The New York Stock Exchange is the principal market on which our common stock is traded, under the ticker symbol MAS. On January 31, 2020,2023, there were approximately 3,1002,600 holders of record of our common stock.
We expect that our practice of paying quarterly dividends on our common stock will continue, although the payment of future dividends is at the discretion of our Board of Directors and will depend upon our earnings, capital requirements, financial condition and other factors. The Board of Directors declared a quarterly dividend of $0.285 per share in the first quarter of 2023 with the intention to increase the annual dividend to $1.14 per share.
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| | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid Per Common Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Value of Shares That May Yet Be Purchased Under the Plans or Programs |
10/1/19 - 10/31/19 | 726,500 |
| | $ | 42.52 |
| | 726,500 |
| | $ | 1,926,741,040 |
|
11/1/19 - 11/30/19 (A) | 7,869,212 |
| | $ | 54.03 |
| | 7,869,212 |
| | $ | 1,501,539,755 |
|
12/1/19 - 12/31/19 | — |
| | $ | — |
| | — |
| | $ | 1,501,539,755 |
|
Total for the quarter | 8,595,712 |
| | | | 8,595,712 |
| | $ | 1,501,539,755 |
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_____________________________
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(A) | In November 2019, we entered into an accelerated stock repurchase transaction whereby we agreed to repurchase a total of $400 million of our common stock with an initial delivery of 7.3 million shares. This transaction will be completed in February 2020, at which time we anticipate we will receive, at no additional cost, 1.2 million additional shares of our common stock resulting from expected changes in the volume weighted average stock price of our common stock over the term of the transaction. The average price paid per common share does not reflect the holdback shares that we expect to receive upon completion of the accelerated stock repurchase transaction. If we had received the expected additional 1.2 million shares at inception of the accelerated stock repurchase transaction, the total number of shares purchased under this transaction would have been approximately 8.5 million with an average price paid per common share of approximately $47.25. |
Performance Graph
The table below compares the cumulative total shareholder return on our common stock with the cumulative total return of (i) the Standard & Poor's 500 Composite Stock Index ("S&P 500 Index"), (ii) The Standard & Poor's Industrials Index ("S&P Industrials Index") and (iii) the Standard & Poor's Consumer Durables & Apparel Index ("S&P Consumer Durables & Apparel Index"), from December 31, 20142017 through December 31, 2019,2022, when the closing price of our common stock was $47.99.$46.67. The graph assumes investments of $100 on December 31, 20142017 in our common stock and in each of the three indices and the reinvestment of dividends.
The table below sets forth the value, as of December 31 for each of the years indicated, of a $100 investment made on December 31, 20142017 in each of our common stock, the S&P 500 Index, the S&P Industrials Index and the S&P Consumer Durables & Apparel Index and includes the reinvestment of dividends.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
Masco | $ | 66.55 | | | $ | 109.22 | | | $ | 125.01 | | | $ | 159.81 | | | $ | 106.21 | |
S&P 500 Index | $ | 93.76 | | | $ | 120.84 | | | $ | 140.49 | | | $ | 178.27 | | | $ | 143.61 | |
S&P Industrials Index | $ | 85.00 | | | $ | 107.81 | | | $ | 117.52 | | | $ | 140.32 | | | $ | 130.35 | |
S&P Consumer Durables & Apparel Index | $ | 86.69 | | | $ | 114.67 | | | $ | 135.78 | | | $ | 164.21 | | | $ | 114.07 | |
Item 6. [Reserved]
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| | | | | | | | | | | | | | | | | | | |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
Masco | $ | 129.60 |
| | $ | 146.62 |
| | $ | 206.07 |
| | $ | 138.69 |
| | $ | 230.60 |
|
S&P 500 Index | $ | 101.38 |
| | $ | 113.51 |
| | $ | 138.29 |
| | $ | 132.23 |
| | $ | 173.86 |
|
S&P Industrials Index | $ | 97.47 |
| | $ | 115.85 |
| | $ | 140.22 |
| | $ | 121.58 |
| | $ | 157.29 |
|
S&P Consumer Durables & Apparel Index | $ | 99.25 |
| | $ | 93.48 |
| | $ | 110.85 |
| | $ | 97.60 |
| | $ | 131.17 |
|
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Item 6. | Selected Financial Data. |
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| | | | | | | | | | | | | | | | | | | |
| Dollars in Millions (Except Per Common Share Data) |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Net sales (1)(2) | $ | 6,707 |
| | $ | 6,654 |
| | $ | 6,014 |
| | $ | 5,754 |
| | $ | 5,513 |
|
Operating profit (1)(2)(3) | 1,088 |
| | 1,077 |
| | 1,029 |
| | 986 |
| | 798 |
|
Income from continuing operations attributable to Masco Corporation (1)(2) | 639 |
| | 636 |
| | 426 |
| | 426 |
| | 282 |
|
Income per common share from continuing operations (1)(2): | |
| | |
| | |
| | |
| | |
|
Basic | $ | 2.21 |
| | $ | 2.06 |
| | $ | 1.34 |
| | $ | 1.29 |
| | $ | 0.82 |
|
Diluted | 2.20 |
| | 2.05 |
| | 1.33 |
| | 1.28 |
| | 0.81 |
|
Dividends declared | 0.510 |
| | 0.450 |
| | 0.410 |
| | 0.390 |
| | 0.370 |
|
Dividends paid | 0.495 |
| | 0.435 |
| | 0.405 |
| | 0.385 |
| | 0.365 |
|
At December 31: | |
| | |
| | |
| | |
| | |
|
Total assets (2) | $ | 5,027 |
| | $ | 5,393 |
| | $ | 5,534 |
| | $ | 5,164 |
| | $ | 5,664 |
|
Long-term debt | 2,771 |
| | 2,971 |
| | 2,969 |
| | 2,995 |
| | 2,403 |
|
Shareholders' (deficit) equity (2) | (56 | ) | | 69 |
| | 183 |
| | (96 | ) | | 58 |
|
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(1) | Amounts exclude discontinued operations for all periods presented. Refer to Note B to the consolidated financial statements for further details. |
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(2) | Net sales, operating profit, income from continuing operations attributable to Masco Corporation, income per common share from continuing operations, total assets and shareholders' equity for 2015 has not been recast for the impact of the adoption of Accounting Standards Codification 606. |
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(3) | Operating profit for 2015 has not been recast for the impact of the adoption of Accounting Standards Update 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." |
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Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations.
The financialfollowing discussion and business analysis below provides information which we believe is relevant to an assessment and understanding of our consolidated financial position, results of operations and cash flows. This financial and business analysis should be read in conjunction with, theand is qualified in its entirety by, our consolidated financial statements (and notes related thereto) and related notes.
Theother more detailed financial information appearing elsewhere in this Report. Further, you should read the following discussion and certain other sectionsanalysis of our financial condition and results of operations together with the “Risk Factors” included elsewhere in this Report contain statementsfor a discussion of important factors that reflect our views about our future performance and constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "outlook," "believe," "anticipate," "appear," "may," "will," "should," "intend," "plan," "estimate," "expect," "assume," "seek," "forecast," and similar references to future periods. Our views about future performance involve risks and uncertainties that are difficult to predict and, accordingly, ourcould cause actual results mayto differ materially from the results discusseddescribed in ouror implied by the forward-looking statements. We caution you against relying on any of these forward-looking statements.
In addition to the various factors includedstatements contained in the "Executive Level Overview," "Critical Accounting Policiesfollowing discussion and Estimates" and "Outlook foranalysis. See also “Cautionary Statement Concerning Forward-Looking Statements” at the Company" sections, our future performance may be affected by the levels of residential repair and remodel activity and new home construction, our ability to maintain our strong brands and reputation and to develop innovative products, our ability to maintain our competitive position in our industries, our reliance on key customers, the cost and availability of materials and the imposition of tariffs, our dependence on third-party suppliers, risks associated with our international operations and global strategies, our ability to achieve the anticipated benefits of our strategic initiatives, including the pending divestiture of our Masco Cabinetry business, our ability to successfully execute our acquisition strategy and integrate businesses that we have and may acquire, our ability to attract, develop and retain talented personnel, risks associated with our reliance on information systems and technology, and our ability to achieve the anticipated benefits from our investments in new technology. These and other factors are discussed in detail in Item 1A "Risk Factors"beginning of this Report. Any forward-looking statement made by us speaks only as of the date on which it was made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise.
Executive Level Overview
We design, manufacture and distribute branded home improvement and building products. These products are sold primarily for repair and remodeling activity and, to a lesser extent, new home construction. We sell our products through home center retailers, online retailers, wholesalers and distributors, mass merchandisers, hardware stores, homebuilders, distributors, and direct to the consumer.consumer, professional contractors and homebuilders.
2019 Results
Net sales were positively impacted by increased net selling pricesWe continue to pursue our strategy of driving the full potential of our core businesses, leveraging opportunities across our two segmentsenterprise, and actively managing our portfolio. We remain confident in the acquisitionfundamentals of The L.D. Kichler Co. ("Kichler") in March 2018. Such increases were partially offsetour business and long-term strategy. We execute our strategy by a decrease in volume, primarilyinvesting in our Decorative Architectural Products segmentbrands, developing innovative products, making capital investments, and unfavorable foreign currency translation.focusing on continuous productivity improvement and operational excellence, among other initiatives. We believe that our strong financial position and cash flow generation, together with our investments in our industry-leading branded building products, our continued focus on innovation and disciplined capital allocation, will allow us to drive long-term growth and create value for our shareholders.
Our Plumbing Products segment was negatively impacted by an increaseWe continue to leverage the Masco Operating System, our methodology to drive growth and productivity, and continuous improvement initiatives across our enterprise to identify additional opportunities to improve our business operations. From time to time, we may take actions to drive efficiency in other expenses (such as salaries, marketing spendthe business focused on the strategic rationalization of our businesses, including business consolidations, plant closures, headcount reductions and severance charges), an increase in commodity costs, unfavorable foreign currency translation, and higher depreciation expense. These negative impacts were partially offset by increased net selling prices and the benefits associated withother cost savings initiatives. Our Decorative Architectural Products segment was positively impacted by increased net selling prices across
Recent Trends
Due to changing market conditions, we are experiencing, and may continue to experience, lower market demand for our products. We have been experiencing, and may continue to experience, elevated commodity and other input costs, elevated transportation costs and supply chain disruptions, particularly disruptions related to our ability to source products, components and raw materials. We have also been experiencing, and may continue to experience, employee-related cost inflation and constraints in hiring qualified employees. While still elevated, we have recently seen some reduction of certain costs, and we aim to offset the segment, the absencepotential unfavorable impact of the recognition of the inventory step-up adjustment established as part of the 2018 Kichler acquisition, and the benefits associated with cost savings initiatives. These positive impacts were partially offset by an increase in commodityour costs and lower sales volume across the segment, an increase in strategic growth investmentsdemand for our products with productivity improvement, pricing, and a non-cash impairment charge related to an other indefinite-lived intangible asset for a trademark associated with lighting products.initiatives.
Consolidated Results of Operations
Critical Accounting Policies and Estimates
Our discussion and analysis ofWe report our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparationHowever, we believe that certain non-GAAP performance measures and ratios, used in managing the business, may provide users of thesethis financial statements requires us to make certain estimatesinformation with additional meaningful comparisons between current results and assumptions that affectresults in prior periods. These include the reported amounts of assets and liabilities, disclosure of any contingent assetsnet sales, operating profit and liabilities at the date of the financial statementsoperating profit margins adjusted for certain items. Non-GAAP performance measures and theratios should be viewed in addition to, and not as an alternative for, our reported amounts of revenues and expenses during the reporting periods. results under GAAP.
We regularly reviewdiscuss our estimates and assumptions, which are based upon historical experience,consolidated results as well as current economic conditionsour Business Segment and various other factors that we believe to be reasonable under the circumstances, theGeographic Area results of which formoperations for the basis for making judgments about the carrying values of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.
Noteyear ended December 31, 2022 versus December 31, 2021. A to the consolidated financial statements includes our accounting policies, estimates and methods used in the preparationdetailed discussion of our consolidated, financial statements.
We believe thatBusiness Segment and Geographic Area results of operations for the following critical accounting policies are affected by significant judgmentsyears ended December 31, 2021 compared to the year ended December 31, 2020 can be found under “Item 7. Management’s Discussion and estimates usedAnalysis of Financial Condition and Results of Operations” in the preparationPart II of our consolidated financial statements.Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 8, 2022.
Revenue Recognition and Receivables
SALES AND OPERATIONS
We recognize revenue as control
Net Sales
Below is a summary of our productsnet sales, in millions, for the years ended December 31, 2022 and 2021: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | Change |
Net sales, as reported | $ | 8,680 | | | $ | 8,375 | | | $ | 305 | |
Acquisitions | (11) | | | — | | | (11) | |
Divestitures | — | | | (32) | | | 32 | |
Net sales, excluding acquisitions and divestitures | 8,669 | | | 8,343 | | | 326 | |
Currency translation | 211 | | | — | | | 211 | |
Net sales, excluding acquisitions, divestitures and the effect of currency translation | $ | 8,880 | | | $ | 8,343 | | | $ | 537 | |
Net sales for 2022 were $8.7 billion, which increased four percent compared to 2021. Excluding acquisitions, divestitures and the effect of currency translation, net sales increased six percent.
Net sales for 2022 increased primarily due to:
•Higher net selling prices across the entire company which increased sales by nine percent.
These amounts were partially offset by:
•Lower sales volume which decreased sales by three percent.
•Unfavorable foreign currency translation which decreased sales by two percent.
Gross Profit and Gross Margin
Below is transferreda summary of our gross profit, in millions, and gross margin for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | Favorable / (Unfavorable) |
Gross profit | $ | 2,713 | | $ | 2,863 | | $ | (150) |
Gross margin | 31.3 | % | | 34.2 | % | | (290) bps |
The 2022 gross profit margin was negatively impacted by:
•Increased commodity and transportation costs.
•Higher costs due to production inefficiencies and related under absorption, as well as higher excess and obsolete inventory charges resulting from business rationalization activities.
•Lower sales volume.
•Unfavorable sales mix.
These amounts were partially offset by:
•Higher net selling prices.
Selling, General and Administrative Expenses
Below is a summary of our customers, whichselling, general and administrative expenses, in millions, and selling, general and administrative expenses as a percentage of net sales for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | (Favorable) / Unfavorable |
Selling, general and administrative expenses | $ | 1,390 | | $ | 1,413 | | $ | (23) |
| | | | | |
| | | | | |
| | | | | |
Selling, general and administrative expenses as percentage of net sales | 16.0 | % | | 16.9 | % | | (90) bps |
Selling, general, and administrative expenses as a percentage of net sales in 2022 was positively impacted by:
•Higher net sales resulting from favorable net selling prices.
•Lower variable compensation.
These amounts were partially offset by:
•Increased marketing costs.
Operating Profit
Below is generally ata summary of our operating profit, in millions, and operating profit margins for the time of shipment or upon delivery based on the contractual terms with our customers. We provide customer programsyears ended December 31, 2022 and incentive offerings, including special pricing2021:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | Change |
Operating profit, as reported | $ | 1,297 | | $ | 1,405 | | $ | (108) |
Rationalization charges | 32 | | 4 | | 28 |
Impairment charges for goodwill and other intangible assets | 26 | | 45 | | (19) |
| | | | | |
Operating profit, excluding rationalization charges and impairment charges | $ | 1,355 | | $ | 1,454 | | $ | (99) |
Operating profit margin, as reported | 14.9 | % | | 16.8 | % | | (190) bps |
Operating profit margin, excluding rationalization charges and impairment charges | 15.6 | % | | 17.4 | % | | (180) bps |
Operating profit in 2022 was negatively impacted by:
•Increased commodity and co-operative advertising arrangements, promotionstransportation costs.
•Higher costs due to production inefficiencies and related under absorption, as well as higher excess and obsolete inventory charges resulting from business rationalization activities.
•Lower sales volume.
•Unfavorable foreign currency translation.
•Increased marketing costs.
•Unfavorable sales mix.
These amounts were partially offset by:
•Higher net selling prices.
•Lower variable compensation.
•Lower goodwill and other volume-based incentives. These customer programs and incentives are considered variable consideration. We includeintangible assets impairment charges in revenue variable consideration only to the extent that itour lighting business.
OTHER INCOME (EXPENSE), NET
Interest Expense
Below is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period.
We monitor our exposure for credit losses on customer receivable balances and the credit worthinesssummary of our customers on an on-going basisinterest expense, in millions, for the years ended December 31, 2022 and maintain allowances for doubtful accounts receivable for estimated losses resulting from the inability of customers to make required payments. Allowances are estimated based upon specific customer balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon historical collection, return and write-off activity. A separate allowance2021:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | Favorable / (Unfavorable) |
Interest expense | $ | (108) | | | $ | (278) | | | $ | 170 | |
| | | | | |
| | | | | |
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The decrease in interest expense is recorded for customer incentive rebates and is generally based upon sales activity.
Goodwill and Other Intangible Assets
We record the excess of purchase cost over the fair value of net tangible assets of acquired companies as goodwill or other identifiable intangible assets. In the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, we primarily complete the impairment testing of goodwill utilizing a discounted cash flow method. We selected the discounted cash flow methodology because we believe that it is comparable to what would be used by market participants. For our Masco Cabinetry reporting unit, we utilized a market approach to determine its fair value instead of the discounted cash flow method, as we were actively marketing the Masco Cabinetry business for sale and on November 14, 2019 we entered into a definitive agreement to sell the business. We have defined our reporting units and completed the impairment testing of goodwill at the operating segment level.
Determining market values using a discounted cash flow method requires us to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in different outcomes. In estimating future cash flows, we rely on internally generated five-year forecasts for sales and operating profits, and, currently, a two to three percent long-term assumed annual growth rate of cash flows for periods after the five-year forecast. We generally develop these forecasts based upon, among other things, recent sales data for existing products, planned timing of new product launches, estimated repair and remodel activity and estimated housing starts. Our assumptions included a relatively stable U.S. Gross Domestic Product growing at approximately 1.9 percent per annum and a eurozone Gross Domestic Product growing at approximately 1.0 percent per annum over the five-year forecast.
We utilize our weighted average cost of capital of approximately 8.0 percent as the basis to determine the discount rate to apply to the estimated future cash flows. Our weighted average cost of capital decreased in 2019 as compared to 2018, primarily due to declining interest rates and lower long-term market growth outlooks. In 2019, based upon our assessmentthe absence of the risks impacting each$168 million loss on debt extinguishment, which was recorded as additional interest expense in connection with the early retirement of our businesses, we applied a risk premium to increasedebt in the discount rate to a range of 10.0 percent to 12.0 percent for our reporting units.
If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized to the extent that a reporting unit's recorded carrying value exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.
In the fourthfirst quarter of 2019, we estimated that future discounted cash flows projected for all of our reporting units were greater than the carrying values. Accordingly, we did not recognize any impairment charges for goodwill. A 10 percent decrease in the estimated fair value of our reporting units would have resulted in2021.
