MASCO CORP /DE/, 10-Q filed on 7/31/2012
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2012
Jul. 26, 2012
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
MASCO CORP /DE/ 
 
Entity Central Index Key
0000062996 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2012 
 
Amendment Flag
false 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q2 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding (actual number)
 
357,100,000 
Condensed Consolidated Balance Sheets (Unaudited) (USD $)
In Millions, unless otherwise specified
Jun. 30, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash investments
$ 1,853 
$ 1,656 
Receivables
1,206 
914 
Prepaid expenses and other
68 
70 
Assets held for sale
19 
20 
Inventories:
 
 
Finished goods
461 
390 
Raw material
288 
280 
Work in process
95 
99 
Inventories
844 
769 
Total current assets
3,990 
3,429 
Property and equipment, net
1,489 
1,567 
Goodwill
1,885 
1,891 
Other intangible assets, net
194 
196 
Other assets
196 
209 
Assets held for sale
Total assets
7,759 
7,297 
Current liabilities:
 
 
Notes payable
751 
803 
Accounts payable
941 
770 
Accrued liabilities
850 
782 
Liabilities held for sale
Total current liabilities
2,551 
2,363 
Long-term debt
3,622 
3,222 
Deferred income taxes and other
967 
970 
Total liabilities
7,140 
6,555 
Commitments and contingencies
   
   
Masco Corporation's shareholders' equity:
 
 
Common shares, par value $1 per share Authorized shares: 1,400,000,000; issued and outstanding: 2012 - 348,600,000; 2011 - 347,900,000
348 
348 
Preferred shares authorized: 1,000,000; issued and outstanding: 2012 - None; 2011 - None
   
   
Paid-in capital
50 
65 
(Accumulated deficit) retained earnings
(30)
38 
Accumulated other comprehensive income
61 
76 
Total Masco Corporation's shareholders' equity
429 
527 
Noncontrolling interest
190 
215 
Total equity
619 
742 
Total liabilities and equity
$ 7,759 
$ 7,297 
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
Jun. 30, 2012
Dec. 31, 2011
Condensed Consolidated Balance Sheets [Abstract]
 
 
Common shares, par value
$ 1 
$ 1 
Common shares, shares authorized
1,400,000,000 
1,400,000,000 
Common shares, shares issued
348,600,000 
347,900,000 
Common shares, shares outstanding
348,600,000 
347,900,000 
Preferred shares, shares authorized
1,000,000 
1,000,000 
Preferred shares, shares issued
   
   
Preferred shares, shares outstanding
   
   
Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Condensed Consolidated Statements of Operations [Abstract]
 
 
 
 
Net sales
$ 2,004 
$ 1,998 
$ 3,879 
$ 3,751 
Cost of sales
1,479 
1,466 
2,869 
2,794 
Gross profit
525 
532 
1,010 
957 
Selling, general and administrative expenses
403 
431 
788 
830 
Charge for litigation settlements, net
75 
73 
Operating profit
47 
96 
149 
122 
Other income (expense), net:
 
 
 
 
Interest expense
(68)
(64)
(132)
(127)
Other, net
32 
17 
53 
Total other income (expense), net
(66)
(32)
(115)
(74)
(Loss) income from continuing operations before income taxes
(19)
64 
34 
48 
Income taxes
30 
38 
34 
51 
(Loss) income from continuing operations
(49)
26 
 
(3)
Loss from discontinued operations
(18)
(6)
(23)
(11)
Net (loss) income
(67)
20 
(23)
(14)
Less: Net income attributable to noncontrolling interest
12 
19 
24 
Net (loss) income attributable to Masco Corporation
(75)
(42)
(38)
Basic:
 
 
 
 
(Loss) income from continuing operations
$ (0.17)
$ 0.04 
$ (0.06)
$ (0.08)
Loss from discontinued operations
$ (0.05)
$ (0.02)
$ (0.07)
$ (0.03)
Net (loss) income
$ (0.22)
$ 0.02 
$ (0.12)
$ (0.11)
Diluted:
 
 
 
 
(Loss) income from continuing operations
$ (0.17)
$ 0.04 
$ (0.06)
$ (0.08)
Loss from discontinued operations
$ (0.05)
$ (0.02)
$ (0.07)
$ (0.03)
Net (loss) income
$ (0.22)
$ 0.02 
$ (0.12)
$ (0.11)
Amounts attributable to Masco Corporation:
 
 
 
 
(Loss) income from continuing operations
(57)
14 
(19)
(27)
Loss from discontinued operations
(18)
(6)
(23)
(11)
Net (loss) income
$ (75)
$ 8 
$ (42)
$ (38)
Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Condensed Consolidated Statements of Comprehensive (Loss) Income [Abstract]
 
 
 
 
Net (loss) income
$ (67)
$ 20 
$ (23)
$ (14)
Other comprehensive income (loss), net of tax:
 
 
 
 
Cumulative translation adjustment
(57)
19 
(27)
80 
Unrealized loss on marketable securities
 
(25)
 
(38)
Unrecognized pension prior service cost and net loss, net
Other comprehensive (loss) income
(53)
(4)
(19)
47 
Total comprehensive (loss) income
(120)
16 
(42)
33 
Less: Comprehensive (loss) income attributable to the noncontrolling interest
(3)
16 
15 
42 
Comprehensive (loss) income attributable to Masco Corporation
$ (117)
 
$ (57)
$ (9)
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
Cash provided by operations
$ 109 
$ 123 
Increase in receivables
(303)
(293)
Increase in inventories
(81)
(151)
Increase in accounts payable and accrued liabilities, net
271 
290 
Net cash for operating activities
(4)
(31)
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
Issuance of Notes, net of issuance costs
396 
 
Cash dividends paid
(53)
(54)
Retirement of Notes
(46)
 
Dividend payment to noncontrolling interest
(40)
(18)
Payment for settlement of swaps
(25)
 
Purchase of Company common stock
(8)
(30)
Payment of debt
(1)
(2)
Credit Agreement costs
 
(1)
Net cash from (for) financing activities
223 
(105)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
Capital expenditures
(52)
(67)
Proceeds from disposition of:
 
 
Marketable securities
 
49 
Other financial investments
30 
15 
Property and equipment
24 
10 
Purchases of other financial investments
(2)
(6)
Other, net
(15)
Net cash (for) from investing activities
(15)
Effect of exchange rate changes on cash and cash investments
(7)
28 
CASH AND CASH INVESTMENTS:
 
 
Increase (decrease) for the period
197 
(104)
At January 1
1,656 
1,715 
At June 30
$ 1,853 
$ 1,611 
Consolidated Statements of Shareholders' Equity (Unaudited) (USD $)
In Millions, unless otherwise specified
Total
Common Shares ($1 par value)
Paid-In Capital
(Accumulated Deficit) Retained Earnings
Accumulated Other Comprehensive Income
Noncontrolling Interest
Beginning Balance at Dec. 31, 2010
$ 1,582 
$ 349 
$ 42 
$ 720 
$ 273 
$ 198 
Total comprehensive income (loss)
33 
 
