MASCO CORP /DE/, 10-K filed on 2/21/2012
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2011
Jan. 31, 2012
Jun. 30, 2011
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
MASCO CORP /DE/ 
 
 
Entity Central Index Key
0000062996 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2011 
 
 
Amendment Flag
false 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 4,179,174,000 
Entity Common Stock, Shares Outstanding (actual number)
 
357,294,300 
 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Current Assets:
 
 
Cash and cash investments
$ 1,656 
$ 1,715 
Receivables
914 
888 
Inventories
769 
732 
Prepaid expenses and other
70 
129 
Assets held for sale
20 
 
Total current assets
3,429 
3,464 
Property and equipment, net
1,567 
1,737 
Goodwill
1,891 
2,383 
Other intangible assets, net
196 
269 
Other assets
209 
287 
Assets held for sale
Total Assets
7,297 
8,140 
Current Liabilities:
 
 
Accounts payable
770 
602 
Notes payable
803 
66 
Accrued liabilities
782 
819 
Liabilities held for sale
 
Total current liabilities
2,363 
1,487 
Long-term debt
3,222 
4,032 
Deferred income taxes and other
970 
1,039 
Total Liabilities
6,555 
6,558 
Commitments and contingencies
   
   
Masco Corporation's shareholders' equity
 
 
Common shares authorized: 1,400,000,000; issued and outstanding: 2011 - 347,900,000; 2010 - 348,600,000
348 
349 
Preferred shares authorized: 1,000,000; issued and outstanding: 2011 and 2010 - None
   
   
Paid-in capital
65 
42 
Retained earnings
38 
720 
Accumulated other comprehensive income
76 
273 
Total Masco Corporation's shareholders' equity
527 
1,384 
Noncontrolling interest
215 
198 
Total Equity
742 
1,582 
Total Liabilities and Equity
$ 7,297 
$ 8,140 
Consolidated Balance Sheets (Parenthetical)
Dec. 31, 2011
Dec. 31, 2010
Consolidated Balance Sheets [Abstract]
 
 
Common shares, shares authorized
1,400,000,000 
1,400,000,000 
Common shares, shares issued
347,900,000 
348,600,000 
Common shares, shares outstanding
347,900,000 
348,600,000 
Preferred shares, shares authorized
1,000,000 
1,000,000 
Preferred shares, shares issued
   
   
Preferred shares, shares outstanding
   
   
Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Consolidated Statements of Income [Abstract]
 
 
 
Net sales
$ 7,467 
$ 7,486 
$ 7,657 
Cost of sales
5,683 
5,653 
5,647 
Gross profit
1,784 
1,833 
2,010 
Selling, general and administrative expenses
1,585 
1,598 
1,678 
Impairment charges for goodwill and other intangible assets
494 
698 
262 
Operating (loss) profit
(295)
(463)
70 
Other income (expense), net:
 
 
 
Interest expense
(254)
(251)
(225)
Impairment charges for financial investments
(17)
(34)
(10)
Other, net
77 
29 
Total other income (expense), net
(177)
(278)
(206)
Loss from continuing operations before income taxes
(472)
(741)
(136)
Income tax (benefit) expense
(49)
240 
(44)
Loss from continuing operations
(423)
(981)
(92)
Loss from discontinued operations, net
(110)
(21)
(53)
Net loss
(533)
(1,002)
(145)
Less: Net income attributable to noncontrolling interest
42 
41 
38 
Net loss attributable to Masco Corporation
(575)
(1,043)
(183)
Basic:
 
 
 
Loss from continuing operations
$ (1.34)
$ (2.94)
$ (0.38)
Loss from discontinued operations, net
$ (0.32)
$ (0.06)
$ (0.15)
Net loss
$ (1.66)
$ (3.00)
$ (0.53)
Diluted:
 
 
 
Loss from continuing operations
$ (1.34)
$ (2.94)
$ (0.38)
Loss from discontinued operations, net
$ (0.32)
$ (0.06)
$ (0.15)
Net loss
$ (1.66)
$ (3.00)
$ (0.53)
Amounts attributable to Masco Corporation:
 
 
 
Loss from continuing operations
(465)
(1,022)
(130)
Loss from discontinued operations, net
(110)
(21)
(53)
Net loss
$ (575)
$ (1,043)
$ (183)
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
 
Net loss
$ (533)
$ (1,002)
$ (145)
Depreciation and amortization
263 
279 
254 
Deferred income taxes
(112)
168 
(83)
Loss on disposition of businesses, net
 
 
40 
(Gain) on disposition of investments, net
(71)
(8)
(2)
Impairment charges:
 
 
 
Financial investments
 
34 
10 
Goodwill and other intangible assets
494 
698 
262 
Long-lived assets
 
67 
 
Discontinued operations
86 
23 
 
Stock-based compensation
61 
62 
69 
Other items, net
53 
29 
58 
(Increase) decrease in receivables
(60)
80 
20 
(Increase) decrease in inventories
(54)
198 
Increase (decrease) in accounts payable and accrued liabilities, net
112 
33 
24 
Net cash from operating activities
239 
465 
705 
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
 
Increase in debt
Payment of debt
(9)
(6)
(14)
Issuance of notes, net of issuance costs
 
494 
 
Credit Agreement costs
(1)
(9)
 
Retirement of notes
(58)
(359)
 
Purchase of Company common stock
(30)
(45)
(11)
Tax benefit from stock-based compensation
 
Dividends paid to noncontrolling interest
(18)
(15)
(16)
Cash dividends paid
(107)
(108)
(166)
Net cash for financing activities
(219)
(40)
(197)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(151)
(137)
(125)
Acquisition of businesses, net of cash acquired
(10)
 
(8)
Proceeds from disposition of :
 
 
 
Marketable securities
49 
22 
Businesses, net of cash disposed
 
 
Property and equipment
24 
18 
23 
Other financial investments, net
45 
20 
Other, net
(18)
(32)
(27)
Net cash for investing activities
(61)
(109)
(118)
Effect of exchange rate changes on cash and cash investments
(18)
(14)
(5)
CASH AND CASH INVESTMENTS:
 
 
 
(Decrease) increase for the year
(59)
302 
385 
At January 1
1,715 
1,413 
1,028 
At December 31
$ 1,656 
$ 1,715 
$ 1,413 
Consolidated Statements of Shareholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common Shares ($1 par value)
Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income
Noncontrolling Interest
Beginning Balance at Dec. 31, 2008
$ 2,981 
$ 351 
$ 0 
$ 2,162 
$ 308 
$ 160 
Net (loss) income
(145)
 
 
(183)
 
38 
Cumulative translation adjustments
28 
 
 
 
22 
Unrealized gain on marketable securities, net of income tax of $13, $xx and $xx for years 2009, 2010, 2011, respectively
22 
 
 
 
22 
 
Unrecognized prior service cost and net loss, net of income tax benefit of $20, $xx and $5 for years 2009, 2010, 2011, respectively
14 
 
 
 
14 
 
Total comprehensive loss
(81)
 
 
 
 
 
Shares issued
(1)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(11)
(2)
(9)
 
 
 
Surrendered (non-cash)
(5)
(1)
(4)
 
 
 
Cash dividends declared
(108)
 
 
(108)
 
 
Dividends paid to noncontrolling interest
(16)
 
 
 
 
(16)
Stock-based compensation
56 
 
56 
 
 
 
Ending Balance at Dec. 31, 2009
2,817 
350 
42 
1,871 
366 
188 
Net (loss) income
(1,002)
 
 
(1,043)
 
41 
Cumulative translation adjustments
(57)
 
 
 
(41)
(16)
Unrealized gain on marketable securities, net of income tax of $13, $xx and $xx for years 2009, 2010, 2011, respectively
 
 
 
 
Unrecognized prior service cost and net loss, net of income tax benefit of $20, $xx and $5 for years 2009, 2010, 2011, respectively
(53)
 
 
 
(53)
 
Total comprehensive loss
(1,111)
 
 
 
 
 
Shares issued
 
(2)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(45)
(3)
(42)
 
 
 
Surrendered (non-cash)
(6)
 
(6)
 
 
 
Cash dividends declared
(108)
 
 
(108)
 
 
Dividends paid to noncontrolling interest
(15)
 
 
 
 
(15)
Stock-based compensation
50 
 
50 
 
 
 
Ending Balance at Dec. 31, 2010
1,582 
349 
42 
720 
273 
198 
Net (loss) income
(533)
 
 
(575)
 
42 
Cumulative translation adjustments
(30)
 
 
 
(23)
(7)
Unrealized gain on marketable securities, net of income tax of $13, $xx and $xx for years 2009, 2010, 2011, respectively
(38)
 
 
 
(38)
 
Unrealized (loss) on interest rate swaps, Net of income tax of $xx
(23)
 
 
 
(23)
 
Unrecognized prior service cost and net loss, net of income tax benefit of $20, $xx and $5 for years 2009, 2010, 2011, respectively
(113)
 
 
 
(113)
 
Total comprehensive loss
(737)
 
 
 
 
 
Shares issued
 
(2)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(30)
(2)
(28)
 
 
 
Surrendered (non-cash)
(8)
(1)
(7)
 
 
 
Cash dividends declared
(107)
 
 
(107)
 
 
Dividends paid to noncontrolling interest
(18)
 
 
 
 
(18)
Stock-based compensation
60 
 
60 
 
 
 
Ending Balance at Dec. 31, 2011
$ 742 
$ 348 
$ 65 
$ 38 
$ 76 
$ 215 
Consolidated Statements of Shareholders' Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Income tax benefit on unrealized gain on marketable securities
$ 0 
$ 0 
$ 13 
Income tax benefit on unrecognized prior service cost
20 
Accumulated Other Comprehensive Income
 
 
 
Income tax benefit on unrealized gain on marketable securities
13 
Net of income tax unrealized (loss) on interest rate swaps
 
 
Income tax benefit on unrecognized prior service cost
$ 5 
$ 0 
$ 20 
Accounting Policies
Accounting Policies

A.  ACCOUNTING POLICIES

Principles of Consolidation.    The consolidated financial statements include the accounts of Masco Corporation and all majority-owned subsidiaries. All significant intercompany transactions have been eliminated. The Company consolidates the assets, liabilities and results of operations of variable interest entities, for which the Company is the primary beneficiary.

Use of Estimates and Assumptions in the Preparation of Financial Statements.    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates and assumptions.

Revenue Recognition.    The Company recognizes revenue as title to products and risk of loss is transferred to customers or when services are rendered, net of applicable provisions for discounts, returns and allowances. The Company records 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. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales.