Other, net
Below is a $35 million impairment to one of our reporting units.
We review our other indefinite-lived intangible assets for impairment annually, in the fourth quarter, or as events occur or circumstances change that indicate the assets may be impaired without regard to the business unit. Potential impairment is identified by comparing the fair value of an other indefinite-lived intangible asset to its carrying value. We utilize a relief-from-royalty model to estimate the fair value of other indefinite-lived intangible assets. We consider the implications of both external (e.g., market growth, competition and local economic conditions) and internal (e.g., product sales and expected product growth) factors and their potential impact on cash flows related to the intangible asset in both the near- and long-term. We also consider the profitability of the business, among other factors, to determine the royalty rate for use in the impairment assessment.
We utilize our weighted average cost of capital of approximately 8.0 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2019, based upon our assessment of the risks impacting each of our businesses, we applied a risk premium to increase the discount rate to a range of 11.0 percent to 13.0 percent for our other indefinite-lived intangible assets.
In the fourth quarter of 2019, we estimated that future discounted cash flows projected for our other indefinite-lived intangible assets were greater than the carrying values. Accordingly, we did not recognize any impairment charges for other indefinite-lived intangible assets. A 10 percent decrease in the estimated fair valuesummary of our other, indefinite-lived intangible assets would have resultednet, in millions, for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | Favorable / (Unfavorable) |
Other, net | $ | 4 | | | $ | (439) | | | $ | 443 | |
| | | | | |
| | | | | |
| | | | | |
Other, net, for 2022 included:
•$24 million of income from the revaluation of contingent consideration related to a $3prior acquisition.
This amount was partially offset by:
•$10 million impairmentof net periodic pension and post-retirement benefit expense.
•$6 million of losses related to equity method investments.
Other, net, for one2021 included:
•$430 million of our trade names.
Employee Retirement Plans
Asnet periodic pension and post-retirement benefit expense, which includes $399 million of January 1, 2010, substantially all our domestic and foreign qualified and domestic non-qualified defined-benefit pension plans were frozennet settlement loss related to future benefit accruals.
Accounting for defined-benefit pension plans involves estimating the cost of benefits to be provided in the future, based upon vested years of service, and attributing those costs over the time period each employee works. We develop our pension costs and obligations from actuarial valuations. Inherent in these valuations are key assumptions regarding expected return on plan assets, mortality rates and discount rates for obligations and expenses. We consider current market conditions, including changes in interest rates, in selecting these assumptions. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in different reported pension costs and obligations within our consolidated financial statements.
In December 2019, our Board of Directors approved the termination of our qualified domestic defined-benefit pension plans. As
•$18 million loss related to the divestiture of our Hüppe GmbH ("Hüppe") business.
•$16 million expense from the revaluation of contingent consideration related to a resultprior acquisition.
These amounts were partially offset by:
•$14 million gain recognized on the redemption of this decision, the projected benefit obligationspreferred stock of ACProducts Holding, Inc. and $6 million of related dividend income.
•$11 million of earnings related to equity method investments.
INCOME TAXES
Below is a summary of our income tax expense, in millions, and our effective tax rate for these plans were increasedthe years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | (Favorable) / Unfavorable |
Income tax expense | $ | 288 | | $ | 210 | | $ | 78 |
| | | | | |
| | | | | |
| | | | | |
Effective tax rate | 24 | % | | 31 | % | | (7) | % |
Our 2021 income tax expense included $16 million due to reflect the incremental costs to terminate the plans. Upon termination in 2021, we expect to recognizeelimination of disproportionate tax effects from accumulated other comprehensive loss approximately $420income related to our debt retirement and pension plan termination and $18 million of pre-tax actuarialdue to losses and approximately $90 million of incomeproviding no tax benefit which includes approximately $11 million of tax expensein certain jurisdictions from the elimination of a disproportionate tax effect.
In December 2019, our discount rate for obligations decreased to a weighted average of 2.5 percent from 3.8 percent. The discount rate for obligations is based primarily upon the expected duration of each defined-benefit pension plan's liabilities matched to the December 31, 2019 Willis Towers Watson Rate Link Curve. For our qualified domestic defined-benefit pension plans, the projected benefit obligations include the estimated incremental cost related to the termination. For these plans, the discount rate was then set equal to the discount rate that results in the same projected benefit obligation resulting from the normal projected benefit obligation calculation plus the estimated incremental cost to terminate. The discount rates we use for our defined-benefit pension plans ranged from 1.1 percent to 3.0 percent, with the most significant portion of the liabilities having a discount rate for obligations of 2.4 percent or
higher. The assumed asset return was primarily 3.0 percent, reflecting the expected long-term return on plan assets based upon an analysis of expected and historical rates of return of various asset classes utilizing the current and long-term target asset allocation of the plan assets.
The net underfunded amount for our qualified defined-benefit pension plans, which is the difference between the projected benefit obligation and plan assets, increased to $254 million at December 31, 2019 from $226 million at December 31, 2018. Our projected benefit obligation for our unfunded, non-qualified, defined-benefit pension plans increased to $161 million at December 31, 2019 from $155 million at December 31, 2018. These unfunded plans are not subject to the funding requirements of the Pension Protection Act of 2006. In accordance with the Pension Protection Act, the Adjusted Funding Target Attainment Percentage for the various defined-benefit pension plans ranges from 90 percent to 119 percent.
The increase in our qualified defined-benefit pension plan projected benefit obligation was primarily impacted bytermination and a decrease in the discount rate. During 2019, we contributed $56 million to our qualified defined-benefit pension plans, and our qualified defined-benefit pension plan assets had a positive return of 17.7 percent. business divestiture.
Refer to Note MS to the consolidated financial statements for additional information.
We expect pension expense
INCOME AND INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS- ATTRIBUTABLE TO MASCO CORPORATION
Below is a summary of our income and diluted income per common share from continuing operations, in millions, except per share data, for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | Favorable / (Unfavorable) |
Income from continuing operations | $ | 844 | | | $ | 410 | | | $ | 434 | |
| | | | | |
| | | | | |
| | | | | |
Diluted income per common share from continuing operations | $ | 3.63 | | | $ | 1.62 | | | $ | 2.01 | |
Business Segment and Geographic Area Results
The following table sets forth our net sales and operating profit information for our qualified defined-benefit pension plans to be $30 millioncontinuing operations by Business Segment and Geographic Area, dollars in 2020 compared with $16 million in 2019millions. | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | Percent Change |
| 2022 | | 2021 | | | 2022 vs. 2021 |
Net Sales: | | | | | | |
Plumbing Products | $ | 5,252 | | | $ | 5,135 | | | | 2 | % |
Decorative Architectural Products | 3,428 | | | 3,240 | | | | 6 | % |
| | | | | | |
Total | $ | 8,680 | | | $ | 8,375 | | | | 4 | % |
| | | | | | |
North America | $ | 6,978 | | | $ | 6,624 | | | | 5 | % |
International, principally Europe | 1,702 | | | 1,751 | | | | (3) | % |
Total | $ | 8,680 | | | $ | 8,375 | | | | 4 | % |
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | Percent Change |
| 2022 | | 2021 | | | 2022 vs. 2021 |
Operating Profit (A): | | | | | | |
Plumbing Products | $ | 819 | | | $ | 929 | | | | (12) | % |
Decorative Architectural Products | 565 | | | 581 | | | | (3) | % |
Total | $ | 1,384 | | | $ | 1,510 | | | | (8) | % |
| | | | | | |
North America | $ | 1,116 | | | $ | 1,214 | | | | (8) | % |
International, principally Europe | 268 | | | 296 | | | | (9) | % |
Total | 1,384 | | | 1,510 | | | | (8) | % |
General corporate expense, net | (87) | | | (105) | | | | (17) | % |
| | | | | | |
Total operating profit | $ | 1,297 | | | $ | 1,405 | | | | (8) | % |
(A). If we assumed that the future return on plan assets was 50 basis points lower than the assumed asset return and the discount rate decreased by 50 basis points, the2020pensionBefore general corporate expense, would increase by$5 million. Assuming a 0 percent asset return for our qualified domestic defined-benefit pension plans, projected 2020 total qualified defined-benefit pension plan expenses are expected to be approximately $37 million. We expect pension expense for our non-qualified defined-benefit pension plans to be $8 million in2020, consistent with the pension expense recognized in 2019.
We anticipate that we will be required to contribute approximately $23 million in 2020 to our qualified and non-qualified defined-benefit plans; however, we currently anticipate contributing approximately $64 million in 2020. Refernet; refer to Note MQ to the consolidated financial statements for further information regarding the funding of our plans.additional information.
Income Taxes
Deferred taxes are recognized based on the future tax consequences of differences between the financial
statement carrying value of assets and liabilities and their respective tax basis. The future realization of deferred taxBUSINESS SEGMENT RESULTS DISCUSSION
assets depends on the existence of sufficient taxable income
Changes in future periods. Possible sources of taxable income
include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated lossesoperating profit in the carryforwardfollowing Business Segment and Geographic Area Results discussion exclude general corporate expense, net, and compares each respective period to the same period of the immediately preceding year.
Plumbing Products
Sales
Net sales in the Plumbing Products segment increased two percent in 2022 due primarily to favorable net selling prices, which increased sales by seven percent, and projected future taxable income.
If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50higher international plumbing sales volume which increased sales by two percent. These amounts were partially offset by unfavorable foreign currency translation which decreased sales by four percent, likely) such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company's three-year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable,lower North America plumbing sales volume which decreased sales by two percent, and the accounting guidance restricts the amountdivestiture of reliance we can place on projected taxable income to support the recovery of the deferred tax assets.Hüppe which decreased sales by one percent.
We maintain a valuation allowance on certain state and foreign deferred tax assets as of December 31, 2019. Should we determine that we would not be able to realize our remaining deferred tax assets in these jurisdictionsOperating Results
Operating profit in the future, an adjustmentPlumbing Products segment in 2022 was negatively impacted by increased commodity and transportation costs, higher costs due to the valuation allowance would be recordedproduction inefficiencies and related under absorption, higher excess and obsolete inventory charges resulting from business rationalization activities, unfavorable foreign currency translation, increased marketing costs and unfavorable sales mix. These amounts were partially offset by favorable net selling prices and, to a lesser extent, lower variable compensation.
Decorative Architectural Products
Sales
Net sales in the period such determination is made. The need to maintain a valuation allowance against deferred tax assets may cause greater volatilityDecorative Architectural Products segment increased six percent in our effective tax rate.
The comprehensive U.S. tax reform, which generally became effective in 2018, has had a significant impact on our effective tax rate and taxes paid2022, primarily due to favorable net selling prices across the reductionsegment. These amounts were partially offset by lower sales volume across the segment.
Operating Results
Operating profit in the U.S. Federal corporate tax rate from 35 percent to 21 percentDecorative Architectural Products segment in 2022 was negatively impacted by increased commodity and the additional U.S. taxes on our foreign earnings. The continued impact from U.S. tax reform may differ from our current estimatestransportation costs, lower sales volume, higher costs due to the issuanceproduction inefficiencies and finalization of future regulatory guidance.related under absorption, higher excess and obsolete inventory charges resulting from business rationalization activities, and increased marketing costs. These amounts were partially offset by favorable net selling prices and lower goodwill and other intangible assets impairment charges in our lighting business.
Geographic Area Results Discussion
North America
Sales
Corporate Development Strategy
We expect to maintain a balanced growth strategy pursuing organic growth by maximizing the full potential of our existing businesses and, as appropriate, complementing our existing business with strategic acquisitions. In addition, we actively manage our portfolio of companies by divesting of those businesses that do not align with our long-term growth strategy.
During 2019, we completed the divestitures of our UKWG and Milgard businesses and entered into a definitive agreement to sell our Masco Cabinetry business. We will continue to reviewNorth America net sales increased five percent in 2022. Favorable net selling prices across all of our businessesproduct categories increased sales by 10 percent. These amounts were partially offset by lower sales volume, which decreased sales by five percent.
Operating Results
North America operating profit in 2022 was negatively impacted by increased commodity and transportation costs, lower sales volume, higher costs due to determineproduction inefficiencies and related under absorption, higher excess and obsolete inventory charges resulting from business rationalization activities, and increased marketing costs. These amounts were partially offset by favorable net selling prices, and to a lesser extent, lower variable compensation and lower goodwill and other intangible assets impairment charges in our lighting business.
International, Principally Europe
Sales
International net sales decreased three percent in 2022. In local currencies (including sales in currencies outside their respective functional currencies), net sales increased eight percent. Favorable net selling prices of plumbing products increased sales by six percent. Higher sales volume of plumbing products increased sales by five percent. These amounts were partially offset by the divestiture of our Hüppe business which businesses, if any, may not align with our long-term growth strategy.decreased sales by two percent and unfavorable sales mix which decreased sales by two percent.
International operating profit in 2022 was negatively impacted by increased commodity and transportation costs, unfavorable foreign currency translation, wage inflation, and unfavorable sales mix. These amounts were partially offset by favorable net selling prices and higher sales volume of plumbing products.
Liquidity and Capital Resources
Overview of Capital Structure
Historically, we have largely funded our growth through cash provided by our operations, the issuance of notes in the financial markets, bank borrowings and the issuance of our common stock, including issuances for certain mergers and acquisitions. Maintaining high levels of liquidity and focusing on cash generation are among our financial strategies. Our capital allocation strategy includes reinvesting in our business, balancing share repurchases with potential acquisitions and maintaining an appropriatea relevant dividend.
We had cash and cash investments of approximately $452 million and $926 million at December 31, 2022 and 2021, respectively. Our cash and cash investments consist of overnight interest bearing money market demand accounts, time deposit accounts, and money market mutual funds containing government securities and treasury obligations. While we attempt to diversify these investments in a prudent manner to minimize risk, it is possible that future changes in the financial markets could affect the security or availability of these investments. Of the cash and cash investments we held at December 31, 2022 and 2021, $321 million and $490 million, respectively, was held in our foreign subsidiaries. If these funds were needed for our operations in the U.S., their repatriation into the U.S. would not result in significant additional U.S. income tax or foreign withholding tax, as we have recorded such taxes on substantially all undistributed foreign earnings, except for those that are legally restricted.
Our current ratio was 1.6 to 1 and 1.8 to 1 at December 31, 2022 and 2021, respectively. The decrease in our current ratio is primarily due to the 364-day $500 million term loan that we entered into on April 26, 2022.
Our total debt as a percent of total capitalization was 102109 percent and 98 percent at December 31, 20192022 and 2018,2021, respectively. Refer to Note KL to the consolidated financial statements for additional information.
During 2019,We believe that our present cash balance and cash flows from operations, and borrowing availability under our 2022 Credit Agreement, are sufficient to fund our near-term working capital and other investment needs. We believe that our longer-term working capital and other general corporate requirements will be satisfied through cash flows from operations and, to the extent necessary, from bank borrowings and future financial market activities. However, due to the changing market conditions and its impact on our customers and suppliers, we completedare unable to fully estimate the divestituresextent of the impact it may have on our UKWGfuture financial condition.
Capital Expenditures
We continue to invest in our manufacturing and Milgard businessesdistribution operations to increase our productivity, improve customer service and entered into a definitive agreementsupport product innovation. Capital expenditures for 2022 were $224 million, compared with $128 million for 2021. The increase in capital expenditures in 2022 was primarily due to sellcapacity expansion plans in our Masco Cabinetry business. With the combinedPlumbing Products and Decorative Architectural Products segments. For 2023, capital expenditures, excluding any potential future acquisitions, are expected to be approximately $250 million. Depreciation and amortization expense for 2022 totaled $145 million, compared with $151 million for 2021. For 2023, depreciation and amortization expense, excluding any potential future acquisitions, is expected to be approximately $150 million. Amortization expense totaled $33 million in 2022, compared with $40 million in 2021.
Senior Indebtedness
On March 4, 2021, we issued $600 million of 1.500% Notes due February 15, 2028, $600 million of 2.000% Notes due February 15, 2031 and $300 million of 3.125% Notes due February 15, 2051. We received proceeds of $722$1,495 million, net of discount, for the UKWGissuance of these Notes. The Notes are senior indebtedness and Milgard divestitures, we executed an accelerated stock repurchase agreementare redeemable at our option at the applicable redemption price. On March 22, 2021, proceeds from the debt issuances, together with cash on hand, were used to repurchase $400repay and early retire our $326 million of our common stock. This repurchase is under Masco's existing share repurchase authorization of $2.0 billion of shares of our common stock, which was approved in September 2019. During 2019, including the accelerated stock repurchase agreement, we repurchased 20.1 million shares of our common stock for cash aggregating $896 million.
Additionally, we redeemed and retired $201 million of our 7.125%5.950% Notes due March 15, 2020 on December 19, 2019.2022, $500 million 4.450% Notes due April 1, 2025, and $500 million 4.375% Notes due April 1, 2026. In connection with thisthese early retirement,retirements, we incurred a loss on debt extinguishment of $2$168 million, which was recorded as interest expense in ourthe consolidated statement of operations.
In the third quarter of 2019, we increased our quarterly dividend to $.135 per common share from $.12 per common share.Credit Agreement
On March 13, 2019,April 26, 2022, we entered into a revolving credit agreement (the "Credit Agreement"“2022 Credit Agreement”) with an aggregate commitment of $1.0 billion and a maturity date of April 26, 2027. Upon entry into the 2022 Credit Agreement, our credit agreement dated March 13, 2024. 2019, as amended, with an aggregate commitment of $1.0 billion, was terminated.
Under the 2022 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 lenders 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. See Note KL to the consolidated financial statements.statements for additional information.
The 2022 Credit Agreement contains financial covenants requiring us to maintain (A) a net leverage ratio, as adjusted for certain items, not exceeding 4.0 to 1.0, and (B) a minimuman interest coverage ratio, as adjusted for certain items, not less than 2.5 to 1.0. We were in compliance with all covenants and no borrowings were outstanding under our 2022 Credit Agreement at December 31, 2019.2022. As of the date of this report, $69 million was borrowed and outstanding at a weighted average interest rate of 5.800%.
364-day Term Loan
On March 9, 2018,April 26, 2022, we entered into a 364-day $500 million senior unsecured delayed draw term loan due April 26, 2023 with a syndicate of lenders. The senior unsecured term loan and commitments thereunder are subject to prepayment or termination at our option and the loans will bear interest at SOFR plus a spread adjustment and 0.70%. The covenants, including the financial covenants, are substantially the same as those in the 2022 Credit Agreement. We repaid $300 million during 2022.
Corporate Development Strategy
We expect to maintain a balanced growth strategy pursuing organic growth by maximizing the full potential of our existing businesses and, as appropriate, complementing our existing business with strategic acquisitions.
In addition, we actively manage our portfolio of companies by divesting those businesses that do not align with our long-term growth strategy. We will continue to review all of our businesses to determine which businesses, if any, may not align with our long-term growth strategy.