 
(38)
29 
42 
Shares issued
 
(2)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(30)
(2)
(28)
 
 
 
Surrendered (non-cash)
(7)
(1)
(6)
 
 
 
Cash dividends declared
(54)
 
 
(54)
 
 
Dividend payment to noncontrolling interest
(18)
 
 
 
 
(18)
Stock-based compensation
31 
 
31 
 
 
 
Ending Balance at Jun. 30, 2011
1,537 
348 
37 
628 
302 
222 
Beginning Balance at Dec. 31, 2011
742 
348 
65 
38 
76 
215 
Total comprehensive income (loss)
(42)
 
 
(42)
(15)
15 
Shares issued
 
(2)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(8)
(1)
(7)
 
 
 
Surrendered (non-cash)
(8)
(1)
(7)
 
 
 
Cash dividends declared
(53)
 
(27)
(26)
 
 
Dividend payment to noncontrolling interest
(40)
 
 
 
 
(40)
Stock-based compensation
28 
 
28 
 
 
 
Ending Balance at Jun. 30, 2012
$ 619 
$ 348 
$ 50 
$ (30)
$ 61 
$ 190 
Accounting Policies
Accounting Policies
Note A: Accounting Policies
A. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as at June 30, 2012 and the results of operations for the three months and six months ended June 30, 2012 and 2011 and cash flows for the six months ended June 30, 2012 and 2011. The condensed consolidated balance sheet at December 31, 2011 was derived from audited financial statements.

Certain prior-year amounts have been reclassified to conform to the 2012 presentation in the condensed consolidated financial statements. The results of operations related to the 2011 discontinued operations have been separately stated in the accompanying condensed consolidated statements of income for the three months and six months ended June 30, 2012 and 2011. In the Company’s condensed consolidated statements of cash flows for the six months ended June 30, 2012 and 2011, cash flows from discontinued operations are not separately classified.

Recently Issued Accounting Pronouncements. On January 1, 2012, the Company adopted new accounting guidance requiring more prominent presentation of other comprehensive income items in the Company’s consolidated financial statements. The adoption of this new guidance did not have an impact on the Company’s financial position or its results of operations.

 

Discontinued Operations
Discontinued Operations
Note B: Discontinued Operations
B. Selected financial information for the discontinued operations, during the period owned by the Company, was as follows, in millions:

 

                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2012     2011     2012     2011  

Net Sales

  $ 21     $ 24     $ 41     $ 43  
   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

  $ (3   $ (6   $ (7   $ (11

Loss on disposal of discontinued operations, net

    (2     —         (3     —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

    (5     (6     (10     (11

Income taxes

    13       —         13       —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations,net

  $ (18   $ (6   $ (23   $ (11
   

 

 

   

 

 

   

 

 

   

 

 

 

The unusual relationship between income taxes and loss before income tax in 2012 results primarily from the increase in the deferred tax liability associated with the abandonment of tax basis in indefinite-lived intangibles due to the disposition of certain discontinued operations. The unusual relationship between income taxes and loss before income tax in 2011 resulted primarily from certain losses providing no current tax benefit.

 

 

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
Note C: Goodwill and Other Intangible Assets
C. The changes in the carrying amount of goodwill for the six months ended June 30, 2012, by segment, were as follows, in millions:

 

                         
    Gross Goodwill
At
June 30, 2012
    Accumulated
Impairment
Losses
    Net Goodwill
At
June 30, 2012
 

Cabinets and Related Products

  $ 589     $ (408   $ 181  

Plumbing Products

    535       (340     195  

Installation and Other Services

    1,806       (762     1,044  

Decorative Architectural Products

    294       (75     219  

Other Specialty Products

    980       (734     246  
   

 

 

   

 

 

   

 

 

 

Total

  $ 4,204     $ (2,319   $ 1,885  
   

 

 

   

 

 

   

 

 

 

 

                                         
    Gross Goodwill
At
Dec. 31, 2011
    Accumulated
Impairment
Losses
    Net Goodwill
At
Dec. 31, 2011
    Other (A)     Net Goodwill
At
June 30, 2012
 

Cabinets and Related Products

  $ 589     $ (408   $ 181     $ —       $ 181  

Plumbing Products

    541       (340     201       (6     195  

Installation and Other Services

    1,806       (762     1,044       —         1,044  

Decorative Architectural Products

    294       (75     219       —         219  

Other Specialty Products

    980       (734     246       —         246  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,210     $ (2,319   $ 1,891     $ (6   $ 1,885  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Other principally includes the effect of foreign currency translation.

Other indefinite-lived intangible assets were $174 million at both June 30, 2012 and December 31, 2011, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $20 million (net of accumulated amortization of $54 million) at June 30, 2012 and $22 million (net of accumulated amortization of $54 million) at December 31, 2011, and principally included customer relationships and non-compete agreements.

 

 

Depreciation and Amortization Expense
Depreciation and Amortization Expense Disclosure
Note D: Depreciation and Amortization Expense Disclosure
D. Depreciation and amortization expense was $104 million and $137 million, including accelerated depreciation (relating to business rationalization initiatives) of $9 million and $26 million for the six months ended June 30, 2012 and 2011, respectively.

 

Fair Value of Financial Investments
Fair Value of Financial Investments
Note E: Fair Value of Financial Investments and Liabilities
E. The Company has maintained investments in available-for-sale securities and a number of private equity funds, principally as part of its tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses. Financial investments included in other assets were as follows, in millions:

 

                 
    June 30,     December 31,  
    2012     2011  

Auction rate securities

  $ 22     $ 22  
   

 

 

   

 

 

 

Total recurring investments

    22       22  
     

Private equity funds

    74       86  

Other investments

    4       4  
   

 

 

   

 

 

 

Total non-recurring investments

    78       90  
   

 

 

   

 

 

 

Total

  $ 100     $ 112  
   

 

 

   

 

 

 

The Company’s investments in available-for-sale securities at June 30, 2012 and December 31, 2011 were as follows, in millions:

 

                                 
          Pre-tax        
          Unrealized     Unrealized     Recorded  
    Cost Basis     Gains     Losses     Basis  

June 30, 2012

  $ 19     $ 3     $ —       $ 22  

December 31, 2011

  $ 19     $ 3     $ —       $ 22  

Recurring Fair Value Measurements. Financial investments measured at fair value on a recurring basis at each reporting period and the amounts for each level within the fair value hierarchy were as follows, in millions:

 

                                 
          Fair Value Measurements Using  
    June 30,
2012
    Quoted
Market
Prices
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Auction rate securities

  $ 22       —         —       $ 22  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 22     $ —       $ —       $ 22  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                 
          Fair Value Measurements Using  
    Dec. 31,
2011
    Quoted
Market
Prices
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Auction rate securities

  $ 22     $ —       $ —       $ 22  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 22     $ —       $ —       $ 22  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

The fair value of the auction rate securities held by the Company have been estimated, on a recurring basis, using a discounted cash flow model (Level 3 input). The significant inputs in the discounted cash flow model used to value the auction rate securities include: expected maturity of auction rate securities, discount rate used to determine the present value of expected cash flows and the assumptions for credit defaults, since the auction rate securities are backed by credit default swap agreements.

The following table summarizes the changes in Level 3 financial assets measured at fair value on a recurring basis for the six months ended June 30, 2012 and the year ended December 31, 2011, in millions:

 

                 
    June 30, 2012
Auction Rate
Securities
    December 31, 2011
Auction Rate
Securities
 

Fair value at beginning of period

  $ 22     $ 22  

Total losses included in earnings

           

Unrealized (losses)

           

Purchases

           

Settlements

           

Transfer from Level 3 to Level 2

           
   

 

 

   

 

 

 

Fair value at period end

  $ 22     $ 22  
   

 

 

   

 

 

 

Non-Recurring Fair Value Measurements. During the period ended June 30, 2011, the Company did not measure any financial investments on a non-recurring basis, as there was no other-than-temporary decline in the estimated value of private equity funds. Financial investments measured at fair value on a non-recurring basis during the period June 30, 2012 and the amounts for each level within the fair value hierarchy were as follows, in millions:

 

                                         
          Fair Value Measurements Using        
    June30,
2012
    Quoted
Market
Prices
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Total
Inputs
(Level 3)
    Gains
(Losses)
 

Private equity funds

  $ 2       —         —       $ 2     $ (2
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2     $ —       $ —       $ 2     $ (2
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The remaining private equity investments at June 30, 2012, with an aggregate carrying value of $72 million, were not reviewed for impairment, as there were no indicators of impairment or identified events or changes in circumstances that would have a significant adverse effect on the fair value of the investment.

The Company did not have any transfers between Level 1 and Level 2 financial assets in the second quarter or in the first six months of 2012 or 2011.

 

Realized Gains (Losses). Income (loss) from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions:

 

                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2012     2011     2012     2011  

Realized gains – distributions from private equity funds

  $ 2     $ 6     $ 18     $ 9  

Realized gains—sale of TriMas Corporation common stock

    —         27       —         41  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total income from financial investments

  $ 2     $ 33     $ 18     $ 50  
   

 

 

   

 

 

   

 

 

   

 

 

 

Impairment charges – private equity funds

  $ (2   $ —       $ (2   $ —    
   

 

 

   

 

 

   

 

 

   

 

 

 

The fair value of the Company’s short-term and long-term fixed-rate debt instruments is based principally upon quoted market prices for the same or similar issues or the current rates available to the Company for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at June 30, 2012 was approximately $4.6 billion, compared with the aggregate carrying value of $4.4 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2011 was approximately $4.0 billion, compared with the aggregate carrying value of $4.0 billion.

 

Derivative Instruments and Hedging Activities
Derivative Instruments and Hedging Activities
Note F: Derivative Instruments and Hedging Activities
F. The Company is exposed to global market risk as part of its normal daily business activities. To manage these risks, the Company enters into various derivative contracts. These contracts include interest rate swap agreements, foreign currency exchange contracts and contracts intended to hedge the Company’s exposure to copper and zinc. The Company reviews its hedging program, derivative positions and overall risk management on a regular basis.

Interest Rate Swap Agreements. In March 2012, in connection with the issuance of $400 million of debt, the Company terminated the interest rate swap hedge relationships that it entered into in August 2011. These interest rate swaps were designated as cash flow hedges and effectively fixed interest rates on the forecasted debt issuance to variable rates based on 3-month LIBOR. Upon termination, the ineffective portion of the cash flow hedges of approximately $2 million was recognized in the Company’s consolidated statement of income in other, net. The remaining loss of approximately $23 million from the termination of these swaps is being amortized as an increase to interest expense over the remaining term of the debt, through March 2022. At June 30, 2012, the balance remaining was $23 million.

At December 31, 2011, the interest rate swaps were considered 100 percent effective; therefore, the market valuation loss of $23 million was recorded in other comprehensive income in the Company’s statement of shareholders’ equity with a corresponding increase to accrued liabilities in the Company’s condensed consolidated balance sheet at December 31, 2011.

 

For both the six months ended June 30, 2012 and 2011, the Company recognized a net decrease in interest expense of $5 million (including additional expense of approximately $500,000 related to the cash flow hedge terminated in March 2012) related to the amortization of gains resulting from the terminations (in 2012, 2008 and 2004) of the interest rate swap agreements.

Foreign Currency Contracts. The Company’s net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, and investments in subsidiaries. To mitigate this risk during 2012 and 2011, the Company, including certain European operations, entered into foreign currency forward contracts and foreign currency exchange contracts.

Gains (losses) related to foreign currency forward and exchange contracts are recorded in the Company’s consolidated statements of income in other income (expense), net. In the event that the counterparties fail to meet the terms of the foreign currency forward contracts, the Company’s exposure is limited to the aggregate foreign currency rate differential with such institutions.

Metal Contracts. During 2012 and 2011, the Company entered into several contracts to manage its exposure to increases in the price of copper and zinc. Gains (losses) related to these contracts are recorded in the Company’s consolidated statements of income in cost of goods sold.

The pre-tax gain (loss) included in the Company’s consolidated statements of income is as follows, in millions:

 

                                 
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2012     2011     2012     2011  

Foreign Currency Contracts

                               

Exchange Contracts

  $ 9     $ 1     $ 4     $ (7

Forward Contracts

    —         (1     (1     1  

Metal Contracts

    (6     (1     1       (1
   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss)

  $ 3     $ (1   $ 4     $ (7
   

 

 

   

 

 

   

 

 

   

 

 

 

 

The Company presents its derivatives, net by counterparty due to the right of offset under master netting arrangements in current assets or current liabilities in the consolidated balance sheet. The notional amounts being hedged and the fair value of those derivative instruments, on a gross basis, are as follows, in millions:

 

                         
    At June 30, 2012  
    

Notional
Amount

    Assets     Liabilities  

Foreign Currency Contracts

                       

Exchange Contracts

  $ 143                  

Current assets

          $ 5     $ —    

Forward Contracts

    67                  

Current assets

            1       —    

Current liabilities

            —         1  

Metal Contracts

    50                  

Current assets

            1       —    

Current liabilities

            —         4  
           

 

 

   

 

 

 

Total

          $ 7     $ 5  
           

 

 

   

 

 

 

 

                         
    At December 31, 2011  
    Notional
Amount
    Assets     Liabilities  

Foreign Currency Contracts

                       

Exchange Contracts

  $ 108                  

Current assets

          $ 8     $ —    

Forward Contracts

    76                  

Current assets

            1       —    

Current liabilities

            1       2  
       

Metal Contracts

    67                  

Current assets

            2       —    

Current liabilities

            —         4  
           

 

 

   

 

 

 

Total

          $ 12     $ 6  
           

 

 

   

 

 

 

The fair value of all metal and foreign currency derivative contracts is estimated on a recurring basis, quarterly, using Level 2 inputs (significant other observable inputs).

 

 

Warranty
Warranty
Note G: Warranty
G. Changes in the Company’s warranty liability were as follows, in millions:

 

                 
    Six Months Ended
June 30, 2012
    Twelve Months Ended
December 31, 2011
 

Balance at January 1

  $ 102     $ 107  

Accruals for warranties issued during the period

    17       28  

Accruals related to pre-existing warranties

    5       8  

Settlements made (in cash or kind) during the period

    (20     (38

Other, net

    (3     (3
   

 

 

   

 

 

 

Balance at end of period

  $ 101     $ 102  
   

 

 

   

 

 

 

 

Debt
Debt
Note H: Deb
H. On March 5, 2012, the Company issued $400 million of 5.95% Notes due March 15, 2022 (“Notes”). Including the interest rate swap amortization, the effective interest rate for the Notes is approximately 6.5%. The Notes are senior indebtedness and are redeemable at the Company’s option. In January 2012, the Company repurchased $46 million of 5.875% Notes due July 15, 2012 in open-market transactions; the Company paid a premium of $1 million for the repurchase.

Based on the limitations of the debt to total capitalization covenant in the Company’s credit agreement with a bank group (the “Credit Agreement”), at June 30, 2012, the Company had additional borrowing capacity, subject to availability, of up to $561 million. Additionally, at June 30, 2012, the Company could absorb a reduction to shareholders’ equity of approximately $302 million and remain in compliance with the debt to total capitalization covenant.

In order for the Company to borrow under the Credit Agreement, there must not be any default in the Company’s covenants in the Credit Agreement (i.e., in addition to the two financial covenants, principally limitations on subsidiary debt, negative pledge restrictions, legal compliance requirements and maintenance of properties and insurance) and the Company’s representations and warranties in the Credit Agreement must be true in all material respects on the date of borrowing (i.e., principally no material adverse change or litigation likely to result in a material adverse change, since December 31, 2009, in each case, no material ERISA or environmental non-compliance and no material tax deficiency). The Company was in compliance with all covenants and no borrowings have been made at June 30, 2012.

Subsequent Event. On July 16, 2012, the Company retired all of the $745 million of 5.875% Notes on the scheduled retirement date. After the retirement of the Notes, the Company had additional borrowing capacity, subject to availability, of approximately $900 million and the Company could absorb a reduction to shareholders’ equity of approximately $487 million.

 

 

Stock-Based Compensation
Stock-Based Compensation
Note I: Stock-Based Compensation
I. The Company’s 2005 Long Term Stock Incentive Plan (the “2005 Plan”) provides for the issuance of stock-based incentives in various forms to employees and non-employee Directors of the Company. At June 30, 2012, outstanding stock-based incentives were in the form of long-term stock awards, stock options, phantom stock awards and stock appreciation rights. Pre-tax compensation expense and the related income tax benefit for these stock-based incentives were as follows, in millions:

 

                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2012     2011     2012     2011  

Long-term stock awards

  $ 11     $ 9     $ 19     $ 19  

Stock options

    4       6       9       11  

Phantom stock awards and stock appreciation rights

    1       (1     6       2  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 16     $ 14     $ 34     $ 32  
   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (before valuation allowance)

  $ 6     $ 5     $ 13     $ 12  
   

 

 

   

 

 

   

 

 

   

 

 

 

Long-Term Stock Awards. Long-term stock awards are granted to key employees and non-employee Directors of the Company and do not cause net share dilution inasmuch as the Company continues the practice of repurchasing and retiring an equal number of shares in the open market. The Company granted 761,720 shares of long-term stock awards in the six months ended June 30, 2012.

The Company’s long-term stock award activity was as follows, shares in millions:

 

                 
    Six Months Ended
June  30,
 
    2012     2011  

Unvested stock award shares at January 1

    10       10  

Weighted average grant date fair value

  $ 17     $ 19  
     

Stock award shares granted

    1       2  

Weighted average grant date fair value

  $ 12     $ 13  
     

Stock award shares vested

    2       1  

Weighted average grant date fair value

  $ 17     $ 19  
     

Stock award shares forfeited

    —         —    

Weighted average grant date fair value

  $ 18     $ 18  
     

Unvested stock award shares at June 30

    9       11  

Weighted average grant date fair value

  $ 16     $ 17  

At June 30, 2012 and 2011, there was $92 million and $134 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of four years and five years, respectively.

The total market value (at the vesting date) of stock award shares which vested during the six months ended June 30, 2012 and 2011 was $23 million at both dates.

 

Stock Options. Stock options are granted to key employees of the Company. The exercise price equals the market price of the Company’s common stock at the grant date. These options generally become exercisable (vest ratably) over five years beginning on the first anniversary from the date of grant and expire no later than 10 years after the grant date.

The Company granted 1,050,750 of stock option shares in the six months ended June 30, 2012 with a grant date exercise price approximating $12 per share. In the first six months of 2012, 2,641,980 stock option shares were forfeited (including options that expired unexercised).

The Company’s stock option activity was as follows, shares in millions:

 

                 
    Six Months Ended  
    June 30,  
    2012     2011  

Option shares outstanding, January 1

    36       37  

Weighted average exercise price

  $ 21     $ 21  
     

Option shares granted, including restoration options

    1       2  

Weighted average exercise price

  $ 12     $ 13  
     

Option shares exercised

    —         —    

Aggregate intrinsic value on date of exercise (A)

  $ 1 million     $ 1 million  

Weighted average exercise price

  $ 9     $ 8  
     

Option shares forfeited

    3       2  

Weighted average exercise price

  $ 19     $ 22  
     

Option shares outstanding, June 30

    34       37  

Weighted average exercise price

  $ 21     $ 21  

Weighted average remaining option term (in years)

    5       6  
     

Option shares vested and expected to vest, June 30

    34       37  

Weighted average exercise price

  $ 21     $ 21  

Aggregate intrinsic value (A)

  $ 29 million     $ 20 million  

Weighted average remaining option term (in years)

    5       6  
     

Option shares exercisable (vested), June 30

    26       24  

Weighted average exercise price

  $ 24     $ 24  

Aggregate intrinsic value (A)

  $ 15 million     $ 8 million  

Weighted average remaining option term (in years)

    4       5  

 

(A) Aggregate intrinsic value is calculated using the Company’s stock price at each respective date, less the exercise price (grant date price) multiplied by the number of shares.

At June 30, 2012 and 2011, there was $24 million and $45 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model) related to unvested stock options; such options had a weighted average vesting period of three years in both 2012 and 2011.

 

The weighted average grant date fair value of option shares granted and the assumptions used to estimate those values using a Black-Scholes option pricing model were as follows:

 

                 
    Six Months Ended  
    June 30,  
    2012     2011  

Weighted average grant date fair value

  $ 4.44     $ 5.10  

Risk-free interest rate

    1.10     2.72

Dividend yield

    2.57     2.34

Volatility factor

    51.00     49.00

Expected option life

    6 years       6 years  

 

Employee Retirement Plans
Employee Retirement Plans
Note J: Employee Retirement Plans
J. The Company sponsors qualified defined-benefit or defined-contribution retirement plans for most of its employees. In addition to the Company’s qualified defined-benefit pension plans, the Company has unfunded non-qualified defined-benefit pension plans covering certain employees, which provide for benefits in addition to those provided by the qualified pension plans. Substantially all salaried employees participate in non-contributory defined-contribution retirement plans, to which payments are determined annually by the Organization and Compensation Committee of the Board of Directors. The Company participates in 20 regional multi-employer pension plans, principally related to building trades; none of the plans are considered significant to the Company.

Effective January 1, 2010, the Company froze all future benefit accruals under substantially all of the Company’s domestic qualified and non-qualified defined-benefit pension plans. Future benefit accruals related to the Company’s foreign non-qualified plans were frozen several years ago.

Net periodic pension cost for the Company’s defined-benefit pension plans was as follows, in millions:

 

                                 
    Three Months Ended June 30,  
    2012     2011  
    Qualified     Non-Qualified     Qualified     Non-Qualified  

Service cost

  $ 1     $ —       $ —       $ —    

Interest cost

    10       1       11       2  

Expected return on plan assets

    (9     —         (8     —    

Amortization of net loss

    4       1       3       —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

  $ 6     $ 2       6       2  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                 
    Six Months Ended June 30,  
    2012     2011  
    Qualified     Non-Qualified     Qualified     Non-Qualified  

Service cost

  $ 3     $ —       $ 1     $ —    

Interest cost

    20       3       22       4  

Expected return on plan assets

    (17     —         (16     —    

Amortization of net loss

    7       1       5       —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

  $ 13     $ 4     $ 12     $ 4  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Segment Information
Segment Information
Note K: Segment Information
K. Information about the Company by segment and geographic area was as follows, in millions:

 

                                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2012     2011     2012     2011     2012     2011     2012     2011  
    Net Sales (A)     Operating Profit (Loss)     Net Sales (A)     Operating Profit (Loss)  

The Company’s operations by segment were:

                                                               

Cabinets and Related Products

  $ 312     $ 330     $ (12   $ (27   $ 609     $ 637     $ (35   $ (77

Plumbing Products

    738       761       70       95       1,480       1,471       167       179  

Installation and Other Services

    296       270       (9     (21     574       505       (23     (56

Decorative Architectural Products

    517       492       95       90       951       867       168       159  

Other Specialty Products

    141       145       6       —         265       271       1       (10
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,004     $ 1,998     $ 150     $ 137     $ 3,879     $ 3,751     $ 278     $ 195  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s operations by geographic area were:

                                                               

North America

  $ 1,587     $ 1,539     $ 125     $ 92     $ 3,018     $ 2,853     $ 213     $ 108  

International, principally Europe

    417       459       25       45       861       898       65       87  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,004     $ 1,998       150       137     $ 3,879     $ 3,751       278       195  
   

 

 

   

 

 

                   

 

 

   

 

 

                 

General corporate expense, net

                    (33     (36                     (61     (68

Gain from sale of fixed assets (B)

                    5       —                         5       —    

(Charge) income for litigation settlements, net (B)

                    (75     (5                     (73     (5
                   

 

 

   

 

 

                   

 

 

   

 

 

 

Operating profit

                    47       96                       149       122  

Other income (expense), net

                    (66     (32                     (115     (74
                   

 

 

   

 

 

                   

 

 

   

 

 

 

(Loss) income before income taxes

                  $ (19   $ 64                     $ 34     $ 48  
                   

 

 

   

 

 

                   

 

 

   

 

 

 

 

(A) Inter-segment sales were not material.
(B) In 2012, gain on sale of fixed assets and in 2011, (charge) income for litigation settlements, net relates to a business unit in the Other Specialty Products segment. For the three months and six months ended June 30, 2012, the charge for litigation settlements, net includes $75 million related to a business unit in the Installation and Other Services segment.

 

 

Other Income (Expense), Net
Other Income (Expense), Net
Note L: Other Income (Expense), Net
L. Other, net, which is included in other income (expense), net, was as follows, in millions:

 

                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2012     2011     2012     2011  

Income from cash and cash investments

  $ 2     $ 1     $ 4     $ 3  

Income from financial investments (Note E)

    2       33       18       50  

Impairment of financial investments (Note E)

    (2     —         (2     —    

Other items, net

    —         (2     (3     —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Total other net

  $ 2     $ 32     $ 17     $ 53  
   

 

 

   

 

 

   

 

 

   

 

 

 

Other items, net, included $— million and $1 million of currency losses for the three months and six months ended June 30, 2012, respectively. Other items, net, included $3 million and $1 million of currency losses for the three months and six months ended June 30, 2011, respectively.

 

Earning Per Common Share
Earnings Per Common Share
Note M: Earnings Per Common Share
M. Reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per common share were as follows, in millions:

 

                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2012     2011     2012     2011  

Numerator (basic and diluted):

                               

(Loss) income from continuing operations

  $ (57   $ 14     $ (19   $ (27

Allocation to unvested restricted stock awards

    (1     (1     (1     (2
   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations attributable to common shareholders

    (58     13       (20     (29
   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

    (18     (6     (23     (11
   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income available to Common shareholders

  $ (76   $ 7     $ (43   $ (40
   

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

                               

Basic common shares (based upon weighted average)

    349       348       349       348  

Add:

                               

Contingent common shares

    —         —         —         —    

Stock option dilution

    —         1       —         —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted common shares

    349       349       349       348  
   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months and six months ended June 30, 2012 and 2011, the Company allocated dividends to the unvested restricted stock awards (participating securities).

At June 30, 2011, the Company did not include any common shares related to the Zero Coupon Convertible Senior Notes (“Zero Coupon Notes”) in the calculation of diluted earnings per common share, as the price of the Company’s common stock at June 30, 2011 did not exceed the equivalent accreted value of the Zero Coupon Notes.

 

Additionally, 34 million common shares for both the three months and six months ended June 30, 2012 and 36 million common shares and 37 million common shares, respectively, for the three months and six months ended June 30, 2011 related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.

In the first six months of 2012, the Company granted 761,720 shares of long-term stock awards; to offset the dilutive impact of these awards, the Company also repurchased and retired 675,110 shares of Company common stock, for cash aggregating approximately $8 million. At June 30, 2012, the Company had 24 million shares of its common stock remaining under the July 2007 Board of Directors’ repurchase authorization.

On the basis of amounts paid (declared), cash dividends per common share were $.075 ($.075) and $.15 ($.15), respectively for the three months and six months ended June 30, 2012 and $.075 ($.075) and $.15 ($.15), respectively, for the three months and six months ended June 30, 2011.

 

Other Commitments and Contingencies
Other Commitments and Contingencies
Note N: Other Commitments and Contingencies
N. The Company is subject to lawsuits and pending or asserted claims with respect to matters generally arising in the ordinary course of business.

As previously disclosed, a lawsuit was brought against the Company and a number of its insulation installation companies alleging that certain of their practices violated provisions of the federal antitrust laws during the period 1999 through 2004. The case was filed in October 2004 in the United States District Court for the Northern District of Georgia by Columbus Drywall & Insulation, Inc., Leo Jones Insulation, Inc., Southland Insulators, Inc., Southland Insulators of Maryland, Inc. d/b/a Devere Insulation, Southland Insulators of Delaware LLC d/b/a Delmarva Insulation, and Whitson Insulation Company of Grand Rapids, Inc. against the Company, its subsidiaries Masco Contractors Services Group Corp., Masco Contractor Services Central, Inc. (“MCS Central”) and Masco Contractor Services East, Inc., and several insulation manufacturers (the “Columbus Drywall case”). In February 2009, the court certified a class of 377 insulation contractors. A trial date in this case had been scheduled in July 2012. The parties in this case reached a settlement in principle in July 2012, in which the Company and its insulation installation companies named in the suit agreed to pay $75 million in return for dismissal with prejudice and full release of all claims, which was recorded by the Company’s the second quarter of 2012. The Company and its insulation installation companies continue to deny that the challenged conduct was unlawful and admit no wrongdoing as part of the settlement. A settlement was reached to eliminate the considerable expense and uncertainty of this suit. The settlement is subject to court approval.

Another suit was filed in March 2003 in the United States District Court for the Northern District of Georgia by Wilson Insulation Company, Wilson Insulation of Augusta, Inc. and The Wilson Insulation Group, Inc. (“Wilson”) against the Company, Masco Contractor Services, Inc., and MCS Central that alleged anticompetitive conduct (the “Wilson Case”). Wilson (who is an individual contractor) alleges that certain practices of the Company and its named insulation installation companies relating to the installation of insulation during the early 2000s in Atlanta and Augusta, Georgia violated the federal antitrust and/or state laws. The Wilson case has been removed from the court’s active docket. In March 2007, Albert Von Der Werth and Valerie Good filed suit in the United States District Court for the Northern District of California against the Company, its subsidiary Masco Contractor Services, and several insulation manufacturers seeking class action status and alleging anticompetitive conduct (the “Von Der Werth case”). In the Von Der Werth case, plaintiffs allege that the alleged conspiracy in the Columbus Drywall case indirectly resulted in an increase in the retail price of fiberglass insulation they purchased from retailers from 1999 to 2004. The Von Der Werth case was subsequently transferred to the United States District Court for the Northern District of Georgia and was administratively stayed by the court in February 2010. An additional suit, which was filed in September 2005 and alleged anticompetitive conduct, was dismissed with prejudice in December 2006.

 

The Company will vigorously defend the Wilson and Von Der Werth cases when they are re-opened by the court. Based upon the advice of its outside counsel, the Company believes that the conduct of the Company and its insulation installation companies, which is the subject of the Wilson and Von Der Werth lawsuits, has not violated any antitrust laws. The Company is unable at this time to reliably estimate any potential liability which might occur from an adverse judgment in either lawsuit. There cannot be any assurance that the Company will ultimately prevail in these lawsuits, or, if unsuccessful, that the ultimate liability would not be material.

 

Income Taxes
Income Taxes
Note O: Income Taxes
O. In the second quarter of 2012, the Company incurred income tax expense of $30 million on a pre-tax loss from continuing operations of $19 million and for the first half of 2012 the effective tax rate was 100 percent. The unusual 2012 tax rate is primarily due to losses in certain jurisdictions providing no tax benefit, including the charge for the settlement of the Columbus Drywall case, and an increase in the valuation allowance related to net operating losses. The effective tax rate for the first half of 2012 includes a $21 million state income tax benefit resulting from the decrease in the liability for uncertain tax positions primarily from the expiration of applicable statutes of limitations in various jurisdictions and certain audit closings.

As a result of tax audit closings, settlements and expiration of applicable statutes of limitations in various jurisdictions within the next 12 months, the Company anticipates that it is reasonably possible that the liability for uncertain tax positions could be reduced by approximately $6 million.

Accounting Policies (Policies)
Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements. On January 1, 2012, the Company adopted new accounting guidance requiring more prominent presentation of other comprehensive income items in the Company’s consolidated financial statements. The adoption of this new guidance did not have an impact on the Company’s financial position or its results of operations.

Discontinued Operations (Tables)
Financial information for discontinued operations
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2012     2011     2012     2011  

Net Sales

  $ 21     $ 24     $ 41     $ 43  
   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

  $ (3   $ (6   $ (7   $ (11

Loss on disposal of discontinued operations, net

    (2     —         (3     —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

    (5     (6     (10     (11

Income taxes

    13       —         13       —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations,net

  $ (18   $ (6   $ (23   $ (11
   

 

 

   

 

 

   

 

 

   

 

 

 
Goodwill and Other Intangible Assets (Tables)
Changes in carrying amount of goodwill
                         
    Gross Goodwill
At
June 30, 2012
    Accumulated
Impairment
Losses
    Net Goodwill
At
June 30, 2012
 

Cabinets and Related Products

  $ 589     $ (408   $ 181  

Plumbing Products

    535       (340     195  

Installation and Other Services

    1,806       (762     1,044  

Decorative Architectural Products

    294       (75     219  

Other Specialty Products

    980       (734     246  
   

 

 

   

 

 

   

 

 

 

Total

  $ 4,204     $ (2,319   $ 1,885  
   

 

 

   

 

 

   

 

 

 

 

                                         
    Gross Goodwill
At
Dec. 31, 2011
    Accumulated
Impairment
Losses
    Net Goodwill
At
Dec. 31, 2011
    Other (A)     Net Goodwill
At
June 30, 2012
 

Cabinets and Related Products

  $ 589     $ (408   $ 181     $ —       $ 181  

Plumbing Products

    541       (340     201       (6     195  

Installation and Other Services

    1,806       (762     1,044       —         1,044  

Decorative Architectural Products

    294       (75     219       —         219  

Other Specialty Products

    980       (734     246       —         246  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,210     $ (2,319   $ 1,891     $ (6   $ 1,885  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Other principally includes the effect of foreign currency translation.
Fair Value of Financial Investments (Tables)
                 
    June 30,     December 31,  
    2012     2011  

Auction rate securities

  $ 22     $ 22  
   

 

 

   

 

 

 

Total recurring investments

    22       22  
     

Private equity funds

    74       86  

Other investments

    4       4  
   

 

 

   

 

 

 

Total non-recurring investments

    78       90  
   

 

 

   

 

 

 

Total

  $ 100     $ 112  
   

 

 

   

 

 

 
                                 
          Pre-tax        
          Unrealized     Unrealized     Recorded  
    Cost Basis     Gains     Losses     Basis  

June 30, 2012

  $ 19     $ 3     $ —       $ 22  

December 31, 2011

  $ 19     $ 3     $ —       $ 22  
                                 
          Fair Value Measurements Using  
    June 30,
2012
    Quoted
Market
Prices
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Auction rate securities

  $ 22       —         —       $ 22  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 22     $ —       $ —       $ 22  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                 
          Fair Value Measurements Using  
    Dec. 31,
2011
    Quoted
Market
Prices
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Auction rate securities

  $ 22     $ —       $ —       $ 22  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 22     $ —       $ —       $ 22  
   

 

 

   

 

 

   

 

 

   

 

 

 
                 
    June 30, 2012
Auction Rate
Securities
    December 31, 2011
Auction Rate
Securities
 

Fair value at beginning of period

  $ 22     $ 22  

Total losses included in earnings

           

Unrealized (losses)

           

Purchases

           

Settlements

           

Transfer from Level 3 to Level 2

           
   

 

 

   

 

 

 

Fair value at period end

  $ 22     $ 22  
   

 

 

   

 

 

 
                                         
          Fair Value Measurements Using        
    June30,
2012
    Quoted
Market
Prices
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Total
Inputs
(Level 3)
    Gains
(Losses)
 

Private equity funds

  $ 2       —         —       $ 2     $ (2
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2     $ —       $ —       $ 2     $ (2
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2012     2011     2012     2011  

Realized gains – distributions from private equity funds

  $ 2     $ 6     $ 18     $ 9  

Realized gains—sale of TriMas Corporation common stock

    —         27       —         41  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total income from financial investments

  $ 2     $ 33     $ 18     $ 50  
   

 

 

   

 

 

   

 

 

   

 

 

 

Impairment charges – private equity funds

  $ (2   $ —       $ (2   $ —    
   

 

 

   

 

 

   

 

 

   

 

 

 
Derivative Instruments and Hedging Activities (Tables)
                                 
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2012     2011     2012     2011  

Foreign Currency Contracts

                               

Exchange Contracts

  $ 9     $ 1     $ 4     $ (7

Forward Contracts

    —         (1     (1     1  

Metal Contracts

    (6     (1     1       (1
   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss)

  $ 3     $ (1   $ 4     $ (7
   

 

 

   

 

 

   

 

 

   

 

 

 
                         
    At June 30, 2012  
    

Notional
Amount

    Assets     Liabilities  

Foreign Currency Contracts

                       

Exchange Contracts

  $ 143                  

Current assets

          $ 5     $ —    

Forward Contracts

    67                  

Current assets

            1       —    

Current liabilities

            —         1  

Metal Contracts

    50                  

Current assets

            1       —    

Current liabilities

            —         4  
           

 

 

   

 

 

 

Total

          $ 7     $ 5  
           

 

 

   

 

 

 

 

                         
    At December 31, 2011  
    Notional
Amount
    Assets     Liabilities  

Foreign Currency Contracts

                       

Exchange Contracts

  $ 108                  

Current assets

          $ 8     $ —    

Forward Contracts

    76                  

Current assets

            1       —    

Current liabilities

            1       2  
       

Metal Contracts

    67                  

Current assets

            2       —    

Current liabilities

            —         4  
           

 

 

   

 

 

 

Total

          $ 12     $ 6  
           

 

 

   

 

 

 
Warranty (Tables)
Warranty liability
                 
    Six Months Ended
June 30, 2012
    Twelve Months Ended
December 31, 2011
 

Balance at January 1

  $ 102     $ 107  

Accruals for warranties issued during the period

    17       28  

Accruals related to pre-existing warranties

    5       8  

Settlements made (in cash or kind) during the period

    (20     (38

Other, net

    (3     (3
   

 

 

   

 

 

 

Balance at end of period

  $ 101     $ 102  
   

 

 

   

 

 

 
Stock-Based Compensation (Tables)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2012     2011     2012     2011  

Long-term stock awards

  $ 11     $ 9     $ 19     $ 19  

Stock options

    4       6       9       11  

Phantom stock awards and stock appreciation rights

    1       (1     6       2  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 16     $ 14     $ 34     $ 32  
   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (before valuation allowance)

  $ 6     $ 5     $ 13     $ 12  
   

 

 

   

 

 

   

 

 

   

 

 

 
                 
    Six Months Ended
June  30,
 
    2012     2011  

Unvested stock award shares at January 1

    10       10  

Weighted average grant date fair value

  $ 17     $ 19  
     

Stock award shares granted

    1       2  

Weighted average grant date fair value

  $ 12     $ 13  
     

Stock award shares vested

    2       1  

Weighted average grant date fair value

  $ 17     $ 19  
     

Stock award shares forfeited

    —         —    

Weighted average grant date fair value

  $ 18     $ 18  
     

Unvested stock award shares at June 30

    9       11  

Weighted average grant date fair value

  $ 16     $ 17  
                 
    Six Months Ended  
    June 30,  
    2012     2011  

Option shares outstanding, January 1

    36       37  

Weighted average exercise price

  $ 21     $ 21  
     

Option shares granted, including restoration options

    1       2  

Weighted average exercise price

  $ 12     $ 13  
     

Option shares exercised

    —         —    

Aggregate intrinsic value on date of exercise (A)

  $ 1 million     $ 1 million  

Weighted average exercise price

  $ 9     $ 8  
     

Option shares forfeited

    3       2  

Weighted average exercise price

  $ 19     $ 22  
     

Option shares outstanding, June 30

    34       37  

Weighted average exercise price

  $ 21     $ 21  

Weighted average remaining option term (in years)

    5       6  
     

Option shares vested and expected to vest, June 30

    34       37  

Weighted average exercise price

  $ 21     $ 21  

Aggregate intrinsic value (A)

  $ 29 million     $ 20 million  

Weighted average remaining option term (in years)

    5       6  
     

Option shares exercisable (vested), June 30

    26       24  

Weighted average exercise price

  $ 24     $ 24  

Aggregate intrinsic value (A)

  $ 15 million     $ 8 million  

Weighted average remaining option term (in years)

    4       5  

 

(A) Aggregate intrinsic value is calculated using the Company’s stock price at each respective date, less the exercise price (grant date price) multiplied by the number of shares.
                 
    Six Months Ended  
    June 30,  
    2012     2011  

Weighted average grant date fair value

  $ 4.44     $ 5.10  

Risk-free interest rate

    1.10     2.72

Dividend yield

    2.57     2.34

Volatility factor

    51.00     49.00

Expected option life

    6 years       6 years  
Employee Retirement Plans (Tables)
Net periodic pension cost for defined-benefit pension plans
                                 
    Three Months Ended June 30,  
    2012     2011  
    Qualified     Non-Qualified     Qualified     Non-Qualified  

Service cost

  $ 1     $ —       $ —       $ —    

Interest cost

    10       1       11       2  

Expected return on plan assets

    (9     —         (8     —    

Amortization of net loss

    4       1       3       —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

  $ 6     $ 2       6       2  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                 
    Six Months Ended June 30,  
    2012     2011  
    Qualified     Non-Qualified     Qualified     Non-Qualified  

Service cost

  $ 3     $ —       $ 1     $ —    

Interest cost

    20       3       22       4  

Expected return on plan assets

    (17     —         (16     —    

Amortization of net loss

    7       1       5       —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

  $ 13     $ 4     $ 12     $ 4  
   

 

 

   

 

 

   

 

 

   

 

 

 
Segment Information (Tables)
Company by segment and geographic area
                                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2012     2011     2012     2011     2012     2011     2012     2011  
    Net Sales (A)     Operating Profit (Loss)     Net Sales (A)     Operating Profit (Loss)  

The Company’s operations by segment were:

                                                               

Cabinets and Related Products

  $ 312     $ 330     $ (12   $ (27   $ 609     $ 637     $ (35   $ (77

Plumbing Products

    738       761       70       95       1,480       1,471       167       179  

Installation and Other Services

    296       270       (9     (21     574       505       (23     (56

Decorative Architectural Products

    517       492       95       90       951       867       168       159  

Other Specialty Products

    141       145       6       —         265       271       1       (10
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,004     $ 1,998     $ 150     $ 137     $ 3,879     $ 3,751     $ 278     $ 195  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s operations by geographic area were:

                                                               

North America

  $ 1,587     $ 1,539     $ 125     $ 92     $ 3,018     $ 2,853     $ 213     $ 108  

International, principally Europe

    417       459       25       45       861       898       65       87  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,004     $ 1,998       150       137     $ 3,879     $ 3,751       278       195  
   

 

 

   

 

 

                   

 

 

   

 

 

                 

General corporate expense, net

                    (33     (36                     (61     (68

Gain from sale of fixed assets (B)

                    5       —                         5       —    

(Charge) income for litigation settlements, net (B)

                    (75     (5                     (73     (5
                   

 

 

   

 

 

                   

 

 

   

 

 

 

Operating profit

                    47       96                       149       122  

Other income (expense), net

                    (66     (32                     (115     (74
                   

 

 

   

 

 

                   

 

 

   

 

 

 

(Loss) income before income taxes

                  $ (19   $ 64                     $ 34     $ 48  
                   

 

 

   

 

 

                   

 

 

   

 

 

 

 

(A) Inter-segment sales were not material.
(B) In 2012, gain on sale of fixed assets and in 2011, (charge) income for litigation settlements, net relates to a business unit in the Other Specialty Products segment. For the three months and six months ended June 30, 2012, the charge for litigation settlements, net includes $75 million related to a business unit in the Installation and Other Services segment.
Other Income (Expense), Net (Tables)
Other, net
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2012     2011     2012     2011  

Income from cash and cash investments

  $ 2     $ 1     $ 4     $ 3  

Income from financial investments (Note E)

    2       33       18       50  

Impairment of financial investments (Note E)

    (2     —         (2     —    

Other items, net

    —         (2     (3     —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Total other net

  $ 2     $ 32     $ 17     $ 53  
   

 

 

   

 

 

   

 

 

   

 

 

 
Earning Per Common Share (Tables)
Numerators and denominators used in the computations of basic and diluted earnings per common share
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2012     2011     2012     2011  

Numerator (basic and diluted):

                               

(Loss) income from continuing operations

  $ (57   $ 14     $ (19   $ (27

Allocation to unvested restricted stock awards

    (1     (1     (1     (2
   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations attributable to common shareholders

    (58     13       (20     (29
   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

    (18     (6     (23     (11
   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income available to Common shareholders

  $ (76   $ 7     $ (43   $ (40
   

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

                               

Basic common shares (based upon weighted average)

    349       348       349       348  

Add:

                               

Contingent common shares

    —         —         —         —    

Stock option dilution

    —         1       —         —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted common shares

    349       349       349       348  
   

 

 

   

 

 

   

 

 

   

 

 

 
Discontinued Operations (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Financial information for discontinued operations
 
 
 
 
Net Sales
$ 21 
$ 24 
$ 41 
$ 43 
Loss from discontinued operations
(3)
(6)
(7)
(11)
Loss on disposal of discontinued operations, net
(2)
 
(3)
 
Loss before income tax
(5)
(6)
(10)
(11)
Income taxes
13 
 
13 
 
Loss from discontinued operations, net
$ (18)
$ (6)
$ (23)
$ (11)
Goodwill and Other Intangible Assets (Details) (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2012
Dec. 31, 2011
Changes in carrying amount of goodwill
 
 
Gross Goodwill
$ 4,204 
$ 4,210 
Accumulated Impairment Losses
(2,319)
(2,319)
Goodwill
1,885 
1,891 
Other
(6)
 
Goodwill and Other Intangible Assets (Textual) [Abstract]
 
 
Other indefinite-lived intangible assets
174 
174 
Carrying value of definite-lived intangible assets
20 
22 
Accumulated amortization
54 
54 
Cabinets and Related Products [Member]
 
 
Changes in carrying amount of goodwill
 
 
Gross Goodwill
589 
589 
Accumulated Impairment Losses
(408)
(408)
Goodwill
181 
181 
Plumbing Products [Member]
 
 
Changes in carrying amount of goodwill
 
 
Gross Goodwill
535 
541 
Accumulated Impairment Losses
(340)
(340)
Goodwill
195 
201 
Other
(6)
 
Installation and Other Services [Member]
 
 
Changes in carrying amount of goodwill
 
 
Gross Goodwill
1,806 
1,806 
Accumulated Impairment Losses
(762)
(762)
Goodwill
1,044 
1,044 
Decorative Architectural Products [Member]
 
 
Changes in carrying amount of goodwill
 
 
Gross Goodwill
294 
294 
Accumulated Impairment Losses
(75)
(75)
Goodwill
219 
219 
Other Specialty Products [Member]