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 March 31, 2014
Commission file number: 1-5794
Masco Corporation
(Exact name of Registrant as Specified in its Charter)
Delaware |
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38-1794485 |
(State or Other |
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(IRS Employer |
Jurisdiction |
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Identification No.) |
of Incorporation) |
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21001 Van Born Road, Taylor, Michigan |
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48180 |
(Address of Principal Executive Offices) |
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(Zip Code) |
(313) 274-7400
(Registrants telephone number, including area code)
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. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
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Accelerated filer o |
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Smaller reporting company o |
Non-accelerated filer o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
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Shares Outstanding at April 21, 2014 |
Common stock, par value $1.00 per share |
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356,545,600 |
MASCO CORPORATION
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Page No. |
PART I. |
FINANCIAL INFORMATION |
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Item 1. |
Financial Statements (Unaudited) |
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1 | |
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2 | |
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3 | |
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4 | |
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5 | |
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6-20 | |
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21-26 | |
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27 | ||
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28-29 | |||
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MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, 2014 and December 31, 2013
(In Millions, Except Share Data)
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March 31, |
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December 31, |
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2014 |
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2013 |
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ASSETS |
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Current assets: |
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Cash and cash investments |
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$ |
906 |
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$ |
1,223 |
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Short-term bank deposits |
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305 |
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321 |
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Receivables |
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1,215 |
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1,004 |
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Prepaid expenses and other |
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154 |
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155 |
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Inventories: |
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Finished goods |
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455 |
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398 |
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Raw material |
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273 |
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268 |
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Work in process |
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110 |
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99 |
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838 |
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765 |
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Total current assets |
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3,418 |
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3,468 |
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Property and equipment, net |
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1,232 |
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1,252 |
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Goodwill |
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1,903 |
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1,903 |
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Other intangible assets, net |
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150 |
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149 |
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Other assets |
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177 |
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185 |
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Total assets |
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$ |
6,880 |
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$ |
6,957 |
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LIABILITIES |
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Current liabilities: |
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Notes payable |
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$ |
6 |
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$ |
6 |
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Accounts payable |
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954 |
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902 |
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Accrued liabilities |
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760 |
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874 |
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Total current liabilities |
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1,720 |
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1,782 |
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Long-term debt |
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3,421 |
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3,421 |
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Deferred income taxes and other |
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938 |
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967 |
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Total liabilities |
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6,079 |
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6,170 |
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Commitments and contingencies |
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EQUITY |
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Masco Corporations shareholders equity: |
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Common shares, par value $1 per share Authorized shares: 1,400,000,000; issued and outstanding: 2014 349,400,000; 2013 349,500,000 |
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349 |
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349 |
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Preferred shares authorized: 1,000,000; issued and outstanding: 2014 None; 2013 None |
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Paid-in capital |
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16 |
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Retained earnings |
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98 |
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79 |
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Accumulated other comprehensive income |
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115 |
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115 |
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Total Masco Corporations shareholders equity |
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562 |
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559 |
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Noncontrolling interest |
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239 |
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228 |
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Total equity |
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801 |
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787 |
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Total liabilities and equity |
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$ |
6,880 |
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$ |
6,957 |
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See notes to condensed consolidated financial statements.
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended March 31, 2014 and 2013
(In Millions Except Per Common Share Data)
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Three Months Ended March 31, |
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2014 |
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2013 |
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Net sales |
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$ |
1,965 |
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$ |
1,876 |
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Cost of sales |
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1,418 |
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1,368 |
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Gross profit |
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547 |
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508 |
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Selling, general and administrative expenses |
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395 |
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376 |
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Operating profit |
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152 |
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132 |
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Other income (expense), net: |
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Interest expense |
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(56 |
) |
(60 |
) | ||
Other, net |
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(3 |
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13 |
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(59 |
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(47 |
) | ||
Income from continuing operations before income taxes |
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93 |
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85 |
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Income taxes |
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5 |
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14 |
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Income from continuing operations |
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88 |
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71 |
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Loss from discontinued operations |
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(2 |
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(9 |
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Net income |
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86 |
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62 |
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Less: Net income attributable to noncontrolling interest |
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12 |
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9 |
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Net income attributable to Masco Corporation |
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$ |
74 |
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$ |
53 |
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Income per common share attributable to Masco Corporation: |
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Basic: |
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Income from continuing operations |
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$ |
.21 |
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$ |
.17 |
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Loss from discontinued operations |
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(.01 |
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(.03 |
) | ||
Net income |
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$ |
.21 |
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$ |
.15 |
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Diluted: |
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Income from continuing operations |
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$ |
.21 |
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$ |
.17 |
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Loss from discontinued operations |
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(.01 |
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(.03 |
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Net income |
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$ |
.21 |
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$ |
.15 |
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Amounts attributable to Masco Corporation: |
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Income from continuing operations |
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$ |
76 |
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$ |
62 |
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Loss from discontinued operations |
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(2 |
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(9 |
) | ||
Net income |
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$ |
74 |
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$ |
53 |
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See notes to condensed consolidated financial statements.