Acquisitions
During 2021, our Hansgrohe SE subsidiary acquired substantiallya 75.1 percent equity interest in Easy Sanitary Solutions B.V., a manufacturer of shower channel drains that offers a wide range of products for barrier-free showering and bathroom wall niches, for approximately €47 million ($58 million), including $52 million of cash and $6 million of debt that will be paid out over two years. During 2021, we also acquired all of the net assetsshare capital of Kichler. The purchase price, netSteamist, Inc., a manufacturer of $2 million cash acquired, consisted of $549 million paid with cash on hand.
On April 16, 2018, we repaid and retired allresidential steam bath products that are complementary to many of our $114plumbing products, for approximately $56 million 6.625% Notes onin cash.
Divestitures
During 2021, we completed the scheduled repayment date.
On June 21, 2017, we issued $300 milliondivestiture of 3.5% Notes due November 15, 2027Hüppe, a manufacturer of shower enclosures and $300 million of 4.5% Notes due May 15, 2047. We received proceeds of $599 million, net of discount, for the issuance of these Notes. The Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On June 27, 2017, proceeds from the debt issuances, together with cash on hand, were used to repay and early retire $299 million of our 7.125% Notes due March 15, 2020, $74 million of our 5.95% Notes due March 15, 2022, $62 million of our 7.75% Notes due August 1, 2029, and $100 million of our 6.5% Notes due August 15, 2032.shower trays. In connection with these early retirements,the divestiture, we incurredrecognized a loss on debt extinguishment of $107$18 million. During 2022, we recorded a $2 million pre-tax post-closing gain related to the finalization of working capital items in connection with the divestiture.
Share Repurchases
We repurchased and retired 16.6 million shares of our common stock in 2022 for approximately $914 million. This included 0.6 million shares to offset the dilutive impact of restricted stock units granted in 2022. Effective October 20, 2022, our Board of Directors authorized the repurchase, for retirement, of up to $2.0 billion of shares of our common stock in open-market transactions or otherwise, replacing the previous Board of Directors authorization established in 2021. At December 31, 2022, we had $2.0 billion remaining under the 2022 authorization. Consistent with past practice and as part of our long-term capital allocation strategy, we anticipate using approximately $500 million of cash for share repurchases (including shares which was recordedwill be purchased to offset any dilution from restricted stock units granted as interest expense.part of our compensation programs) in 2023. Refer to Note O to the consolidated financial statements for additional information.
During 2021, we repurchased and retired 17.6 million shares of our common stock (including 0.7 million shares to offset the dilutive impact of restricted stock units granted during the year), for approximately $1,026 million.
Dividend to holders of our Common Shares
We paid a quarterly dividend of $0.28 per common share for an annual dividend of $1.12 per share.
As part of our capital allocation strategy, the Board of Directors declared a quarterly dividend of $0.285 per share in the first quarter of 2023 with the intention to increase the annual dividend to $1.14 per share.
Other Liquidity and Capital Resource Activities
As part of our ongoing efforts to improve our cash flow and related liquidity, we work with suppliers to optimize our terms and conditions, including extending payment terms. We also facilitate a voluntary supply chain finance program (the "program") to provide certain of our suppliers with the opportunity to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. A third party administers the program; our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. We do not enter into agreements with any of the participating financial institutions in connection with the program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program.
All outstanding payments owed under the program are recorded within accounts payable in our consolidated balance sheets. The amounts owed to participating financial institutions under the program and included in accounts payable for our continuing operations were $29 million and $35$43 million at December 31, 20192022 and 2018,2021, respectively. We account for all payments made under the program as a reduction to our cash flows from operations and reported within our (decrease) increase in accounts payable and accrued liabilities, net, line within our consolidated statements of cash flows. The amounts settled through the program and paid to participating financial institutions were $164 million, $117$188 million and $186$220 million for our continuing operations during the years ended December 31, 2019, 2018,2022 and 2017,2021, respectively. A downgrade in our credit rating or changes in the financial markets could limit the financial institutions’ willingness to commit funds to, and participate in, the program. We do not believe such risk would have a material impact on our working capital or cash flows, as substantially all of our payments are made outside of the program.
We had cash and cash investments of approximately $697 million at December 31, 2019. Our cash and cash investments consist of overnight interest bearing money market demand accounts, time deposit accounts, and money market mutual funds containing government securities and treasury obligations. While we attempt to diversify these investments in a prudent manner to minimize risk, it is possible that future changes in the financial markets could affect the security or availability of these investments.
Of the $697 million and $552 million of cash and cash investments we held at December 31, 2019 and 2018, respectively, $297 million and $270 million, respectively, was held in our foreign subsidiaries. If these funds were needed for our operations in the U.S., their repatriation into the U.S. would not result in significant additional U.S. income tax or foreign withholding tax, as we have recorded such taxes on substantially all undistributed foreign earnings, except for those that are legally restricted.
We utilize derivative and hedging instruments to manage our exposure to currency fluctuations, primarily related to the European euro, British pound sterling, the Chinese renminbi and the U.S. dollar; occasionally, we have also used derivative and hedging instruments to manage our exposure to commodity cost fluctuations, primarily zinc and copper, and interest rate fluctuations, primarily related to debt issuances. We review our hedging program, derivative positions and overall risk management on a regular basis. We currently do not have any derivative instruments for which we have designated hedge accounting.
Our current ratio was 1.8 to 1 and 1.6 to 1 at December 31, 2019 and 2018, respectively. The increase in our current ratio is due primarily to the cash received from the divestiture of our Milgard business less cash used for the accelerated stock repurchase agreement and to repay and retire our 7.125% Notes due March 15, 2020.
Cash Flows
Significant sources and (uses) of cash infor the past three years ended December 31, 2022 and 2021 are summarized as follows, in millions: | | | | | | | | | | | |
| 2022 | | 2021 |
Net cash from operating activities | $ | 840 | | | $ | 930 | |
Retirement of notes | — | | | (1,326) | |
Purchase of Company common stock | (914) | | | (1,026) | |
Cash dividends paid | (258) | | | (211) | |
Dividends paid to noncontrolling interest | (68) | | | (43) | |
Capital expenditures | (224) | | | (128) | |
Proceeds from term loan | 500 | | | — | |
Payment of term loan | (300) | | | — | |
Debt extinguishment costs | — | | | (160) | |
Proceeds from the exercise of stock options | 1 | | | 5 | |
Acquisition of businesses, net of cash acquired | — | | | (57) | |
| | | |
| | | |
Issuance of notes, net of issuance costs | — | | | 1,481 | |
Employee withholding taxes paid on stock-based compensation | (17) | | | (15) | |
Proceeds from disposition of: | | | |
Businesses, net of cash disposed | — | | | 5 | |
Property and equipment | 1 | | | — | |
Financial investments | 1 | | | 171 | |
Payment of debt | (10) | | | (3) | |
Effect of exchange rate changes on cash and cash investments | (18) | | | (20) | |
Other, net | (8) | | | (3) | |
Cash decrease | $ | (474) | | | $ | (400) | |
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Net cash from operating activities | $ | 833 |
| | $ | 1,032 |
| | $ | 751 |
|
Retirement of notes | (201 | ) | | (114 | ) | | (535 | ) |
Purchase of Company common stock | (896 | ) | | (654 | ) | | (331 | ) |
Cash dividends paid | (144 | ) | | (134 | ) | | (129 | ) |
Dividends paid to noncontrolling interest | (42 | ) | | (89 | ) | | (35 | ) |
Capital expenditures | (162 | ) | | (219 | ) | | (173 | ) |
Debt extinguishment costs | (2 | ) | | — |
| | (104 | ) |
Acquisition of businesses, net of cash acquired | — |
| | (549 | ) | | (89 | ) |
Issuance of notes, net of issuance costs | — |
| | — |
| | 593 |
|
Employee withholding taxes paid on stock-based compensation | (23 | ) | | (42 | ) | | (33 | ) |
Proceeds from disposition of: | |
| | |
| | |
|
Businesses, net of cash disposed | 722 |
| | — |
| | 128 |
|
Property and equipment | 34 |
| | 14 |
| | 24 |
|
Financial investments | 1 |
| | 5 |
| | 7 |
|
Decrease in debt, net | (8 | ) | | (1 | ) | | (3 | ) |
Proceeds of short-term bank deposits, net | — |
| | 108 |
| | 112 |
|
Effect of exchange rate changes on cash and cash investments | 14 |
| | 4 |
| | 55 |
|
Other, net | 12 |
| | 4 |
| | (34 | ) |
Cash increase (decrease) | $ | 138 |
| | $ | (635 | ) | | $ | 204 |
|
Our working capital days were as follows: | | | | | | | | | | | |
| At December 31, |
| 2022 | | 2021 |
Receivable days | 53 | | | 51 | |
Inventory days | 80 | | | 85 | |
Accounts payable days | 68 | | | 66 | |
Working capital (receivables plus inventories, less accounts payable) as a percentage of net sales | 17.4 | % | | 16.0 | % |
|
| | | | | |
| At December 31, |
| 2019 | | 2018 |
Receivable days | 54 |
| | 54 |
|
Inventory days | 67 |
| | 71 |
|
Accounts Payable days | 68 |
| | 69 |
|
Working capital (receivables plus inventories, less accounts payable) as a percentage of net sales | 15.7 | % | | 15.8 | % |
Operating ActivitiesNet cash provided by operations of $833$840 million consisted primarily of net income adjusted for certain non-cash items, including depreciation and amortization expense of $159 million, stock-based compensation expense and amortization expense related to in-store displays, as well as employee withholding taxes paid on stock-based compensation, which is classified as a financing activity. These amounts werebenefited from operating profit, partially offset by the net gain on the sale of Milgardchanges in working capital, primarily lower accounts payable and UKWG as well as contributions to our defined-benefit pension plans.accrued liabilities balances.
Financing Activities
Net cash used for financing activities was $1,291$1,066 million, primarily due to $896$914 million for the repurchase and retirement of Company common stock (as part of our strategic initiative to drive shareholder value), $201 million for the early retirement of our 7.125% Notes due March 15, 2020, $144 million for the payment of cash dividends, $42 million for dividends paid to noncontrolling interests and $23 million for employee withholding taxes paid on stock-based compensation. These uses of cash were slightly offset by $27 million of proceeds from the exercise of stock options.
In September 2019, our Board of Directors authorized the repurchase, for retirement, of up to $2.0 billion of shares of our common stock in open-market transactions or otherwise, replacing the previous authorization established by our Board of Directors in 2017. During 2019, we repurchased and retired 20.1 million shares of our common stock (including 0.6 million shares repurchased to offset the dilutive impact of long-termrestricted stock awardsunits granted in 2019). At December 31, 2019, we had $1.5 billion remaining under2022), $300 million for the authorization. Consistent with past practice and as partpartial payment of our strategic initiative to drive shareholder value, we anticipate using approximately $1.2 billionthe 364-day term loan, $258 million for the payment of cash dividends, $68 million for share repurchases (including shares which will be purchaseddividends paid to noncontrolling interest and $17 million for employee withholding taxes paid on stock-based compensation. These uses of cash were partially offset any dilutionby $500 million in proceeds from long-term stock awards granted as part of our compensation programs) in 2020.the 364-day term loan.
Investing Activities
Net cash provided byused for investing activities was $582$230 million, primarily driven by $720$224 million of proceeds from the sale of Milgard, net of cash disposed, partially offset by $162 million for capital expenditures.
We continue to invest in our manufacturing and distribution operations to increase our productivity, improve customer service and support product innovation. Capital expenditures for 2019 were $162 million, compared with $219 million for 2018 and $173 million for 2017. For 2020, capital expenditures of our continuing operations, excluding any potential acquisitions, are expected to be approximately $150 million. Depreciation and amortization expense for 2019 totaled $159 million, compared with $156 million for 2018 and $127 million for 2017. For 2020, depreciation and amortization expense of our continuing operations, excluding any potential 2020 acquisitions, is expected to be approximately $140 million. Amortization expense totaled $27 million in 2019, compared with $24 million and $11 million in 2018 and 2017, respectively.
Costs of environmental responsibilities and compliance with existing environmental laws and regulations have not had, nor do we expect them to have, a material effect on our capital expenditures, financial position or results of operations.
We believe that our present cash balance and cash flows from operations, and our ability to utilize our Credit Agreement are sufficient to fund our near-term working capital and other investment needs. We believe that our longer-term working capital and other general corporate requirements will be satisfied through cash flows from operations and, to the extent necessary, from bank borrowings and future financial market activities.
Consolidated Results of Operations
We report our financial results in accordance with GAAP in the United States. However, we believe that certain non-GAAP performance measures and ratios, used in managing the business, may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, our reported results under GAAP.
The following discussion of consolidated results of operations compares each respective period to the same period of the immediately preceding year.
Sales and Operations
Net sales for 2019 were $6.7 billion, which increased one percent compared to 2018. Excluding acquisitions and the effect of currency translation, net sales increased one percent. The following table reconciles reported net sales to net sales excluding acquisitions and the effect of currency translation, in millions:
|
| | | | | | | |
| Year Ended December 31 |
| 2019 | | 2018 |
Net sales, as reported | $ | 6,707 |
| | $ | 6,654 |
|
Acquisitions | (65 | ) | | — |
|
Net sales, excluding acquisitions | 6,642 |
| | 6,654 |
|
Currency translation | 77 |
| | — |
|
Net sales, excluding acquisitions and the effect of currency translation | $ | 6,719 |
| | $ | 6,654 |
|
Net sales for 2019 increased one percent primarily due to increased net selling prices of our plumbing products and paints and other coating products, which, in aggregate, increased sales by two percent. The acquisition of Kichler in March 2018 increased sales by one percent. Net sales for 2019 were negatively impacted by decreased sales volume of our lighting products which decreased sales by one percent. Foreign currency translation also decreased sales by one percent.
Net sales for 2018 increased 11 percent primarily due to the acquisition of Kichler in March 2018 and Mercury Plastics, Inc. ("Mercury") in December 2017, which increased sales by six percent. Net sales were also positively impacted by increased sales volume of plumbing products, which increased sales by three percent, and net selling price increases of paints and other coating products, and plumbing products, which, in aggregate, increased sales by two percent. Foreign currency translation also increased sales by one percent. Net sales for 2018 were negatively affected by the divestiture of our Arrow Fastener Co., LLC ("Arrow") and Moores Furniture Group Limited ("Moores") businesses, which, in aggregate, decreased sales by one percent.
Our gross profit margins were 35.4 percent, 35.0 percent and 36.9 percent in 2019, 2018 and 2017, respectively. The 2019 gross profit margin was positively impacted by increased net selling prices and the absence of the recognition of the inventory step up adjustment established as part of the acquisition of Kichler. Such increases were partially offset by an increase in commodity costs including tariffs. The 2018 gross profit margin was negatively impacted by an increase in commodity costs, the recognition of the inventory step up adjustment established as a part of the acquisition of Kichler, an increase in other expenses (such as salaries and logistics costs) and unfavorable sales mix. These negative impacts were partially offset by an increase in net selling prices, increased sales volume, and the benefits associated with cost savings initiatives.
Selling, general and administrative expenses as a percent of sales were 19.0 percent in 2019 compared with 18.8 percent in 2018 and 19.8 percent in 2017. The increase in selling, general, and administrative expenses as a percentage of sales in 2019 was primarily driven by an increase in marketing spend. The decrease in selling, general, and administrative expenses as a percentage of sales in 2018 was driven by leverage of fixed expenses, due primarily to increased sales volume and improved cost control.
The following table reconciles reported operating profit to operating profit, as adjusted to exclude certain items, dollars in millions:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Operating profit, as reported | $ | 1,088 |
| | $ | 1,077 |
| | $ | 1,029 |
|
Rationalization charges | 13 |
| | 9 |
| | 2 |
|
Kichler inventory step up adjustment | — |
| | 40 |
| | — |
|
Impairment charge for other intangible assets | 9 |
| | — |
| | — |
|
Operating profit, as adjusted | $ | 1,110 |
| | $ | 1,126 |
| | $ | 1,031 |
|
Operating profit margins, as reported | 16.2 | % | | 16.2 | % | | 17.1 | % |
Operating profit margins, as adjusted | 16.5 | % | | 16.9 | % | | 17.1 | % |
Operating profit in 2019 was positively affected by increased net selling prices, the absence of the recognition of the Kichler inventory step up adjustment and benefits associated with cost savings initiatives. These positive impacts were partially offset by an increase in commodity costs including tariffs and an increase in other expenses (such as salaries). Operating profit in 2018 was positively affected by increased net selling prices, increased sales volume, and benefits associated with cost savings initiatives. These positive impacts were partially offset by an increase in commodity costs, the recognition of the Kichler inventory step up adjustment and an increase in other expenses (such as salaries, logistics costs, and ERP costs).
Other Income (Expense), Net
Other, net, for 2019 included $21 million of net periodic pension and post-retirement benefit cost, partially offset by $2 million of realized foreign currency transaction gains and $1 million of earnings related to equity method investments.
Other, net, for 2018 included $14 million of net periodic pension and post-retirement benefit cost and $8 million of realized foreign currency transaction losses. These expenses were partially offset by $3 million of earnings related to equity method investments and $1 million related related to distributions from private equity funds.
Interest expense was $159 million, $156 million and $279 million in 2019, 2018 and 2017, respectively. The decrease in interest expense from 2017 to 2018 is primarily the result of a loss on debt extinguishment of $107 million, which was recorded as additional interest expense in connection with the early retirement of debt in 2017, the discharge of indebtedness in 2018 and refinancing certain debt at more favorable interest rates in 2017.
Income and Income Per Common Share from Continuing Operations (Attributable to Masco Corporation)
Income and diluted income per common share from continuing operations for 2019 were $639 million and $2.20 per common share, respectively. Income and diluted income per common share from continuing operations for 2018 were $636 million and $2.05 per common share, respectively. Income and diluted income per common share from continuing operations for 2017 were $426 million and $1.33 per common share, respectively.
Our effective tax rate was 25 percent, 24 percent and 34 percent in 2019, 2018 and 2017, respectively. U.S. tax reform, which generally became effective in 2018, reduced the U.S. Federal tax rate from 35 percent to 21 percent. Additionally, effective January 1, 2017 we adopted ASU 2016-09, which requires the tax effects related to employee stock-based payments to be recorded to income tax expense, thus increasing the volatility in our effective tax rate. Our normalized tax rate was 26 percent for both 2019 and 2018 and 34 percent for 2017.
Our effective tax rate in 2019 and 2018 was lower than our normalized of 26 percent due primarily to a $3 million income tax benefit from a change in judgment regarding the realizability of certain deferred tax assets in our state and foreign jurisdictions recognized in 2019 and a $4 million and $14 million tax benefit from stock-based compensation payments recognized in 2019 and 2018, respectively.
The 2017 effective tax rate was impacted by divestiture of businesses with no tax impact. This impact was offset by a $17 million net tax benefit from the impact of changes in U.S. Federal tax law and a $18 million tax benefit from stock-based compensation payments recognized in 2017.
Refer to Note R to the consolidated financial statements for additional information.
Outlook for the Company
We continue to execute our long-term growth strategies by leveraging our strong brand portfolio, industry-leading positions and Masco Operating System, our methodology to drive growth and productivity. We remain confident in the fundamentals of our business and will continue to execute on our strategies to create shareholder value. We believe that our strong financial position and cash flow generation, together with our current strategy of investing in our industry-leading branded building products, our continued focus on innovation and our commitment to operational excellence, the active management of our portfolio and disciplined capital allocation, will allow us to drive long-term growth and create value for shareholders. Additionally, we completed the divestitures of Milgard and UKWG, as well as, entered into a definitive agreement to sell our Masco Cabinetry business. The closing of the sale of our Masco Cabinetry business is expected during the first quarter of 2020, subject to customary closing conditions.
Business Segment and Geographic Area Results
The following table sets forth our net sales and operating profit information for our continuing operations by business segment and geographic area, dollars in millions.
|
| | | | | | | | | | | | | | | | | |
| | | | | | | Percent Change |
| 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 2018 vs. 2017 |
Net Sales: | |
| | |
| | |
| | |
| | |
|
Plumbing Products | $ | 3,984 |
| | $ | 3,998 |
| | $ | 3,732 |
| | — | % | | 7 | % |
Decorative Architectural Products | 2,723 |
| | 2,656 |
| | 2,206 |
| | 3 | % | | 20 | % |
Total | $ | 6,707 |
| | $ | 6,654 |
| | $ | 5,938 |
| | 1 | % | | 12 | % |
North America | $ | 5,328 |
| | $ | 5,208 |
| | $ | 4,568 |
| | 2 | % | | 14 | % |
International, principally Europe | 1,379 |
| | 1,446 |
| | 1,370 |
| | (5 | )% | | 6 | % |
Total | $ | 6,707 |
| | $ | 6,654 |
| | $ | 5,938 |
| | 1 | % | | 12 | % |
Divestitures not included in discontinued operations (A) | — |
| | — |
| | 76 |
| | | | |
Total net sales | $ | 6,707 |
| | $ | 6,654 |
| | $ | 6,014 |
| | 1 | % | | 11 | % |
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Operating Profit: (B) | |
| | |
| | |
|
Plumbing Products | $ | 708 |
| | $ | 715 |
| | $ | 702 |
|
Decorative Architectural Products | 480 |
| | 456 |
| | 438 |
|
Total | $ | 1,188 |
| | $ | 1,171 |
| | $ | 1,140 |
|
| | | | | |
North America | $ | 987 |
| | $ | 954 |
| | $ | 924 |
|
International, principally Europe | 201 |
| | 217 |
| | 216 |
|
Total | 1,188 |
| | 1,171 |
| | 1,140 |
|
General corporate expense, net | (100 | ) | | (94 | ) | | (105 | ) |
Divestitures not included in discontinued operations (A) | — |
| | — |
| | (6 | ) |
Total operating profit | $ | 1,088 |
| | $ | 1,077 |
| | $ | 1,029 |
|
| |
(A) | Divestitures not included in discontinued operations, refer to Note P to the consolidated financial statements for additional information. |
| |
(B) | Before general corporate expense, net; refer to Note P to the consolidated financial statements for additional information. |
Business Segment Results Discussion
Changes in operating profit in the following Business Segment and Geographic Area Results discussion exclude general corporate expense, net, and compares each respective period to the same period of the immediately preceding year.
Description of changes to sales and operating profit between 2018 and 2017 for the Plumbing Products and Decorative Architectural Products segments were excluded as there were no changes from what was disclosed in the December 31, 2018 Form 10-K.
Plumbing Products
Sales
Net sales in the Plumbing Products segment were flat in 2019. Net selling price increases of North American operations increased sales by two percent. This increase was offset by foreign currency translation, which decreased sales by two percent.
Operating Results
Operating profit in the Plumbing Products segment in 2019 was negatively impacted by an increase in other expenses (such as salaries, marketing spend and severance charges), an increase in commodity costs including tariffs, unfavorable foreign currency translation, and unfavorable mix. These negative impacts were partially offset by increased net selling prices and benefits associated with cost savings initiatives.
Decorative Architectural Products
Sales
Net sales of Decorative Architectural Products increased three percent in 2019. The acquisition of Kichler increased sales by two percent. Net selling price increases of paints and other coating products and to a lesser extent, lighting products and builders' hardware also increased sales. Such increases were partially offset by lower sales volume, primarily related to our lighting products.
Operating Results
Operating profit in the Decorative Architectural Products segment in 2019 was positively impacted by increased net selling prices, the absence of the recognition of the Kichler inventory step up adjustment, and the benefits associated with cost savings initiatives. These positive impacts were partially offset by an increase in commodity costs including tariffs, lower sales volume, an increase in strategic growth investments and a non-cash impairment charge related to an other indefinite-lived intangible asset for a trademark associated with lighting products.
Business Rationalizations and Other Initiatives
Over the last several years, we have taken several actions focused on the strategic rationalization of our businesses including business consolidations, plant closures, headcount reductions and other cost savings initiatives. In 2019, 2018 and 2017, we incurred net pre-tax costs and charges related to these initiatives of $13 million, $9 million, and $2 million, respectively.
We continue to realize the benefits of our business rationalizations and continuous improvement initiatives across our enterprise and expect to identify additional opportunities to improve our business operations, although we do not anticipate that the related costs will be as significant as they have been historically.
During 2019, 2018 and 2017, our Plumbing Products segment incurred costs and charges of $13 million, $9 million and $2 million, respectively. The 2019 costs primarily related to severance and plant consolidation costs in North America. The 2018 costs primarily related to plant closure costs in North America.
Geographic Area Results Discussion
North America
Sales
North American net sales in 2019 increased two percent. Net selling price increases of plumbing products and paints and other coating products, in aggregate, increased sales by two percent. The acquisition of Kichler in March 2018 increased sales by one percent. Such increases were partially offset by lower sales volume of lighting products, which decreased sales by one percent.
North American net sales in 2018 increased 14 percent. Net sales were positively impacted by the acquisitions of Kichler and Mercury which, in aggregate, increased sales by eight percent. Net sales were also positively impacted by increased sales volume of plumbing products, which increased sales by four percent, and increased net selling prices of paints and other coating products, which increased sales by two percent.
Operating Results
Operating profit from North American operations in 2019 was positively affected by net selling price increases of plumbing products and paints and other coating products, the absence of the Kichler inventory step-up adjustment, and benefits associated with cost savings initiatives. The positive impacts were partially offset by increased commodity costs and lower volume.
Operating profit from North American operations in 2018 was positively affected by increased net selling prices, higher sales volume, and the benefits associated with cost savings initiatives. These positive impacts were partially offset by an increase in commodity costs, the recognition of the Kichler inventory step up adjustment and an increase in other expenses (such as salaries, logistics costs, and ERP costs).
International, Principally Europe
Sales
Net sales from International operations in 2019 decreased five percent. In local currencies (including sales in foreign currencies outside their respective functional currencies), net sales were flat with favorable net selling prices of plumbing products being offset by unfavorable sales mix.
Net sales from International operations in 2018 increased six percent. In local currencies, net sales increased two percent, primarily due to higher sales volume of plumbing products, which increased sales by two percent, and net selling price increases, which increased sales by two percent. Such increases were partially offset by an unfavorable sales mix, which decreased sales by one percent.
Operating Results
Operating profit from International operations in 2019 was negatively impacted by other expenses (such as salaries and marketing spend), unfavorable foreign currency translation and an increase in commodity costs, partially offset by increased net selling prices.
Operating profit from International operations in 2018 was positively impacted by increased net selling prices, higher sales volume and favorable foreign currency translation, mostly offset by an increase in other expenses (such as salaries and logistic costs), an increase in commodity costs and unfavorable sales mix.
Other Matters
Commitments and Contingencies
Litigation
Information regarding our legal proceedings is set forth in Note TU to the consolidated financial statements, which is incorporated herein by reference.
Other Commitments
We enter into contracts, which include reasonable and customary indemnifications that are standard for the industries in which we operate. Such indemnifications include claims made against builders by homeowners for issues relating to our products and workmanship. In conjunction with divestitures and other transactions, we occasionally provide reasonable and customary indemnifications. We have never had to paynot paid a material amount related to these indemnifications, and we evaluate the probability that amounts may be incurred and record an estimated liability when probable and reasonably estimable.
Contractual Obligations
The following table provides payment obligations related to current contracts at December 31, 2022, in millions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| 2023 | | 2024-2025 | | 2026-2027 | | Beyond 2027 | | Other | | Total |
Debt (A) | $ | 205 | | | $ | 6 | | | $ | 304 | | | $ | 2,644 | | | $ | — | | | $ | 3,159 | |
Interest (A) | 101 | | | 194 | | | 192 | | | 738 | | | — | | | 1,225 | |
Operating leases | 50 | | | 89 | | | 68 | | | 174 | | | — | | | 381 | |
Currently payable income taxes | 48 | | | — | | | — | | | — | | | — | | | 48 | |
Purchase commitments (B) | 438 | | | 64 | | | 35 | | | — | | | — | | | 537 | |
Uncertain tax positions, including interest and penalties (C) | — | | | — | | | — | | | — | | | 92 | | | 92 | |
Total | $ | 842 | | | $ | 353 | | | $ | 599 | | | $ | 3,556 | | | $ | 92 | | | $ | 5,442 | |
______________________________(A)We assume that all debt would be held to maturity. Amounts include finance lease obligations.
(B)Excludes contracts that do not require volume commitments and open or pending purchase orders.
(C)Due to the high degree of uncertainty regarding the timing of future cash outflows associated with uncertain tax positions, we are unable to make a reasonable estimate for the year in which cash settlements may occur with applicable tax authorities.
Refer to Note N to the consolidated financial statements for defined-benefit pension plan obligations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that affect or could have affected the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We regularly review our estimates and assumptions, which are based upon historical experience, as well as current economic conditions and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities and related disclosures, and future revenues and expenses, that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.
Note A to the consolidated financial statements includes our accounting policies, estimates and methods used in the preparation of our consolidated financial statements.
We believe that the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue as control of our products is transferred to our customers, which is generally at the time of shipment or upon delivery based on the contractual terms with our customers. We provide customer programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. These customer programs and incentives are considered variable consideration. We include in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period.
Goodwill and Other Intangible Assets
We record the excess of purchase cost over the fair value of net tangible assets of acquired companies as goodwill or other identifiable intangible assets. In the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, we complete the impairment testing of goodwill utilizing a discounted cash flow method. We selected the discounted cash flow methodology because we believe that it is comparable to what would be used by market participants. We have defined our reporting units and completed the impairment testing of goodwill at the operating segment level.
Determining market values using a discounted cash flow method requires us to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in different outcomes. In estimating future cash flows, we rely on internally generated five-year forecasts for sales and operating profits, and, currently, a two percent to three percent long-term assumed annual growth rate of cash flows for periods after the five-year forecast. We generally develop these forecasts based upon, among other things, recent sales data for existing products, planned timing of new product launches, estimated repair and remodel activity and, to a lesser extent, estimated housing starts. Our assumptions included U.S. and Eurozone Gross Domestic Product growing at approximately 1.3 percent and 1.5 percent, respectively, in 2023, and 2.0 percent and 1.5 percent, respectively, per annum over the remainder of the five-year forecast.
We utilize our weighted average cost of capital of approximately 8.75 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2022, based upon our assessment of the risks impacting each of our businesses, we applied a risk premium to increase the discount rate to a range of 10.25 percent to 12.75 percent for our reporting units.
If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized to the extent that a reporting unit's recorded carrying value exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.
In the fourth quarter of 2022, we recognized a $19 million non-cash goodwill impairment charge related to a reporting unit within our Decorative Architectural Products segment due to competitive market conditions, higher inflationary costs and increased cost of capital in our lighting business. There is no remaining goodwill associated with the impaired reporting unit. A 10 percent decrease in the estimated fair value of our other reporting units would not have resulted in any additional goodwill impairment.
We review our other indefinite-lived intangible assets for impairment annually, in the fourth quarter, or as events occur or circumstances change that indicate the assets may be impaired without regard to the business unit. Potential impairment is identified by comparing the fair value of an other indefinite-lived intangible asset to its carrying value. We utilize a relief-from-royalty model to estimate the fair value of other indefinite-lived intangible assets. We consider the implications of both external (e.g., market growth, competition and local economic conditions) and internal (e.g., product sales and expected product growth) factors and their potential impact on cash flows related to the intangible asset in both the near- and long-term. We also consider the profitability of the business, among other factors, to determine the royalty rate for use in the impairment assessment.
We utilize our weighted average cost of capital of approximately 8.75 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2022, based upon our assessment of the risks impacting each of our businesses and the nature of the other indefinite-lived intangible assets (i.e., trade name), we applied a risk premium to increase the discount rate to a range of 11.25 percent to 13.75 percent for our other indefinite-lived intangible assets.
If the carrying amount of an other indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized to the extent that an other indefinite-lived intangible asset's recorded carrying value exceeds its fair value, not to exceed the carrying amount of the other indefinite-lived intangible asset.
In the fourth quarter of 2022, we recognized a $7 million non-cash impairment charge related to a registered trademark within our Decorative Architectural Products segment due to competitive market conditions and increased cost of capital in our lighting business. As of December 31, 2022, the impaired other indefinite-lived intangible asset had a remaining net carrying value of $43 million. A 10 percent decrease in the estimated fair value of our other indefinite-lived intangibles assets would not have resulted in an impairment for any of our other indefinite-lived intangible assets.
Refer to Note H for additional information.
Income Taxes
We record deferred taxes on the future tax consequences of differences between the financial statement carrying value of our assets and liabilities and their respective tax basis. The realization of deferred tax assets depends on sufficient sources of taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains and projected future taxable income.
If, based upon all available evidence, both positive and negative, it is more likely than not such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to evidence that is objectively verifiable such as cumulative losses in recent years, however, some evidence may be based on estimates and assumptions regarding potential sources of future taxable income. Changes in these estimates and assumptions may result in a change in judgment regarding the realizability of deferred tax assets.
Refer to Note S for additional information.
Recently Adopted and Issued Accounting Pronouncements
Refer to Note A to the consolidated financial statements for discussion of recently adopted and issued accounting pronouncements, which is incorporated herein by reference.
Contractual Obligations
The following table provides payment obligations related to current contracts at December 31, 2019, in millions:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| 2020 | | 2021-2022 | | 2023-2024 | | Beyond 2024 | | Other | | Total |
Debt (A) | $ | 2 |
| | $ | 731 |
| | $ | 5 |
| | $ | 2,052 |
| | $ | — |
| | $ | 2,790 |
|
Interest (A) | 134 |
| | 236 |
| | 200 |
| | 576 |
| | — |
| | 1,146 |
|
Operating leases | 45 |
| | 70 |
| | 37 |
| | 101 |
| | — |
| | 253 |
|
Currently payable income taxes | 10 |
| | — |
| | — |
| | — |
| | — |
| | 10 |
|
Private equity funds (B) | — |
| | — |
| | — |
| | — |
| | 4 |
| | 4 |
|
Purchase commitments (C) | 240 |
| | 1 |
| | — |
| | — |
| | — |
| | 241 |
|
Uncertain tax positions, including interest and penalties (D) | — |
| | — |
| | — |
| | — |
| | 73 |
| | 73 |
|
Total | $ | 431 |
| | $ | 1,038 |
| | $ | 242 |
| | $ | 2,729 |
| | $ | 77 |
| | $ | 4,517 |
|
| |
(A) | We assume that all debt would be held to maturity. Amounts include finance lease obligations. |
| |
(B) | There is no schedule for the capital commitments to the private equity funds; accordingly, we are unable to make a reasonable estimate as to when capital commitments may be paid. |
| |
(C) | Excludes contracts that do not require volume commitments and open or pending purchase orders. |
| |
(D) | Due to the high degree of uncertainty regarding the timing of future cash outflows associated with uncertain tax positions, we are unable to make a reasonable estimate for the year in which cash settlements may occur with applicable tax authorities. |
Refer to Note M to the consolidated financial statements for defined-benefit pension plan obligations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We have considered the provisions of accounting guidance regarding disclosure of accounting policies for derivative financial instruments and disclosure of quantitative and qualitative information about market risk inherent in derivative financial instruments and other financial instruments.
We are exposed to the impact of changes in interest rates and foreign currency exchange rates, particularly changes between the U.S. dollar and the European euro, British pound andsterling, Canadian dollar, Chinese renminbi, and Mexican peso, and to market price fluctuations related to our financial investments. We have insignificant involvement with derivative financial instruments and use such instruments to the extent necessary to manage exposure to foreign currency fluctuations.
At December 31, 2019,2022, we performed sensitivity analyses to assess the potential loss in the fair values of market risk sensitive instruments resulting from a hypothetical change of 10 percent in foreign currency exchange rates, a 10 percent decline in the market value of our long-term investments, or a 100 basis point change in interest rates. Based upon the analyses performed, such changes would not be expected to materially affect our consolidated financial position, results of operations or cash flows.
| |
Item 8. | Financial Statements and Supplementary Data. |
Item 8.Financial Statements and Supplementary Data.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
We assessed the effectiveness of our internal control over financial reporting as of December 31, 20192022 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control – Integrated Framework (2013). Based on this assessment, we have determined that our internal control over financial reporting was effective as of December 31, 2019.2022.
PricewaterhouseCoopers LLP (PCAOB ID 238), an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2019,2022, as stated in their report, which is presented herein. Their report expressed an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 20192022 and expressed an unqualified opinion on our 20192022 consolidated financial statements. This report appears under 'Item 8. Financial Statements and Supplementary Data'is included herein under the heading "Report of Independent Registered Public Accounting Firm."
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Masco Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Masco Corporation and its subsidiaries (the “Company”) as of December 31, 20192022 and 2018,2021, and the related consolidated statements of operations, of comprehensive income (loss), of shareholders'shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019,2022, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework(2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessments
As described in Notes A and H to the consolidated financial statements, the Company’s consolidated goodwill balance was $509$537 million as of December 31, 2019.2022. Management performs an annual impairment test of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would indicate the carrying value of goodwill may be impaired. In connection with its annual assessment, management recorded a $19 million non-cash goodwill impairment charge within their Decorative Architectural Products segment. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value, including goodwill. Management estimates fair value by using a discounted cash flow model or a market approach.model. The determination of fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasted sales and operating profits, and the discount rate.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments is a critical audit matter are there was(i) the significant judgment by management when developing the fair value measurements of the reporting units. This in turn led tounits; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s discounted cash flow model, including significant assumptions related to forecasted sales, and the discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.as applicable.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the Company’s reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and, evaluating the significant assumptions used by management includingrelated to forecasted sales, and the discount rates. Professionals with specialized skill and knowledge were used to assist in evaluating the Company’s discount rate assumptions.as applicable. Evaluating management’s assumptionassumptions related to forecasted sales involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of the reporting units, (ii) the consistency with external market and industry data as it relates to forecasted sales, and (iii) whether they were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 11, 20209, 2023
We have served as the Company’s auditor since 1959.