Customer Promotion Costs.    The Company records estimated reductions to revenue for customer programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. In-store displays that are owned by the Company and used to market the Company’s products are included in other assets in the consolidated balance sheets and are amortized using the straight-line method over the expected useful life of three years; related amortization expense is classified as a selling expense in the consolidated statements of income.

Foreign Currency.    The financial statements of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates in effect during the year. The resulting cumulative translation adjustments have been recorded in the accumulated other comprehensive income component of shareholders’ equity. Realized foreign currency transaction gains and losses are included in the consolidated statements of income in other income (expense), net.

Cash and Cash Investments.    The Company considers all highly liquid investments with an initial maturity of three months or less to be cash and cash investments.

Receivables.    The Company does significant business with a number of customers, including certain home centers and homebuilders. The Company monitors its exposure for credit losses on its customer receivable balances and the credit worthiness of its customers on an on-going basis and records related allowances for doubtful accounts. Allowances are estimated based upon specific customer balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon historical collection, return and write-off activity. During downturns in the Company’s markets, declines in the financial condition and creditworthiness of customers impacts the credit risk of the receivables involved and the Company has incurred additional bad debt expense related to customer defaults. A separate allowance is recorded for customer incentive rebates and is generally based upon sales activity. Receivables are presented net of certain allowances (including allowances for doubtful accounts) of $61 million and $65 million at December 31, 2011 and 2010, respectively. Receivables include unbilled revenue related to the Installation and Other Services segment of $17 million and $12 million at December 31, 2011 and 2010, respectively.

Property and Equipment.    Property and equipment, including significant betterments to existing facilities, are recorded at cost. Upon retirement or disposal, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the consolidated statements of income. Maintenance and repair costs are charged against earnings as incurred.

The Company reviews its property and equipment as an event occurs or circumstances change that would more likely than not reduce the fair value of the property and equipment below the carrying amount. If the carrying amount of property and equipment is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, the Company evaluates the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.

Depreciation.    Depreciation expense is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and land improvements, 2 to 10 percent, and machinery and equipment, 5 to 33 percent. Depreciation expense was $246 million, $261 million and $237 million in 2011, 2010 and 2009, respectively.

Goodwill and Other Intangible Assets.    The Company performs its annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company has defined its reporting units and completed the impairment testing of goodwill at the operating segment level. The Company’s operating segments are reporting units that engage in business activities, for which discrete financial information, including five-year forecasts, are available. The Company compares the fair value of the reporting units to the carrying value of the reporting units for goodwill impairment testing. Fair value is determined using a discounted cash flow method, which includes significant unobservable inputs (Level 3 inputs).

Determining market values using a discounted cash flow method requires the Company to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. The Company’s judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. In estimating future cash flows, the Company relies 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. The Company utilizes its weighted average cost of capital of approximately seven percent as the basis to determine the discount rate to apply to the estimated future cash flows. In recent years, due to market conditions, the Company increased the discount rate to a range of ten percent to 15 percent for most of its reporting units. The Company records an impairment to goodwill (adjusting the value to the estimated fair value) if the book value exceeds the estimated fair value, on a non-recurring basis.

The Company reviews its other indefinite-lived intangible assets for impairment annually in the fourth quarter of each year, or as events occur or circumstances change that indicate the assets may be impaired without regard to the reporting unit. The Company considers 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.

 

Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. The Company evaluates the remaining useful lives of amortizable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization. See Note H for additional information regarding Goodwill and Other Intangible Assets.

Fair Value Accounting.    The Company follows accounting guidance for its financial investments and liabilities which defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements. The Company also follows this guidance for its non-financial investments and liabilities.

The fair value of financial investments and liabilities is determined at each balance sheet date and future declines in market conditions, the future performance of the underlying investments or new information could affect the recorded values of the Company’s investments in marketable securities, private equity funds and other private investments.

The Company uses derivative financial instruments to manage certain exposure to fluctuations in earnings and cash flows resulting from changes in foreign currency exchange rates, commodity costs and interest rate exposures. Derivative financial instruments are recorded in the consolidated balance sheets as either an asset or liability measured at fair value. For each derivative financial instrument that is designated and qualifies as a fair-value hedge, the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in determining current earnings during the period of the change in fair values. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in determining current earnings during the period of the change in fair value.

Warranty.    At the time of sale, the Company accrues a warranty liability for estimated costs to provide products, parts or services to repair or replace products in satisfaction of warranty obligations. The Company’s estimate of costs to service its warranty obligations is based upon historical experience and expectations of future conditions.

A majority of the Company’s 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 the Company. The Company’s revenue recognition policy takes into account this type of return when recognizing revenue, and deductions are recorded at the time of sale.

Product Liability.    The Company provides for expenses associated with product liability obligations when such amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change that would affect the estimated liability.

Stock-Based Compensation.    The Company measures compensation expense for stock awards at the market price of the Company’s common stock at the grant date. Effective January 1, 2006, such expense is being recognized ratably over the shorter of the vesting period of the stock awards, typically 5 to 10 years (except for stock awards held by grantees age 66 or older, which vest over five years), or the length of time until the grantee becomes retirement-eligible at age 65. For stock awards granted prior to January 1, 2006, such expense is being recognized over the vesting period of the stock awards, typically 10 years, or for executive grantees that are, or will become, retirement-eligible during the vesting period, the expense is being recognized over five years or immediately upon a grantee’s retirement.

 

The Company measures compensation expense for stock options using a Black-Scholes option pricing model. Such expense is being recognized ratably over the shorter of the vesting period of the stock options, typically five years, or the length of time until the grantee becomes retirement-eligible at age 65. The Company utilizes the shortcut method to determine the tax windfall pool associated with stock options.

Noncontrolling Interest.    The Company owns 68 percent of Hansgrohe AG at both December 31, 2011 and 2010. The aggregate noncontrolling interest, net of dividends, at December 31, 2011 and 2010 has been recorded as a component of equity on the Company’s consolidated balance sheets.

Interest and Penalties on Uncertain Tax Positions.    The Company records interest and penalties on its uncertain tax positions in income tax expense.

Reclassifications.    Certain prior-year amounts have been reclassified to conform to the 2011 presentation in the consolidated financial statements. In the Company’s consolidated statements of cash flows, the cash flows from discontinued operations are not separately classified.

Recently Issued Accounting Pronouncements.    Effective January 1, 2011, the Company adopted new accounting guidance which addresses how to determine whether a sales arrangement involves multiple deliverables or contains more than one unit of accounting, and how the sales arrangement consideration should be allocated among the separate units of accounting. The Company evaluated this new guidance and the adoption did not have an impact on the Company’s financial position or its results of operations.

In June 2011, new accounting guidance was issued regarding the presentation and disclosure of comprehensive income. The new guidance will require presentation of other comprehensive income items in the Company’s consolidated statement of income; such items will no longer be included in the statement of shareholders’ equity. The new guidance will be effective for the Company January 1, 2012. The new guidance will also require additional disclosure for reclassification of items from other comprehensive income to the Company’s statement of income; however, this requirement has been delayed. The Company does not expect this guidance to have a material impact on the Company’s financial condition or its results of operations.

In September 2011, new accounting guidance was issued regarding impairment testing of goodwill. The new guidance would allow the Company to make a qualitative determination regarding potential goodwill impairment before performing the quantitative impairment test. The new guidance will be effective for the Company January 1, 2012. The Company does not currently anticipate utilizing the qualitative provisions of the new guidance.

Discontinued Operations
Discontinued Operations

B.  DISCONTINUED OPERATIONS

The presentation of discontinued operations includes components of the Company that the Company intends to sell, which comprises operations and cash flows that can be clearly distinguished from the rest of the Company. The Company has accounted for the business units identified in 2011 and those which were sold in 2009 as discontinued operations.

During 2011, the Company determined that several businesses in the Installation and Other Services segment were not core to the Company’s long-term growth strategy. These businesses provide commercial drywall installation, millwork and framing services; accordingly, the Company has embarked on a plan of sale for these businesses.

 

During 2009, the Company sold several business units that were not core to the Company’s long-term growth strategy.

Losses from these 2011 and 2009 discontinued operations were included in loss from discontinued operations, net, in the consolidated statements of income.

Selected financial information for the discontinued operations during the period owned by the Company, were as follows, in millions:

 

 

                         
    2011     2010     2009  

Net sales

  $ 93     $ 106     $ 201  
   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

  $ (22   $ (13   $ (25

Impairment of assets held for sale

    (86     (23      

Loss on disposal of discontinued operations, net

    (3           (40
   

 

 

   

 

 

   

 

 

 

Loss before income tax

    (111     (36     (65

Income tax benefit

    1       15       12  
   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net

  $ (110   $ (21   $ (53
   

 

 

   

 

 

   

 

 

 

Included in loss on disposal of discontinued operations, net in 2011 is the impairment of indefinite and definite-lived intangible assets of $56 million, the impairment of goodwill of $13 million and the impairment of fixed and other assets of $17 million. Also included in the loss on disposal of discontinued operations, net in 2011 is $3 million expense reflecting the adjustment of certain assets related to businesses disposed in prior years.

Included in income tax benefit was $6 million related to (loss) from discontinued operations in 2009.

The income tax benefit recorded in 2010 relates primarily to the allocation of an income tax benefit to impairment charges on goodwill and other indefinite-lived intangible assets of certain discontinued operations.

The unusual relationship between income taxes and (loss) before income taxes in 2011 and 2009 resulted primarily from certain losses providing no current tax benefit.

Also during 2011, the Company decided to exit a product line in builders’ hardware in the Decorative Architectural Products segment with net sales of $1 million and an operating loss of $15 million in 2011 (including $8 million to write-down inventory related to satisfaction of contractual obligations); this business will be included in continuing operations through the date of disposal.

Acquisitions
Acquisitions

C.  ACQUISITIONS

In late 2011, the Company acquired a small manufacturer of hot tubs in the Plumbing Products segment; this business allows the Company to expand its spa offering into additional price point categories. During 2009, the Company acquired a small business in the Plumbing Products segment; this business allows the Company to expand into a developing market and had annual sales of $11 million.

The results of all acquisitions are included in the consolidated financial statements from the respective dates of acquisition.

 

The total net cash purchase price of these acquisitions was $10 million and $6 million, respectively, in 2011 and 2009.

Certain purchase agreements provided for the payment of additional consideration in cash, contingent upon whether certain conditions are met, including the operating performance of the acquired business. At December 31, 2011 and 2010, there was no outstanding contingent consideration.

