30, 2019
 
December 31, 2018
ASSETS
 

 
 

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

 
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

 
 
 
 
LIABILITIES
 

 
 

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)


 


 
 
 
 
EQUITY
 

 
 

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

 

Paid-in capital

 

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






See notes to condensed consolidated financial statements.

1


MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


For the Three and Six Months Ended June 30, 2019 and 2018
(In Millions, Except Per Common Share Data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
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

 

 
16

 

Operating profit
392

 
358

 
603

 
602

Other income (expense), net:
 

 
 

 
 

 
 

Interest expense
(41
)
 
(38
)
 
(80
)
 
(79
)
Other, net
(4
)
 
(8
)
 
(8
)
 
(11
)
 
(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

 
 
 
 
 
 
 
 
Income per common share attributable to Masco Corporation:
 
 

 
 

 
 

Basic:
 

 
 

 
 

 
 

Net income
$
.82

 
$
.69

 
$
1.22

 
$
1.16

Diluted:
 

 
 

 
 

 
 

Net income
$
.82

 
$
.68

 
$
1.21

 
$
1.15

 























See notes to condensed consolidated financial statements.

2


MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)


For the Three and Six Months Ended June 30, 2019 and 2018
(In Millions)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
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

 
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

 






































See notes to condensed consolidated financial statements.

3


MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


For the Six Months Ended June 30, 2019 and 2018
(In Millions) 
 
 
Six Months Ended June 30,
 
2019
 
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

 
(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

 

Employee withholding taxes paid on stock-based compensation
(16
)
 
(33
)
Increase (decrease) in debt, net
20

 
(1
)
Credit Agreement and other financing costs
(2
)
 

Net cash for financing activities
(386
)
 
(567
)
 
 
 
 
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(71
)
 
(103
)
Acquisition of business, net of cash acquired

 
(548
)
Proceeds from disposition of:
 

 
 

Short-term bank deposits

 
108

Other financial 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

 









See notes to condensed consolidated financial statements.

4


MASCO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)


For the Three and Six Months Ended June 30, 2019 and 2018
(In Millions, Except Per Common Share Data)
 
 
 
Total
 
Common
Shares
($1 par value)
 
Paid-In
Capital
 
Retained (Deficit) Earnings
 
Accumulated
Other
Comprehensive
 (Loss) Income
 
Noncontrolling
Interest
Balance, January 1, 2018
$
183

 
$
310

 
$

 
$
(298
)
 
$
(65
)
 
$
236

Reclassification of disproportionate tax effects (Refer to Note K)

 
 
 
 
 
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, March 31, 2018
$
183

 
$
308

 
$

 
$
(296
)
 
$
(84
)
 
$
255

Total comprehensive income (loss)
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, June 30, 2018
$
126

 
$
305

 
$

 
$
(221
)
 
$
(118
)
 
$
160


























5


MASCO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Concluded)


For the Three and Six Months Ended June 30, 2019 and 2018
(In Millions, Except Per Common Share Data)
 
 
 
Total
 
Common
Shares
($1 par value)
 
Paid-In
Capital
 
Retained (Deficit) Earnings
 
Accumulated
Other
Comprehensive
 (Loss) Income
 
Noncontrolling
Interest
Balance, January 1, 2019
$
69

 
$
294

 
$

 
$
(278
)
 
$
(127
)
 
$
180

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, March 31, 2019
$
42

 
$
291

 
$

 
$
(314
)
 
$
(123
)
 
$
188

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, June 30, 2019
$
71

 
$
287

 
$

 
$
(261
)
 
$
(117
)
 
$
162




























See notes to condensed consolidated financial statements.

6


MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


A. 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.


7


MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


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.

B. 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.

8


MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


C. 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.


9


MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


D. 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.

10


MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


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.

E. 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. 

F. 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





 
    


11


MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


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.

G. 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



H. 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.

12


MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


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.

I. 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.

    



















13


MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


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).




















14


MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


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.












15


MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


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.

J. 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