Financial Statements and Supplementary Data
MASCO CORPORATION and Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 20192022 and 20182021
(In Millions, Except Share Data) | | | | | | | | | | | |
| 2022 | | 2021 |
ASSETS |
Current assets: | | | |
Cash and cash investments | $ | 452 | | | $ | 926 | |
| | | |
Receivables | 1,149 | | | 1,171 | |
Inventories | 1,236 | | | 1,216 | |
Prepaid expenses and other | 109 | | | 109 | |
Total current assets | 2,946 | | | 3,422 | |
Property and equipment, net | 975 | | | 896 | |
Goodwill | 537 | | | 568 | |
Other intangible assets, net | 350 | | | 388 | |
Operating lease right-of-use assets | 266 | | | 187 | |
Other assets | 113 | | | 114 | |
Total assets | $ | 5,187 | | | $ | 5,575 | |
| | | |
LIABILITIES |
Current liabilities: | | | |
Accounts payable | $ | 877 | | | $ | 1,045 | |
Notes payable | 205 | | | 10 | |
Accrued liabilities | 807 | | | 884 | |
Total current liabilities | 1,889 | | | 1,939 | |
Long-term debt | 2,946 | | | 2,949 | |
Noncurrent operating lease liabilities | 255 | | | 172 | |
Other liabilities | 339 | | | 437 | |
Total liabilities | $ | 5,429 | | | $ | 5,497 | |
| | | |
Commitments and contingencies (Note U) | | | |
Redeemable noncontrolling interest | 20 | | | 22 | |
| | | |
EQUITY |
Masco Corporation's shareholders' equity: | | | |
Common shares, par value $1 per share Authorized shares: 1,400,000,000; Issued and outstanding: 2022 – 225,300,000; 2021 – 241,200,000 | 225 | | | 241 | |
Preferred shares authorized: 1,000,000; Issued and outstanding: 2022 and 2021 – None | — | | | — | |
Paid-in capital | 16 | | | — | |
Retained deficit | (947) | | | (652) | |
Accumulated other comprehensive income | 226 | | | 232 | |
Total Masco Corporation's shareholders' deficit | (480) | | | (179) | |
Noncontrolling interest | 218 | | | 235 | |
Total equity | (262) | | | 56 | |
Total liabilities and equity | $ | 5,187 | | | $ | 5,575 | |
|
| | | | | | | |
| 2019 | | 2018 |
ASSETS | |
| | |
|
Current Assets: | |
| | |
|
Cash and cash investments | $ | 697 |
| | $ | 552 |
|
Receivables | 997 |
| | 990 |
|
Inventories | 754 |
| | 798 |
|
Prepaid expenses and other | 90 |
| | 84 |
|
Assets held for sale | 173 |
| | 342 |
|
Total current assets | 2,711 |
| | 2,766 |
|
Property and equipment, net | 878 |
| | 885 |
|
Goodwill | 509 |
| | 511 |
|
Other intangible assets, net | 259 |
| | 288 |
|
Operating lease right-of-use assets | 176 |
| | — |
|
Other assets | 139 |
| | 90 |
|
Assets held for sale | 355 |
| | 853 |
|
Total assets | $ | 5,027 |
| | $ | 5,393 |
|
| | | |
LIABILITIES | | | |
Current Liabilities: | | | |
Accounts payable | $ | 697 |
| | $ | 736 |
|
Notes payable | 2 |
| | 8 |
|
Accrued liabilities | 700 |
| | 645 |
|
Liabilities held for sale | 149 |
| | 295 |
|
Total current liabilities | 1,548 |
| | 1,684 |
|
Long-term debt | 2,771 |
| | 2,971 |
|
Other liabilities | 751 |
| | 549 |
|
Liabilities held for sale | 13 |
| | 120 |
|
Total liabilities | 5,083 |
| | 5,324 |
|
| | | |
Commitments and contingencies (Note T) |
| |
|
| | | |
EQUITY | | | |
Masco Corporation's shareholders' equity: | | | |
Common shares, par value $1 per share Authorized shares: 1,400,000,000; Issued and outstanding: 2019 – 275,600,000; 2018 – 293,900,000 | 276 |
| | 294 |
|
Preferred shares authorized: 1,000,000; Issued and outstanding: 2019 and 2018 – None | — |
| | — |
|
Paid-in capital | — |
| | — |
|
Retained deficit | (332 | ) | | (278 | ) |
Accumulated other comprehensive loss | (179 | ) | | (127 | ) |
Total Masco Corporation's shareholders' deficit | (235 | ) | | (111 | ) |
Noncontrolling interest | 179 |
| | 180 |
|
Total equity | (56 | ) | | 69 |
|
Total liabilities and equity | $ | 5,027 |
| | $ | 5,393 |
|
See notes to consolidated financial statements.
3436
MASCO CORPORATION and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2019, 20182022, 2021 and 20172020
(In Millions, Except Per Common Share Data)
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Net sales | $ | 6,707 |
| | $ | 6,654 |
| | $ | 6,014 |
|
Cost of sales | 4,336 |
| | 4,327 |
| | 3,794 |
|
Gross profit | 2,371 |
| | 2,327 |
| | 2,220 |
|
Selling, general and administrative expenses | 1,274 |
| | 1,250 |
| | 1,191 |
|
Impairment charge for other intangible assets | 9 |
| | — |
| | — |
|
Operating profit | 1,088 |
| | 1,077 |
| | 1,029 |
|
Other income (expense), net: | |
| | |
| | |
|
Interest expense | (159 | ) | | (156 | ) | | (279 | ) |
Other, net | (15 | ) | | (14 | ) | | (32 | ) |
| (174 | ) | | (170 | ) | | (311 | ) |
Income from continuing operations before income taxes | 914 |
| | 907 |
| | 718 |
|
Income tax expense | 230 |
| | 221 |
| | 245 |
|
Income from continuing operations | 684 |
| | 686 |
| | 473 |
|
Income from discontinued operations, net | 296 |
| | 98 |
| | 107 |
|
Net income | 980 |
| | 784 |
| | 580 |
|
Less: Net income attributable to noncontrolling interest | 45 |
| | 50 |
| | 47 |
|
Net income attributable to Masco Corporation | $ | 935 |
| | $ | 734 |
| | $ | 533 |
|
| | | | | |
Income per common share attributable to Masco Corporation: | | |
| | |
|
Basic: | |
| | |
| | |
|
Income from continuing operations | $ | 2.21 |
| | $ | 2.06 |
| | $ | 1.34 |
|
Income from discontinued operations, net | 1.03 |
| | 0.32 |
| | 0.34 |
|
Net income | $ | 3.24 |
| | $ | 2.38 |
| | $ | 1.68 |
|
Diluted: | |
| | |
| | |
|
Income from continuing operations | $ | 2.20 |
| | $ | 2.05 |
| | $ | 1.33 |
|
Income from discontinued operations, net | 1.02 |
| | 0.32 |
| | 0.33 |
|
Net income | $ | 3.22 |
| | $ | 2.37 |
| | $ | 1.66 |
|
| | | | | |
Amounts attributable to Masco Corporation: | |
| | |
| | |
|
Income from continuing operations | $ | 639 |
| | $ | 636 |
| | $ | 426 |
|
Income from discontinued operations, net | 296 |
| | 98 |
| | 107 |
|
Net income | $ | 935 |
| | $ | 734 |
| | $ | 533 |
|
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Net sales | $ | 8,680 | | | $ | 8,375 | | | $ | 7,188 | |
Cost of sales | 5,967 | | | 5,512 | | | 4,601 | |
Gross profit | 2,713 | | | 2,863 | | | 2,587 | |
Selling, general and administrative expenses | 1,390 | | | 1,413 | | | 1,292 | |
| | | | | |
Impairment charges for goodwill and other intangible assets | 26 | | | 45 | | | — | |
Operating profit | 1,297 | | | 1,405 | | | 1,295 | |
Other income (expense), net: | | | | | |
Interest expense | (108) | | | (278) | | | (144) | |
Other, net | 4 | | | (439) | | | (20) | |
| (104) | | | (717) | | | (164) | |
Income from continuing operations before income taxes | 1,193 | | | 688 | | | 1,131 | |
Income tax expense | 288 | | | 210 | | | 269 | |
Income from continuing operations | 905 | | | 478 | | | 862 | |
Income from discontinued operations, net | — | | | — | | | 414 | |
Net income | 905 | | | 478 | | | 1,276 | |
Less: Net income attributable to noncontrolling interest | 61 | | | 68 | | | 52 | |
Net income attributable to Masco Corporation | $ | 844 | | | $ | 410 | | | $ | 1,224 | |
| | | | | |
Income per common share attributable to Masco Corporation: | | | | |
Basic: | | | | | |
Income from continuing operations | $ | 3.65 | | | $ | 1.63 | | | $ | 3.05 | |
Income from discontinued operations, net | — | | | — | | | 1.55 | |
Net income | $ | 3.65 | | | $ | 1.63 | | | $ | 4.60 | |
Diluted: | | | | | |
Income from continuing operations | $ | 3.63 | | | $ | 1.62 | | | $ | 3.04 | |
Income from discontinued operations, net | — | | | — | | | 1.55 | |
Net income | $ | 3.63 | | | $ | 1.62 | | | $ | 4.59 | |
| | | | | |
Amounts attributable to Masco Corporation: | | | | | |
Income from continuing operations | $ | 844 | | | $ | 410 | | | $ | 810 | |
Income from discontinued operations, net | — | | | — | | | 414 | |
Net income | $ | 844 | | | $ | 410 | | | $ | 1,224 | |
See notes to consolidated financial statements.
3537
MASCO CORPORATION and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2019, 20182022, 2021 and 20172020
(In Millions)
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Net income | $ | 980 |
| | $ | 784 |
| | $ | 580 |
|
Less: Net income attributable to noncontrolling interest | 45 |
| | 50 |
| | 47 |
|
Net income attributable to Masco Corporation | $ | 935 |
| | $ | 734 |
| | $ | 533 |
|
Other comprehensive (loss) income, net of tax (Note O): | |
| | |
| | |
|
Cumulative translation adjustment | $ | 6 |
| | $ | (31 | ) | | $ | 133 |
|
Interest rate swaps | 2 |
| | 2 |
| | 3 |
|
Pension and other post-retirement benefits | (64 | ) | | 9 |
| | 63 |
|
Other comprehensive (loss) income, net of tax | (56 | ) | | (20 | ) | | 199 |
|
Less: Other comprehensive (loss) income attributable to the noncontrolling interest: | |
| | |
| | |
|
Cumulative translation adjustment | $ | (1 | ) | | $ | (15 | ) | | $ | 28 |
|
Pension and other post-retirement benefits | (3 | ) | | (2 | ) | | 1 |
|
| (4 | ) | | (17 | ) | | 29 |
|
Other comprehensive (loss) income attributable to Masco Corporation | $ | (52 | ) | | $ | (3 | ) | | $ | 170 |
|
Total comprehensive income | $ | 924 |
| | $ | 764 |
| | $ | 779 |
|
Less: Total comprehensive income attributable to noncontrolling interest | 41 |
| | 33 |
| | 76 |
|
Total comprehensive income attributable to Masco Corporation | $ | 883 |
| | $ | 731 |
| | $ | 703 |
|
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Net income | $ | 905 | | | $ | 478 | | | $ | 1,276 | |
Less: Net income attributable to noncontrolling interest | 61 | | | 68 | | | 52 | |
Net income attributable to Masco Corporation | $ | 844 | | | $ | 410 | | | $ | 1,224 | |
Other comprehensive (loss) income, net of tax (Note P): | | | | | |
Cumulative translation adjustment | $ | (60) | | | $ | (32) | | | $ | 72 | |
Interest rate swaps | — | | | 7 | | | 1 | |
Pension and other post-retirement benefits | 54 | | | 384 | | | (18) | |
| | | | | |
Other comprehensive (loss) income, net of tax | (6) | | | 359 | | | 55 | |
Less: Other comprehensive (loss) income attributable to the noncontrolling interest: | | | | | |
Cumulative translation adjustment | $ | (9) | | | $ | (19) | | | $ | 20 | |
Pension and other post-retirement benefits | 9 | | | 4 | | | (2) | |
| — | | | (15) | | | 18 | |
Other comprehensive (loss) income attributable to Masco Corporation | $ | (6) | | | $ | 374 | | | $ | 37 | |
Total comprehensive income | $ | 899 | | | $ | 837 | | | $ | 1,331 | |
Less: Total comprehensive income attributable to noncontrolling interest | 61 | | | 53 | | | 70 | |
Total comprehensive income attributable to Masco Corporation | $ | 838 | | | $ | 784 | | | $ | 1,261 | |
See notes to consolidated financial statements.
3638
MASCO CORPORATION and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2019, 20182022, 2021 and 20172020
(In Millions) | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: | | | | | |
Net income | $ | 905 | | | $ | 478 | | | $ | 1,276 | |
Depreciation and amortization | 145 | | | 151 | | | 133 | |
Fair value adjustment to contingent earnout obligation | (24) | | | 16 | | | — | |
Display amortization | — | | | — | | | 2 | |
Deferred income taxes | (15) | | | (68) | | | (3) | |
Employee withholding taxes paid on stock-based compensation | 17 | | | 15 | | | 25 | |
Loss (gain) on investments, net | 5 | | | (25) | | | (3) | |
Loss (gain) on disposition of businesses, net | 1 | | | 18 | | | (602) | |
Pension and other post-retirement benefits | (3) | | | 312 | | | (32) | |
| | | | | |
Impairment of goodwill and other intangible assets | 26 | | | 45 | | | — | |
| | | | | |
Stock-based compensation | 49 | | | 61 | | | 45 | |
Dividends paid-in-kind | — | | | (6) | | | (10) | |
Increase in receivables | (15) | | | (64) | | | (141) | |
Increase in inventories | (43) | | | (350) | | | (89) | |
(Decrease) increase in accounts payable and accrued liabilities, net | (225) | | | 190 | | | 332 | |
Debt extinguishment costs | — | | | 160 | | | 5 | |
Other, net | 17 | | | (3) | | | 15 | |
Net cash from operating activities | 840 | | | 930 | | | 953 | |
| | | | | |
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: | | | | | |
Retirement of notes | — | | | (1,326) | | | (400) | |
Purchase of Company common stock | (914) | | | (1,026) | | | (727) | |
Cash dividends paid | (258) | | | (211) | | | (145) | |
Dividends paid to noncontrolling interest | (68) | | | (43) | | | (23) | |
| | | | | |
| | | | | |
Issuance of notes, net of issuance costs | — | | | 1,481 | | | 415 | |
Proceeds from term loan | 500 | | | — | | | — | |
Payment of term loan | (300) | | | — | | | — | |
Debt extinguishment costs | — | | | (160) | | | (5) | |
| | | | | |
| | | | | |
Proceeds from the exercise of stock options | 1 | | | 5 | | | 26 | |
Employee withholding taxes paid on stock-based compensation | (17) | | | (15) | | | (25) | |
Payment of debt | (10) | | | (3) | | | (2) | |
| | | | | |
Net cash for financing activities | (1,066) | | | (1,298) | | | (886) | |
| | | | | |
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: | | | | | |
Capital expenditures | (224) | | | (128) | | | (114) | |
Acquisition of businesses, net of cash acquired | — | | | (57) | | | (227) | |
Proceeds from disposition of: | | | | | |
Businesses, net of cash disposed | — | | | 5 | | | 870 | |
Property and equipment | 1 | | | — | | | 1 | |
Financial investments | 1 | | | 171 | | | 3 | |
| | | | | |
| | | | | |
Other, net | (8) | | | (3) | | | (2) | |
Net cash (for) from investing activities | (230) | | | (12) | | | 531 | |
Effect of exchange rate changes on cash and cash investments | (18) | | | (20) | | | 31 | |
| | | | | |
CASH AND CASH INVESTMENTS: | | | | | |
(Decrease) increase for the year | (474) | | | (400) | | | 629 | |
At January 1 | 926 | | | 1,326 | | | 697 | |
At December 31 | $ | 452 | | | $ | 926 | | | $ | 1,326 | |
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: | |
| | |
| | |
|
Net income | $ | 980 |
| | $ | 784 |
| | $ | 580 |
|
Depreciation and amortization | 159 |
| | 156 |
| | 127 |
|
Display amortization | 12 |
| | 21 |
| | 25 |
|
Deferred income taxes | (41 | ) | | 4 |
| | 13 |
|
Employee withholding taxes paid on stock-based compensation | 23 |
| | 42 |
| | 33 |
|
Gain on disposition of investments, net | (1 | ) | | (4 | ) | | (4 | ) |
(Gain) loss on disposition of businesses, net | (298 | ) | | — |
| | 13 |
|
Pension and other postretirement benefits | (45 | ) | | (47 | ) | | (38 | ) |
Impairment of financial investments | — |
| | — |
| | 2 |
|
Impairment of goodwill and other intangible assets | 16 |
| | — |
| | — |
|
Stock-based compensation | 35 |
| | 27 |
| | 38 |
|
Increase in receivables | (37 | ) | | (46 | ) | | (140 | ) |
Decrease (increase) in inventories | 58 |
| | (11 | ) | | (78 | ) |
(Decrease) increase in accounts payable and accrued liabilities, net | (27 | ) | | 108 |
| | 67 |
|
Debt extinguishment costs | 2 |
| | — |
| | 104 |
|
Other, net | (3 | ) | | (2 | ) | | 9 |
|
Net cash from operating activities | 833 |
| | 1,032 |
| | 751 |
|
| | | | | |
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES: | |
| | |
| | |
|
Retirement of notes | (201 | ) | | (114 | ) | | (535 | ) |
Purchase of Company common stock | (896 | ) | | (654 | ) | | (331 | ) |
Cash dividends paid | (144 | ) | | (134 | ) | | (129 | ) |
Dividends paid to noncontrolling interest | (42 | ) | | (89 | ) | | (35 | ) |
Issuance of notes, net of issuance costs | — |
| | — |
| | 593 |
|
Debt extinguishment costs | (2 | ) | | — |
| | (104 | ) |
Increase in debt | — |
| | — |
| | 2 |
|
Proceeds from the exercise of stock options | 27 |
| | 14 |
| | — |
|
Employee withholding taxes paid on stock-based compensation | (23 | ) | | (42 | ) | | (33 | ) |
Payment of debt | (8 | ) | | (1 | ) | | (5 | ) |
Credit Agreement and other financing costs | (2 | ) | | — |
| | — |
|
Net cash for financing activities | (1,291 | ) | | (1,020 | ) | | (577 | ) |
| | | | | |
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES: |
|
| | |
| | |
|
Capital expenditures | (162 | ) | | (219 | ) | | (173 | ) |
Acquisition of businesses, net of cash acquired | — |
| | (549 | ) | | (89 | ) |
Proceeds from disposition of: | | | | | |
Businesses, net of cash disposed | 722 |
| | — |
| | 128 |
|
Short-term bank deposits | — |
| | 108 |
| | 218 |
|
Property and equipment | 34 |
| | 14 |
| | 24 |
|
Other financial investments | 1 |
| | 5 |
| | 7 |
|
Purchases of short-term bank deposits | — |
| | — |
| | (106 | ) |
Other, net | (13 | ) | | (10 | ) | | (34 | ) |
Net cash from (for) investing activities | 582 |
| | (651 | ) | | (25 | ) |
Effect of exchange rate changes on cash and cash investments | 14 |
| | 4 |
| | 55 |
|
| | | | | |
CASH AND CASH INVESTMENTS: | |
| | |
| | |
|
Increase (decrease) for the year | 138 |
| | (635 | ) | | 204 |
|
At January 1 | 559 |
| | 1,194 |
| | 990 |
|
At December 31 | $ | 697 |
| | $ | 559 |
| | $ | 1,194 |
|
See notes to consolidated financial statements.
3739
MASCO CORPORATION and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2019, 20182022, 2021 and 20172020
(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, 2020 | $ | (57) | | | $ | 276 | | | $ | — | | | $ | (333) | | | $ | (179) | | | $ | 179 | |
Total comprehensive income | 1,331 | | | — | | | — | | | 1,224 | | | 37 | | | 70 | |
Shares issued | 14 | | | 2 | | | 12 | | | — | | | — | | | — | |
Shares retired: | | | | | | | | | | | |
Repurchased | (727) | | | (19) | | | (53) | | | (655) | | | — | | | — | |
Surrendered (non-cash) | (14) | | | (1) | | | — | | | (13) | | | — | | | — | |
Cash dividends declared | (144) | | | — | | | — | | | (144) | | | — | | | — | |
Dividends declared to noncontrolling interest | (23) | | | — | | | — | | | — | | | — | | | (23) | |
Stock-based compensation | 41 | | | — | | | 41 | | | — | | | — | | | — | |
Balance, December 31, 2020 | $ | 421 | | | $ | 258 | | | $ | — | | | $ | 79 | | | $ | (142) | | | $ | 226 | |
Total comprehensive income | 836 | | | — | | | — | | | 410 | | | 374 | | | 52 | |
Shares issued | 3 | | | 1 | | | 2 | | | — | | | — | | | — | |
Shares retired: | | | | | | | | | | | |
Repurchased | (1,026) | | | (18) | | | (57) | | | (951) | | | — | | | — | |
Surrendered (non-cash) | (13) | | | — | | | — | | | (13) | | | — | | | — | |
Cash dividends declared | (175) | | | — | | | — | | | (175) | | | — | | | — | |
Dividends declared to noncontrolling interest | (43) | | | — | | | — | | | — | | | — | | | (43) | |
Redeemable noncontrolling interest - redemption adjustment | (2) | | | — | | | — | | | (2) | | | — | | | — | |
Stock-based compensation | 55 | | | — | | | 55 | | | — | | | — | | | — | |
Balance, December 31, 2021 | $ | 56 | | | $ | 241 | | | $ | — | | | $ | (652) | | | $ | 232 | | | $ | 235 | |
Total comprehensive income (loss) | 900 | | | — | | | — | | | 844 | | | (6) | | | 62 | |
Shares issued | 1 | | | 1 | | | — | | | — | | | — | | | — | |
Shares retired: | | | | | | | | | | | |
Repurchased | (914) | | | (17) | | | (32) | | | (865) | | | — | | | — | |
Surrendered (non-cash) | (17) | | | — | | | — | | | (17) | | | — | | | — | |
Cash dividends declared | (259) | | | — | | | — | | | (259) | | | — | | | — | |
Dividends declared to noncontrolling interest | (79) | | | — | | | — | | | — | | | — | | | (79) | |
Redeemable noncontrolling interest - redemption adjustment | 2 | | | — | | | — | | | 2 | | | — | | | — | |
Stock-based compensation | 48 | | | — | | | 48 | | | — | | | — | | | — | |
Balance, December 31, 2022 | $ | (262) | | | $ | 225 | | | $ | 16 | | | $ | (947) | | | $ | 226 | | | $ | 218 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Common Shares ($1 par value) | | Paid-In Capital | | Retained (Deficit) Earnings | | Accumulated Other Comprehensive (Loss) Income | | Noncontrolling Interest |
Balance, January 1, 2017 | $ | (96 | ) | | $ | 318 |
| | $ | — |
| | $ | (374 | ) | | $ | (235 | ) | | $ | 195 |
|
Total comprehensive income | 779 |
| | |
| | |
| | 533 |
| | 170 |
| | 76 |
|
Shares issued | (19 | ) | | 2 |
| | (21 | ) | | |
| | |
| | |
|
Shares retired: | | |
|
| |
|
| |
|
| |
|
| |
|
|
Repurchased | (331 | ) | | (9 | ) | | (8 | ) | | (314 | ) | | |
| | |
|
Surrendered (non-cash) | (15 | ) | | (1 | ) | | |
| | (14 | ) | | |
| | |
|
Cash dividends declared | (129 | ) | | |
| | |
| | (129 | ) | | |
| | |
|
Dividends paid to noncontrolling interest | (35 | ) | | |
| | |
| |
|
| | |
| | (35 | ) |
Stock-based compensation | 29 |
| |
|
| | 29 |
| |
|
| |
|
| |
|
|
Balance, December 31, 2017 | $ | 183 |
| | $ | 310 |
| | $ | — |
| | $ | (298 | ) | | $ | (65 | ) | | $ | 236 |
|
Reclassification of disproportionate tax effects (Refer to Note O) | — |
| | | | | | 59 |
| | (59 | ) | | |
Total comprehensive income (loss) | 764 |
| | |
| | |
| | 734 |
| | (3 | ) | | 33 |
|
Shares issued | (9 | ) | | 3 |
| | (4 | ) | | (8 | ) | | |
| | |
|
Shares retired: | |
| | |
| | |
| | |
| | |
| | |
|
Repurchased | (654 | ) | | (19 | ) | | (26 | ) | | (609 | ) | | |
| | |
|
Surrendered (non-cash) | (19 | ) | |
|
| | |
| | (19 | ) | | |
| | |
|
Cash dividends declared | (137 | ) | | |
| | |
| | (137 | ) | | |
| | |
|
Dividends paid to noncontrolling interest | (89 | ) | | |
| | |
| | |
| | |
| | (89 | ) |
Stock-based compensation | 30 |
| | |
| | 30 |
| | |
| | |
| | |
|
Balance, December 31, 2018 | $ | 69 |
| | $ | 294 |
| | $ | — |
| | $ | (278 | ) | | $ | (127 | ) | | $ | 180 |
|
Total comprehensive income (loss) | 924 |
| | |
| | |
| | 935 |
| | (52 | ) | | 41 |
|
Shares issued | 15 |
| | 3 |
| | 12 |
| |
|
| |
|
| |
|
|
Shares retired: | |
| |
|
| |
|
| |
|
| |
|
| |
|
|
Repurchased | (896 | ) | | (20 | ) | | (42 | ) | | (834 | ) | |
|
| |
|
|
Surrendered (non-cash) | (10 | ) | | (1 | ) | |
|
| | (9 | ) | |
|
| |
|
|
Cash dividends declared | (146 | ) | |
|
| |
|
| | (146 | ) | |
|
| |
|
|
Dividends paid to noncontrolling interest | (42 | ) | |
|
| |
|
| |
|
| |
|
| | (42 | ) |
Stock-based compensation | 30 |
| |
|
| | 30 |
| |
|
| |
|
| |
|
|
Balance, December 31, 2019 | $ | (56 | ) | | $ | 276 |
| | $ | — |
| | $ | (332 | ) | | $ | (179 | ) | | $ | 179 |
|
See notes to consolidated financial statements.
3840
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the accounts of Masco Corporation and all majority-owned subsidiaries. All significant intercompany transactions have been eliminated. We consolidate the assets, liabilities and results of operations of variable interest entities for which we are the primary beneficiary.
Use of Estimates and Assumptions in the Preparation of Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted ("GAAP") in the United States of America requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates and assumptions.
Revenue Recognition. We recognize revenue as control of our products is transferred to our customers, which is generally at the time of shipment or upon delivery based on the contractual terms with our customers. Our customers' payment terms generally range from 30 to 65 days of fulfilling our performance obligations and recognizing revenue.days.
We provide customer programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. These customer programs and incentives are considered variable consideration. We include in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period.
Certain product sales include a right of return. We estimate future product returns at the time of sale based on historical experience and record a corresponding refund liability. We additionally record an asset, based on historical experience, for the amount of product we expect to return to inventory as a result of the return, which is recorded in prepaid expenses and other in the consolidated balance sheets.
We consider shipping and handling activities performed by us as activities to fulfill the sales of our products. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales. We capitalize incremental costs of obtaining a contract and expense the costs on a straight-line basis over the contractual period if the cost is recoverable, the cost would not have been incurred without the contract and the term of the contract is greater than one year; otherwise, we expense the amounts as incurred. We do not adjust the promised amount of consideration for the effects of a financing component if the period between when we transfer our products or services and when our customers pay for our products or services is expected to be one year or less.
Customer Displays. In-store displays that are owned by us and used to market our products are included in other assets in the consolidated balance sheets and are amortized using the straight-line method over the expected useful life of three to five years; related amortization expense is classified as a selling expense in the consolidated statementstatements of operations.
Foreign Currency. The financial statements of our foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at exchange rates as of the balance sheet dates. Revenues and expenses are translated at average exchange rates in effect during the year. The resulting cumulative translation adjustments have been recorded in the accumulated other comprehensive loss component of shareholders' equity.income in the consolidated balance sheets. Realized foreign currency transaction gains and losses are included in other income (expense), net in the consolidated statements of operations in other income (expense), net.operations.
Cash and Cash Investments. We consider all highly liquid investments with an initial maturity of three months or less to be cash and cash investments.
Short-Term Bank Deposits. Occasionally, we invest a portion of our foreign excess cash in short-term bank deposits. These highly liquid investments have original maturities between three and twelve months and are valued at cost, which approximate their fair value. These short-term bank deposits are classified in the current assets section of our consolidated balance sheets, and interest income related to short-term bank deposits is recorded in our consolidated statements of operations in other income (expense), net.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Continued)
Receivables. We do significant business with home center retailers, wholesalers and a number of customers, including certain home center retailers.other customers. We monitor our exposure for credit losses on our customer receivable balances and other financial investments measured at amortized cost and the credit worthiness of our customers on an on-going basis, including requiring the completion of credit applications and performing periodic reviews of our open accounts receivable. We record related allowances for doubtful accountscredit losses for estimated losses resulting from the inability of our customers to makefulfill their required payments.payment obligation to us. Allowances are estimated based upon specific customer balances, where a risk of defaultloss has been identified, and also include a provision for non-customer specific defaultslosses based upon historical collection returnexperience and write-off activity.activity as well as reasonable and supportable forecast information that considers macro-economic factors and industry-specific trends associated with our businesses, among others. A separate allowance is recorded for customer incentive rebates and is generally based upon sales activity. Receivables are presented net of certain allowances (including allowances for doubtful accounts)credit losses) of $36$53 million and $33$67 million at December 31, 20192022 and 2018,2021, respectively. Our receivables balances are generally due in less than one year.
Property and Equipment. Property and equipment, including significant improvements to existing facilities, are recorded at cost. Upon retirement or disposal, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the consolidated statements of operations. Maintenance and repair costs are charged against earnings as incurred.
We review our property and equipment as events occur or circumstances change that would more likely than not reduce the fair value of the property and equipment below its carrying amount. If the carrying amount of property and equipment 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. Further, we evaluate the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.
Depreciation. Depreciation expense is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements, 2 to 10 percent, computer hardware and software, 17 to 33 percent, and machinery and equipment, 5 to 33 percent. Depreciation expense, including discontinued operations, was $132$112 million in 2019 and 2018 and $1162022, $111 million in 2017.2021 and $105 million in 2020.
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 othernoncurrent operating lease liabilities on our consolidated balance sheet. Finance lease ROU assets are included in property and equipment, net, notes payable, and long-term debt on our consolidated balance sheet.sheets.
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 discount 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 or a comparable market alternative, 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.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Continued)
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 consolidated balance sheet;sheets; we recognize lease expense for these leases on a straight-line basis over the lease term.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Continued)
Goodwill and Other Intangible Assets. We perform our annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We have defined our reporting units and completed the impairment testing of goodwill at the operating segment level. Our operating segments are reporting units that engage in business activities, for which discrete financial information, including five-year forecasts, areis available. We compare the fair value of the reporting units to the carrying value of the reporting units for goodwill impairment testing. Fair value is determined primarily using a discounted cash flow method, which includes significant unobservable inputs (Level 3 inputs), and requires us to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. In estimating future cash flows, we rely on internally generated five-year forecasts for sales and operating profits, and, currently, a 2two percent to 3three percent long-term assumed annual growth rate of cash flows for periods after the five-year forecast. We utilize ourFor 2022, we utilized a weighted average cost of capital of approximately 8.08.75 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2019, basedBased upon our assessment of the risks impacting each of our businesses, we applied a risk premium to increase the discount rate to a range of 10.010.25 percent to 12.012.75 percent for our reporting units. For our Masco Cabinetry reporting unit, we utilized a market approach to determine its fair value instead of the discounted cash flow method, as we were actively marketing the Masco Cabinetry business for sale and on November 14, 2019 we entered into a definitive agreement to sell the business. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized to the extent that a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.
We review our other indefinite-lived intangible assets for impairment annually in the fourth quarter, or as events occur or circumstances change that indicate the assets may be impaired without regard to the business unit. Potential impairment is identified by comparing the fair value of an other indefinite-lived intangible asset to its carrying value. We utilize a relief-from-royalty model to estimate the fair value of other indefinite-lived intangible assets. We consider the implications of both external (e.g., market growth, competition and local economic conditions) and internal (e.g., product sales and expected product growth) factors and their potential impact on cash flows related to the intangible asset in both the near- and long-term. We also consider the profitability of the business, among other factors, to determine the royalty rate for use in the impairment assessment. We utilize our weighted average cost of capital of approximately 8.08.75 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2019,2022, based upon our assessment of the risks impacting each of our businesses and the nature of the other indefinite-lived intangible asset (i.e., trade name), we applied a risk premium to increase the discount rate to a range of 11.011.25 percent to 13.013.75 percent for our other indefinite-lived intangible assets.
While we believe that the estimates and assumptions underlying the valuation methodologies are reasonable, different estimates and assumptions could result in different outcomes.
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We review our intangible assets with finite useful lives as events occur or circumstances change that would more likely than not reduce the fair value of the assets below its carrying amount. If the carrying amount of the assets is not recoverable from the undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value. We evaluate the remaining useful lives of amortizable intangible assets at each reporting period to determine whether events or circumstances warrant a revision to the remaining periods of amortization.
Refer to Note H for additional information regarding goodwill and other intangible assets.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Continued)
Acquisitions. We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. In addition, any contingent consideration is fair valued as of the date of the acquisition and is recorded as part of the purchase price. This estimate is updated in future periods and any changes in the estimate, which are not considered an adjustment to the purchase price, are recorded in our consolidated statements of operations.
We use all available information to estimate fair values. We typically engage external valuation specialists to assist in the fair value determination of identifiable intangible assets and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain more information regarding assets acquired and liabilities assumed based on facts and circumstances that existed as of the acquisition date.
Our purchase price allocation methodology contains uncertainties because it requires us to make assumptions and to apply judgment to estimate the fair value of acquired assets and assumed liabilities. We estimate the fair value of assets and liabilities based upon the carrying value of the acquired assets and assumed liabilities and widely accepted valuation techniques, including discounted cash flows. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
Other estimates used in determining fair value include, but are not limited to, future cash flows or income related to intangibles, market rate assumptions and appropriate discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but that are inherently uncertain, and therefore, may not be realized. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.
Refer to Note B for additional information regarding acquisitions.
Fair Value Accounting.of Financial Instruments. We use derivative financial instruments to manage certain exposure to fluctuations in earnings and cash flows resulting from changes in foreign currency exchange rates, and occasionally from changes in commodity costs and interest rate exposures. Derivative financial instruments are recorded in the consolidated balance sheets as either an asset or liability measured at fair value, netted by counterparty, where the right of offset exists. The gain or loss is recognized in determining current earnings during the period of the change in fair value. We currently do not have any derivative instruments for which we have designated hedge accounting.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Continued)Refer to Note I for additional information regarding fair value of financial instruments.
Warranty. We offer limited warranties on certain products with warranty periods ranginglasting up to the lifetime of the product to the original consumer purchaser. At the time of sale, we accrue a warranty liability for the estimated future cost to provide products, parts or services to repair or replace products, or refunds to satisfy our warranty obligations. Our estimate of future costs to service our warranty obligations is based upon the information available and includes a number of factors, such as the warranty coverage, the warranty period, historical experience specific to the nature, frequency and average cost to service the claim, along with industry and demographic trends.
Certain factors and related assumptions in determining our warranty liability involve judgments and estimates and are sensitive to changes in the factors described above. We believe that the warranty accrual is appropriate; however, actual claims incurred could differ from our original estimates which would require us to adjust our previously established accruals. Refer to Note TU for additional information on our warranty accrual.
A significant portion of our business is at the consumer retail level through home center retailers and other major retailers. A consumer may return a product to a retail outlet that is a warranty return. However, certain retail outlets do not distinguish between warranty and other types of returns when they claim a return deduction from us. Our revenue recognition policy takes into account this type of return when recognizing revenue, and an estimate of these amounts is recorded as a deduction to net sales at the time of sale.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Continued)
Insurance Reserves. We provide for expenses associated with workers' compensation and product liability obligations when such amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change that would affect the estimated liability. Any obligations expected to be settled within 12 months are recorded in accrued liabilities; all other obligations are recorded in other liabilities.liabilities.
Litigation. We are involved in claims and litigation, including class actions, mass torts and regulatory proceedings, which arise in the ordinary course of our business. Liabilities and costs associated with these matters require estimates and judgments based upon our professional knowledge and experience and that of our legal counsel. When a liability is probable of being incurred and our exposure in these matters is reasonably estimable, amounts are recorded as charges to earnings. The ultimate resolution of these exposures may differ due to subsequent developments.
Stock-Based Compensation. We issue stock-based incentives in various forms to our employees and non-employee Directors. Outstanding stock-based incentives were in the form of long-term stock awards, stock options, restricted stock units ("RSUs"), phantomperformance restricted stock units ("PRSUs"), stock options, long-term stock awards and phantom stock appreciation rights ("SARs"). awards.
We measure compensation expense for RSUs and long-term stock awards at the market price of our common stock at the grant date. SuchWe measure compensation expense is recognized ratably overfor PRSUs at the shorterexpected payout of the vesting period of the stock awards, typically five years, or the length of time until the grantee becomes retirement-eligible, generally at age 65.awards. We measure compensation expense for stock options using a Black-Scholes option pricing model. Such expense is recognized ratably over the shorter of the vesting period of the stock options, typically five years, or the length of time until the grantee becomes retirement-eligible, generally at age 65. We measure compensation expense for RSUs at the expected payout of the awards. Such expense is recognized ratably over the three-year vesting period of the units. We recognize forfeitures related to stock awards,RSUs, PRSUs, stock options and RSUslong-term stock awards as they occur.