Inventories
Inventories

D.  INVENTORIES

 

 

                 
    (In Millions)  
    At December 31  
      2011       2010  

Finished goods

  $ 390     $ 393  

Raw material

    280       246  

Work in process

    99       93  
   

 

 

   

 

 

 

Total

  $ 769     $ 732  
   

 

 

   

 

 

 

Inventories, which include purchased parts, materials, direct labor and applied manufacturing overhead, are stated at the lower of cost or net realizable value, with cost determined by use of the first-in, first-out method.

Fair Value of Financial Investments and Liabilities
Fair Value of Financial Investments and Liabilities

E.   FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES

Accounting Policy.    The Company follows accounting guidance that defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements for its financial investments and liabilities. The guidance defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Further, it defines a fair value hierarchy, as follows: Level 1 inputs as quoted prices in active markets for identical assets or liabilities; Level 2 inputs as observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities or other inputs that are observable or can be corroborated by market data; and Level 3 inputs as unobservable inputs that are supported by little or no market activity and that are financial instruments whose value is determined using pricing models or instruments for which the determination of fair value requires significant management judgment or estimation.

Financial investments that are available to be traded on readily accessible stock exchanges (domestic or foreign) are considered to have active markets and have been valued using Level 1 inputs. Financial investments that are not available to be traded on a public market or have limited secondary markets, or contain provisions that limit the ability to sell the investment are considered to have inactive markets and have been valued using Level 2 or 3 inputs. The Company incorporated credit risk into the valuations of financial investments by estimating the likelihood of non-performance by the counterparty to the applicable transactions. The estimate included the length of time relative to the contract, financial condition of the counterparty and current market conditions. The criteria for determining if a market was active or inactive were based on the individual facts and circumstances.

Financial Investments.    The Company has maintained investments in available-for-sale securities and a number of private equity funds and other private investments, 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:

 

 

                 
    At December 31  
    2011     2010  

Auction rate securities

  $ 22     $ 22  

TriMas Corporation common stock

          40  
   

 

 

   

 

 

 

Total recurring investments

    22       62  

Private equity funds

    86       106  

Other investments

    4       6  
   

 

 

   

 

 

 

Total non-recurring investments

    90       112  

Total

  $ 112     $ 174  
   

 

 

   

 

 

 

The Company’s investments in available-for-sale securities at December 31, 2011 and 2010 were as follows, in millions:

 

 

                                 
          Pre-tax        
    Cost Basis     Unrealized
Gains
    Unrealized
Losses
    Recorded
Basis
 

December 31, 2011

  $ 19     $ 3     $     $ 22  

December 31, 2010

  $ 22     $ 40     $     $ 62  

The Company’s investments in private equity funds and other private investments are carried at cost. At December 31, 2011, the Company has investments in 17 venture capital funds, with an aggregate carrying value of $17 million. The venture capital funds invest in start-up or smaller, early-stage established businesses, principally in the information technology, bio-technology and health care sectors. At December 31, 2011, the Company also has investments in 22 buyout funds, with an aggregate carrying value of $69 million. The buyout funds invest in later-stage, established businesses and no buyout fund has a concentration in a particular sector.

Recurring Fair Value Measurements.    For financial investments measured at fair value on a recurring basis at each reporting period, the unrealized gains or losses (that are deemed to be temporary) are recognized, net of tax effect, through shareholders’ equity, as a component of other comprehensive income. Realized gains and losses and charges for other-than-temporary impairments are included in determining net income, with related purchase costs based upon specific identification.

For marketable securities, the Company reviews, on a recurring basis, industry analyst reports, key ratios and statistics, market analyses and other factors for each investment to determine if an unrealized loss is other-than-temporary.

In the past, the Company invested excess cash in auction rate securities. Auction rate securities are investment securities that have interest rates which are reset every 7, 28 or 35 days. The fair values 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 assumptions for credit defaults, since the auction rate securities are backed by credit default swap agreements.

 

During 2010, the Company and Asahi Tec agreed to amend the preferred stock to include a more favorable conversion feature into common stock and to include a mandatory conversion date of February 28, 2011. As a result of the amendment, the Company recognized a $28 million impairment loss based on the current fair value of the preferred stock on an if-converted basis at June 30, 2010. Also, as a result of the amendment, the Company reversed an unrealized gain of $23 million that was previously included in accumulated other comprehensive income. During the last six months of 2010, the Company converted all its holdings of Asahi Tec preferred stock into common stock which was sold, in its entirety, in open market transactions. The Company realized cash proceeds of $11 million and realized losses aggregating $8 million in 2010. As a result of the disposition of the Asahi Tec common stock, the Company received a tax refund of $16 million in 2011 relating to the utilization of a loss carryback to offset taxes paid on prior capital gains.

During 2011 and 2010, the Company sold 1,974,000 shares and 481,000 shares, respectively, of its investment in TriMas common stock for cash of $43 million and $10 million, respectively; at December 31, 2011, the Company does not own any shares of TriMas common stock.

Non-Recurring Fair Value Measurements.    It is not practicable for the Company to estimate a fair value for private equity funds and other private investments because there are no quoted market prices, and sufficient information is not readily available for the Company to utilize a valuation model to determine the fair value for each fund. These investments are evaluated, on a non-recurring basis, for potential other-than-temporary impairment when impairment indicators are present, or when an event or change in circumstances has occurred, that may have a significant adverse effect on the fair value of the investment.

Impairment indicators the Company considers include the following: whether there has been a significant deterioration in earnings performance, asset quality or business prospects; a significant adverse change in the regulatory, economic or technological environment; a significant adverse change in the general market condition or geographic area in which the investment operates; industry and sector performance; current equity and credit market conditions; and any bona fide offers to purchase the investment for less than the carrying value. The Company also considers specific adverse conditions related to the financial health of and business outlook for the fund, including industry and sector performance. The significant assumptions utilized in analyzing a fund for potential other-than-temporary impairment include current economic conditions, market analysis for specific funds and performance indicators in the residential and commercial construction, bio-technology, health care and information technology sectors in which the applicable funds’ investments operate. Since there is no active trading market for these investments, they are for the most part illiquid. These investments, by their nature, can also have a relatively higher degree of business risk, including financial leverage, than other financial investments. Future changes in market conditions, the future performance of the underlying investments or new information provided by private equity fund managers could affect the recorded values of such investments and the amounts realized upon liquidation. Due to the significant unobservable inputs, the fair value measurements used to evaluate impairment are a Level 3 input.

 

Recurring Fair Value Measurements.    Financial investments and (liabilities) 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  
    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  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                 
          Fair Value Measurements Using  
    Dec. 31,
2010
    Quoted
Market
Prices
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

TriMas Corporation

  $ 40     $ 40     $     $  

Auction rate securities

    22                   22  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 62     $ 40     $     $ 22  
   

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes the changes in Level 3 financial investments measured at fair value on a recurring basis for the years ended December 31, 2011 and 2010, in millions:

 

 

         
    Auction Rate
Securities
 

Fair value January 1, 2011

  $ 22  

Total losses included in earnings

       

Unrealized losses

     

Purchases, issuances, settlements

     

Transfers from Level 3 to Level 2

     
   

 

 

 

Fair value at December 31, 2011

  $ 22  
   

 

 

 

 

                         
    Asahi Tec
Preferred Stock
    Auction Rate
Securities
    Total  

Fair value January 1, 2010

  $ 71     $ 22     $ 93  

Total losses included in earnings

    (28           (28

Unrealized losses

    (23           (23

Purchases, issuances, settlements

                 

Transfers from Level 3 to Level 2

    (20           (20
   

 

 

   

 

 

   

 

 

 

Fair value at December 31, 2010

  $     $ 22     $ 22  
   

 

 

   

 

 

   

 

 

 

 

Non-Recurring Fair Value Measurements.    During 2011, there were not any financial investments measured on a non-recurring basis. Financial investments measured at fair value on a non-recurring basis during 2010 and the amounts for each level within the fair value hierarchy were as follows, in millions:

 

 

                                         
          Fair Value Measurements Using        
    Dec. 31,
2010
    Quoted
Market
Prices
(Level 1)
    Significant
Other
Observable
Unobservable
Inputs

(Level 2)
    Significant
Total
Inputs
(Level 3)
    Gains
(Losses)
 

Private equity funds

  $ 2     $     $     $ 2     $ (4

Other private investments

                            (2
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 2     $     $     $ 2     $ (6
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

None of the Company’s investments in private equity funds, for which fair value was determined, had unrealized losses in 2011 or 2010.

The remaining private equity investments in 2010 with an aggregate carrying value of $104 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.

Realized Gains (Losses) and Impairment Charges.    The Company did not have any transfers between Level 1 and Level 2 financial assets in 2011 or 2010. During 2010, based on information from the fund manager, the Company determined that the decline in the estimated value of three private equity funds (with an aggregate carrying value of $6 million prior to impairment) was other-than-temporary and, accordingly, recognized non-cash, pre-tax impairment charges of $4 million. During 2010, the Company also determined that the decline in the estimated value of one private investment was other-than-temporary and, accordingly, recognized a non-cash, pre-tax impairment charge of $2 million.

During 2009, the Company determined that the decline in the estimated value of five private equity funds, with an aggregate carrying value of $41 million prior to impairment, was other-than-temporary. Accordingly, for the year ended December 31, 2009, the Company recognized non-cash, pre-tax impairment charges of $10 million.

 

Income from financial investments, net, included in other, net, within other income (expense), net, and impairment charges for financial investments were as follows, in millions:

 

 

                         
    2011     2010     2009  

Realized gains from marketable securities

  $ 41     $ 10     $  

Realized losses from marketable securities

          (8      

Dividend income from marketable securities

                 

Income from other investments, net

    32       7       3  

Dividend income from other investments

                 
   

 

 

   

 

 

   

 

 

 

Income from financial investments, net

  $ 73     $ 9     $ 3  
   

 

 

   

 

 

   

 

 

 

Impairment charges:

                       

Asahi Tec

  $     $ (28   $  

Private equity funds

          (4     (10

Other private investments

          (2      

TriMas Corporation

                 

Marketable securities

                 
   

 

 

   

 

 

   

 

 

 

Total impairment charges

  $     $ (34   $ (10
   

 

 

   

 

 

   

 

 

 

The impairment charges related to the Company’s financial investments recognized during 2010 and 2009 were based upon then-current estimates for the fair value of certain financial investments; such estimates could change in the near-term based upon future events and circumstances.

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 December 31, 2011 was approximately $4.0 billion, compared with the aggregate carrying value of $4.0 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2010 was approximately $4.2 billion, compared with the aggregate carrying value of $4.1 billion.