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the Three Months Ended March 31, 2014 and 2013
(In Millions)
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Three Months Ended March 31, |
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2014 |
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2013 |
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Net income |
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$ |
86 |
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$ |
62 |
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Less: Net income attributable to noncontrolling interest |
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12 |
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9 |
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Net income attributable to Masco Corporation |
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$ |
74 |
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$ |
53 |
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Other comprehensive income (loss), net of tax: |
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Cumulative translation adjustment |
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(4 |
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(36 |
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Unrecognized pension prior service cost and net gain |
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3 |
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5 |
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Other comprehensive loss |
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(1 |
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(31 |
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Less: Other comprehensive loss attributable to noncontrolling interest |
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(1 |
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(8 |
) | ||
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Other comprehensive income (loss) attributable to Masco Corporation |
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$ |
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$ |
(23 |
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Total comprehensive income |
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$ |
85 |
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$ |
31 |
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Less: Total comprehensive income attributable to noncontrolling interest |
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11 |
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1 |
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Total comprehensive income attributable to Masco Corporation |
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$ |
74 |
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$ |
30 |
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See notes to condensed consolidated financial statements.
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended March 31, 2014 and 2013
(In Millions)
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Three Months Ended |
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March 31, |
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2014 |
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2013 |
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CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: |
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Cash provided by operations |
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$ |
121 |
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$ |
130 |
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Increase in receivables |
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(227 |
) |
(263 |
) | ||
Increase in inventories |
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(75 |
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(43 |
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Decrease in accounts payable and accrued liabilities, net |
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(63 |
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(34 |
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Net cash for operating activities |
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(244 |
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(210 |
) | ||
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: |
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Purchase of Company common stock |
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(39 |
) |
(35 |
) | ||
Cash dividends paid |
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(27 |
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(26 |
) | ||
New Credit Agreement costs |
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(4 |
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Net cash for financing activities |
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(66 |
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(65 |
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CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: |
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Capital expenditures |
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(26 |
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(31 |
) | ||
Acquisition of companies, net of cash acquired |
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(2 |
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(5 |
) | ||
Proceeds from disposition of: |
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Other financial investments |
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2 |
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5 |
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Property and equipment |
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5 |
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5 |
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Short-term bank deposits |
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84 |
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172 |
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Purchases of: |
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Short-term bank deposits |
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(69 |
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(72 |
) | ||
Other, net |
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(4 |
) | ||
Net cash (for) from investing activities |
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(6 |
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70 |
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Effect of exchange rate changes on cash and cash investments |
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(1 |
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(7 |
) | ||
CASH AND CASH INVESTMENTS: |
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Decrease for the period |
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(317 |
) |
(212 |
) | ||
At January 1 |
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1,223 |
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1,040 |
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At March 31 |
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$ |
906 |
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$ |
828 |
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See notes to condensed consolidated financial statements.
MASCO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (Unaudited)
For The Three Months Ended March 31, 2014 and 2013
(In Millions)
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Accumulated |
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Common |
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Retained |
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Other |
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Shares |
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Paid-In |
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(Deficit) |
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Comprehensive |
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Noncontrolling |
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Total |
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($1 par value) |
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Capital |
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Earnings |
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Income |
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Interest |
| ||||||
Balance, January 1, 2013 |
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$ |
542 |
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$ |
349 |
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$ |
16 |
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$ |
(94 |
) |
$ |
59 |
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$ |
212 |
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Total comprehensive income |
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31 |
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53 |
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(23 |
) |
1 |
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Shares issued |
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(7 |
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2 |
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(9 |
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Shares retired: |
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Repurchased |
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(35 |
) |
(2 |
) |
(11 |
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(22 |
) |
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Surrendered (non-cash) |
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(10 |
) |
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(10 |
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Cash dividends declared |
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(26 |
) |
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(26 |
) |
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Stock-based compensation |
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14 |
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14 |
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Balance, March 31, 2013 |
|
$ |
509 |
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$ |
349 |
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$ |
|
|
$ |
(89 |
) |
$ |
36 |
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$ |
213 |
|
Balance, January 1, 2014 |
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$ |
787 |
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$ |
349 |
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$ |
16 |
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$ |
79 |
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$ |
115 |
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$ |
228 |
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Total comprehensive income |
|
85 |
|
|
|
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|
74 |
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|
11 |
| ||||||
Shares issued |
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(3 |
) |
2 |
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(5 |
) |
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Shares retired: |
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|
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Repurchased |
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(39 |
) |
(2 |
) |
(9 |
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(28 |
) |
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Surrendered (non-cash) |
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(14 |
) |
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(14 |
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Cash dividends declared |
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(27 |
) |
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(27 |
) |
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Stock-based compensation |
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12 |
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12 |
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Balance, March 31, 2014 |
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$ |
801 |
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$ |
349 |
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$ |
|
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$ |
98 |
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$ |
115 |
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$ |
239 |
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See notes to consolidated financial statements.
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
A. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as at March 31, 2014 and the results of operations for the three months ended March 31, 2014 and 2013 and cash flows for the three months ended March 31, 2014 and 2013. The condensed consolidated balance sheet at December 31, 2013 was derived from audited financial statements.
Certain prior-year amounts have been reclassified to conform to the 2014 presentation in the condensed consolidated financial statements.
Revision of Previously Issued Financial Statements. During the first quarter ended March 31, 2014, the Company identified an error in the accounting for certain of its investments in private equity limited partnership funds. The investments were inappropriately accounted for under the cost basis versus the equity method. The impact of the error was to under report the investment value (included in other assets on the consolidated balance sheets) and to over (under) state equity investment earnings (loss) (included in other income (expense), net in the consolidated statements of operations). We have revised our first quarter 2013 consolidated statement of operations and prior year consolidated balance sheet in these financial statements to reflect the investment accounted for as an equity investment. Retained earnings and other comprehensive income were adjusted for the changes in net income. Other historic periods will be revised, as detailed below, in our future filings. This error is not considered material to any prior period financial statement.
This revision has no effect on our consolidated statement of cash flows.
The following table presents the impact of the revisions on the Companys previously issued full-year consolidated statement of operations (in millions):
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Year ended December 31, |
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2013 |
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2012 |
|
2011 |
| |||
Other income (expense), net |
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|
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As reported |
|
$ |
(239 |
) |
$ |
(229 |
) |
$ |
(177 |
) |
Correction |
|
16 |
|
|
|
9 |
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As revised |
|
$ |
(223 |
) |
$ |
(229 |
) |
$ |
(168 |
) |
Income (loss) from continuing operations, before income taxes |
|
|
|
|
|
|
| |||
As reported |
|
$ |
434 |
|
$ |
73 |
|
$ |
(392 |
) |
Correction |
|
16 |
|
|
|
9 |
| |||
As revised |
|
$ |
450 |
|
$ |
73 |
|
$ |
(383 |
) |
Income (loss) from continuing operations |
|
|
|
|
|
|
| |||
As reported |
|
$ |
323 |
|
$ |
(18 |
) |
$ |
(352 |
) |
Correction |
|
16 |
|
|
|
9 |
| |||
As revised |
|
$ |
339 |
|
$ |
(18 |
) |
$ |
(343 |
) |
Net income (loss) |
|
|
|
|
|
|
| |||
As reported |
|
$ |
313 |
|
$ |
(79 |
) |
$ |
(533 |
) |
Correction |
|
16 |
|
|
|
9 |
| |||
As revised |
|
$ |
329 |
|
$ |
(79 |
) |
$ |
(524 |
) |
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Note A continued:
The following table presents the impact of the revisions on the Companys previously issued quarterly consolidated statements of operations (in millions):
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Three Months Ended |
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Three Months Ended |
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Dec. 31 |
|
Sep. 30 |
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June 30 |
|
Mar. 31 |
|
Dec. 31 |
|
Sep. 30 |
|
June 30 |
|
Mar. 31 |
| ||||||||
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2013 |
|
2012 |
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| ||||||||
Other income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
As reported |
|
$ |
(71 |
) |
$ |
(58 |
) |
$ |
(57 |
) |
$ |
(53 |
) |
$ |
(57 |
) |
$ |
(57 |
) |
$ |
(66 |
) |
$ |
(49 |
) |
Correction |
|
3 |
|
6 |
|
1 |
|
6 |
|
4 |
|
7 |
|
(2 |
) |
(9 |
) | ||||||||
As revised |
|
$ |
(68 |
) |
$ |
(52 |
) |
$ |
(56 |
) |
$ |
(47 |
) |
$ |
(53 |
) |
$ |
(50 |
) |
$ |
(68 |
) |
$ |
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income (loss) from continuing operations, before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
As reported |
|
$ |
70 |
|
$ |
154 |
|
$ |
131 |
|
$ |
79 |
|
$ |
(26 |
) |
$ |
51 |
|
$ |
(12 |
) |
$ |
60 |
|
Correction |
|
3 |
|
6 |
|
1 |
|
6 |
|
4 |
|
7 |
|
(2 |
) |
(9 |
) | ||||||||
As revised |
|
$ |
73 |
|
$ |
160 |
|
$ |
132 |
|
$ |
85 |
|
$ |
(22 |
) |
$ |
58 |
|
$ |
(14 |
) |
$ |
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income (loss) from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
As reported |
|
$ |
50 |
|
$ |
116 |
|
$ |
92 |
|
$ |
65 |
|
$ |
(63 |
) |
$ |
35 |
|
$ |
(43 |
) |
$ |
53 |
|
Correction |
|
3 |
|
6 |
|
1 |
|
6 |
|
4 |
|
7 |
|
(2 |
) |
(9 |
) | ||||||||
As revised |
|
$ |
53 |
|
$ |
122 |
|
$ |
93 |
|
$ |
71 |
|
$ |
(59 |
) |
$ |
42 |
|
$ |
(45 |
) |
$ |
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
As reported |
|
$ |
56 |
|
$ |
114 |
|
$ |
87 |
|
$ |
56 |
|
$ |
(80 |
) |
$ |
24 |
|
$ |
(67 |
) |
$ |
44 |
|
Correction |
|
3 |
|
6 |
|
1 |
|
6 |
|
4 |
|
7 |
|
(2 |
) |
(9 |
) | ||||||||
As revised |
|
$ |
59 |
|
$ |
120 |
|
$ |
88 |
|
$ |
62 |
|
$ |
(76 |
) |
$ |
31 |
|
$ |
(69 |
) |
$ |
35 |
|
The following table presents the impact of the revisions on the Companys previously issued consolidated balance sheets (in millions):
|
|
As of |
|
|
| |||||||||||
|
|
Dec. 31 |
|
Sep. 30 |
|
June 30 |
|
Mar. 31 |
|
As of |
| |||||
|
|
2013 |
|
Dec. 31, 2012 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other assets |
|
|
|
|
|
|
|
|
|
|
| |||||
As reported |
|
$ |
161 |
|
$ |
166 |
|
$ |
173 |
|
$ |
182 |
|
$ |
184 |
|
Correction |
|
24 |
|
21 |
|
15 |
|
14 |
|
8 |
| |||||
As revised |
|
$ |
185 |
|
$ |
187 |
|
$ |
188 |
|
$ |
196 |
|
$ |
192 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets |
|
|
|
|
|
|
|
|
|
|
| |||||
As reported |
|
$ |
6,933 |
|
$ |
7,059 |
|
$ |
7,062 |
|
$ |
6,779 |
|
$ |
6,875 |
|
Correction |
|
24 |
|
21 |
|
15 |
|
14 |
|
8 |
| |||||
As revised |
|
$ |
6,957 |
|
$ |
7,080 |
|
$ |
7,077 |
|
$ |
6,793 |
|
$ |
6,883 |
|
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Note A concluded:
Revision of Previously Issued Financial Statements. As previously disclosed, during the third quarter ended September 30, 2013, the Company identified an error related to the classification of cash and cash investments. Foreign short-term bank deposits with terms ranging from three months to twelve months were incorrectly classified as cash and cash investments rather than short-term bank deposits. The statement of cash flows for the three months ended March 31, 2013 has been revised. Other historic periods will be revised, as detailed below, in our future filings. These classification errors were not considered material to any prior period financial statements.
This revision had no effect on our consolidated results of operations.
The following table presents the impact of the revisions on the Companys previously issued consolidated balance sheets and statements of cash flows (all cash flow figures are year-to-date, in millions).
|
|
Mar. 31, |
|
June 30, |
| ||
|
|
2013 |
|
2013 |
| ||
|
|
|
|
|
| ||
Cash and cash investments |
|
|
|
|
| ||
As reported |
|
$ |
1,032 |
|
$ |
1,223 |
|
As revised |
|
$ |
828 |
|
$ |
1,028 |
|
|
|
|
|
|
| ||
Short-term bank deposits |
|
|
|
|
| ||
As reported |
|
|
|
|
| ||
As revised |
|
$ |
204 |
|
$ |
195 |
|
|
|
|
|
|
| ||
Net cash (for) from investing activities |
|
|
|
|
| ||
As reported |
|
$ |
(30 |
) |
$ |
(51 |
) |
As revised |
|
$ |
70 |
|
$ |
62 |
|
The revisions did not significantly impact the effect of exchange rate changes on cash and cash investments in either quarter above. These changes will be reflected in the revised statements of cash flows, in future filings.
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
B. In the first quarter of 2013, the Company determined that Tvilum, its Danish ready-to-assemble cabinet business, was no longer core to its long-term growth strategy and, accordingly, the Company embarked on a plan for disposition. The disposition of Tvilum was completed in the fourth quarter of 2013. The Company has accounted for this business as a discontinued operation.
Selected financial information for the discontinued operations, during the period owned by the Company, was as follows, in millions:
|
|
Three Months Ended |
| |
|
|
March 31, 2013 |
| |
|
|
|
| |
Net Sales |
|
$ |
59 |
|
Operating loss from discontinued operations |
|
$ |
(3 |
) |
Impairment of assets |
|
(10 |
) | |
Loss on disposal of discontinued operations, net |
|
|
| |
Loss before income tax |
|
(13 |
) | |
Income tax benefit |
|
(4 |
) | |
Loss from discontinued operations |
|
$ |
(9 |
) |
In the first quarter of 2014, the Company recognized $2 million of additional expenses related to prior discontinued operations.
During the first quarter of 2013, the Company estimated the fair value of the business held for sale, using unobservable inputs (Level 3). After considering the deferred gains reported in Accumulated Other Comprehensive Income, the Company recorded an impairment of $10 million in the first quarter of 2013.
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
C. The changes in the carrying amount of goodwill for the three months ended March 31, 2014, by segment, were as follows, in millions:
|
|
Gross Goodwill |
|
Accumulated |
|
Net Goodwill |
|
|
|
|
| |||
|
|
At |
|
Impairment |
|
At |
|
|
|
|
| |||
|
|
Mar. 31, 2014 |
|
Losses |
|
Mar. 31, 2014 |
|
|
|
|
| |||
Cabinets and Related Products |
|
$ |
240 |
|
$ |
(59 |
) |
$ |
181 |
|
|
|
|
|
Plumbing Products |
|
550 |
|
(340 |
) |
210 |
|
|
|
|
| |||
Installation and Other Services |
|
1,806 |
|
(762 |
) |
1,044 |
|
|
|
|
| |||
Decorative Architectural Products |
|
294 |
|
(75 |
) |
219 |
|
|
|
|
| |||
Other Specialty Products |
|
983 |
|
(734 |
) |
249 |
|
|
|
|
| |||
Total |
|
$ |
3,873 |
|
$ |
(1,970 |
) |
$ |
1,903 |
|
|
|
|
|
|
|
Gross Goodwill |
|
Accumulated |
|
Net Goodwill |
|
|
|
Net Goodwill |
| |||||
|
|
At |
|
Impairment |
|
At |
|
|
|
At |
| |||||
|
|
Dec. 31, 2013 |
|
Losses |
|
Dec. 31, 2013 |
|
Other(A) |
|
Mar. 31, 2014 |
| |||||
Cabinets and Related Products |
|
$ |
240 |
|
$ |
(59 |
) |
$ |
181 |
|
$ |
|
|
$ |
181 |
|
Plumbing Products |
|
550 |
|
(340 |
) |
210 |
|
|
|
210 |
| |||||
Installation and Other Services |
|
1,806 |
|
(762 |
) |
1,044 |
|
|
|
1,044 |
| |||||
Decorative Architectural Products |
|
294 |
|
(75 |
) |
219 |
|
|
|
219 |
| |||||
Other Specialty Products |
|
983 |
|
(734 |
) |
249 |
|
|
|
249 |
| |||||
Total |
|
$ |
3,873 |
|
$ |
(1,970 |
) |
$ |
1,903 |
|
$ |
|
|
$ |
1,903 |
|
(A) Other principally includes the effect of foreign currency translation.
Other indefinite-lived intangible assets were $133 million at both March 31, 2014 and December 31, 2013, and principally included registered trademarks. The carrying value of the Companys definite-lived intangible assets was $17 million (net of accumulated amortization of $63 million) at March 31, 2014 and $16 million (net of accumulated amortization of $62 million) at December 31, 2013, and principally included customer relationships and non-compete agreements.
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
D. Depreciation and amortization expense, including discontinued operations, was $43 million and $51 million, including accelerated depreciation (relating to business rationalization initiatives) of $1 million and $4 million for the three months ended March 31, 2014 and 2013, respectively.
E. The Company has maintained investments in available-for-sale securities and a number of private equity funds, principally as part of its tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses. Financial investments included in other assets were as follows, in millions:
|
|
March 31, |
|
December 31, |
| ||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Equity method investments |
|
$ |
68 |
|
$ |
70 |
|
Total equity method investments |
|
68 |
|
70 |
| ||
|
|
|
|
|
| ||
Auction rate securities |
|
22 |
|
22 |
| ||
Total recurring investments |
|
22 |
|
22 |
| ||
|
|
|
|
|
| ||
Private equity funds |
|
17 |
|
18 |
| ||
Other investments |
|
3 |
|
3 |
| ||
Total non-recurring investments |
|
20 |
|
21 |
| ||
|
|
|
|
|
| ||
Total |
|
$ |
110 |
|
$ |
113 |
|
Equity Method Investments. Investments in private equity fund partnerships, joint ventures and less than majority-owned subsidiaries in which we have significant influence are accounted for under the equity method. Our consolidated statements of operations include the Companys proportionate share of the net income or (loss) of our equity method investees. When we record our proportionate share of net income (loss), it increases (decreases) our equity income in our consolidated statement of operations and our carrying value of that investment on our consolidated balance sheet.
Recurring Fair Value Measurements. The fair value of the auction rate securities held by the Company have been estimated, on a recurring basis, using a discounted cash flow model (Level 3 input). The significant inputs in the discounted cash flow model used to value the auction rate securities include: expected maturity of auction rate securities, discount rate used to determine the present value of expected cash flows and the assumptions for credit defaults, since the auction rate securities are backed by credit default swap agreements.
The Companys investments in auction rate securities included cost basis of $19 million and pre-tax unrealized gains of $3 million and had a recorded basis of $22 million at both March 31, 2014 and December 31, 2013.
Non-Recurring Fair Value Measurements. During the three months ended March 31, 2014 and 2013, the Company did not measure any financial investments at fair value on a non-recurring basis, as there was no other-than-temporary decline in the estimated value of private equity funds.
The Company did not have any transfers between Level 1 and Level 2 financial assets in the three months ended March 31, 2014 or 2013.
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Note E concluded:
Realized Gains (Losses) and Impairment Charges. Income (loss) from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions:
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Realized gains from private equity funds |
|
$ |
1 |
|
$ |
3 |
|
Equity investments (loss) income, net |
|
(2 |
) |
7 |
| ||
Total income from financial investments |
|
$ |
(1 |
) |
$ |
10 |
|
Fair Value of Debt. The fair value of the Companys short-term and long-term fixed-rate debt instruments is based principally upon modeled market prices for the same or similar issues or the current rates available to the Company for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at March 31, 2014 was approximately $3.8 billion, compared with the aggregate carrying value of $3.4 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2013 was approximately $3.7 billion, compared with the aggregate carrying value of $3.4 billion.
F. The Company is exposed to global market risk as part of its normal daily business activities. To manage these risks, the Company enters into various derivative contracts. These contracts include interest rate swap agreements, foreign currency exchange contracts and metals contracts intended to hedge the Companys exposure to copper and zinc. The Company reviews its hedging program, derivative positions and overall risk management on a regular basis.
Foreign Currency Contracts. The Companys 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 during the year, the Company, including certain European operations, enters into foreign currency forward contracts and foreign currency exchange contracts.
Gains (losses) related to foreign currency forward and exchange contracts are recorded in the Companys 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 contracts, the Companys exposure is limited to the aggregate foreign currency rate differential with such institutions.
Metals Contracts. The Company has entered into several contracts to manage its exposure to increases in the price of copper and zinc. (Losses) gains related to these contracts are recorded in the Companys condensed consolidated statements of operations in cost of sales.
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Note F concluded:
The pre-tax (losses) gains included in the Companys condensed consolidated statements of operations is as follows, in millions:
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Foreign Currency Contracts |
|
|
|
|
| ||
Exchange Contracts |
|
$ |
(2 |
) |
$ |
7 |
|
Forward Contracts |
|
(1 |
) |
2 |
| ||
Metals Contracts |
|
(3 |
) |
(4 |
) | ||
|
|
|
|
|
| ||
Total (loss) gain |
|
$ |
(6 |
) |
$ |
5 |
|
The Company presents its derivatives, net by counterparty due to the right of offset under master netting arrangements in current assets or current liabilities in the condensed consolidated balance sheet. The notional amounts being hedged and the fair value of those derivative instruments, on a gross basis, are as follows, in millions:
|
|
At March 31, 2014 |
| |||||||
|
|
Notional |
|
|
|
|
| |||
|
|
Amount |
|
Assets |
|
Liabilities |
| |||
Foreign Currency Contracts |
|
|
|
|
|
|
| |||
Exchange Contracts |
|
$ |
83 |
|
|
|
|
| ||
Current liabilities |
|
|
|
$ |
|
|
$ |
1 |
| |
Forward Contracts |
|
67 |
|
|
|
|
| |||
Current liabilities |
|
|
|
|
|
1 |
| |||
|
|
|
|
|
|
|
| |||
Metals Contracts |
|
54 |
|
|
|
|
| |||
Current liabilities |
|
|
|
|
|
4 |
| |||
|
|
|
|
|
|
|
| |||
Total |
|
|
|
$ |
|
|
$ |
6 |
| |
|
|
At December 31, 2013 |
| |||||||
|
|
Notional |
|
|
|
|
| |||
|
|
Amount |
|
Assets |
|
Liabilities |
| |||
Foreign Currency Contracts |
|
|
|
|
|
|
| |||
Exchange Contracts |
|
$ |
53 |
|
|
|
|
| ||
Current liabilities |
|
|
|
$ |
|
|
$ |
2 |
| |
Forward Contracts |
|
88 |
|
|
|
|
| |||
Current liabilities |
|
|
|
|
|
1 |
| |||
|
|
|
|
|
|
|
| |||
Metals Contracts |
|
48 |
|
|
|
|
| |||
Current liabilities |
|
|
|
|
|
2 |
| |||
|
|
|
|
|
|
|
| |||
Total |
|
|
|
$ |
|
|
$ |
5 |
| |
The fair value of all metals and foreign currency derivative contracts is estimated on a recurring basis, using Level 2 inputs (significant other observable inputs).
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
G. Changes in the Companys warranty liability were as follows, in millions:
|
|
Three Months Ended |
|
Twelve Months Ended |
| ||
|
|
March 31, 2014 |
|
December 31, 2013 |
| ||
|
|
|
|
|
| ||
Balance at January 1 |
|
$ |
124 |
|
$ |
118 |
|
Accruals for warranties issued during the period |
|
11 |
|
42 |
| ||
Accruals related to pre-existing warranties |
|
2 |
|
6 |
| ||
Settlements made (in cash or kind) during the period |
|
(11 |
) |
(42 |
) | ||
Other, net |
|
|
|
|
| ||
Balance at end of period |
|
$ |
126 |
|
$ |
124 |
|
H. On March 28, 2013, the Company 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.
Based on the limitations of the debt to total capitalization ratio covenant in the Credit Agreement, at March 31, 2014, the Company had additional borrowing capacity, subject to availability, of up to $1.2 billion. Additionally, at March 31, 2014, the Company could absorb a reduction to shareholders equity of approximately $796 million and remain in compliance with the debt to total capitalization covenant.
In order for the Company to borrow under the Credit Agreement, there must not be any default in the Companys 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 the Companys 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, 2012, in each case, no material ERISA or environmental non-compliance and no material tax deficiency). The Company was in compliance with all covenants and no borrowings have been made at March 31, 2014.
I. The Companys 2005 Long Term Stock Incentive Plan (the 2005 Plan) provides for the issuance of stock-based incentives in various forms to employees and non-employee Directors of the Company. At March 31, 2014, outstanding stock-based incentives were in the form of long-term stock awards, stock options, phantom stock awards and stock appreciation rights. Pre-tax compensation expense and the related income tax benefit for these stock-based incentives were as follows, in millions:
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Long-term stock awards |
|
$ |
11 |
|
$ |
9 |
|
Stock options |
|
1 |
|
5 |
| ||
Phantom stock awards and stock appreciation rights |
|
|
|
3 |
| ||
|
|
|
|
|
| ||
Total |
|
$ |
12 |
|
$ |
17 |
|
|
|
|
|
|
| ||
Income tax benefit (37 percent tax rate - before valuation allowance) |
|
$ |
4 |
|
$ |
6 |
|
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Note I continued:
Long-Term Stock Awards. Long-term stock awards are granted to key employees and non-employee Directors of the Company and do not cause net share dilution inasmuch as the Company continues the practice of repurchasing and retiring an equal number of shares in the open market. The Company granted 1,582,210 shares of long-term stock awards in the three months ended March 31, 2014.
The Companys long-term stock award activity was as follows, shares in millions:
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Unvested stock award shares at January 1 |
|
8 |
|
8 |
| ||
Weighted average grant date fair value |
|
$ |
17 |
|
$ |
16 |
|
|
|
|
|
|
| ||
Stock award shares granted |
|
1 |
|
2 |
| ||
Weighted average grant date fair value |
|
$ |
22 |
|
$ |
20 |
|
|
|
|
|
|
| ||
Stock award shares vested |
|
2 |
|
2 |
| ||
Weighted average grant date fair value |
|
$ |
17 |
|
$ |
16 |
|
|
|
|
|
|
| ||
Stock award shares forfeited |
|
|
|
|
| ||
Weighted average grant date fair value |
|
$ |
18 |
|
$ |
18 |
|
|
|
|
|
|
| ||
Unvested stock award shares at March 31 |
|
7 |
|
8 |
| ||
Weighted average grant date fair value |
|
$ |
18 |
|
$ |
17 |
|
At both March 31, 2014 and 2013, there was $94 million of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of four years in both 2014 and 2013.
The total market value (at the vesting date) of stock award shares which vested during the three months ended March 31, 2014 and 2013 was $45 million and $32 million, respectively.
Stock Options. Stock options are granted to key employees of the Company. The exercise price equals the market price of the Companys 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.
The Company granted 332,750 of stock option shares in the three months ended March 31, 2014 with a grant date exercise price approximating $22 per share. In the first three months of 2014, 121,850 stock option shares were forfeited (including options that expired unexercised).
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Note I continued:
The Companys stock option activity was as follows, shares in millions:
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Option shares outstanding, January 1 |
|
|
24 |
|
|
30 |
|
Weighted average exercise price |
|
$ |
22 |
|
$ |
21 |
|
|
|
|
|
|
|
|
|
Option shares granted |
|
|
|
|
|
1 |
|
Weighted average exercise price |
|
$ |
22 |
|
$ |
20 |
|
|
|
|
|
|
|
|
|
Option shares exercised |
|
|
1 |
|
|
2 |
|
Aggregate intrinsic value on date of exercise (A) |
|
$ |
10 million |
|
$ |
17 million |
|
Weighted average exercise price |
|
$ |
16 |
|
$ |
11 |
|
|
|
|
|
|
| ||
Option shares forfeited |
|
|
|
|
|
|
|
Weighted average exercise price |
|
$ |
27 |
|
$ |
19 |
|
|
|
|
|
|
|
|
|
Option shares outstanding, March 31 |
|
|
23 |
|
|
29 |
|
Weighted average exercise price |
|
$ |
22 |
|
$ |
22 |
|
Weighted average remaining option term (in years) |
|
|
4 |
|
|
4 |
|
|
|
|
|
|
|
| |
Option shares vested and expected to vest, March 31 |
|
|
23 |
|
|
29 |
|
Weighted average exercise price |
|
$ |
22 |
|
$ |
22 |
|
Aggregate intrinsic value (A) |
|
$ |
93 million |
|
$ |
82 million |
|
Weighted average remaining option term (in years) |
|
|
4 |
|
|
4 |
|
|
|
|
|
|
| ||
Option shares exercisable (vested), March 31 |
|
|
20 |
|
|
23 |
|
Weighted average exercise price |
|
$ |
23 |
|
$ |
24 |
|
Aggregate intrinsic value (A) |
|
$ |
72 million |
|
$ |
45 million |
|
Weighted average remaining option term (in years) |
|
|
3 |
|
|
4 |
|
(A) Aggregate intrinsic value is calculated using the Companys stock price at each respective date, less the exercise price (grant date price) multiplied by the number of shares.
At March 31, 2014 and 2013, there was $11 million and $17 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 and two years at March 31, 2014 and 2013, respectively.
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Note I 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:
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Weighted average grant date fair value |
|
$ |
9.53 |
|
$ |
8.33 |
|
Risk-free interest rate |
|
1.91 |
% |
1.20 |
% | ||
Dividend yield |
|
1.34 |
% |
1.47 |
% | ||
Volatility factor |
|
49.00 |
% |
49.00 |
% | ||
Expected option life |
|
6 years |
|
6 years |
| ||
J. Net periodic pension cost for the Companys defined-benefit pension plans was as follows, in millions:
|
|
Three Months ended March 31, |
| ||||||||||
|
|
2014 |
|
2013 |
| ||||||||
|
|
Qualified |
|
Non-Qualified |
|
Qualified |
|
Non-Qualified |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service cost |
|
$ |
1 |
|
$ |
|
|
$ |
1 |
|
$ |
|
|
Interest cost |
|
13 |
|
2 |
|
11 |
|
1 |
| ||||
Expected return on plan assets |
|
(12 |
) |
|
|
(10 |
) |
|
| ||||
Amortization of net loss |
|
3 |
|
|
|
4 |
|
1 |
| ||||
Net periodic pension cost |
|
$ |
5 |
|
$ |
2 |
|
6 |
|
2 |
| ||
The Company participates in 21 regional multi-employer pension plans, principally related to building trades; none of the plans are considered significant to the Company.
Effective January 1, 2010, the Company froze all future benefit accruals under substantially all of the Companys domestic qualified and non-qualified defined benefit pension plans. Future benefit accruals related to the Companys foreign non-qualified plans were frozen several years ago.
K. The reclassifications from accumulated other comprehensive income to the condensed consolidated statement of operations were as follows, in millions:
|
|
|
|
|
|
|
| ||
|
|
Amount |
|
|
| ||||
Accumulated Other |
|
Reclassified |
|
|
| ||||
Comprehensive |
|
March 31, |
|
|
| ||||
Income (Loss) |
|
2014 |
|
2013 |
|
Financial Statement Line Item |
| ||
|
|
|
|
|
|
|
| ||
Amortization of defined benefit pension: |
|
|
|
|
|
|
| ||
Actuarial losses, net |
|
$ |
3 |
|
$ |
5 |
|
Selling, general & administrative expense |
|
|
|
|
|
|
|
Income tax expense |
| ||
|
|
$ |
3 |
|
$ |
5 |
|
Net of tax |
|
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
L. Information about the Company by segment and geographic area was as follows, in millions:
|
|
Three Months Ended March 31, |
| ||||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
Net Sales(A) |
|
Operating Profit (Loss) |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||
The Companys operations by segment were: |
|
|
|
|
|
|
|
|
| ||||
Cabinets and Related Products |
|
$ |
237 |
|
$ |
236 |
|
$ |
(12 |
) |
$ |
(4 |
) |
Plumbing Products |
|
800 |
|
762 |
|
119 |
|
86 |
| ||||
Installation and Other Services |
|
335 |
|
312 |
|
(4 |
) |
(4 |
) | ||||
Decorative Architectural Products |
|
441 |
|
432 |
|
76 |
|
89 |
| ||||
Other Specialty Products |
|
152 |
|
134 |
|
5 |
|
(1 |
) | ||||
Total |
|
$ |
1,965 |
|
$ |
1,876 |
|
$ |
184 |
|
$ |
166 |
|
|
|
|
|
|
|
|
|
|
| ||||
The Companys operations by geographic area were: |
|
|
|
|
|
|
|
|
| ||||
North America |
|
$ |
1,556 |
|
$ |
1,510 |
|
$ |
129 |
|
$ |
140 |
|
International, principally Europe |
|
409 |
|
366 |
|
55 |
|
26 |
| ||||
Total |
|
$ |
1,965 |
|
$ |
1,876 |
|
184 |
|
166 |
| ||
|
|
|
|
|
|
|
|
|
| ||||
General corporate expense, net |
|
|
|
|
|
(32 |
) |
(34 |
) | ||||
Operating profit, as reported |
|
|
|
|
|
152 |
|
132 |
| ||||
Other income (expense), net |
|
|
|
|
|
(59 |
) |
(47 |
) | ||||
Income from continuing operations before income taxes |
|
|
|
|
|
$ |
93 |
|
$ |
85 |
|
(A) Inter-segment sales were not material.
M. The Company recorded charges related to severance of $2 million and $4 million for the three months ended March 31, 2014 and 2013, respectively. Such charges are principally reflected in the condensed consolidated statement of operations in selling, general and administrative expenses.
N. Other, net, which is included in other income (expense), net, was as follows, in millions:
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Income from cash and cash investments |
|
$ |
1 |
|
$ |
1 |
|
Income from financial investments (Note E) |
|
(1 |
) |
10 |
| ||
Other items, net |
|
(3 |
) |
2 |
| ||
Total other net |
|
$ |
(3 |
) |
$ |
13 |
|
Other items, net, included $(2) million and $3 million of currency (losses) gains for the three months ended March 31, 2014 and 2013, respectively.