We initially measure compensation expense for phantom stock awards at the market price of our common stock at the grant date. Such expense is recognized ratably over the vesting period, typically five years. Phantom stock awards are linked to the value of our common stock on the date of grant and are settled in cash upon vesting. We account for phantom stock awards as liability-based awards; the liability is remeasured and adjusted at the end of each reporting period until the awards are fully-vested and paid to the employees. We measure
In December 2019, our Compensation and Talent Committee of the Board of Directors (the "Compensation Committee") amended the terms of equity awards under our 2014 Long Term Stock Incentive Plan to provide that newly issued RSUs, stock options and phantom stock awards vest over a three-year period and redefined retirement-eligibility as age 65 or age 55 with at least 10 years of continuous service. As such, compensation expense for SARs using a Black-Scholes option pricing model; such expenseequity awards granted in 2020 and thereafter is recognized ratably over the shorter of the vesting period, typically five years. SARs are linked tothree years, or the valuelength of our common stock on the date of grant and are settled in cash upon exercise. We account for SARs using the fair value method, which requires outstanding SARs to be classified as liability-based awards. The liability is remeasured and adjusted at the end of each reporting periodtime until the SARs are exercisedgrantee becomes retirement eligible. For prior year grants, expense was recognized ratably over the shorter of the vesting period of the long-term stock awards, stock options and payment is made to the employeesphantom stock awards, typically five years, or the SARs expire. length of time until the grantee became retirement-eligible, generally at age 65. Expense for PRSUs is recognized ratably over the three-year vesting period of the units.
Refer to Note LM for additional information on stock-based compensation.
Noncontrolling Interest. We owned 68 percent of Hansgrohe SE at both December 31, 20192022 and 2018.2021. The aggregate noncontrolling interest, net of dividends, at December 31, 20192022 and 20182021 has been recorded as a component of equity on our consolidated balance sheets.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Continued)
Discontinued Operations. We report financial results for discontinued operations separately from continuing operations to distinguish the financial impact of disposal transactions from ongoing operations. Discontinued operations reporting occurs only when the disposal of a component or a group of components represents a strategic shift that will have a major effect on our operations and financial results. In our consolidated statements of cash flows, the cash flow from discontinued operations are not separately classified.
Refer to Note BC for further information regarding our discontinued operations.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Concluded)
Income Taxes. DeferredWe record deferred taxes are recognized based on the future tax consequences of differences between the financial statement carrying value of our assets and liabilities and their respective tax basis. The future realization of deferred tax assets depends on the existencesufficient sources of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period and projected future taxable income.
If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) suchour deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company's three-year cumulative loss position is significant negative evidence in considering whether deferred
We only recognize the tax assets are realizable, and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of the deferred tax assets.
The current accounting guidance allows the recognition of only thosebenefits from income tax positions that have a greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. We believe that thereA liability is an increased potential for volatility in our effective tax rate because this threshold allows for changes in the income tax environment and, to a greater extent, the inherent complexities of income tax law in a substantial number of jurisdictions, which may affect the computation of our liabilityrecorded for uncertain tax positions.
positions where it is more likely than not the position may not be sustained based on its technical merits. We record interest and penalties on our uncertain tax positions in income tax expense.
The accounting guidance for
We record the tax effects of Global Intangible Low-taxed Income related to our foreign operations, if applicable, as a component of income taxes requires us totax expense in the period the tax arises.
We allocate our provision for income taxes between continuing operations and other categories of earnings, such as other comprehensive income (loss). Subsequent adjustmentsearnings. Adjustments to deferred taxes originally recorded to other comprehensive income (loss) may reverse in a different category of earnings, such as continuing operations, resulting in a disproportionate tax effect within accumulated other comprehensive income (loss).income. Generally, a disproportionate tax effect will be eliminated and recognized in income tax expense when the circumstances upon which it is premised cease to exist.
The disproportionate tax effecteffects related to our various qualified domestic defined-benefit pension plans will bewere eliminated from accumulated other comprehensive income (loss) at the termination of the related pension plans.plans in 2021. The disproportionate tax effect relating to our interest rate swap hedge, which was terminated in 2012, will bewas eliminated from accumulated other comprehensive income (loss) upon the maturityearly retirement of the related debt in March 2022.
We record the tax effects of Global Intangible Low-taxed Income related to our foreign operations as a component of income tax expense in the period the tax arises.
Reclassifications. Certain prior year amounts have been reclassified to conform to the 2019 presentation in the consolidated financial statements.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. ACCOUNTING POLICIES (Concluded)2021.
Recently Adopted Accounting Pronouncements. In February 2016,August 2020, the Financial Accounting Standards Board ("FASB") issued a newASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. We adopted this standard for leases, ASC 842, which changes the accounting model for identifying and accounting for leases. We adopted ASC 842 onannual periods beginning 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 which includes assets and liabilities that have subsequently been reclassified as held for sale or disposed of. Our accounting for finance leases remained unchanged. The standard did not impact our 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, 2019.2022. The adoption of thethis new standard did not impact our financial position or results of operations.
In June 2018,October 2021, the FASB issued ASU 2018-07, "Compensation-Stock Compensation2021-08, “Business Combinations (Topic 718)805): ImprovementsAccounting for Acquired Contract Assets and Contract Liabilities from Contracts with Customers.” ASU 2021-08 requires contract assets and contract liabilities acquired in a business combination to Nonemployee Share-Based Payment Accounting," which modifiesbe recognized in accordance with Topic 606 as if the accounting for share-based payment awards issued to nonemployees to largely align it withacquirer had originated the accounting for share-based payment awards issued to employees.contracts. We adopted ASU 2018-07 onthis standard for annual periods beginning January 1, 2019.2022. The adoption of thethis new standard did not impact our financial position or results of operations.
Recently Issued Accounting Pronouncements. In June 2016,September 2022, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326)2022-04, "Liabilities – Supplier Finance Programs (Subtopic 405-50): MeasurementDisclosure of Credit Losses on Financial Instruments,"Supplier Finance Program Obligations,” which modifies the methodology for recognizing loss impairments on certain types of financial instruments, including receivables. The new methodology requires that an entity that uses a supplier finance program in connection with the purchase of goods or services disclose information about the program’s nature, activity during the period, changes from period to estimate the credit losses expected over the life of an exposure. Additionally,period, and potential magnitude. ASU 2016-13 amends the current available-for-sale security other-than-temporary impairment model for debt securities. ASU 2016-132022-04 is effective for usannual periods on a retrospective basis, including interim periods within those annual periods, beginning January 1, 2023, except for the amendment on rollforward information, which is effective prospectively for annual periods beginning January 1, 2020. This standard2024. The adoption of this guidance will impact the valuation ofmodify our credit losses relating to our receivables, however, we dodisclosures, but will not expect the standard to have a material impact on our financial position or results of operations.statements.
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. We plan to adopt this standard prospectively effective for annual periods beginning January 1, 2020 and do not expect that the adoption of this new standard will have a material impact on our financial position or results of operations.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for us for annual periods beginning January 1, 2021. Early adoption is permitted. We are currently reviewing the provisions of this new pronouncement and the impact, if any, the adoption of this guidance has on our financial position and results of operations.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. ACQUISITIONS
In the third quarter of 2021, we acquired all of the share capital of Steamist, Inc. ("Steamist") for approximately $56 million in cash. Steamist is a manufacturer of residential steam bath products that are complementary to many of our plumbing products. This business is included in our Plumbing Products segment. In connection with this acquisition, we recognized $31 million of definite-lived intangible assets, primarily related to customer relationships. The definite-lived intangible assets are being amortized on a straight-line basis over a weighted average amortization period of 11 years. We also recognized $29 million of goodwill, which is not tax deductible, and is related primarily to the expected synergies from combining the operations into our business. Working capital and other adjustments were finalized with the seller in the fourth quarter of 2021, resulting in no significant changes.
In the first quarter of 2021, our Hansgrohe SE subsidiary acquired a 75.1 percent equity interest in Easy Sanitary Solutions B.V. ("ESS"), for approximately €47 million ($58 million), including $52 million of cash and $6 million of debt that will be paid out over two years less any pending or settled indemnity matters. The cash payment was made to a third-party notary on December 29, 2020 for the acquisition of this equity interest in advance of the transaction closing on January 4, 2021. ESS is a manufacturer of shower channel drains that offers a wide range of products for barrier-free showering and bathroom wall niches. This business is included in our Plumbing Products segment. In connection with this acquisition, we recognized $32 million of definite-lived intangible assets, primarily related to customer relationships. The definite-lived intangible assets are being amortized on a straight-line basis over a weighted average amortization period of 10 years. We also recognized $35 million of goodwill, which is not tax deductible, and is related primarily to the expected synergies from combining the operations into our business. Working capital and other adjustments were finalized with the seller in the fourth quarter of 2021, resulting in no significant changes.
The remaining 24.9 percent equity interest in ESS is subject to a call and put option that is exercisable by Hansgrohe SE or the sellers, respectively, any time after December 31, 2023. The redemption value of the call and put option is the same and based on a floating EBITDA value. The call and put options were determined to be embedded within the redeemable noncontrolling interest and were recorded as temporary equity in the consolidated balance sheets. We elected to adjust the redeemable noncontrolling interest to its full redemption amount directly into retained deficit.
In the fourth quarter of 2020, we acquired substantially all of the net assets of Kraus USA Inc. ("Kraus"), a designer and distributor of sinks, faucets and accessories for the kitchen and bathroom, for approximately $103 million and an additional cash payment of up to $50 million to be paid in 2023, contingent upon the achievement of certain financial performance metrics for the year ending December 31, 2022. As of the closing date of the acquisition, the contingent consideration was assigned a fair value of approximately $8 million. Refer to Note I for additional information regarding the measurement of the contingent consideration liability. This business expands our product offerings to our customers and our online presence under the Kraus brand. This business is included in our Plumbing Products segment. In connection with this acquisition, we recognized $25 million of indefinite-lived intangible assets, which is related to trademarks, and $49 million of definite-lived intangible assets, primarily related to customer relationships. The definite-lived intangible assets are being amortized on a straight-line basis over a weighted average amortization period of 10 years. We also recognized $20 million of goodwill, which is generally tax deductible, and is related primarily to the expected synergies from combining the operations into our business. During the first quarter of 2021, we revised the allocation of the purchase price to certain identifiable assets and liabilities based on analysis of information as of the acquisition date, which resulted in a $1 million decrease to goodwill. The working capital adjustments were finalized with the seller in the second quarter of 2021, resulting in no significant changes.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. ACQUISITIONS (Concluded)
In the fourth quarter of 2020, we acquired substantially all of the net assets of Work Tools International Inc. and Elder & Jenks, LLC (collectively, "Work Tools") for approximately $53 million, including $48 million of cash and $5 million of debt that was paid out in 18 months less any pending or settled indemnity matters. Work Tools expands our product offering to our customers as it is a leading manufacturer of high-quality precision painting tools and accessories including brushes, rollers and mini rollers for DIY and professionals. This business is included in our Decorative Architectural Products segment. In connection with this acquisition, we recognized $7 million of indefinite-lived intangible assets, which is related to trademarks, and $27 million of definite-lived intangible assets, primarily related to customer relationships. The definite-lived intangible assets are being amortized on a straight-line basis over a weighted average amortization period of 12 years. We also recognized $7 million of goodwill, which is generally tax deductible, and is related primarily to the expected synergies from combining the operations into our business. The working capital adjustments were finalized with the seller in the first quarter of 2021, resulting in no significant changes.
In the first quarter of 2020, we acquired all of the share capital of SmarTap A.Y Ltd. ("SmarTap") for approximately $24 million in cash. SmarTap is a developer of a smart bathing system that monitors and controls the temperature and flow of water. This acquisition provides an adaptable solution for a wide range of products as it is compatible with showerheads, hand showers, spouts and shower jets. This business is included in our Plumbing Products segment. In connection with this acquisition, we recognized $10 million of definite-lived intangible assets, primarily related to technology, which is being amortized on a straight-line basis over a weighted average amortization period of 5 years. We also recognized $14 million of goodwill, which is not tax deductible, and is related primarily to the expected synergies from combining the operations into our business.
C. DIVESTITURES
On September 6, 2019,May 31, 2021, we completed the divestiture of our UK Window GroupHüppe GmbH ("Hüppe") business, ("UKWG"), a manufacturer of shower enclosures and distributor of windows and doors, for proceeds of approximately $8 million, of which $2 million net of cash disposed was received upon sale. The remaining $6 million was accounted for as a note receivable that is expected to be collected within the next two years.shower trays. In connection with the sale,divestiture, we recognized a loss of $70$18 million for the year ended December 31, 2019,2021, which is included in income from discontinued operations,other, net in theour consolidated statementsstatement of operations. This loss resulted primarily from the recognition of $23 million of currency translation losses that were previously included within accumulated other comprehensive income. During the first quarter of 2022, we recorded a $2 million pre-tax post-closing gain related to the finalization of working capital items in other, net in our consolidated statement of operations. The sale of Hüppe did not represent a strategic shift that will have a major effect on our operations and financial results and therefore was not presented as discontinued operations. Prior to the divestiture, the results of the business were included in our Plumbing Products segment.
On November 6, 2019, we completed the divestiture of our Milgard Windows and Doors business ("Milgard"), a manufacturer and distributor of windows and doors for proceeds of approximately $720 million, net of cash disposed, subjectdisposed. During the second quarter of 2020, a $17 million pre-tax post-closing adjustment related to finalthe finalization of working capital adjustments. In connection with the sale, we recognized a gain on the divestiture of $368 million for the year ended December 31, 2019, which is included initems was recorded to income from discontinued operations, net in the consolidated statement of operations.
In 2019, we determined that the previously reported Windows and Other Specialty Products segment met the criteria to be classifiedoperations, as a discontinued operationgain on the divestiture of Milgard. As of December 31, 2020, we received $17 million in cash, which was presented in investing activities on the consolidated statement of cash flow as a resultproceeds from disposition of businesses, net of cash disposed. All post-closing adjustments related to our divestiture of Milgard were finalized with the combined sale of UKWG and Milgard. These businesses represented all of our windows businesses and all remaining businessesbuyer in the Windows and Other Specialty Products segment.second quarter of 2020.
Additionally, onOn November 14, 2019, we entered into a definitive agreement to sell Masco Cabinetry LLC ("Cabinetry"), a manufacturer of cabinetry products,products. We completed the divestiture of Cabinetry on February 18, 2020 for proceeds of approximately $1.0 billion, consisting$989 million, including $853 million, net of $850cash disposed. The remaining $136 million in cash at closing andwas accounted for as preferred stock issued by ACProducts Holding, Inc., a holding company of the buyer; refer to Note R for additional information. The working capital adjustment was finalized with the buyer with a liquidation preference of $150 million. The preferred stock will have a coupon of 8 percent until the first anniversary of issuance, 9 percent after the first anniversary and untilin the second anniversary of issuance,10 percent after the second anniversary of issuance and until the seventh anniversary of issuance, after which the rate will increase by 50 basis points up to a maximum of 15 percent for each period occurring during and after the seventh anniversary until all shares have been redeemed in full. The closing of the sale is expected during the first quarter of 2020, subjectresulting in no significant changes to customary closing conditions, andnet proceeds. In connection with the sale, we expect to recognizerecognized a gain on the divestiture of approximately $600 million.$585 million for the year ended December 31, 2020, which was included in income from discontinued operations, net in the consolidated statement of operations. We determined that the previously reported Cabinetry Products segment met the criteria to be classified as a discontinued operation as Cabinetry representsrepresented all of our cabinet businesses and all remaining businesses in the Cabinetry Products segment.
We determined that the assets and liabilities for Cabinetry, Milgard and UKWG met the held for sale criteria in accordance with ASC 205-20, Discontinued Operations, during 2019. Accordingly, these businesses' held for sale assets and liabilities were reclassified in the consolidated balance sheets at December 31, 2019 and 2018 to assets held for sale or liabilities held for sale. We ceased recording depreciation and amortization for the held for sale assets upon meeting the held for sale criteria.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. DIVESTITURES (Concluded)
As the combined sale of UKWG and Milgard and the planned disposition of Cabinetry each represented a strategic shift that will have a major effect on our operations and financial results, these businesses were presented in discontinued operations separate from continuing operations for all periods presented. In addition, depreciation and amortization, capital expenditures, and significant non-cash operating and investing activities related to discontinued operations were separately disclosed.
The results of Milgard recorded in income from discontinued operations before income tax was income of $2 million for the windows businessesyear ended December 31, 2020. The results of Cabinetry recorded in income from discontinued operations before income tax was a loss of $1$7 million for the year ended December 31, 2019 and income of $40 million and $57 million for the years ended December 31, 2018 and 2017, respectively. The results of the cabinetry business recorded in income from discontinued operations before income tax were income of $107 million, $95 million and $109 million for the years ended December 31, 2019, 2018 and 2017, respectively.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. DIVESTITURES (Continued)2020.
The major classes of line items constituting income from discontinued operations, net, in millions:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net sales | $ | — | | | $ | — | | | $ | 101 | |
Cost of sales | — | | | — | | | 78 | |
Gross profit | — | | | — | | | 23 | |
Selling, general and administrative expenses | — | | | — | | | 28 | |
| | | | | |
| | | | | |
Loss from discontinued operations | — | | | — | | | (5) | |
Gain on disposal of discontinued operations, net | — | | | — | | | 602 | |
Income before income tax | — | | | — | | | 597 | |
Income tax expense | — | | | — | | | (183) | |
Income from discontinued operations, net | $ | — | | | $ | — | | | $ | 414 | |
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
Net sales | $ | 1,528 |
| | $ | 1,705 |
| | $ | 1,628 |
|
Cost of sales | 1,184 |
| | 1,343 |
| | 1,236 |
|
Gross profit | 344 |
| | 362 |
|
| 392 |
|
Selling, general and administrative expenses | 232 |
| | 228 |
| | 227 |
|
Impairment charge for goodwill (A) | 7 |
| | — |
| | — |
|
Other income (expense), net | 1 |
| | 1 |
| | 1 |
|
Income from discontinued operations | 106 |
| | 135 |
| | 166 |
|
Gain on disposal of discontinued operations, net | 298 |
| | — |
| | — |
|
Income before income tax | 404 |
| | 135 |
| | 166 |
|
Income tax expense | (108 | ) | | (37 | ) | | (59 | ) |
Income from discontinued operations, net | $ | 296 |
| | $ | 98 |
| | $ | 107 |
|
| |
(A) | In the first quarter of 2019, we recognized a $7 million non-cash goodwill impairment charge related to a decline in the long-term outlook of our windows and doors business in the United Kingdom. |
The windows businesses included assets classified as held for sale of $660 million and liabilities classified as held for sale of $257 million in the consolidated balance sheet at December 31, 2018. The cabinetry business included assets classified as held for sale of $528 million and $535 million and liabilities classified as held for sale of $162 million and $158 million in the consolidated balance sheets at December 31, 2019 and 2018, respectively.
The carrying amount of major classes of assets and liabilities included as part of the Cabinetry, Milgard, and UKWG discontinued operations, were as follows, in millions:
|
| | | | | | | |
| December 31, 2019 | | December 31, 2018 |
Cash and cash investments | $ | — |
| | $ | 7 |
|
Receivables | 76 |
| | 163 |
|
Prepaid expenses and other | 7 |
| | 24 |
|
Inventories | 90 |
| | 148 |
|
Property and equipment, net | 157 |
| | 338 |
|
Operating lease right-of-use assets | 4 |
| | — |
|
Goodwill | 181 |
| | 387 |
|
Other intangible assets, net | 1 |
| | 118 |
|
Other assets | 12 |
| | 10 |
|
Total assets classified as held for sale | $ | 528 |
| | $ | 1,195 |
|
| | | |
Accounts payable | $ | 103 |
| | $ | 190 |
|
Accrued liabilities | 46 |
| | 105 |
|
Other liabilities | 13 |
| | 120 |
|
Total liabilities classified as held for sale | $ | 162 |
| | $ | 415 |
|
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. DIVESTITURES (Concluded)D. REVENUE
Assets and liabilities classified as held for sale were required to be recorded at the lower of its carrying value or fair value less costs to sell. The estimated fair value less costs to sell of the held for sale businesses exceeded their carrying value, and therefore no adjustment to these long-lived assets was necessary.
Other selected financial information for Cabinetry, Milgard and UKWG during the period owned by us, were as follows, in millions:
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
Depreciation and amortization | $ | 29 |
| | $ | 36 |
| | $ | 34 |
|
Capital expenditures | 34 |
| | 38 |
| | 26 |
|
ROU assets obtained in exchange for new lease obligations | 3 |
| | — |
| | — |
|
In conjunction with the divestiture of Milgard, we have entered into a Transition Services Agreement to provide administrative services subsequent to the separation. The fees for services rendered under the Transition Services Agreement are not expected to be material to our results of operations.
In the fourth quarter of 2017, we divested Moores Furniture Group Limited ("Moores"), a manufacturer of kitchen and bathroom furniture in the United Kingdom. In connection with the divestiture we recognized a loss of $64 million for the year ended December 31, 2017, included in other, net, within other income (expense), net in our consolidated statement of operations. This loss resulted primarily from the recognition of $58 million of defined-benefit pension plan actuarial losses, net of tax, that were previously included within accumulated other comprehensive loss, due to the transfer of the plan assets and obligations to the purchaser in connection with the sale of the business. Prior to divestiture, the results of this business are included within income before income taxes in the consolidated statement of operations. This divestiture was not accounted for as a discontinued operation.
In the second quarter of 2017, we divested Arrow Fastener Co., LLC ("Arrow"), a manufacturer and distributor of fastening tools, for proceeds of $128 million. In connection with the divestiture we recognized a gain of $51 million for the year ended December 31, 2017, included in other, net, within other income (expense), net in our consolidated statement of operations. Prior to divestiture, the results of this business are included within income before income taxes in the consolidated statement of operations. This divestiture was not accounted for as a discontinued operation.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. 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 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 have revised the allocation of the purchase price to identifiable assets and liabilities based on analysis of information as of the acquisition date that has been 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 |
|
Prepaid expenses and other | 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 three years.
In the fourth quarter of 2017, we acquired Mercury Plastics, Inc., a plastics processor and manufacturer of water handling systems for appliance and faucet applications, for approximately $89 million in cash. This business is included in the Plumbing Products segment. This acquisition enhances our ability to develop faucet technology and provides continuity of supply of quality faucet components. In connection with this acquisition, we recognized $38 million of goodwill, which is tax deductible, and is related primarily to the expected synergies from combining the operations into our business.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. 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:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Plumbing Products | | Decorative Architectural Products | | Total |
Primary geographic markets: | | | | | |
North America | $ | 3,550 | | | $ | 3,428 | | | $ | 6,978 | |
International, principally Europe | 1,702 | | | — | | | 1,702 | |
Total | $ | 5,252 | | | $ | 3,428 | | | $ | 8,680 | |
| | | Year Ended December 31, 2019 | | Year Ended December 31, 2021 |
| Plumbing Products | | Decorative Architectural Products | | Total | | Plumbing Products | | Decorative Architectural Products | | Total |
Primary geographic markets: | | | | | | Primary geographic markets: | | | | | |
North America | $ | 2,605 |
| | $ | 2,723 |
| | $ | 5,328 |
| North America | $ | 3,384 | | | $ | 3,240 | | | $ | 6,624 | |
International, principally Europe | 1,379 |
| | — |
| | 1,379 |
| International, principally Europe | 1,751 | | | — | | | 1,751 | |
Total | $ | 3,984 |
| | $ | 2,723 |
| | $ | 6,707 |
| Total | $ | 5,135 | | | $ | 3,240 | | | $ | 8,375 | |
|
| | | | | | | | | | | |
| Year Ended December 31, 2018 |
| Plumbing Products | | Decorative Architectural Products | | Total |
Primary geographic markets: | | | | | |
North America | $ | 2,552 |
| | $ | 2,656 |
| | $ | 5,208 |
|
International, principally Europe | 1,446 |
| | — |
| | 1,446 |
|
Total | $ | 3,998 |
| | $ | 2,656 |
| | $ | 6,654 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, 2017 |
| Plumbing Products | | Decorative Architectural Products | | Total (A) |
Primary geographic markets: | | | | | |
North America | $ | 2,362 |
| | $ | 2,206 |
| | $ | 4,568 |
|
International, principally Europe | 1,370 |
| | — |
| | 1,370 |
|
Total | $ | 3,732 |
| | $ | 2,206 |
| | $ | 5,938 |
|
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| |
(A) | Total net sales for 2017 excludes net sales of $76 million relating to divestitures not included in discontinued operations. Divestitures not included in discontinued operations consists of our previously owned Arrow and Moores businesses which were disposed of in 2017. |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Plumbing Products | | Decorative Architectural Products | | Total |
Primary geographic markets: | | | | | |
North America | $ | 2,753 | | | $ | 3,052 | | | $ | 5,805 | |
International, principally Europe | 1,383 | | | — | | | 1,383 | |
Total | $ | 4,136 | | | $ | 3,052 | | | $ | 7,188 | |
We recognized increases toto revenue of $2$20 million, $4$9 million, and $9$7 million in 2019, 2018,2022, 2021, and 2017,2020, respectively, for variable consideration related to performance obligations settled in previous periods.
We record contract assets for items for which we have satisfied our performance obligation but our receipt of payment is contingent upon delivery or other circumstances other than the passage of time. Our contract assets are recorded in prepaid expenses and other in our consolidated balance sheets. Our contract assets generally become unconditional and are reclassified to receivables in the quarter subsequent to each balance sheet date. Our contract asset balance was $2$1 million at both December 31, 20192022 and 2018.
2021.
We record contract liabilities primarily for deferred revenue. Our contract liabilities are recorded in accrued liabilities in our consolidated balance sheets. Our contract liabilities are generally recognized to net sales in the immediately subsequent reporting period. Our contract liability balance was $40$61 million and $39$67 million at December 31, 20192022 and 2018,2021, respectively.
Changes in the allowance for credit losses deducted from accounts receivable were as follows, in millions:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Balance at January 1 | $ | 6 | | | $ | 7 | |
Provision for expected credit losses during the period | 5 | | | 1 | |
Write-offs charged against the allowance | (4) | | | (2) | |
Recoveries of amounts previously written off | 1 | | | 1 | |
Other (A) | — | | | (1) | |
Balance at end of year | $ | 8 | | | $ | 6 | |
______________________________(A)As a result of Hüppe being divested in May 2021, $1 million for the year ended December 31, 2021 was removed from allowance for credit losses.
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. INVENTORIES
|
| | | | | | | |
| (In Millions) At December 31 |
| 2019 | | 2018 |
Finished goods | $ | 485 |
| | $ | 508 |
|
Raw materials | 211 |
| | 237 |
|
Work in process | 58 |
| | 53 |
|
Total | $ | 754 |
| | $ | 798 |
|
The components of inventory were as follows, in millions:
| | | | | | | | | | | |
| At December 31, |
| 2022 | | 2021 |
Finished goods | $ | 715 | | | $ | 702 | |
Raw materials | 408 | | | 383 | |
Work in process | 113 | | | 131 | |
Total | $ | 1,236 | | | $ | 1,216 | |
Inventories, which include purchased parts, materials, direct labor and applied overhead, are stated at the lower of cost or net realizable value, with cost determined primarily by use of the first-in, first-out method, and to a lesser extent the average cost method.
F. 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 2320 years, some of which may include one or more renewal options with terms to extend the lease for up to an additional 2015 years,, and some of which may include options to terminate the leases prior to their expiration.
The components of lease cost included in income from continuing operations were as follows, in millions:
|
| | | |
| 2019 |
Operating lease cost | $ | 49 |
|
Short-term lease cost | 6 |
|
Variable lease cost | 3 |
|
Finance lease cost: | |
Amortization of right-of-use assets | 3 |
|
Interest on lease liabilities | 1 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Operating lease cost | $ | 56 | | | $ | 48 | | | $ | 47 | |
Short-term lease cost | 10 | | | 8 | | | 7 |
Variable lease cost | 5 | | | 4 | | | 3 |
Finance lease cost: | | | | | |
Amortization of right-of-use assets | 3 | | | 3 | | | 3 |
Interest on lease liabilities | 1 | | | 1 | | | 1 |
Supplemental cash flow information related to leases was as follows, in millions:
| | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash flows for operating leases | | | $ | 47 | | | $ | 47 | | | $ | 47 | |
Operating cash flows for finance leases | | | 1 | | | 1 | | | 1 |
Financing cash flows for finance leases | | | 2 | | | 2 | | | 2 |
| | | | | | | |
ROU assets obtained in exchange for new lease obligations: | | | | | | | |
Operating leases (A) | | | 126 | | | 67 | | | 27 | |
Finance leases | | | — | | | — | | | — | |
|
| | | |
| 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows for operating leases | $ | 58 |
|
Operating cash flows for finance leases | 1 |
|
Financing cash flows for finance leases | 8 |
|
| |
ROU assets obtained in exchange for new lease obligations: | |
Operating leases | 27 |
|
Finance leases | — |
|
(A)Includes $2 million of ROU assets obtained in exchange for new lease obligations related to the acquisitions of ESS and Steamist in 2021. Includes $9 million of ROU assets obtained in exchange for new lease obligations related to the acquisitions of Kraus and Work Tools in the fourth quarter of 2020.
Certain other information related to leases was as follows:
|
| | |
| At December 31, 2019 |
Weighted-average remaining lease term: | |
Operating leases | 10 years |
|
Finance leases | 11 years |
|
| |
Weighted-average discount rate: | |
Operating leases | 4.6 | % |
Finance leases | 3.4 | % |
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. LEASES (Concluded)
Certain other information related to leases was as follows: | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2022 | | 2021 | | 2020 |
Weighted-average remaining lease term: | | | | | |
Operating leases | 10 years | | 9 years | | 10 years |
Finance leases | 9 years | | 9 years | | 10 years |
| | | | | |
Weighted-average discount rate: | | | | | |
Operating leases | 4.8 | % | | 4.0 | % | | 4.4 | % |
Finance leases | 3.3 | % | | 3.3 | % | | 3.3 | % |
Supplemental balance sheet information related to leases was as follows, in millions:
|
| | | | | | | |
| At December 31, 2019 |
| Operating Leases | | Finance Leases |
Property and equipment, net | $ | — |
| | $ | 29 |
|
Notes payable | — |
| | 2 |
|
Accrued liabilities | 38 |
| | — |
|
Long-term debt | — |
| | 28 |
|
Other liabilities | 162 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2022 | | 2021 |
| Operating Leases | | Finance Leases | | Operating Leases | | Finance Leases |
Property and equipment, net | $ | — | | | $ | 21 | | | $ | — | | | $ | 24 | |
Notes payable | — | | | 3 | | | — | | | 3 | |
Accrued liabilities | 39 | | | — | | | 38 | | | — | |
Long-term debt | — | | | 20 | | | — | | | 23 | |
| | | | | | | |
Gross ROU assets under finance leases recorded within property and equipment, net were $42 was $41 million, and $42 million at December 31, 2022 and 2021, respectively, and accumulated amortization associated with these leases was $13$20 million, and $18 million, at December 31, 2019.2022 and 2021, respectively.
At December 31, 2019,2022, future maturities of lease liabilities (under ASC 842) were as follows, in millions:
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
Year ending December 31, | | | |
2023 | $ | 50 | | | $ | 3 | |
2024 | 47 | | | 3 | |
2025 | 42 | | | 3 | |
2026 | 38 | | | 3 | |
2027 | 30 | | | 3 | |
Thereafter | 174 | | | 11 | |
Total lease payments | 381 | | | 26 | |
Less: imputed interest | (87) | | | (3) | |
Total | $ | 294 | | | $ | 23 | |
|
| | | | | | | |
| Operating Leases | | Finance Leases |
Year ending December 31, | | | |
2020 | $ | 45 |
| | $ | 3 |
|
2021 | 39 |
| | 3 |
|
2022 | 31 |
| | 3 |
|
2023 | 21 |
| | 3 |
|
2024 | 16 |
| | 4 |
|
Thereafter | 101 |
| | 20 |
|
Total lease payments | 253 |
| | 36 |
|
Less: imputed interest | (53 | ) | | (6 | ) |
Total | $ | 200 |
| | $ | 30 |
|
Rental expense (under ASC 840) recorded in the consolidated statements of operations totaled approximately $63 million and $49 million during 2018 and 2017, respectively.
At December 31, 2018, future minimum operating lease payments (under ASC 840), including discontinued operations, 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.
G. PROPERTY AND EQUIPMENT
|
| | | | | | | |
| (In Millions) At December 31 |
| 2019 | | 2018 |
Land and improvements | $ | 64 |
| | $ | 64 |
|
Buildings | 497 |
| | 470 |
|
Computer hardware and software | 232 |
| | 220 |
|
Machinery and equipment | 1,103 |
| | 1,088 |
|
| 1,896 |
| | 1,842 |
|
Less: Accumulated depreciation | (1,018 | ) | | (957 | ) |
Total | $ | 878 |
| | $ | 885 |
|
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. PROPERTY AND EQUIPMENT
The components of property and equipment, net were as follows, in millions:
| | | | | | | | | | | |
| At December 31, |
| 2022 | | 2021 |
Land and improvements | $ | 67 | | | $ | 67 | |
Buildings | 579 | | | 514 | |
Computer hardware and software | 265 | | | 259 | |
Machinery and equipment | 1,255 | | | 1,199 | |
| 2,166 | | | 2,039 | |
Less: Accumulated depreciation | (1,191) | | | (1,143) | |
Total | $ | 975 | | | $ | 896 | |
H. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at December 31, 2022, by segment, was as follows, in millions:
| | | | | | | | | | | | | | | | | |
| Gross Goodwill At December 31, 2022 | | Accumulated Impairment Losses | | Net Goodwill At December 31, 2022 |
Plumbing Products | $ | 611 | | | $ | (301) | | | $ | 310 | |
Decorative Architectural Products | 366 | | | (139) | | | 227 | |
| | | | | |
| | | | | |
Total | $ | 977 | | | $ | (440) | | | $ | 537 | |
The changes in the carrying amount of goodwill for years ended December 31, 2022 and 2021, by segment, were as follows, in millions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Goodwill At December 31, 2021 | | Accumulated Impairment Losses | | Net Goodwill At December 31, 2021 | | Acquisitions | | | | Pre-tax Impairment Charge | | Other (B) | | Net Goodwill At December 31, 2022 |
Plumbing Products (A) | $ | 623 | | | $ | (301) | | | $ | 322 | | | $ | — | | | | | $ | — | | | $ | (12) | | | $ | 310 | |
Decorative Architectural Products | 366 | | | (120) | | | 246 | | | — | | | | | (19) | | | — | | | 227 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total | $ | 989 | | | $ | (421) | | | $ | 568 | | | $ | — | | | | | $ | (19) | | | $ | (12) | | | $ | 537 | |
|
| | | | | | | | | | | |
| Gross Goodwill At December 31, 2019 | | Accumulated Impairment Losses | | Net Goodwill At December 31, 2019 |
Plumbing Products | $ | 566 |
| | $ | (340 | ) | | $ | 226 |
|
Decorative Architectural Products | 358 |
| | (75 | ) | | 283 |
|
Total | $ | 924 |
| | $ | (415 | ) | | $ | 509 |
|
| | | Gross Goodwill At December 31, 2018 | | Accumulated Impairment Losses | | Net Goodwill At December 31, 2018 | | Additions (A) | | Other (B) | | Net Goodwill At December 31, 2019 | | Gross Goodwill At December 31, 2020 | | Accumulated Impairment Losses | | Net Goodwill At December 31, 2020 | | Acquisitions | | Pre-tax Impairment Charge | | | Other (B) | | Net Goodwill At December 31, 2021 |
Plumbing Products | $ | 568 |
| | $ | (340 | ) | | $ | 228 |
| | $ | — |
| | $ | (2 | ) | | $ | 226 |
| Plumbing Products | $ | 613 | | | $ | (340) | | | $ | 273 | | | $ | 63 | | | $ | — | | | | $ | (14) | | | $ | 322 | |
Decorative Architectural Products | 358 |
| | (75 | ) | | 283 |
| | — |
| | — |
| | 283 |
| Decorative Architectural Products | 365 | | | (75) | | | 290 | | | 1 | | | (45) | | | | — | | | 246 | |
| Total | $ | 926 |
| | $ | (415 | ) | | $ | 511 |
| | $ | — |
| | $ | (2 | ) | | $ | 509 |
| Total | $ | 978 | | | $ | (415) | | | $ | 563 | | | $ | 64 | | | $ | (45) | | | | $ | (14) | | | $ | 568 | |
We completed our annual impairment testing of goodwill and other indefinite-lived intangible assets in the fourth quarters of 2019, 20182022, 2021 and 2017.2020. We recognized a $19 million and $7 million non-cash impairment charge within our Decorative Architectural Products segment to goodwill and other indefinite-lived intangible assets, respectively, in the fourth quarter of 2022 due to competitive market conditions, higher inflationary costs and increased cost of capital in our lighting business. We recognized a $45 million non-cash goodwill impairment charge within our Decorative Architectural Products segment in the fourth quarter of 2021, due to competitive market conditions and higher inflationary costs in our lighting business. There was no impairment of goodwill for any of our reporting units or of our other indefinite-lived intangible assets in any of these years, other than as disclosed above.
L. DEBT
Our 2014 Long Term Stock Incentive Plan (the "2014 Plan") provides for the issuance of stock-based incentives in various forms to our employees and non-employee Directors. At December 31, 2019,2022, outstanding stock-based incentives were in the form of restricted stock units, performance restricted stock units, stock options, long-term stock awards stock options, restricted stock units, and phantom stock awards.
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: