filings.toolsItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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The financial 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 the consolidated financial statements and related notes.
The following discussion and certain other sections of this Report contain statements reflecting 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 "believe," "anticipate," "appear," "may," "will," "should," "intend," "plan," "estimate," "expect," "assume," "seek," "forecast" and similar references to future periods. These views involve risks and uncertainties that are difficult to predict and, accordingly, our actual results may differ materially from the results discussed in such forward-looking statements. We caution you against relying on any of these forward-looking statements. In addition to the various factors included in the "Executive Level Overview," "Critical Accounting Policies and Estimates" and "Outlook for the Company" sections, our future performance may be affected by our reliance on new home construction and home improvement, our reliance on key customers, the cost and availability of raw materials, uncertainty in the international economy, shifts in consumer preferences and purchasing practices, our ability to improve our underperforming businesses, our ability to maintain our competitive position in our industries, risks associated with the proposed spin-off of our Installation and Other Services businesses, our ability to realize the expected benefits of the spin-off, the timing and the terms of our share repurchase program, and our ability to reduce corporate expense and simplify our organizational structure. These and other factors are discussed in detail in Item 1A "Risk Factors" 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 manufacture, distribute and install home improvement and building products. These products are sold for home improvement and new home construction through mass merchandisers, hardware stores, home centers, homebuilders, distributors and other outlets for consumers and contractors and direct to the consumer.
2014 Results
Net sales were positively affected by increased new home construction and repair and remodel activity in the U.S. and Europe. Such increases were partially offset by decreased sales volume in our North American cabinetry business. Our results of operations were positively affected by increased sales volume, as well as a more favorable relationship between selling prices and commodity costs, except in paints and stains. Our results of operations were negatively affected by increased business rationalization costs and costs associated with our proposed spin-off transaction. Most of our business segments also benefited from the business rationalizations and cost savings initiatives we have undertaken over the last several years.
Our Cabinets and Related Products segment was negatively affected by lower sales volume of our North American operations, which completely offset a more favorable relationship between selling prices and commodity costs and any increased sales volume by our U.K. cabinet business. Our Plumbing Products segment benefited from increased sales volume of North American and International operations, as well as a more favorable relationship between selling prices and commodity costs. The Installation and Other Services segment benefited from increased new home construction and
commercial activity and a more favorable relationship between selling prices and commodity costs. The Decorative Architectural Products segment benefited from increased sales volume of paints and stains and builders' hardware, which was offset by a less favorable relationship between selling prices and commodity costs in paints and stains. Our Other Specialty Products segment benefited from a more favorable relationship between selling prices and commodity costs and a more favorable product mix of U.S. and U.K. windows, as well as increased sales volume.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are 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 preparation of these financial statements 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 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 that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.
Note A to our 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 and Receivables
We recognize revenue as title to products and risk of loss is transferred to customers or when services are rendered. We record revenue for unbilled services performed based upon estimates of material and labor incurred in the Installation and Other Services segment; such amounts are recorded in Receivables. Receivables include unbilled revenue related to the Installation and Other Services segment of $24 million at both December 31, 2014 and 2013. We record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. We maintain allowances for doubtful accounts receivable for estimated losses resulting from the inability of customers to make required payments. In addition, we monitor our customer receivable balances and the credit worthiness of our customers on an on-going basis.
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 other market participants. We have defined our reporting units and completed the impairment testing of goodwill at the operating segment level, as defined by accounting guidance.
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, including capital expenditures, and generally a one 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 housing starts and estimated repair and remodel activity.
In 2014, we utilized estimated housing starts, from independent industry sources, growing from current levels to 1.45 million units in 2019 (terminal growth year) and operating profit margins improving to approximate historical levels for those business units by 2019 (terminal growth year). We utilize our weighted average cost of capital of approximately 9 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 2014 primarily due to lower bond rates. In 2014, 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 14.0 percent for our reporting units.
If the carrying amount of a reporting unit exceeds its fair value, we measure the possible goodwill impairment based upon an allocation of the estimate of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets (Step Two Analysis). The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit's recorded goodwill exceeds the implied fair value of goodwill.
In the fourth quarter of 2014, 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 at December 31, 2014 would not have resulted in any additional analysis of goodwill impairment for any additional 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. 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. In 2014, we recognized an insignificant impairment charge for other indefinite-lived intangible assets.
Employee Retirement Plans
Effective January 1, 2010, we froze all future benefit accruals under substantially all of our domestic qualified and non-qualified defined-benefit pension plans.
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 inflation, 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. Changes in assumptions used could result in changes to reported pension costs and obligations within our consolidated financial statements.
In December 2014, our discount rate decreased for obligations to an average of 3.80 percent from 4.40 percent. The discount rate for obligations is based upon the expected duration of each defined-
benefit pension plan's liabilities matched to the December 31, 2014 Towers Watson Rate Link curve. The discount rates we use for our defined-benefit pension plans ranged from 2.00 percent to 4.00 percent, with the most significant portion of the liabilities having a discount rate for obligations of 3.70 percent or higher. The assumed asset return was primarily 7.25 percent, reflecting the expected long-term return on plan assets.
Our net underfunded amount for our qualified defined-benefit pension plans, which is the difference between the projected benefit obligation and plan assets, increased to $454 million at December 31, 2014 from $324 million at December 31, 2013. Our projected benefit obligation for our unfunded non-qualified defined-benefit pension plans was $190 million at December 31, 2014 compared with $163 million at December 31, 2013.