Derivative Instrument and Hedging Activities
Derivative Instrument and Hedging Activities

F.   DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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 August of 2011, the Company entered into new interest rate swap agreements to hedge the volatility in interest payments associated with an expected debt issuance in 2012. These interest rate swaps are designed as cash flow hedges and effectively fix interest rates on the forecasted debt issuance to variable rates based on 3-month LIBOR. The average fixed rate on the interest rate swaps is 2.8%. At December 31, 2011, the interest rate swap agreements covered a notional amount of $400 million, which the Company expects to issue in connection with the maturity of the Company’s $791 million 5.875% fixed-rate debt due July 15, 2012. At December 31, 2011, the interest rate swaps are considered 100 percent effective; therefore, the market valuation of $23 million is recorded in other comprehensive income in the Company’s statement of shareholders’ equity with a corresponding increase to accrued other in the Company’s condensed consolidated balance sheet at December 31, 2011.

 

In 2011, 2010 and 2009, the Company recognized a decrease in interest expense of $10 million, $11 million and $10 million, respectively, related to the amortization of gains resulting from the terminations (in 2008 and 2004) of two 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 2011 and 2010, 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.

Metals Contracts.    During 2011 and 2010, 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 (loss) gain included in the Company’s consolidated statements of income is as follows, in millions:

 

 

                         
    Twelve Months Ended December 31,  
      2011         2010         2009    

Foreign Currency Contracts

                       

Exchange Contracts

  $     3     $     3     $ (12

Forward Contracts

    3       (2     (3

Metal Contracts

    (7     7        
   

 

 

   

 

 

   

 

 

 

Total (loss) gain

  $ (1   $ 8     $ (15
   

 

 

   

 

 

   

 

 

 

 

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

 

 

                         
    At December 31, 2011  
    Notional
Amount
    Assets     Liabilities  

Foreign exchange contracts

                       

Exchange Contracts

  $ 108                  

Current assets

          $ 8     $  

Foreign Forward Contracts

    76                  

Current assets

            1        

Current liabilities

            1       2  

Metal Contracts

    67                  

Current assets

            2        

Current liabilities

                  4  
   

 

 

   

 

 

   

 

 

 

Total

  $ 251     $ 12     $ 6  
   

 

 

   

 

 

   

 

 

 
   
    At December 31, 2010  
    Notional
Amount
    Assets     Liabilities  

Foreign exchange contracts

                       

Exchange Contracts

  $ 94                  

Current assets

          $     $ 4  

Foreign Contracts

    47                  

Current liabilities

                  3  

Metal Contracts

    22                  

Current assets

            8       1  
   

 

 

   

 

 

   

 

 

 

Total

  $ 163     $ 8     $ 8  
   

 

 

   

 

 

   

 

 

 

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).

 

Property and Equipment
Property and Equipment

G.  PROPERTY AND EQUIPMENT

 

 

                 
    (In Millions)  
    At December 31  
    2011     2010  

Land and improvements

  $ 183     $ 190  

Buildings

    1,004       1,030  

Machinery and equipment

    2,159       2,419  
   

 

 

   

 

 

 
      3,346       3,639  

Less: Accumulated depreciation

    1,779       1,902  
   

 

 

   

 

 

 

Total

  $ 1,567     $ 1,737  
   

 

 

   

 

 

 

The Company leases certain equipment and plant facilities under noncancellable operating leases. Rental expense recorded in the consolidated statements of income totaled approximately $103 million, $111 million and $135 million during 2011, 2010 and 2009, respectively. Future minimum lease payments at December 31, 2011 were approximately as follows: 2012 – $68 million; 2013 – $47 million; 2014 – $32 million; 2015 – $21 million; and 2016 and beyond – $95 million.

The Company leases operating facilities from certain related parties, primarily former owners (and in certain cases, current management personnel) of companies acquired. The Company recorded rental expense to such related parties of approximately $5 million, $6 million and $8 million in 2011, 2010 and 2009, respectively.

As a result of its business rationalization activities over the last several years, at December 31, 2011 and 2010, the Company is holding several facilities for sale, within the Cabinets and Related Products segment and the Other Specialty Products segment. At December 31, 2011, the net book value of those facilities is approximately $49 million and approximates fair value. Fair value was estimated using a market approach, considering the estimated fair values for the other comparable buildings in the areas where the facilities are located, Level 3 inputs.

 

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

H.  GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for 2011 and 2010, by segment, were as follows, in millions:

 

 

                         
    Gross Goodwill
At December  31,
2011
    Accumulated
Impairment
Losses
    Net Goodwill
At December 31,
2011
 

Cabinets and Related Products

  $ 589     $ (408   $ 181  

Plumbing Products

    541       (340     201  

Installation and Other Services

    1,806       (762     1,044  

Decorative Architectural Products

    294       (75     219  

Other Specialty Products

    980       (734     246  
   

 

 

   

 

 

   

 

 

 

Total

  $ 4,210     $ 2,319     $ 1,891  
   

 

 

   

 

 

   

 

 

 

 

                                                                 
    Gross
Goodwill At
December 31,
2010
    Accumulated
Impairment
Losses
    Net Goodwill
At
December 31,
2010
    Additions(A)     Discontinued
Operations(B)
    Pre-tax
Impairment
Charge
    Other(C)     Net Goodwill
At
December 31,
2011
 

Cabinets and Related Products

  $ 587     $ (364   $ 223     $     $     $ (44   $ 2     $ 181  

Plumbing Products

    536       (340     196       9                   (4     201  

Installation and Other Services

    1,819       (762     1,057             (13                 1,044  

Decorative Architectural Products

    294             294                   (75           219  

Other Specialty Products

    980       (367     613                   (367           246  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,216     $ (1,833   $ 2,383     $ 9     $ (13   $ (486   $ (2   $ 1,891  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                                                 
    Gross
Goodwill At
December 31,
2009
    Accumulated
Impairment
Losses
    Net Goodwill
At
December 31,
2009
    Additions(A)     Discontinued
Operations(B)
    Pre-tax
Impairment
Charge
    Other(C)     Net Goodwill
At
December 31,
2010
 

Cabinets and Related Products

  $ 590     $ (364   $ 226     $     $     $     $ (3   $ 223  

Plumbing Products

    547       (340     207                         (11     196  

Installation and Other Services

    1,819       (51     1,768             (14     (697           1,057  

Decorative Architectural Products

    294             294                               294  

Other Specialty Products

    980       (367     613                               613  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,230     $ (1,122   $ 3,108     $     $ (14   $ (697   $ (14   $ 2,383  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(A) Additions include acquisitions.

 

(B) During 2011, the Company reclassified the goodwill related to the business units held for sale. Subsequent to the reclassification, the Company recognized a charge for those business units expected to be divested at a loss; the charge included a write-down of goodwill of $13 million. In 2010, the Company recognized pre-tax impairment charges of $711 million related to the Installation and Other Services segment; during 2011, the Company allocated $14 million of the pre-tax impairment charge to the discontinued operations.

 

(C) Other principally includes the effect of foreign currency translation and purchase price adjustments related to prior-year acquisitions.

 

In the fourth quarters of 2011 and 2010, the Company completed its annual impairment testing of goodwill and other indefinite-lived intangible assets. During the third quarter of 2011, the Company assessed the goodwill related to the Installation and Other Services segment and determined no impairment was necessary at September 30, 2011.

The impairment tests in 2011 and 2010 indicated that goodwill recorded for certain of the Company’s reporting units was impaired. The Company recognized the non-cash, pre-tax impairment charges, in continuing operations, for goodwill of $486 million ($330 million, after tax) and $697 million ($586 million, after tax) for 2011 and 2010, respectively. In 2011, the pre-tax impairment charge in the Cabinets and Related Products segment relates to the European ready-to-assemble cabinet manufacturer and reflects the declining demand for certain products, as well as decreased operating margins. The pre-tax impairment charge in the Decorative Architectural Products segment relates to the builders’ hardware business and reflects increasing competitive conditions for that business. The pre-tax impairment charge in the Other Specialty Products segment relates to the North American window and door business and reflects the continuing weak level of new home construction activity in the western U.S., the reduced levels of repair and remodel activity and the expectation that recovery in these segments will be modestly slower than anticipated. In 2010, the pre-tax impairment charge in the Installation and Other Services segment reflects the Company’s expectation that the recovery in the new home construction market will be modestly slower than previously anticipated. The Company then assessed the long-lived assets associated with these business units and determined no impairment was necessary at December 31, 2011.

Other indefinite-lived intangible assets were $174 million and $185 million at December 31, 2011 and 2010, respectively, and principally included registered trademarks. In 2011, the impairment test indicated that the registered trademark for a North American business unit in the Other Specialty Products segment and the registered trademark for a North American business unit in the Plumbing Products segment were impaired due to changes in the long-term outlook for the business units. The Company recognized non-cash, pre-tax impairment charges for other indefinite-lived intangible assets of $8 million ($5 million, after tax) in 2011. In 2010, the Company recognized non-cash, pre-tax impairment charges for other indefinite-lived intangible assets of $10 million ($6 million after tax) related to the Installation and Other Services segment ($9 million pre-tax) and the Plumbing Products segment ($1 million pre-tax). During 2011, the Company allocated $9 million of the pre-tax impairment charge from the Installation and Other Services segment to discontinued operations.

The carrying value of the Company’s definite-lived intangible assets was $22 million at December 31, 2011 (net of accumulated amortization of $54 million) and $84 million at December 31, 2010 (net of accumulated amortization of $75 million) and principally included customer relationships and non-compete agreements, with a weighted average amortization period of 15 years in both 2011 and 2010. The change in definite-lived intangible assets is due to the classification of such assets related to business units held for sale. Subsequent to the classification, the Company recognized a charge for those business units expected to be divested at a loss; the charge included a write-down of $56 million for indefinite and definite-lived intangible assets. Amortization expense related to the definite-lived intangible assets of continuing operations was $6 million in each of 2011, 2010 and 2009.

At December 31, 2011, amortization expense related to the definite-lived intangible assets during each of the next five years was as follows: 2012 – $6 million; 2013 – $4 million; 2014 – $4 million; 2015 – $2 million; and 2016 – $2 million.

 

Other Assets
Other Assets

I.  OTHER ASSETS

 

 

                 
   

(In Millions)

 
    At December 31  
    2011     2010  

Financial investments (Note E)

  $ 112     $ 174  

In-store displays, net

    34       43  

Debenture expense

    28       34  

Notes receivable

    1       2  

Other

    34       34  
   

 

 

   

 

 

 

Total

  $ 209     $ 287  
   

 

 

   

 

 

 

In-store displays are amortized using the straight-line method over the expected useful life of three years; the Company recognized amortization expense related to in-store displays of $24 million, $33 million and $44 million in 2011, 2010 and 2009, respectively. Cash spent for displays was $17 million, $32 million and $26 million in 2011, 2010 and 2009, respectively.

Accrued Liabilities
Accrued Liabilities

J.  ACCRUED LIABILITIES

 

 

                 
   

(In Millions)

 
    At December 31  
    2011     2010  

Insurance

  $ 163     $ 176  

Salaries, wages and commissions

    144       177  

Warranty (Note S)

    102       107  

Advertising and sales promotion

    83       90  

Interest

    78       78  

Employee retirement plans

    32       43  

Property, payroll and other taxes

    28       32  

Derivative instruments (Note F)

    27        

Dividends payable

    27       27  

Litigation

    14       5  

Plant closures

    3       4  

.Other

    81       80  
   

 

 

   

 

 

 

Total

  $ 782     $ 819  
   

 

 

   

 

 

 

 

Debt
Debt

K.  DEBT

 

 

                 
   

(In Millions)

 
    At December 31  
    2011     2010  

Notes and debentures:

               

5.875%, due July 15, 2012

  $ 791     $ 791  

7.125%, due Aug. 15, 2013

    200       200  

4.8%, due June 15, 2015

    500       500  

6.125%, due Oct. 3, 2016

    1,000       1,000  

5.85%, due Mar. 15, 2017

    300       300  

6.625%, due Apr. 15, 2018

    114       114  

7.125%, due Mar. 15, 2020

    500       500  

7.75%, due Aug. 1, 2029

    296       296  

6.5%, due Aug. 15, 2032

    300       300  

Zero Coupon Convertible Senior Notes due 2031 (accreted value)

          57  

Other

    24       40  
   

 

 

   

 

 

 
      4,025       4,098  

Less: Current portion

    803       66  
   

 

 

   

 

 

 

Total Long-term debt

  $ 3,222     $ 4,032  
   

 

 

   

 

 

 

All of the notes and debentures above are senior indebtedness and, other than the 6.625% notes due 2018 and the 7.75% notes due 2029, are redeemable at the Company’s option.

On March 10, 2010, the Company issued $500 million of 7.125% Notes (“Notes”) due March 15, 2020. The notes are senior indebtedness and are redeemable at the Company’s option.

The Company retired $300 million of floating rate notes on March 12, 2010, the scheduled maturity date.

During 2010, the Company repurchased $59 million of 5.875% Notes due July 2012, in open-market transactions. The Company paid a premium of $2 million over par value on the purchase of the notes; this cost was included in interest expense.

In July 2001, the Company issued $1.9 billion principal amount at maturity of Zero Coupon Convertible Senior Notes due 2031 (“Old Notes”), resulting in gross proceeds of $750 million.

During 2011, holders of $108.1 million principal amount at maturity with an accreted value of $58.1 million of Notes required the Company to repurchase the Notes for cash of $57.9 million; the remaining Notes were retired. At December 31, 2011, no principal amount at maturity of Zero Coupon Convertible Senior Notes due 2031 (“Notes”) was outstanding.

On June 21, 2010, the Company entered into a Credit Agreement (the “Credit Agreement”) with a bank group, with an aggregate commitment of $1.25 billion with a maturity date of January 10, 2014. The Company’s 5-Year Revolving Credit Agreement dated as of November 5, 2004, as amended, was terminated at that time. On February 11, 2011, the Company entered into an amendment (deemed to be effective and applicable as of December 31, 2010) of the Credit Agreement with its bank group (the “Amendment”). The Amendment provided for the add-back to shareholders’ equity in the Company’s debt to capitalization covenant of (i) certain non-cash charges (including impairment charges for financial investments and goodwill and other intangible assets) and (ii) changes to the valuation allowance on the Company’s deferred tax assets included in income tax expense, each taken in 2010, which aggregate $986 million after tax. The Amendment also permitted the Company to add-back, if incurred, up to $350 million in the aggregate of future non-cash charges beginning January 1, 2011.

The Credit Agreement provides for an unsecured revolving credit facility available to the Company and one of its foreign subsidiaries, in U.S. dollars, European euros and certain other currencies. Borrowings under the revolver denominated in euros are limited to $500 million, equivalent. The Company can also borrow swingline loans up to $150 million and obtain letters of credit of up to $250 million. Any outstanding Letters of Credit reduce the Company’s borrowing capacity. At December 31, 2011, the Company had $92 million of outstanding and unused Letters of Credit, reducing the Company’s borrowing capacity by such amount.

The Credit Agreement contains financial covenants requiring the Company to maintain (A) a maximum debt to total adjusted capitalization ratio of 65 percent, and (B) a minimum adjusted interest coverage ratio equal to or greater than (i) 2.25 to 1.0 through the quarter ending on September 30, 2011 and (ii) 2.50 to 1.0 thereafter.

Revolving credit loans bear interest under the Credit Agreement, at the Company’s option: at (A) a rate per annum equal to the greatest of (i) prime rate, (ii) the Federal Funds effective rate plus 0.50% and (iii) LIBOR plus 1.0% (the “Alternative Base Rate”); plus an applicable margin based upon the then-applicable corporate credit ratings of the Company; or (B) LIBOR plus an applicable margin based upon the then-applicable corporate credit ratings of the Company. The foreign currency revolving credit loans bear interest at a rate equal to LIBOR plus an applicable margin based upon the then-applicable corporate credit ratings of the Company.

Based on the limitations of the debt to total capitalization covenant (before the amendment discussed below), at December 31, 2011, the Company had additional borrowing capacity, subject to availability, of up to $178 million. Alternatively, at December 31, 2011, the Company could absorb a reduction to shareholders’ equity of approximately $96 million, and remain in compliance with the debt to total capitalization covenant.

In order 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).

At December 31, 2011 and 2010, the Company was in compliance with the requirements of the New Credit Agreement and the Amended Five-Year Revolving Credit Agreement, as applicable.

There were no borrowings under the Credit Agreement and the Amended Five-Year Revolving Credit Agreement at December 31, 2011 and 2010, as applicable.

At December 31, 2011, the maturities of long-term debt during each of the next five years were as follows: 2012 – $803 million; 2013 – $201 million; 2014 – $1 million; 2015 – $501 million; and 2016 – $1 billion.

 

Interest paid was $254 million, $241 million and $226 million in 2011, 2010 and 2009, respectively.

Subsequent Events.    In January 2012, the Company repurchased $46 million of 5.875% Notes due July 2012 in open-market transactions. The Company paid a premium of approximately $1 million on the purchase of the Notes.

On February 13, 2012, the Company entered into an amendment (deemed to be effective and applicable as of December 31, 2011) of the Credit Agreement (the “Second Amendment”). The Second Amendment provides for the add-back to shareholders’ equity in the Company’s debt to capitalization covenant of (i) certain non-cash charges (including impairment charges for financial investments and goodwill and other intangible assets) and (ii) changes to the valuation allowance on the Company’s deferred tax assets included in income tax expense, each taken in 2010 and 2011, which aggregate $1.6 billion after tax. The Second Amendment also permits the Company to add-back, if incurred, up to $250 million in the aggregate of future non-cash charges subsequent to December 31, 2011. The Second Amendment also revised the permitted ratio of consolidated EBITDA to consolidated interest expense to 2.25 to 1.00 through December 31, 2012, increasing to 2.50 to 1.00 with respect to each quarter thereafter.

Taking the Second Amendment into account, at December 31, 2011, the Company had additional borrowing capacity, subject to availability, of up to $630 million. Alternatively, at December 31, 2011, the Company could absorb a reduction to shareholders’ equity of approximately $340 million, and remain in compliance with the debt to total capitalization covenant.

Stock-Based Compensation
Stock-Based Compensation

L.  STOCK-BASED COMPENSATION

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 December 31, 2011, 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 (income) and the income tax benefit related to these stock-based incentives were as follows, in millions:

 

 

                         
    2011     2010     2009  

Long-term stock awards

  $ 39     $ 37     $ 37  

Stock options

    21       22       25  

Phantom stock awards and stock appreciation rights

    1       3       7  
   

 

 

   

 

 

   

 

 

 

Total

  $ 61     $ 62     $ 69  
   

 

 

   

 

 

   

 

 

 

Income tax benefit (before valuation allowance)

  $ 23     $ 23     $ 26  
   

 

 

   

 

 

   

 

 

 

In 2009, the Company recognized $6 million of accelerated stock compensation expense (for previously granted stock awards and options) related to the retirement from full-time employment of the Company’s Executive Chairman of the Board of Directors; he continues to serve as a non-executive, non-employee Chairman of the Board of Directors.

At December 31, 2011, a total of 8,318,400 shares of Company common stock were available under the 2005 Plan for the granting of stock options and other long-term stock incentive awards.

 

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 on the open market.

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

 

 

                         
    2011     2010     2009  

Unvested stock award shares at January 1

    10       9       8  

Weighted average grant date fair value

  $ 19     $ 21     $ 26  

Stock award shares granted

    2       3       2  

Weighted average grant date fair value

  $ 13     $ 14     $ 8  

Stock award shares vested

    2       2       1  

Weighted average grant date fair value

  $ 20     $ 23     $ 26  

Stock award shares forfeited

                 

Weighted average grant date fair value

  $ 18     $ 20     $ 24  

Unvested stock award shares at December 31

    10       10       9  

Weighted average grant date fair value

  $ 17     $ 19     $ 21  

At December 31, 2011, 2010 and 2009, there was $107 million, $127 million and $126 million, respectively, of unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of four years for 2011 and five years for 2010 and 2009.

The total market value (at the vesting date) of stock award shares which vested during 2011, 2010 and 2009 was $28 million, $22 million and $16 million, respectively.

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 2005 Plan does not permit the granting of restoration stock options, except for restoration options resulting from options previously granted under the 1991 Plan. Restoration stock options become exercisable six months from the date of grant.

The Company granted 2,412,500 of stock option shares, including restoration stock option shares, during 2011 with a grant date exercise price range of $9 to $13 per share. During 2011, 3,032,900 stock option shares were forfeited (including options that expired unexercised).