The increase in the projected benefit obligations was primarily due to lower bond rates and a change to the RP 2014 Mortality tables issued by the U.S. Society of Actuaries, which increased our long-term pension liabilities. Our qualified domestic pension plan assets in 2014 had a net gain of 3.6 percent compared to average gains of 9.5 percent for the InvestorForce Defined Benefit Plan Universe.
At December 31, 2014, we reported a net liability of $644 million, of which $190 million was related to our non-qualified, supplemental retirement plans, which 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 79 percent to 90 percent.
We expect pension expense for our qualified defined-benefit pension plans to be $23 million in 2015 compared with $16 million in 2014. If we assumed that the future return on plan assets was one-half percent lower than the assumed asset return and the discount rate decreased by 50 basis points, the 2015 pension expense would increase by $5 million. We expect pension expense for our non-qualified defined-benefit pension plans to be $10 million in 2015 compared with $9 million in 2014.
We anticipate that we will be required to contribute approximately $55 million to $65 million in 2015 to our qualified and non-qualified defined-benefit plans.
Income Taxes
The accounting guidance for income taxes requires that the future realization of deferred tax assets depends on the existence 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) 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 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.
In 2010, we recorded a $372 million valuation allowance against our U.S. Federal deferred tax assets as a non-cash charge to income tax expense. In reaching this conclusion, we considered the weaker retail sales of certain of our building products and the slower than anticipated recovery in the U.S. housing market which led to U.S. operating losses and significant U.S. goodwill impairment charges, that primarily occurred in the fourth quarter of 2010, causing us to be in a three-year cumulative U.S. loss position.
During 2012 and 2011, objective and verifiable negative evidence, such as U.S. operating losses and significant impairment charges for U.S. goodwill in 2011 and other intangible assets, continued to
outweigh positive evidence necessary to reduce the valuation allowance. As a result, we recorded increases of $65 million and $87 million in the valuation allowance related to our U.S. Federal deferred tax assets as a non-cash charge to income tax expense in 2012 and 2011, respectively.
In the third quarter of 2014, we recorded a $517 million tax benefit from the release of the valuation allowance against our U.S. Federal and certain state deferred tax assets due primarily to a return to sustainable profitability in our U.S. operations. In reaching this conclusion, we considered the continued improvement in both the new home construction market and repair and remodel activity in the U.S. and our progress on strategic initiatives to reduce costs and expand our product leadership positions which contributed to the continued improvement in our U.S. operations over the past few years.
In the fourth quarter of 2014, we recorded an additional $12 million tax benefit from the release of the valuation allowances against certain U.K. and Mexican deferred tax assets primarily resulting from a return to sustainable profitability in these jurisdictions.
We continue to maintain a valuation allowance on certain state and foreign deferred tax assets as of December 31, 2014. Should we determine that we would not be able to realize our remaining deferred tax assets in these jurisdictions in the future, an adjustment to the valuation allowance would be recorded in the period such determination is made. The need to maintain a valuation allowance against deferred tax assets may cause greater volatility in our effective tax rate.
It is reasonably possible that the continued improvements in certain of our businesses located in the U.S. could result in the objective positive evidence necessary to warrant the additional reversal of all or a portion of the valuation allowance, up to approximately $27 million, by the end of 2015.
The current accounting guidance allows the recognition of only those income tax positions that have a greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. We believe that there is an increased potential for volatility in our effective tax rate because this threshold allows changes in the income tax environment and the inherent complexities of income tax law in a substantial number of jurisdictions to affect the computation of our liability for uncertain tax positions to a greater extent.
While we believe we have adequately provided for our uncertain tax positions, amounts asserted by taxing authorities could vary from our liability for uncertain tax positions. Accordingly, additional provisions for tax-related matters, including interest and penalties, could be recorded in income tax expense in the period revised estimates are made or the underlying matters are settled or otherwise resolved.
Warranty
At the time of sale, we accrue a warranty liability for the estimated cost to provide products, parts or services to repair or replace products in satisfaction of warranty obligations. Our estimate of 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 product manufacturing metrics and 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 aforementioned factors. We believe that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates thereby requiring adjustments to previously established accruals.
A majority of our business is at the consumer retail level through home centers and 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 deductions are recorded at the time of sale.
Litigation
We are subject to lawsuits and pending or asserted claims 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 estimates of our exposure for lawsuits and pending or asserted claims meet the criteria for recognition under accounting guidance, amounts are recorded as charges to earnings. The ultimate resolution of these exposures may differ due to subsequent developments.
Corporate Development Strategy
Our business strategy includes expanding our product leadership and implementing lean principles and product process improvements across our business units. Going forward, we expect to maintain a balanced growth strategy with emphasis on cash flow, organic growth with smaller acquisitions and growth through new product development.
As part of our strategic planning, we continue to review all of our businesses to determine which businesses may not be core to our long-term growth strategy.
On September 30, 2014, we announced a plan to spin off 100 percent of our Installation and Other Services businesses into an independent, publicly-traded company through a tax-free stock distribution to our shareholders. The transaction is expected to be completed in mid-2015.
Liquidity and Capital Resources
Historically, we have largely funded our growth through cash provided by our operations, long-term bank debt and the issuance of notes in the financial markets, and by 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 total debt as a percent of total capitalization was 75 percent and 81 percent at December 31, 2014 and 2013, respectively.
On March 28, 2013, we entered into a Credit Agreement (the "Credit Agreement") with a bank group, with an aggregate commitment of $1.25 billion and a maturity date of March 28, 2018.
The Credit Agreement contains financial covenants requiring us to maintain (A) a maximum debt to total capitalization ratio, as adjusted for certain items, of 65 percent, and (B) a minimum interest coverage ratio, as adjusted for certain items, equal to or greater than 2.5 to 1.0. The debt to total capitalization ratio allows the add-back, if incurred, of up to the first $250 million of certain non-cash charges, including goodwill and other intangible asset impairment charges, occurring from and after January 1, 2012 that would negatively impact shareholders' equity.
At December 31, 2014, we had additional borrowing capacity, subject to availability, of up to $1.2 billion. Alternatively, at December 31, 2014, we could absorb a reduction to shareholders' equity of approximately $747 million and remain in compliance with the debt to total capitalization covenant. We were in compliance with all Credit Agreement covenants and we had no borrowings under the Credit Agreement at December 31, 2014.
We had cash, cash investments and short-term bank deposits of approximately $1.7 billion at December 31, 2014. Our cash and cash investments consist of overnight interest bearing money market demand and time deposit accounts, 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 $1.7 billion and the $1.5 billion of cash, cash investments and short-term bank deposits we held at December 31, 2014 and 2013, respectively, $672 million and $622 million, respectively, is held in our foreign subsidiaries. If these funds were needed for our operations in the U.S., their repatriation into the U.S. may result in additional U.S. income taxes or foreign withholding taxes. The amount of such taxes is dependent on the income tax laws and circumstances at the time of distribution.
We utilize derivative and hedging instruments to manage our exposure to currency fluctuations, primarily related to the European euro and the U.S. dollar; 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.
In the second quarter of 2014, we increased our quarterly dividend to $.09 per common share from $.075 per common share.
Our current ratio was 1.7 to 1 and 2.1 to 1 at December 31, 2014 and 2013, respectively. The decrease in the current ratio was due to the short-term classification of $500 million of 4.8% Notes due June 2015 at December 31, 2014.
Cash Flows
Significant sources and (uses) of cash in the past three years are summarized as follows, in millions:
| 2014 | 2013 | 2012 | ||||||||
| Net cash from operating activities | $ | 602 | $ | 645 | $ | 281 | ||||
| Cash dividends paid | (117 | ) | (107 | ) | (107 | ) | ||||
| Capital expenditures | (128 | ) | (126 | ) | (119 | ) | ||||
| Purchase of Company common stock | (158 | ) | (35 | ) | (8 | ) | ||||
| Proceeds from disposition of: | ||||||||||
| Businesses, net of cash disposed | — | 17 | 9 | |||||||
| Property and equipment, net | 16 | 27 | 67 | |||||||
| Financial investments, net | 63 | 15 | 40 | |||||||
| Decrease in debt, net | (2 | ) | (2 | ) | (1 | ) | ||||
| Dividends paid to noncontrolling interest | (34 | ) | (34 | ) | (40 | ) | ||||
| (Purchases) proceeds of short-term bank deposits, net | (20 | ) | 2 | (2 | ) | |||||
| Acquisition of businesses, net of cash acquired | (2 | ) | (7 | ) | — | |||||
| Retirement of notes | — | (200 | ) | (791 | ) | |||||
| Issuance of notes, net of issuance costs | — | — | 396 | |||||||
| Payment for settlement of swaps | — | — | (25 | ) | ||||||
| Effect of exchange rates on cash and cash investments | (45 | ) | (3 | ) | 11 | |||||
| Other, net | (15 | ) | (9 | ) | (24 | ) | ||||
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| Cash increase (decrease) | $ | 160 | $ | 183 | $ | (313 | ) | |||
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Our working capital days were as follows:
| At December 31, | |||||||
| 2014 | 2013 | ||||||
| Receivable days | 47 | 46 | |||||
| Inventory days | 49 | 49 | |||||
| Accounts Payable days | 71 | 67 | |||||
| Working capital (receivables plus inventories, less accounts payable) as a % of net sales | 10.7 | % | 10.6 | % | |||
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Net cash provided by operations of $602 million consisted primarily of net income adjusted for non-cash and certain other items, including depreciation and amortization expense of $167 million, a $406 million net decrease in deferred taxes and other non-cash items, including stock-based compensation expense and amortization expense related to in-store displays. Our cash provided by operations was positively affected by increased sales and more effective accounts payable management.
Net cash used for financing activities was $297 million, primarily due to $158 million for the repurchase and retirement of company common stock in open market transactions (as part of our strategic initiative to drive shareholder value, and includes 1.7 million shares repurchased to offset the dilutive impact of long-term stock awards granted in 2014), $117 million for cash dividends paid and $34 million for dividends paid to noncontrolling interest.
In September 2014, our Board of Directors authorized the repurchase of up to 50 million shares for retirement of our common stock in open-market transactions or otherwise, replacing the previous Board of Directors authorization established in 2007. During the fourth quarter of 2014, we repurchased and retired 5 million common shares for cash of $119 million. At December 31, 2014, we had remaining authorization from our Board of Directors to repurchase up to an additional 45 million shares of our common stock. We expect to repurchase between $400 million and $500 million of our common stock in 2015.
We believe that our present cash balance and cash flows from operations 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. Consistent with past practice, we anticipate repurchasing shares in 2015 as part of our strategic initiative and to offset any dilution from long-term stock awards granted as part of our compensation programs.
Net cash used for investing activities was $100 million, and included $128 million for capital expenditures. Cash provided by investing activities included primarily $63 million from the net sale of financial investments and $16 million of net proceeds from the disposition of property and equipment. Investing activities also include net cash used for the purchase of short-term bank deposits of $20 million.
We continue to invest in our manufacturing operations to increase our productivity, improve customer service and support new product innovation, as well as to invest in our distribution facilities. Capital expenditures for 2014 were $128 million, compared with $126 million for 2013 and $119 million for 2012. For 2015, capital expenditures, excluding any potential 2015 acquisitions, are expected to be approximately $190 million. Depreciation and amortization expense for 2014 totaled $167 million, compared with $186 million for 2013 and $214 million for 2012, including accelerated depreciation of $1 million, $13 million and $28 million in 2014, 2013 and 2012, respectively. For 2015, depreciation and amortization expense, excluding any potential 2015 acquisitions, is expected to be approximately $154 million. Amortization expense totaled $10 million, $11 million and $12 million in 2014, 2013 and 2012, 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.
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.
Sales and Operations
Net sales for 2014 were $8.5 billion, which increased four percent compared with 2013. The effect of currency translation and acquisitions was insignificant compared with 2013. The following table reconciles reported net sales to net sales excluding acquisitions and the effect of currency translation, in millions:
| Year Ended December 31 | |||||||
| 2014 | 2013 | ||||||
| Net sales, as reported | $ | 8,521 | $ | 8,173 | |||
| – Acquisitions | (2 | ) | — | ||||
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| Net sales, excluding acquisitions | 8,519 | 8,173 | |||||
| – Currency translation | (6 | ) | — | ||||
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| Net sales, excluding acquisitions and the effect of currency | $ | 8,513 | $ | 8,173 | |||
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Net sales for 2014 were positively affected by increased sales volume of North American plumbing products, installation and other services, paints and stains, builders' hardware and windows, which, in aggregate, increased sales by approximately three percent compared to 2013. Net sales for 2014 were also positively affected by selling prices for cabinets, international plumbing products, installation and other services and windows, which in aggregate increased sales by approximately two percent. Net sales for 2014 were negatively affected by lower sales volume of cabinets and by lower selling prices of paints and stains.
Net sales for 2013 were positively affected by increased sales volume of North American cabinets (such increase in cabinets was partially offset by a less favorable product mix), installation and other services, plumbing products, paints and stains, builders' hardware and windows, which, in aggregate, increased sales by approximately seven percent compared to 2012. Net sales of international plumbing products and cabinets also increased sales by one percent compared to 2012. Net sales for 2013 were also positively affected by selling prices, which increased sales by approximately one percent. Net sales for 2013 were negatively affected by lower selling prices of paints and stains.
Net sales for 2012 were positively affected by increased sales volume of installed products, North American plumbing products, paints and stains, builders' hardware and windows, and selling price increases. Net sales for 2012 were negatively affected by the planned exit of certain cabinet and window product lines in certain geographic areas.
Our gross profit margins were 28.0 percent, 27.6 percent and 26.1 percent in 2014, 2013 and 2012, respectively. The 2014 and 2013 gross profit margin reflects a more favorable relationship between selling prices and commodity costs as well as increased sales volume. Both 2014 and 2013 reflect the benefits associated with business rationalizations and other cost savings initiatives.
Selling, general and administrative expenses as a percent of sales were 18.9 percent in 2014 compared with 19.4 percent in 2013 and 20.5 percent in 2012. Selling, general and administrative expenses as a percent of sales in 2014 and 2013 reflect increased sales. Both 2014 and 2013 also reflect the benefits associated with our business rationalizations and other cost savings initiatives.
The following table reconciles reported operating profit to operating profit, as adjusted to exclude certain items, dollars in millions:
| 2014 | 2013 | 2012 | ||||||||
| Operating profit, as reported | $ | 788 | $ | 673 | $ | 302 | ||||
| Rationalization charges | 66 | 48 | 75 | |||||||
| Costs related to spin-off of Services Business | 6 | — | — | |||||||
| Impairment charges for other intangible assets | — | — | 42 | |||||||
| (Income) charge for litigation settlements | (9 | ) | — | 77 | ||||||
| Gains from sales of fixed assets, net | — | — | (8 | ) | ||||||
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| Operating profit, as adjusted | $ | 851 | $ | 721 | $ | 488 | ||||
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| Operating profit margins, as reported | 9.2 | % | 8.2 | % | 4.0 | % | ||||
| Operating profit margins, as adjusted | 10.0 | % | 8.8 | % | 6.5 | % |
Operating margins in 2014 and 2013 were positively affected by a more favorable relationship between selling prices and commodity costs, increased sales volume and the benefits associated with business rationalizations and other cost savings initiatives.
Other Income (Expense), Net
Other, net, for 2014 included gains of $4 million from private equity funds and realized foreign currency gains of $5 million and other miscellaneous items. Other, net, for 2014 included losses from equity investments, net, of $2 million.
Other, net, for 2013 included income from equity investments, net of $16 million and gains of $11 million from private equity funds. Other, net, for 2013 also included realized foreign currency losses of $18 million and other miscellaneous items.
In 2013, in conjunction with the transaction to sell our Danish ready-to-assemble cabinet business (included in discontinued operations), we also disposed of a related Danish holding company. This disposition triggered the settlement of loans, which resulted in the recognition of $18 million of currency translation expense, which is included in other income (expense), net from continuing operations in the statement of operations.
Other, net, for 2012 included net gains of $24 million from private equity funds. During 2012, we recognized non-cash, pre-tax impairment charges aggregating $2 million for an investment in a private equity fund. Other, net, for 2012 also included realized foreign currency losses of $2 million and other miscellaneous items.
Interest expense was $225 million in 2014, $235 million in 2013 and $254 million in 2012.
Income (Loss) and Earnings (Loss) Per Common Share from Continuing Operations (Attributable to Masco Corporation)
Income and diluted income per common share from continuing operations for 2014 were $861 million and $2.39 per common share, respectively. Income and diluted income per common share from continuing operations for 2013 were $298 million and $.83 per common share, respectively. (Loss) and diluted (loss) per common share from continuing operations for 2012 were $(53) million and $(.16) per common share, respectively. (Loss) from continuing operations for 2012 included non-cash, pre-tax impairment charges for other intangible assets of $42 million ($27 million or $.08 per common share, after tax).
Our effective tax rate on income (loss) from continuing operations was 58 percent tax benefit, 25 percent tax expense and 125 percent tax expense in 2014, 2013 and 2012, respectively. Compared to our normalized tax rate of 36 percent, the variance in 2014 is primarily due to $529 million tax benefit related to the reversal of the valuation allowance on our deferred tax assets. The variance from our normalized tax rate in 2013 and 2012 is due primarily to changes in the U.S. Federal valuation allowance and reversal of an accrual for uncertain tax positions.
Outlook for the Company
We continue to make progress on our strategic initiatives, which include leveraging opportunities across our businesses, driving the full potential of our core businesses and actively managing our portfolio. In 2015, we expect new home construction and repair and remodel activity to show continued improvement in North American and internationally. Our focus will be to continue to maximize the benefits of this activity and maintain the positive momentum. We are well positioned to grow our key brands and to gain share in our channels in 2015.
We believe and are confident that the long-term fundamentals for new home construction and home improvement activity continue to be positive. We believe that our strong financial position, together with our current strategy of investing in leadership brands, including KRAFTMAID and MERILLAT cabinets, DELTA and HANSGROHE faucets, BEHR paint and MILGARD windows, our continued focus on innovation and our commitment to lean principles, will allow us to drive long-term growth and create value for our shareholders.
Business Segment and Geographic Area Results
The following table sets forth our net sales and operating profit (loss) information by business segment and geographic area, dollars in millions.
| Percent Change | ||||||||||||||||
| 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | ||||||||||||
| Net Sales: | ||||||||||||||||
| Cabinets and Related Products | $ | 999 | $ | 1,014 | $ | 939 | (1 | )% | 8 | % | ||||||
| Plumbing Products | 3,308 | 3,183 | 2,955 | 4 | % | 8 | % | |||||||||
| Installation and Other Services | 1,515 | 1,412 | 1,209 | 7 | % | 17 | % | |||||||||
| Decorative Architectural Products | 1,998 | 1,927 | 1,818 | 4 | % | 6 | % | |||||||||
| Other Specialty Products | 701 | 637 | 574 | 10 | % | 11 | % | |||||||||
| | | | | | | | | | | | | | | | | |
| Total | $ | 8,521 | $ | 8,173 | $ | 7,495 | 4 | % | 9 | % | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| North America | $ | 6,892 | $ | 6,634 | $ | 6,046 | 4 | % | 10 | % | ||||||
| International, principally Europe | 1,629 | 1,539 | 1,449 | 6 | % | 6 | % | |||||||||
| | | | | | | | | | | | | | | | | |
| Total | $ | 8,521 | $ | 8,173 | $ | 7,495 | 4 | % | 9 | % | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| 2014 | 2013 | 2012 | 2012 (B) | ||||||||||
| Operating Profit (Loss): (A) | |||||||||||||
| Cabinets and Related Products | $ | (62 | ) | $ | (10 | ) | $ | (89 | ) | $ | (89 | ) | |
| Plumbing Products | 512 | 394 | 307 | 307 | |||||||||
| Installation and Other Services | 58 | 37 | (19 | ) | (19 | ) | |||||||
| Decorative Architectural Products | 360 | 351 | 329 | 329 | |||||||||
| Other Specialty Products | 47 | 35 | (31 | ) | 11 | ||||||||
| | | | | | | | | | | | | | |
| Total | $ | 915 | $ | 807 | $ | 497 | $ | 539 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| North America | $ | 701 | $ | 649 | $ | 360 | $ | 402 | |||||
| International, principally Europe | 214 | 158 | 137 | 137 | |||||||||
| | | | | | | | | | | | | | |
| Total | 915 | 807 | 497 | 539 | |||||||||
| General corporate expense, net | (136 | ) | (134 | ) | (126 | ) | (126 | ) | |||||
| Income (charge) for litigation settlements | 9 | — | (77 | ) | (77 | ) | |||||||
| Gain from sales of fixed assets, net | — | — | 8 | 8 | |||||||||
| | | | | | | | | | | | | | |
| Total operating profit | $ | 788 | $ | 673 | $ | 302 | $ | 344 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 2014 | 2013 | 2012 | 2012 (B) | ||||||||||
| Operating Profit (Loss) Margin: (A) | |||||||||||||
| Cabinets and Related Products | (6.2 | )% | (1.0 | )% | (9.5 | )% | (9.5 | )% | |||||
| Plumbing Products | 15.5 | % | 12.4 | % | 10.4 | % | 10.4 | % | |||||
| Installation and Other Services | 3.8 | % | 2.6 | % | (1.6 | )% | (1.6 | )% | |||||
| Decorative Architectural Products | 18.0 | % | 18.2 | % | 18.1 | % | 18.1 | % | |||||
| Other Specialty Products | 6.7 | % | 5.5 | % | (5.4 | )% | 1.9 | % | |||||
| North America | 10.2 | % | 9.8 | % | 6.0 | % | 6.6 | % | |||||
| International, principally Europe | 13.1 | % | 10.3 | % | 9.5 | % | 9.5 | % | |||||
| Total | 10.7 | % | 9.9 | % | 6.6 | % | 7.2 | % | |||||
| Total operating profit margin, as reported | 9.2 | % | 8.2 | % | 4.0 | % | N/A |
(A)
Before general corporate expense, net, gain from sales of fixed assets, net and certain income (charge) for litigation settlements; see Note P to the consolidated financial statements.
(B)
Excluding impairment charges for other intangible assets. The 2012 impairment charge for other intangible assets was as follows: Other Specialty Products – $42 million.
Business Segment Results Discussion
Changes in operating profit margins in the following Business Segment and Geographic Area Results discussion exclude general corporate expense, net, income (charge) for litigation settlements, net, gain from sales of fixed assets, net and impairment charges for other intangible assets in 2014, 2013 and 2012, as applicable.
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. For the years ended December 31, 2014, 2013 and 2012, we incurred net pre-tax costs and charges related to these initiatives of $72 million (including $6 million of spin-off transaction costs), $48 million and $75 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. We do not anticipate that any costs and charges related to our ongoing commitment to continuous improvement will be as significant as they have been.
During 2014, our North American cabinet business continued to incur costs and charges of $31 million primarily related to actions taken to sell two previously idled manufacturing facilities. Our corporate office incurred $27 million in costs primarily related to severance actions. Finally, we incurred $8 million of costs and charges across our business units related to other cost savings initiatives.
On September 30, 2014, we announced a plan to spin off 100 percent of our Installation and Other Services businesses into an independent, publicly-traded company through a tax-free stock distribution to our shareholders. The transaction is expected to be completed in mid-2015. Through December 31, 2014, we have incurred $6 million of costs and charges related to this transaction. Under generally accepted accounting principles, the Installation and Other Services businesses are included in continuing operations until the transaction is completed.
During 2013, our North American cabinet business continued to incur costs and charges of $11 million related to the closure of a cabinet components facility and additional severance. Our Plumbing Products segment incurred costs of $16 million related to a plant consolidation and severance in our bathing systems business in North America. Finally, we incurred $21 million of costs and charges across our business units related to other cost savings initiatives.
During 2012, our North American cabinet business incurred costs and charges of $33 million related to the closure of its countertop manufacturing facility (as a result of our strategic change to a sourcing model for countertops), the closure of a cabinet components facility and additional headcount reductions. Our Plumbing Products segment incurred costs of $25 million related to a plant closure and severance in our bathing systems business in North America and a plant closure and severance in Spain. We also incurred $14 million in costs related to severance actions at our corporate office. Finally, we incurred $3 million of costs and charges across our business units related to other cost savings initiatives.
Based on current plans, we anticipate costs and charges related to our business rationalizations and other initiatives to approximate $30 million in 2015. Our business rationalization expenses in 2015 include approximately $25 million of costs and charges related to the spin-off transaction. We continue to evaluate our businesses and may implement additional rationalization programs based on changes in our markets which could result in further costs and charges.
Cabinets and Related Products
Sales
Net sales of Cabinets and Related Products in 2014 decreased primarily due to lower sales volume and a less favorable product mix of North American operations, which decreased sales by nine percent compared to 2013. Such decreases more than offset increased selling prices in North America and increased sales volume and a more favorable product mix of international cabinets, which increased sales by seven percent compared to 2013.
Net sales in this segment in 2013 increased primarily due to increased sales volume of North American and International operations and by increased selling prices in North America which, in the aggregate, increased sales by 14 percent compared to 2012. Such increases were partially offset by a less favorable product mix in North America, which reduced sales in this segment by six percent.
Net sales in this segment in 2012 were positively affected by increased sales volume of North American operations and by increased selling prices.
Operating Results
Operating margins in the Cabinets and Related Products segment in 2014 were negatively affected by lower North American sales volume and the related under-absorption of fixed costs as well as increased business rationalization expenses. Operating margins were also negatively affected by a less favorable product mix. Such declines more than offset a more favorable relationship between selling prices and commodity costs and the benefits associated with business rationalization activities and other cost savings initiatives.
Operating margins in this segment in 2013 were positively affected by lower business rationalization expenses and the benefits associated with such expenses incurred in prior years. Operating margins were also positively affected by a more favorable relationship between selling prices and commodity costs, as well as increased sales volume and the related absorption of fixed costs. Such increases were partially offset by a less favorable product mix.
Operating margins in this segment in 2012 were positively affected by lower business rationalization expenses and the benefits associated with such expenses incurred in prior years.
Plumbing Products
Sales
Net sales of Plumbing Products increased in 2014 primarily due to increased sales volume of both North American and International operations, which, in aggregate, increased sales by four percent compared to 2013. This segment was also positively affected by increased selling prices of International plumbing products.
Net sales in this segment increased in 2013 primarily due to increased sales volume and increased selling prices, which, in aggregate, increased sales by eight percent compared to 2012. A weaker U.S. dollar increased sales by one percent in 2013 compared to 2012. Such increases were partially offset by the loss of a portion of our bath products business.
Net sales in this segment in 2012 were positively affected by primarily increased sales volume of North American operations and increased selling prices. Lower sales volume of international operations decreased sales in this segment.
Operating Results
Operating margins in the Plumbing Products segment in 2014 were positively affected by increased sales volume, a more favorable relationship between selling prices and commodity costs (including the impact of the metal hedge contracts), lower business rationalization expenses and the benefits associated with business rationalization activities and other cost savings initiatives.
Operating margins in this segment in 2013 were positively affected by increased sales volume and a more favorable relationship between selling prices and commodity costs (including the impact of the metal hedge contracts), partially offset by a less favorable product mix.
Operating margins in this segment in 2012 were negatively affected by lower sales volume and a less favorable product mix principally related to International operations. Such declines more than offset increased North American sales volume and a more favorable relationship between selling prices and commodity costs.
Installation and Other Services
Sales
Net sales in the Installation and Other Services segment increased in 2014 primarily due to increased volume of distribution sales, as well as increased sales volume related to a higher level of activity in the new home construction and commercial markets, which increased sales by six percent compared to 2013. Net sales were also positively affected by increased selling prices.
Net sales in this segment increased in 2013 primarily due to increased sales volume related to a higher level of activity in the new home construction market, as well as increased selling prices. Net sales were also positively affected by increased retrofit and commercial sales.
Net sales in this segment in 2012 were positively affected by increased sales volume related to a higher level of activity in the new home construction market and increased commercial sales.
Operating Results
Operating margins in the Installation and Other Services segment in 2014 were positively affected by increased sales volume and a more favorable relationship between selling prices and commodity costs.
Operating margins in this segment in 2013 were positively affected by increased sales volume and the related absorption of fixed costs, as well as the benefits associated with business rationalizations and other cost savings initiatives. Operating margins were also positively affected by a more favorable relationship between selling prices and commodity costs.
Operating margins in this segment in 2012 were positively affected by increased sales volume and the related absorption of fixed costs, as well as the benefits associated with business rationalizations and other cost savings initiatives.
Decorative Architectural Products
Sales
Net sales of Decorative Architectural Products increased in 2014, primarily due to increased sales volume of paints and stains related to new product introductions and other growth initiatives and increased sales volume of builders' hardware, partially offset by lower selling prices of paints and stains.
Net sales in this segment increased in 2013, primarily due to increased sales volume of paints and stains and builders' hardware, partially offset by lower selling prices of paints and stains.
Net sales in this segment in 2012 were positively affected by increased selling prices of paints and stains, as well as increased sales volume of paints and stains and builders' hardware.
Operating Results
Operating margins in the Decorative Architectural Products segment in 2014 reflect a less favorable relationship between selling prices and commodity costs, a less favorable product mix of paints and stains and costs for new product introductions and advertising. Such decreases more than offset the benefits associated with cost savings initiatives.
Operating margins in this segment in 2013 reflect the benefits of increased sales volume of paints and stains and builders' hardware. Such benefits were partially offset by a less favorable relationship between selling prices and commodity costs and increased promotional and advertising costs.
Operating margins in this segment in 2012 reflect a more favorable product mix, a more favorable relationship between selling prices and commodity costs related to paints and stains and lower program costs related to builders' hardware.
Other Specialty Products
Sales
Net sales of Other Specialty Products increased in 2014 primarily due to more favorable product mix, increased selling prices and increased sales volume of North American windows in the Western U.S. which, in the aggregate, increased sales by eight percent compared to 2013. This segment was also positively affected by a more favorable product mix and increased selling prices of our U.K. windows business, which increased sales in this segment by two percent compared to 2013. A weaker U.S. dollar increased sales by one percent in 2014 compared to 2013. Such increases were partially offset by lower sales volume and lower selling prices of staple gun tackers and other fastening tools.
Net sales in this segment increased in 2013 primarily due to increased sales volume, increased selling prices and a more favorable product mix of windows in North America which, in the aggregate, increased sales by 11 percent compared to 2012. Such increases were partially offset by lower sales volume and lower selling prices of staple gun tackers and other fastening tools.
Net sales in this segment in 2012 were affected by increased sales volume of windows in Western markets in the U.S., a more favorable product mix and increased selling prices which were offset by lower sales volume of North American windows resulting from the exit of certain markets.
Operating Results
Operating margins in the Other Specialty Products segment in 2014 reflect a more favorable relationship between selling prices and commodity costs, a more favorable product mix of U.S. and U.K. windows and increased sales volume in the western U.S. Such positive results were partially offset by lower sales volume and lower selling prices of staple gun tackers and other fastening tools.
Operating margins in this segment in 2013 reflect increased sales volume and the related absorption of fixed costs, as well as a more favorable relationship between selling prices and commodity costs. This segment also reflects the benefits associated with the business rationalizations and other cost savings initiatives. Such positive results were partially offset by lower sales volume and lower selling prices of staple gun tackers and other fastening tools.
Operating results in the Other Specialty Products segment in 2012 were positively affected by the benefits associated with business rationalizations and other cost savings initiatives, lower business rationalization costs and a more favorable relationship between selling prices and commodity costs. These items more than offset the increased warranty expense of $12 million.
Geographic Area Results Discussion
North America
Sales
North American net sales in 2014 were positively impacted by increased sales volume of plumbing products, installation and other services, paints and stains, builders' hardware and windows which, in the aggregate, increased sales by approximately four percent compared to 2013. Net sales were also positively affected by increased selling prices of cabinets, installation and other services and windows, which increased sales by approximately two percent compared to 2013. Such increases were partially offset by lower sales volume of cabinets and lower selling prices of paints and stains.
North American net sales in 2013 were positively impacted by increased sales volume of installation and other services, plumbing products, paints and stains, windows, cabinets (such increase in cabinets was partially offset by a less favorable product mix), and builders' hardware which, in the aggregate, increased sales by approximately nine percent compared to 2012. Net sales were also positively affected by increased selling prices of cabinets, installation and other services and windows, which increased sales by approximately two percent compared to 2012. Such increases were partially offset by lower selling prices of paints and stains.
North American net sales in 2012 were positively impacted by increased sales volume of installation and other services, plumbing products, paints and stains, builders' hardware and windows, and by increased selling prices of plumbing products and paints and stains.
Operating Results
Operating margins from North American operations in 2014 were positively affected by increased sales volume, as well as a more favorable relationship between selling prices and commodity costs. North American operations were also positively affected by the benefits associated with past business rationalization and other cost savings initiatives.
Operating margins from North American operations in 2013 were positively affected by increased sales volume and the related absorption of fixed costs, as well as a more favorable relationship between selling prices and commodity costs. North American operations were also positively affected by lower business rationalization expenses and the benefits associated with business rationalization and other cost savings initiatives.
Operating margins from North American operations in 2012 were positively affected by a more favorable relationship between selling prices and commodity costs, lower business rationalization expenses and the benefits associated with business rationalization and other cost savings initiatives.
International, Principally Europe
Sales
Net sales from international operations in 2014 increased four percent in local currencies compared to 2013, primarily due to increased selling prices and sales volume for international plumbing products and a more favorable product mix of cabinets and windows. A weaker U.S. dollar increased international net sales by one percent in 2014 compared to 2013.
Net sales from international operations in 2013 increased four percent in local currencies compared to 2012, primarily due to increased sales volume of international plumbing products and cabinets and increased selling prices for International plumbing products. A weaker U.S. dollar increased International net sales by two percent in 2013 compared to 2012.
Net sales from international operations in 2012 were positively affected by increased selling prices, partially offset by lower sales volume of international plumbing products, cabinets and windows.
Operating Results
Operating margins from International operations in 2014 were positively affected by a more favorable relationship between selling prices and commodity costs, primarily related to international plumbing products.
Operating margins from International operations in 2013 were positively affected by a more favorable relationship between selling prices and commodity costs, primarily related to international plumbing products and the benefits associated with business rationalizations and other cost savings initiatives, partially offset by a less favorable product mix.
Operating margins from International operations in 2012 were negatively affected by a less favorable product mix, partially offset by a more favorable relationship between selling prices and commodity costs, primarily related to international plumbing products, the benefits associated with business rationalizations and other cost savings initiatives.
Other Matters
Commitments and Contingencies
Litigation
Information regarding our legal proceedings is set forth in Note U to the consolidated financial statements, which is incorporated herein by reference.
Other Commitments
With respect to our investments in private equity funds, we had, at December 31, 2014, commitments to contribute up to $9 million of additional capital to such funds, representing our aggregate capital commitment to such funds less capital contributions made to date. We are contractually obligated to make additional capital contributions to these private equity funds upon receipt of a capital call from the private equity fund. We have no control over when or if the capital calls will occur. Capital calls are funded in cash and generally result in an increase in the carrying value of our investment in the private equity fund when paid.
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 relating to various items, including: the enforceability of trademarks; legal and environmental issues; and provisions for sales returns. We have never had to pay a material amount related to these indemnifications, and we evaluate the probability that amounts may be incurred and we appropriately record an estimated liability when probable.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard for revenue recognition, Accounting Standards Codification 606 (ASC 606). The purpose of ASC 606 is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability across industries. ASC 606 is effective for us for annual periods beginning January 1, 2017.
We are currently evaluating the impact the adoption of this new standard will have on our results of operations.
In April 2014, the FASB issued Accounting Standards Update 2014-8 (ASU 2014-8), "Reporting of Discontinued Operations and Disclosure of Disposals of Components of an Entity," which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. ASU 2014-8 is effective for us beginning January 1, 2015. We do not expect that the adoption will have a significant impact on our financial position or our results of operations.
Contractual Obligations
The following table provides payment obligations related to current contracts at December 31, 2014, in millions:
| Payments Due by Period | |||||||||||||||||||
| Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | Other (D) | Total | ||||||||||||||
| Debt (A) | $ | 505 | $ | 1,301 | $ | 116 | $ | 1,502 | $ | — | $ | 3,424 | |||||||
| Interest (A) | 199 | 286 | 206 | 526 | — | 1,217 | |||||||||||||
| Operating leases | 92 | 91 | 31 | 73 | — | 287 | |||||||||||||
| Currently payable income taxes | 24 | — | — | — | — | 24 | |||||||||||||
| Private equity funds (B) | 5 | 4 | — | — | — | 9 | |||||||||||||
| Purchase commitments (C) | 243 | 3 | — | — | — | 246 | |||||||||||||
| Uncertain tax positions, including interest and penalties (D) | — | — | — | — | 48 | 48 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Total | $ | 1,068 | $ | 1,685 | $ | 353 | $ | 2,101 | $ | 48 | $ | 5,255 | |||||||
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| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
(A)
We assumed that all debt would be held to maturity.
(B)
There is no schedule for the capital commitments to the private equity funds; such allocation was estimated.
(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 period beyond the next year in which cash settlements may occur with applicable tax authorities.
Refer to Note M of our financial statements for defined-benefit plan obligations.
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