 

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

 

 

                         
    2011     2010     2009  

Option shares outstanding, January 1

    37       36       31  

Weighted average exercise price

  $ 21     $ 23     $ 25  

Option shares granted, including restoration options

    2       5       6  

Weighted average exercise price

  $ 13     $ 14     $ 8  

Option shares exercised

                 

Aggregate intrinsic value on date of exercise (A)

  $   1 million     $   1 million     $  — million  

Weighted average exercise price

  $ 8     $ 8     $  

Option shares forfeited

    3       4       1  

Weighted average exercise price

  $ 22     $ 23     $ 22  

Option shares outstanding, December 31

    36       37       36  

Weighted average exercise price

  $ 21     $ 21     $ 23  

Weighted average remaining option term (in years)

    5       6       6  

Option shares vested and expected to vest, December 31

    36       37       36  

Weighted average exercise price

  $ 21     $ 22     $ 23  

Aggregate intrinsic value (A)

  $ 12 million     $ 23 million     $ 31 million  

Weighted average remaining option term (in years)

    5       6       6  

Option shares exercisable (vested), December 31

    24       22       21  

Weighted average exercise price

  $ 25     $ 25     $ 26  

Aggregate intrinsic value (A)

  $ 4 million     $ 4 million     $  — million  

Weighted average remaining option term (in years)

    4       4       4  

 

(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 December 31, 2011, 2010 and 2009, there was $33 million, $45 million and $41 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average remaining vesting period of three years.

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, was as follows:

 

 

                         
    2011     2010     2009  

Weighted average grant date fair value

  $ 5.07     $ 5.30     $ 2.28  

Risk-free interest rate

    2.69     2.76     2.60

Dividend yield

    2.35     2.17     3.70

Volatility factor

    49.03     46.03     39.18

Expected option life

    6 years       6 years       6 years  

 

The following table summarizes information for stock option shares outstanding and exercisable at December 31, 2011, shares in millions:

 

 

                                         

Option Shares Outstanding

        Option Shares Exercisable      

Range of

Prices

  Number of
Shares
    Weighted
Average
Remaining
Option
Term
    Weighted
Average
Exercise
Price
    Number of
Shares
    Weighted
Average
Exercise
Price
 

$  8-23

    20       7 Years     $ 14       9     $ 16  

$24-28

    6       3 Years     $ 27       6     $ 27  

$29-32

    10       4 Years     $ 30       9     $ 30  

$33-38

          3 Years     $ 34           $ 34  
   

 

 

                   

 

 

         

$  8-38

    36       5 Years     $ 21       24     $ 25  
   

 

 

                   

 

 

         

Phantom Stock Awards and Stock Appreciation Rights (“SARs”).    The Company grants phantom stock awards and SARs to certain non-U.S. employees.

Phantom stock awards are linked to the value of the Company’s common stock on the date of grant and are settled in cash upon vesting, typically over 5 to 10 years. The Company accounts for phantom stock awards as liability-based awards; the compensation expense is initially measured as the market price of the Company’s common stock at the grant date and is recognized over the vesting period. The liability is remeasured and adjusted at the end of each reporting period until the awards are fully-vested and paid to the employees. The Company recognized expense of $2 million, $2 million and $3 million related to the valuation of phantom stock awards for 2011, 2010 and 2009, respectively. In 2011, 2010 and 2009, the Company granted 349,550 shares, 299,650 shares and 318,920 shares, respectively, of phantom stock awards with an aggregate fair value of $4 million, $4 million and $3 million, respectively, and paid $2 million, $1 million and $1 million of cash in 2011, 2010 and 2009, respectively, to settle phantom stock awards.

SARs are linked to the value of the Company’s common stock on the date of grant and are settled in cash upon exercise. The Company accounts for SARs using the fair value method, which requires outstanding SARs to be classified as liability-based awards and valued using a Black-Scholes option pricing model at the grant date; such fair value is recognized as compensation expense over the vesting period, typically five years. The liability is remeasured and adjusted at the end of each reporting period until the SARs are exercised and payment is made to the employees or the SARs expire. The Company recognized expense (income) of $(1) million, $1 million and $4 million related to the valuation of SARs for 2011, 2010 and 2009, respectively. During 2011, the Company did not grant any SARs. During 2010 and 2009, the Company granted SARs for 429,300 shares and 438,200 shares, respectively, with an aggregate fair value of $2 million and $1 million in 2010 and 2009, respectively.

Information related to phantom stock awards and SARs was as follows, in millions:

 

 

                                 
    Phantom Stock
Awards

At December  31,
    Stock Appreciation
Rights At
December 31,
 
    2011     2010     2011     2010  

Accrued compensation cost liability

  $ 7     $ 6     $ 3     $ 5  

Unrecognized compensation cost

  $ 4     $ 5     $ 1     $ 2  

Equivalent common shares

    1       1       2       2  

 

Employee Retirement Plans
Employee Retirement Plans

M.  EMPLOYEE RETIREMENT PLANS

The Company sponsors qualified defined-benefit and 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. Aggregate charges to earnings under the Company’s defined-benefit and defined-contribution retirement plans were $34 million and $31 million in 2011, $34 million and $47 million in 2010 and $59 million and $35 million in 2009, respectively.

In addition, the Company participates in 20 regional multi-employer pension plans, principally related to building trades; none of the plans are considered significant. The aggregate expense recognized through contributions by the Company to these plans was approximately $3 million, $3 million and $4 million in 2011, 2010 and 2009, respectively.

In March 2009, based on management’s recommendation, the Board of Directors approved a plan to freeze all future benefit accruals under substantially all of the Company’s domestic qualified and non-qualified defined-benefit pension plans. The freeze was effective January 1, 2010. As a result of this action, the liabilities for the plans impacted by the freeze were remeasured and the Company recognized a curtailment charge of $8 million in the first quarter of 2009.

 

Changes in the projected benefit obligation and fair value of plan assets, and the funded status of the Company’s defined-benefit pension plans were as follows, in millions:

 

                                 
    2011     2010  
  Qualified     Non-Qualified     Qualified     Non-Qualified  
       

Changes in projected benefit obligation:

                               

Projected benefit obligation at January 1

  $ 868     $ 163     $ 806     $ 152  

Service cost

    2             3        

Interest cost

    44       8       45       9  

Participant contributions

                1        

Actuarial loss (gain), net

    70       13       61       12  

Foreign currency exchange

    (2           (10      

Recognized curtailment loss

                (1      

Benefit payments

    (39     (10     (37     (10
   

 

 

   

 

 

   

 

 

   

 

 

 

Projected benefit obligation at December 31

  $ 943     $ 174     $ 868     $ 163  
   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in fair value of plan assets:

                               

Fair value of plan assets at January 1

  $ 509     $     $ 474     $  

Actual return on plan assets

    (1           46        

Foreign currency exchange

                (3      

Company contributions

    38       10       31       10  

Participant contributions

                1        

Expenses, other

    (3           (3      

Benefit payments

    (39     (10     (37     (10
   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at December 31

  $ 504     $     $ 509     $  
   

 

 

   

 

 

   

 

 

   

 

 

 

Funded status at December 31:

  $ (439   $ (174   $ (359   $ (163
   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts in the Company’s consolidated balance sheets were as follows, in millions:

 

 

                                 
    At December 31, 2011     At December 31, 2010  
  Qualified     Non-Qualified     Qualified     Non-Qualified  

Accrued liabilities

  $ (3   $ (12   $ (3   $ (11

Deferred income taxes and other

    (436     (162     (356     (152
   

 

 

   

 

 

   

 

 

   

 

 

 

Total net liability

  $ (439   $ (174   $ (359   $ (163
   

 

 

   

 

 

   

 

 

   

 

 

 

 

Amounts in accumulated other comprehensive income before income taxes were as follows, in millions:

 

 

                                 
    At December 31, 2011     At December 31, 2010  
  Qualified     Non-Qualified     Qualified     Non-Qualified  
       

Net loss

  $ 424     $ 43     $ 326     $ 31  

Net transition obligation

    1             1        

Net prior service cost

    (1           (1      
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 424     $ 43     $ 326     $ 31  
   

 

 

   

 

 

   

 

 

   

 

 

 

Information for defined-benefit pension plans with an accumulated benefit obligation in excess of plan assets was as follows, in millions:

 

 

                                 
    At December 31  
  2011     2010  
  Qualified     Non-Qualified     Qualified     Non-Qualified  

Projected benefit obligation

  $ 943     $ 174     $ 868     $ 163  

Accumulated benefit obligation

  $ 941     $ 174     $ 866     $ 163  

Fair value of plan assets

  $ 504     $     $ 509     $  

The projected benefit obligation was in excess of plan assets for all of the Company’s qualified defined-benefit pension plans at December 31, 2011 and 2010.

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

 

 

                                                 
    2011     2010     2009  
  Qualified     Non-Qualified     Qualified     Non-Qualified     Qualified     Non-Qualified  
           

Service cost

  $ 2     $     $ 3     $     $ 9     $ 1  

Interest cost

    44       8       45       9       45       9  

Expected return on plan assets

    (33           (34           (29      

Recognized prior service cost

                (1                  

Recognized curtailment loss

                            3       5  

Recognized net loss

    10       1       10             12        
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

  $ 23     $ 9     $ 23     $ 9     $ 40     $ 15  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company expects to recognize $16 million of pre-tax net loss from accumulated other comprehensive income into net periodic pension cost in 2012 related to its defined-benefit pension plans.

 

Plan Assets.    The Company’s qualified defined-benefit pension plan weighted average asset allocation, which is based upon fair value, was as follows:

 

 

                 
    At December 31  
  2011     2010  

Equity securities

    44%       54%  

Debt securities

    39%       31%  

Other

    17%       15%  
   

 

 

   

 

 

 

Total

    100%       100%  
   

 

 

   

 

 

 

Plan assets included 1.2 million shares for each of the years, of Company common stock valued at $12 million and $14 million at December 31, 2011 and 2010, respectively.

The Company’s qualified defined-benefit pension plans have adopted accounting guidance that defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements. Accounting guidance defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2011.

Common and preferred stocks, debt securities, government securities and short-term and other investments:    Valued at the closing price reported on the active market on which the individual securities are traded.

Limited Partnerships:    Valued based on an estimated fair value. There is no active trading market for these investments and they are for the most part illiquid. Due to the significant unobservable inputs, the fair value measurements are a Level 3 input.

Common Collective Trust Fund:    Valued based on a unit value basis, which approximates fair value as of December 31, 2011 and 2010, respectively. Such basis is determined by reference to the respective fund’s underlying assets, which are primarily marketable equity and fixed income securities. There are no unfunded commitments or other restrictions associated with this fund.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

 

The following table sets forth by level, within the fair value hierarchy, the qualified defined-benefit pension plan assets at fair value as of December 31, 2011 and 2010, in millions.

 

 

                                 
    Assets at Fair Value as of December 31,
2011
 
    Level 1     Level 2     Level 3     Total  

Common and preferred stocks

  $ 173     $ 47     $     $ 220  

Limited Partnerships

                67       67  

Corporate debt securities

          72       1       73  

Government and other debt securities

    62       61       1       124  

Common collective trust Fund

          7             7  

Short-term and other investments

                13       13  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets at fairvalue

  $ 235     $ 187     $ 82     $ 504  
   

 

 

   

 

 

   

 

 

   

 

 

 
   
    Assets at Fair Value as of December 31,
2010
 
    Level 1     Level 2     Level 3     Total  

Common and preferred stocks

  $ 258     $ 19     $     $ 277  

Limited Partnerships

                64       64  

Corporate debt securities

    30                   30  

Government and other debt securities

    61       57             118  

Common collective trust fund

          7             7  

Short-term and other investments

    4             9       13  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets at fair value

  $ 353     $ 83     $ 73     $ 509  
   

 

 

   

 

 

   

 

 

   

 

 

 

The table below sets forth a summary of changes in the fair value of the qualified defined-benefit pension plan level 3 assets for the year ended December 31, 2011, in millions.

 

 

                 
    Year Ended
December 31,
2011
    Year Ended
December 31,
2010
 

Balance, beginning of year

  $ 73     $ 52  

Purchases, sales, issuancesand settlements (net)

    9       21  

Unrealized losses

           
   

 

 

   

 

 

 

Balance, end of year

    82       73  
   

 

 

   

 

 

 

Assumptions.    Major assumptions used in accounting for the Company’s defined-benefit pension plans were as follows:

 

 

                         
    December 31  
  2011     2010     2009  

Discount rate for obligations

    4.40%       5.30%       5.80%  

Expected return on plan assets

    7.25%       7.25%       8.00%  

Rate of compensation increase

    —%       1.00%       2.00%  

Discount rate for net periodic pension cost

    5.30%       5.80%       6.10%  

 

The discount rate for obligations for 2011 and 2010 was based upon the expected duration of each defined-benefit pension plan’s liabilities matched to the December 31, 2011 and 2010 Towers Watson Rate Link Curve. At December 31, 2011, such rates for the Company’s defined-benefit pension plans ranged from 2.00 percent to 5.50 percent, with the most significant portion of the liabilities having a discount rate for obligations of 4.20 percent or higher. At December 31, 2010, such rates for the Company’s defined-benefit pension plans ranged from 2.30 percent to 5.55 percent, with the most significant portion of the liabilities having a discount rate for obligations of 5.0 percent or higher. The decline in the weighted average discount rate to 4.40 percent over the last several years was principally the result of lower long-term interest rates in the bond markets. The discount rate for obligations for 2009 was based upon the expected duration of each defined-benefit plan’s liabilities matched to the widely used Citigroup Pension Discount Curve and Liability index for December 31, 2009. The weighted average discount rates were also affected by the freezing of all future benefit accruals for substantially all of the Company’s domestic qualified and non-qualified defined-benefit plans, which shortened the period of future payments.

For 2011 and 2010, the Company determined the expected long-term rate of return on plan assets of 7.25 percent based upon an analysis of expected and historical rates of return of various asset classes utilizing the current and long-term target asset allocation of the plan assets. The projected asset return at both December 31, 2011 and 2010 also considered near term returns, including current market conditions and also that pension assets are long-term in nature. The actual annual rate of return on the Company’s pension plan assets was 3.2 percent and 4.3 percent for the 10-year periods ended December 31, 2011 and 2010, respectively. Although these rates of return are less than the Company’s current expected long-term rate of return on plan assets, the Company notes that these 10-year periods include two significant declines in the equity markets. Accordingly, the Company believes a 7.25 percent expected long-term rate of return is reasonable.

The investment objectives seek to minimize the volatility of the value of the Company’s plan assets relative to pension liabilities and to ensure plan assets are sufficient to pay plan benefits. In 2010, the Company and its pension investment advisor concluded that the Company should achieve the following targeted asset portfolio: 45 percent equities, 25 percent fixed-income, 15 percent global assets (combination of equity and fixed-income) and 15 percent alternative investments (such as private equity, commodities and hedge funds). The Company achieved its targeted asset portfolio in 2011. The revised asset allocation of the investment portfolio was developed with the objective of achieving the Company’s expected rate of return and reducing volatility of asset returns, and considered the freezing of future benefits. The equity portfolios are invested in individual securities or funds that are expected to mirror broad market returns for equity securities. The fixed-income portfolio is invested in corporate bonds, bond index funds or U.S. Treasury securities. The increased allocation to fixed-income securities partially matches the bond-like and long-term nature of the pension liabilities. It is expected that the alternative investments would have a higher rate of return than the targeted overall long-term return of 7.25 percent. However, these investments are subject to greater volatility, due to their nature, than a portfolio of equities and fixed-income investments, and would be less liquid than financial instruments that trade on public markets. This portfolio is expected to yield a long-term rate of return of 7.25 percent.

The fair value of the Company’s plan assets is subject to risk including significant concentrations of risk in the Company’s plan assets related to equity, interest rate and operating risk. In order to ensure plan assets are sufficient to pay benefits, a portion of plan assets is allocated to equity investments that are expected, over time, to earn higher returns with more volatility than fixed-income investments which more closely match pension liabilities. Within equity, risk is mitigated by targeting a portfolio that is broadly diversified by geography, market capitalization, manager mandate size, investment style and process.

In order to minimize asset volatility relative to the liabilities, a portion of plan assets are allocated to fixed-income investments that are exposed to interest rate risk. Rate increases generally will result in a decline in fixed-income assets, while reducing the present value of the liabilities. Conversely, rate decreases will increase fixed income assets, partially offsetting the related increase in the liabilities.

Potential events or circumstances that could have a negative effect on estimated fair value include the risks of inadequate diversification and other operating risks. To mitigate these risks, investments are diversified across and within asset classes in support of investment objectives. Policies and practices to address operating risks include ongoing manager oversight, plan and asset class investment guidelines and instructions that are communicated to managers, and periodic compliance and audit reviews to ensure adherence to these policies. In addition, the Company periodically seeks the input of its independent advisor to ensure the investment policy is appropriate.

Other.    The Company sponsors certain post-retirement benefit plans that provide medical, dental and life insurance coverage for eligible retirees and dependents in the United States based upon age and length of service. The aggregate present value of the unfunded accumulated post-retirement benefit obligation was $14 million and $13 million at December 31, 2011 and 2010, respectively.

Cash Flows.    At December 31, 2011, the Company expected to contribute approximately $50 million to its qualified defined-benefit pension plans to meet ERISA requirements in 2012. The Company also expected to pay benefits of $8 million and $11 million to participants of its foreign and non-qualified (domestic) defined-benefit pension plans, respectively, in 2012.

At December 31, 2011, the benefits expected to be paid in each of the next five years, and in aggregate for the five years thereafter, relating to the Company’s defined-benefit pension plans, were as follows, in millions:

 

 

                 
    Qualified
Plans
    Non-Qualified
Plans
 

2012

  $ 42     $ 11  

2013

  $ 43     $ 12  

2014

  $ 44     $ 12  

2015

  $ 46     $ 12  

2016

  $ 46     $ 12  

2017-2021

  $ 255     $ 58  
Shareholders' Equity
Shareholders' Equity

N.  SHAREHOLDERS’ EQUITY

In July 2007, the Company’s Board of Directors authorized the repurchase for retirement of up to 50 million shares of the Company’s common stock in open-market transactions or otherwise. At December 31, 2011, the Company had remaining authorization to repurchase up to 25 million shares. During 2011, the Company repurchased and retired two million shares of Company common stock, for cash aggregating $30 million to offset the dilutive impact of the 2011 grant of two million shares of long-term stock awards. The Company repurchased and retired three million common shares in 2010 and two million common shares in 2009 for cash aggregating $45 million and $11 million in 2010 and 2009, respectively.

 

On the basis of amounts paid (declared), cash dividends per common share were $.30 ($.30) in 2011, $.30 ($.30) in 2010 and $.46 ($.30) in 2009, respectively. In 2009, the Company decreased its quarterly cash dividend to $.075 per common share from $.235 per common share.

Accumulated Other Comprehensive (Loss) Income.    The components of accumulated other comprehensive income attributable to Masco Corporation were as follows, in millions:

 

 

                 
    At December 31  
    2011     2010  

Cumulative translation adjustments

  $ 482     $ 505  

Unrealized (loss) gain on marketable securities, net

    (12     26  

Unrealized (loss) on interest rate swaps

    (23      

Unrecognized prior service cost and net loss, net

    (371     (258
   

 

 

   

 

 

 

Accumulated other comprehensive income

  $ 76     $ 273  
   

 

 

   

 

 

 

The unrealized (loss) gain on marketable securities, net, is reported net of income tax expense of $14 million at both December 31, 2011 and 2010. The unrecognized prior service cost and net loss, net, is reported net of income tax benefit of $100 million and $105 million at December 31, 2011 and 2010, respectively.

Segment Information
Segment Information

O.  SEGMENT INFORMATION

The Company’s reportable segments are as follows:

Cabinets and Related Products – principally includes assembled and ready-to-assemble kitchen and bath cabinets; home office workstations; entertainment centers; storage products; bookcases; and kitchen utility products.

Plumbing Products – principally includes faucets; plumbing fittings and valves; showerheads and hand showers; bathtubs and shower enclosures; and spas.

Installation and Other Services – principally includes the sale, installation and distribution of insulation and other building products.

Decorative Architectural Products – principally includes paints and stains; and cabinet, door, window and other hardware.

Other Specialty Products – principally includes windows, window frame components and patio doors; staple gun tackers, staples and other fastening tools.

The above products and services are sold to the home improvement and new home construction markets through mass merchandisers, hardware stores, home centers, builders, distributors and other outlets for consumers and contractors.

The Company’s operations are principally located in North America and Europe. The Company’s country of domicile is the United States of America.

Corporate assets consist primarily of real property, equipment, cash and cash investments and other investments.

 

The Company’s segments are based upon similarities in products and services and represent the aggregation of operating units, for which financial information is regularly evaluated by the Company’s corporate operating executives in determining resource allocation and assessing performance and is periodically reviewed by the Board of Directors. Accounting policies for the segments are the same as those for the Company. The Company primarily evaluates performance based upon operating profit (loss) and, other than general corporate expense, allocates specific corporate overhead to each segment. The evaluation of segment operating profit also excludes the charge for defined-benefit plan curtailment, the charge for litigation settlements, the accelerated stock compensation expense and the (loss) on corporate fixed assets, net.

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

 

 

                                                                         
    Net Sales(1)(2)(3)(4)(5)     Operating (Loss) Profit(5)(6)     Assets at December 31(11)(12)  
    2011     2010     2009         2011             2010             2009             2011             2010             2009      

The Company’s operations by segment were:

                                                                       

Cabinets and Related Products

  $ 1,231     $ 1,464     $ 1,674     $ (206   $ (250   $ (64   $ 1,009     $ 1,108     $ 1,382  

Plumbing Products

    2,913       2,692       2,564       322       331       237       1,959       1,866       1,815  

Installation and Other Services

    1,077       1,041       1,121       (79     (798     (116     1,427       1,537       2,339  

Decorative Architectural Products

    1,670       1,693       1,714       196       345       375       770       851       871  

Other Specialty Products

    576       596       584       (401     19       (199     768       1,182       1,197  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 7,467     $ 7,486     $ 7,657     $ (168   $ (353   $ 233     $ 5,933     $ 6,544     $ 7,604  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s operations by geographic area were:

                                                                       

North America

  $ 5,669     $ 5,823     $ 6,000     $ (259   $ (507   $ 108     $ 4,441     $ 5,063     $ 6,113  

International, principally Europe

    1,798       1,663       1,657       91       154       125       1,492       1,481       1,491  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, as above

  $ 7,467     $ 7,486     $ 7,657       (168     (353     233       5,933       6,544       7,604  
   

 

 

   

 

 

   

 

 

                                                 

General corporate expense, net (7)

  

    (118     (110     (140                        

Charge for defined-benefit curtailment (8)

  

                (8                        

Charge for litigation settlements (9)

  

    (9           (7                        

Accelerated stock compensation expense (10)

  

                (6                        

Loss on corporate fixed assets, net

  

                (2                        
     

 

 

   

 

 

   

 

 

                         

Operating (loss) profit, as reported

  

    (295     (463     70                          
             

Other income (expense), net

  

    (177     (278     (206                        
     

 

 

   

 

 

   

 

 

                         

Loss from continuing operations before income taxes

   

  $ (472   $ (741   $ (136                        
     

 

 

   

 

 

   

 

 

                         
             

Corporate assets

  

                            1,339       1,596       1,571  

Assets held for sale

  

                            25              
                             

 

 

   

 

 

   

 

 

 

Total assets

  

                          $ 7,297     $ 8,140     $ 9,175  
                             

 

 

   

 

 

   

 

 

 

 

 

                                                 
    Property Additions(5)     Depreciation and
Amortization(5)
 
    2011     2010     2009     2011     2010     2009  

The Company’s operations by segment were:

                                               

Cabinets and Related Products

  $ 26     $ 34     $ 30     $ 78     $ 112     $ 84  

Plumbing Products

    85       65       47       68       63       70  

Installation and Other Services

    9       6       29       32       33       28  

Decorative Architectural Products

    8       9       7       15       18       18  

Other Specialty Products

    17       18       7       48       26       28  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      145       132       120       241       252       228  

Unallocated amounts, principally related to corporate assets

    6       4       1       16       20       17  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 151     $ 136     $ 121     $ 257     $ 272     $ 245  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) Included in net sales were export sales from the U.S. of $241 million, $246 million and $277 million in 2011, 2010 and 2009, respectively.

 

(2) Intra-company sales between segments represented approximately two percent of net sales in 2011 and 2010 and three percent of net sales in 2009.

 

(3) Included in net sales were sales to one customer of $1,984 million, $1,993 million and $2,053 million in 2011, 2010 and 2009, respectively. Such net sales were included in the following segments: Cabinets and Related Products, Plumbing Products, Decorative Architectural Products and Other Specialty Products.

 

(4) Net sales from the Company’s operations in the U.S. were $5,394 million, $5,618 million and $5,952 million in 2011, 2010 and 2009, respectively.

 

(5) Net sales, operating (loss) profit, property additions and depreciation and amortization expense for 2011, 2010 and 2009 excluded the results of businesses reported as discontinued operations in 2011, 2010 and 2009.

 

(6) Included in segment operating (loss) profit for 2011 were impairment charges for goodwill and other intangible assets as follows: Cabinets and Related Products – $44 million; Plumbing Products – $1 million; Decorative Architectural Products – $75 million; and Other Specialty Products – $374 million. Included in segment operating (loss) profit for 2010 were impairment charges for goodwill and other intangible assets as follows: Plumbing Products – $1 million; and Installation and Other Services – $697 million. Included in segment operating profit (loss) for 2009 were impairment charges for goodwill as follows: Plumbing Products – $39 million; and Other Specialty Products – $223 million.

 

(7) General corporate expense, net included those expenses not specifically attributable to the Company’s segments.

 

(8) During 2009, the Company recognized a curtailment loss related to the plan to freeze all future benefit accruals beginning January 1, 2010 under substantially all of the Company’s domestic qualified and non-qualified defined-benefit pension plans. See Note M to the consolidated financial statements.

 

(9) The charge for litigation settlement in 2011 relates to business units in the Cabinets and Related Products and the Other Specialty Products segments. The charge for litigation settlement in 2009 relates to a business unit in the Cabinets and Related Products segment.

 

(10) See Note L to the consolidated financial statements.

 

(11) Long-lived assets of the Company’s operations in the U.S. and Europe were $2,964 million and $565 million, $3,684 million and $617 million, and $4,628 million and $690 million at December 31, 2011, 2010 and 2009, respectively.

 

(12) Segment assets for 2011 excluded the assets of businesses reported as discontinued operations in the respective years.
Other Income (Expense), Net
Other Income (Expense), Net

P.  OTHER INCOME (EXPENSE), NET

Other, net, which is included in other income (expense), net, was as follows, in millions:

 

 

                         
    2011     2010     2009  

Income from cash and cash investments

  $ 8     $ 6     $ 7  

Other interest income

    1       1       2  

Income from financial investments, net (Note E)

    73       9       3  

Other items, net

    (5     (9     17  
   

 

 

   

 

 

   

 

 

 

Total other, net

  $ 77     $ 7     $ 29  
   

 

 

   

 

 

   

 

 

 

Other items, net, included realized foreign currency transaction gains (losses) of $(5) million, $(2) million and $17 million in 2011, 2010 and 2009, respectively, as well as other miscellaneous items.

 

Income Taxes
Income Taxes

Q.  INCOME TAXES

 

 

                         
          (In Millions)  
    2011     2010     2009  

(Loss) income from continuing operations before income taxes:

                       

U.S.

  $ (575   $ (928   $ (286

Foreign

    103       187       150  
   

 

 

   

 

 

   

 

 

 
    $ (472   $ (741   $ (136
   

 

 

   

 

 

   

 

 

 

Income tax (benefit) expense on (loss) income from continuing operations:

                       

Currently payable:

                       

U.S. Federal

  $     $ (24   $ (21

State and local

    (1     22       12  

Foreign

    63       59       45  

Deferred:

                       

U.S. Federal

    (103     190       (67

State and local

          (7     (2

Foreign

    (8           (11
   

 

 

   

 

 

   

 

 

 
    $ (49   $ 240     $ (44
   

 

 

   

 

 

   

 

 

 

Deferred tax assets at December 31:

                       

Receivables

  $ 14     $ 15          

Inventories

    28       35          

Other assets, principally stock-based compensation

    121       119          

Accrued liabilities

    141       143          

Long-term liabilities

    260       227          

Net operating loss carryforward

    260       136          

Capital loss carryforward

          3          

Tax credit carryforward

    20       12          
   

 

 

   

 

 

         
      844       690          

Valuation allowance

    (688     (462        
   

 

 

   

 

 

         
      156       228          
   

 

 

   

 

 

         

Deferred tax liabilities at December 31:

                       

Property and equipment

    178       223          

Intangibles

    192       323          

Other

    25       29          
   

 

 

   

 

 

         
      395       575          
   

 

 

   

 

 

         

Net deferred tax liability at December 31

  $ 239     $ 347          
   

 

 

   

 

 

         

At December 31, 2011 and 2010, the net deferred tax liability consisted of net short-term deferred tax assets included in prepaid expenses and other of $11 million and $50 million, respectively, and net long-term deferred tax liabilities included in deferred income taxes and other of $250 million and $397 million, respectively.

 

The current portion of the 2011 state and local income tax benefit includes a $10 million tax benefit from the reversal of an accrual for uncertain tax positions resulting primarily from the expiration of applicable statutes of limitations. The deferred portion of the 2011 state and local taxes includes a $31 million non-cash charge to income tax expense resulting from a change in the valuation allowance against state and local deferred tax assets.

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 the Company can place on projected taxable income to support the recovery of the deferred tax assets.

In the fourth quarter of 2010, the Company recorded a $372 million valuation allowance against its U.S. Federal deferred tax assets as a non-cash charge to income tax expense. In reaching this conclusion, the Company considered the weaker retail sales of certain of its 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 the Company to be in a three-year cumulative U.S. loss position. These factors negatively impacted the Company’s ability to utilize tax-planning strategies that included the potential sale of certain non-core operating assets to support the realization of its U.S. Federal deferred tax assets, since current year losses are heavily weighted in determining if sufficient income would exist in the carryforward period to realize the benefit of the strategies.

During 2011, objective and verifiable negative evidence, such as continued U.S. operating losses and significant U.S. goodwill impairment charges, continued to outweigh positive evidence. As a result, the Company recorded an $89 million increase in the valuation allowance against its U.S. Federal deferred tax assets as a non-cash charge to income tax expense.

Recording the valuation allowance does not restrict the Company’s ability to utilize the future deductions and net operating losses associated with the deferred tax assets assuming taxable income is recognized in future periods.

A rebound in the U.S. housing market from the current historic lows and retail sales of building products improving from their current levels should have a positive impact on the Company’s operating results in the U.S. A return to sustained profitability in the U.S. should result in objective positive evidence thereby warranting the potential reversal of all or a portion of the valuation allowance.

The $156 million and $228 million of deferred tax assets at December 31, 2011 and 2010, respectively, for which there is no valuation allowance recorded, is anticipated to be realized through the future reversal of existing taxable temporary differences recorded as deferred tax liabilities.

Of the deferred tax asset related to the net operating loss and tax credit carryforwards at December 31, 2011 and 2010, $269 million and $143 million will expire between 2020 and 2031 and $11 million and $5 million is unlimited, respectively.

 

The tax benefit from certain stock-based compensation is not recognized as a deferred tax asset until the tax deduction reduces cash taxes. Accordingly, as of December 31, 2011, the Company has not recorded a $13 million deferred tax asset on additional net operating losses that, when realized, will be recorded to paid-in capital.

A tax provision has not been provided at December 31, 2011 for U.S. income taxes or additional foreign withholding taxes on approximately $74 million of undistributed earnings of certain foreign subsidiaries that are considered to be permanently reinvested. It is not practicable to determine the amount of deferred tax liability on such earnings as the actual U.S. tax would depend on income tax laws and circumstances at the time of distribution.

A reconciliation of the U.S. Federal statutory tax rate to the income tax (benefit) expense on (loss) income from continuing operations was as follows: