MASCO CORP /DE/, 10-Q filed on 10/31/2012
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Oct. 26, 2012
Entity Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
MAS 
 
Entity Registrant Name
MASCO CORP /DE/ 
 
Entity Central Index Key
0000062996 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
357,100,000 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash investments
$ 1,166 
$ 1,656 
Receivables
1,156 
914 
Prepaid expenses and other
83 
70 
Assets held for sale
20 
20 
Inventories:
 
 
Finished goods
449 
390 
Raw material
290 
280 
Work in process
91 
99 
Inventories
830 
769 
Total current assets
3,255 
3,429 
Property and equipment, net
1,484 
1,567 
Goodwill
1,891 
1,891 
Other intangible assets, net
193 
196 
Other assets
191 
209 
Assets held for sale
Total assets
7,016 
7,297 
Current liabilities:
 
 
Notes payable
207 
803 
Accounts payable
866 
770 
Accrued liabilities
884 
782 
Liabilities held for sale
10 
Total current liabilities
1,967 
2,363 
Long-term debt
3,422 
3,222 
Deferred income taxes and other
953 
970 
Total liabilities
6,342 
6,555 
Commitments and contingencies
   
   
Masco Corporation's shareholders' equity:
 
 
Common shares, par value $1 per share Authorized shares: 1,400,000,000; issued and outstanding: 2012 - 348,900,000; 2011 - 347,900,000
349 
348 
Preferred shares authorized: 1,000,000; issued and outstanding: 2012 - None; 2011 - None
   
   
Paid-in capital
34 
65 
Accumulated deficit retained earnings
(15)
38 
Accumulated other comprehensive income
99 
76 
Total Masco Corporation's shareholders' equity
467 
527 
Noncontrolling interest
207 
215 
Total equity
674 
742 
Total liabilities and equity
$ 7,016 
$ 7,297 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Sep. 30, 2012
Dec. 31, 2011
Common shares, par value
$ 1 
$ 1 
Common shares, shares Authorized
1,400,000,000 
1,400,000,000 
Common shares, shares issued
348,900,000 
347,900,000 
Common shares, shares outstanding
348,900,000 
347,900,000 
Preferred shares, shares authorized
1,000,000 
1,000,000 
Preferred shares, shares issued
   
   
Preferred shares, shares outstanding
   
   
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Net sales
$ 1,976 1
$ 1,978 1
$ 5,855 1
$ 5,729 1
Cost of sales
1,476 
1,483 
4,345 
4,277 
Gross profit
500 
495 
1,510 
1,452 
Selling, general and administrative expenses
398 
380 
1,186 
1,210 
Charge for litigation settlements, net
2
2
74 2
2
Operating profit
101 
114 
250 
236 
Other income (expense), net:
 
 
 
 
Interest expense
(62)
(63)
(194)
(190)
Other, net
22 
23 
75 
Total other income (expense), net
(56)
(41)
(171)
(115)
Income from continuing operations before income taxes
45 
73 
79 
121 
Income taxes
14 
48 
55 
Income from continuing operations
31 
69 
31 
66 
Loss from discontinued operations
(7)
(20)
(30)
(31)
Net income
24 
49 
35 
Less: Net income attributable to noncontrolling interest
13 
28 
37 
Net income (loss) attributable to Masco Corporation
15 
36 
(27)
(2)
Basic:
 
 
 
 
Income from continuing operations
$ 0.06 
$ 0.16 
 
$ 0.08 
Loss from discontinued operations
$ (0.02)
$ (0.06)
$ (0.08)
$ (0.09)
Net income (loss)
$ 0.04 
$ 0.10 
$ (0.08)
$ (0.01)
Diluted:
 
 
 
 
Income from continuing operations
$ 0.06 
$ 0.16 
 
$ 0.08 
Loss from discontinued operations
$ (0.02)
$ (0.06)
$ (0.08)
$ (0.09)
Net income (loss)
$ 0.04 
$ 0.10 
$ (0.08)
$ (0.01)
Amounts attributable to Masco Corporation:
 
 
 
 
Income from continuing operations
22 
56 
29 
Loss from discontinued operations
(7)
(20)
(30)
(31)
Net income (loss) attributable to Masco Corporation
$ 15 
$ 36 
$ (27)
$ (2)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Net income
$ 24 
$ 49 
$ 1 
$ 35 
Other comprehensive income (loss), net of tax:
 
 
 
 
Cumulative translation adjustment
42 
(72)
15 
Unrealized gain (loss) on interest rate swaps
(17)
(17)
Unrealized (loss) on marketable securities
 
 
 
(38)
Unrecognized pension prior service cost and net loss, net
11 
Other comprehensive income (loss)
46 
(86)
27 
(39)
Total comprehensive income (loss)
70 
(37)
28 
(4)
Less: Comprehensive income (loss) attributable to the noncontrolling interest
17 
(2)
32 
40 
Comprehensive income (loss) attributable to Masco Corporation
$ 53 
$ (35)
$ (4)
$ (44)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
Cash provided by operations
$ 191 
$ 210 
Increase in receivables
(245)
(245)
Increase in inventories
(58)
(118)
Increase in accounts payable and accrued liabilities, net
202 
248 
Net cash from operating activities
90 
95 
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
Issuance of Notes, net of issuance costs
396 
 
Cash dividends paid
(80)
(80)
Retirement of Notes
(791)
(58)
Dividend payment to noncontrolling interest
(40)
(18)
Payment for settlement of swaps
(25)
 
Purchase of Company common stock
(8)
(30)
Payment of debt
 
(3)
Credit Agreement costs
 
(1)
Net cash for financing activities
(548)
(190)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
Capital expenditures
(80)
(106)
Proceeds from disposition of:
 
 
Marketable securities
 
49 
Other financial investments
35 
43 
Businesses
 
Property and equipment
25 
19 
Purchases of other financial investments
(2)
(7)
Other, net
(21)
(7)
Net cash for investing activities
(42)
(9)
Effect of exchange rate changes on cash and cash investments
10 
(1)
CASH AND CASH INVESTMENTS:
 
 
Decrease for the period
(490)
(105)
At January 1
1,656 
1,715 
At September 30
$ 1,166 
$ 1,610 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (USD $)
In Millions, unless otherwise specified
Total
Common Shares ($1 par value)
Paid-In Capital
(Accumulated Deficit) Retained Earnings
Accumulated Other Comprehensive Income
Noncontrolling Interest
Beginning Balance at Dec. 31, 2010
$ 1,582 
$ 349 
$ 42 
$ 720 
$ 273 
$ 198 
Total comprehensive income (loss)
(4)
 
 
(2)
(42)
40 
Shares issued
 
(2)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(30)
(2)
(28)
 
 
 
Surrendered (non-cash)
(8)
(1)
(7)
 
 
 
Cash dividends declared
(80)
 
 
(80)
 
 
Dividend payment to noncontrolling interest
(18)
 
 
 
 
(18)
Stock-based compensation
45 
 
45 
 
 
 
Ending Balance at Sep. 30, 2011
1,487 
348 
50 
638 
231 
220 
Beginning Balance at Dec. 31, 2011
742 
348 
65 
38 
76 
215 
Total comprehensive income (loss)
28 
 
 
(27)
23 
32 
Shares issued
 
(3)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(8)
(1)
(7)
 
 
 
Surrendered (non-cash)
(8)
(1)
(7)
 
 
 
Cash dividends declared
(80)
 
(54)
(26)
 
 
Dividend payment to noncontrolling interest
(40)
 
 
 
 
(40)
Stock-based compensation
40 
 
40 
 
 
 
Ending Balance at Sep. 30, 2012
$ 674 
$ 349 
$ 34 
$ (15)
$ 99 
$ 207 
Accounting Policies
Accounting Policies
A. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as at September 30, 2012 and the results of operations for the three months and nine months ended September 30, 2012 and 2011 and cash flows for the nine months ended September 30, 2012 and 2011. The condensed consolidated balance sheet at December 31, 2011 was derived from audited financial statements.

 

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

 

     Recently Issued Accounting Pronouncements. On January 1, 2012, the Company adopted new accounting guidance requiring more prominent presentation of other comprehensive income items in the Company’s consolidated financial statements. The adoption of this new guidance did not have an impact on the Company’s financial position or its results of operations.
Discontinued Operations
Discontinued Operations
B. Selected financial information for the discontinued operations, during the period owned by the Company, was as follows, in millions:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Net Sales

   $ 23      $ 28      $ 64      $ 71   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss from discontinued operations

   $ (3   $ (5   $ (10   $ (16

Impairment of assets

     (3     (7     (3     (7

Loss on disposal of discontinued operations, net

     —          —          (3     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (6     (12     (16     (23

Income taxes

     1        8        14        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

   $ (7   $ (20   $ (30   $ (31
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     The unusual relationship between income taxes and loss before income tax in 2012 results primarily from the increase in the deferred tax liability associated with the abandonment of tax basis in indefinite-lived intangibles due to the disposition of certain discontinued operations.
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
C. The changes in the carrying amount of goodwill for the nine months ended September 30, 2012, by segment, were as follows, in millions:

 

     Gross Goodwill      Accumulated     Net Goodwill  
     At      Impairment     At  
     Sep. 30, 2012      Losses     Sep. 30, 2012  

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

Cabinets and Related Products

   $ 589       $ (408   $ 181       $ —         $ 181   

Plumbing Products

     541         (340     201         —           201   

Installation and Other Services

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

Decorative Architectural Products

     294         (75     219         —           219   

Other Specialty Products

     980         (734     246         —           246   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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

Other indefinite-lived intangible assets were $174 million at both September 30, 2012 and December 31, 2011, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $19 million (net of accumulated amortization of $55 million) at September 30, 2012 and $22 million (net of accumulated amortization of $54 million) at December 31, 2011, and principally included customer relationships and non-compete agreements.

Depreciation and Amortization Expense
Depreciation and Amortization Expense
D. Depreciation and amortization expense was $154 million and $188 million, including accelerated depreciation (relating to business rationalization initiatives) of $12 million and $28 million, for the nine months ended September 30, 2012 and 2011, respectively.
Fair Value of Financial Investments
Fair Value of Financial Investments
E. The Company has maintained investments in available-for-sale securities and a number of private equity funds, principally as part of its tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses. Financial investments included in other assets were as follows, in millions:

 

     September 30,      December 31,  
     2012      2011  

Auction rate securities

   $ 22       $ 22   
  

 

 

    

 

 

 

Total recurring investments

     22         22   
  

 

 

    

 

 

 

Private equity funds

     71         86   

Other investments

     4         4   
  

 

 

    

 

 

 

Total non-recurring investments

     75         90   
  

 

 

    

 

 

 

Total

   $ 97       $ 112   
  

 

 

    

 

 

 

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

 

            Pre-tax         
     Cost Basis      Unrealized
Gains
     Unrealized
Losses
     Recorded
Basis
 

September 30, 2012

   $ 19       $ 3       $ —         $ 22   

December 31, 2011

   $ 19       $ 3       $ —         $ 22   

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

 

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

Auction rate securities

   $ 22         —           —         $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22       $ —         $ —         $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Auction rate securities

     22       $ —         $ —           22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22       $ —         $ —         $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

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

Fair value at beginning of period

   $ 22       $ 22   

Total losses included in earnings

     —           —     

Unrealized (losses)

     —           —     

Purchases

     —           —     

Settlements

     —           —     

Transfer from Level 3 to Level 2

     —           —     
  

 

 

    

 

 

 

Fair value at period end

   $ 22       $ 22   
  

 

 

    

 

 

 

Non-Recurring Fair Value Measurements. Financial investments measured at fair value on a non-recurring basis during the nine-month period ended September 30, 2012 and the amounts for each level within the fair value hierarchy were as follows, in millions:

 

            Fair Value Measurements Using         
                   Significant                
            Quoted      Other      Significant         
            Market      Observable      Total         
     Sep. 30,      Prices      Inputs      Inputs      Gains  
     2012      (Level 1)      (Level 2)      (Level 3)      (Losses)  

Private equity funds

   $ 2         —           —         $ 2       $ (2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2       $ —         $ —         $ 2       $ (2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The remaining private equity investments at September 30, 2012, with an aggregate carrying value of $69 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.

During the nine-month period ended September 30, 2011, the Company did not measure any financial investments at fair value on a non-recurring basis, as there was no other-than-temporary decline in the estimated value of private equity funds.

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

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012     2011  

Realized gains - distributions from private equity funds

   $ 2       $ 19       $ 20      $ 28   

Realized gains - sale of TriMas Corporation common stock

     —           —           —          41   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total income from financial investments

   $ 2       $ 19       $ 20      $ 69   
  

 

 

    

 

 

    

 

 

   

 

 

 

Impairment charges - private equity funds

   $ —         $ —         $ (2   $ —     
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     The fair value of the Company’s short-term and long-term fixed-rate debt instruments is based principally upon quoted market prices for the same or similar issues or the current rates available to the Company for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at September 30, 2012 was approximately $3.9 billion, compared with the aggregate carrying value of $3.6 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2011 was approximately $4.0 billion, compared with the aggregate carrying value of $4.0 billion.
Derivative Instruments and Hedging Activities
Derivative Instruments and Hedging Activities
F. The Company is exposed to global market risk as part of its normal daily business activities. To manage these risks, the Company enters into various derivative contracts. These contracts include interest rate swap agreements, foreign currency exchange contracts and contracts intended to hedge the Company’s exposure to copper and zinc. The Company reviews its hedging program, derivative positions and overall risk management on a regular basis.

 

     Interest Rate Swap Agreements. In March 2012, in connection with the issuance of $400 million of debt, the Company terminated the interest rate swap hedge relationships that it entered into in August 2011. These interest rate swaps were designated as cash flow hedges and effectively fixed interest rates on the forecasted debt issuance to variable rates based on 3-month LIBOR. Upon termination, the ineffective portion of the cash flow hedges of approximately $2 million loss was recognized in the Company’s consolidated statement of income in other, net. The remaining loss of approximately $23 million from the termination of these swaps is being amortized as an increase to interest expense over the remaining term of the debt, through March 2022. At September 30, 2012, the balance remaining was $22 million.

 

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

The Company recognized a net decrease in interest expense of $4 million (including additional expense of $1 million related to the cash flow hedge terminated in March 2012) and $8 million, respectively, for the nine months ended September 30, 2012 and 2011. These decreases to interest expense are related to the amortization of net gains resulting from the terminations (in 2012, 2008 and 2004) of the interest rate swap agreements.

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

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

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

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Foreign Currency Contracts

        

Exchange Contracts

   $ (4   $ 8      $ —        $ 1   

Forward Contracts

     (1     2        (2     3   

Metal Contracts

     2        (10     3        (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss)

   $ (3   $ —        $ 1      $ (7
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     At September 30, 2012  
     Notional                
     Amount      Assets      Liabilities  

Foreign Currency Contracts

        

Exchange Contracts

   $ 168         

Current assets

      $ 1       $ —     

Current liabilities

        1         (3

Forward Contracts

     84         

Current liabilities

        1         (1

Metal Contracts

     38         

Current assets

        1         (1
     

 

 

    

 

 

 

Total

      $ 4       $ (5
     

 

 

    

 

 

 
     At December 31, 2011  
     Notional
Amount
     Assets      Liabilities  

Foreign Currency Contracts

        

Exchange Contracts

   $ 108         

Current assets

      $ 8       $ —     

Forward Contracts

     76         

Current assets

        1         —     

Current liabilities

        1         2   

Metal Contracts

     67         

Current assets

        2         —     

Current liabilities

        —           4   
     

 

 

    

 

 

 

Total

      $ 12       $ 6   
     

 

 

    

 

 

 

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

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

 

     Nine Months Ended     Twelve Months Ended  
     September 30, 2012     December 31, 2011  

Balance at January 1

   $ 102      $ 107   

Accruals for warranties issued during the period

     28        28   

Accruals related to pre-existing warranties

     21        8   

Settlements made (in cash or kind) during the period

     (31     (38

Other, net

     (4     (3
  

 

 

   

 

 

 

Balance at end of period

   $ 116      $ 102   
  

 

 

   

 

 

 

 

     At the time of sale, the Company accrues a warranty liability for the estimated cost 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 the information available and includes a number of factors such as the warranty coverage, the warranty period, historical experience specific to the nature, frequency and average cost to service the claim along with product manufacturing metrics and industry and demographic trends. The Company’s warranty coverage varies by business unit and by product such as warranty period or length, types of coverage including limitations, and transfer restrictions should the original purchaser no longer own the home or product. The Company periodically studies these trends, which may include analyses provided by third party service providers, including home ownership demographics, as well as specific actions to be taken to improve product quality and minimize future warranty trends.

 

     During the third quarter of 2012, a business in the Other Specialty Products segment recorded a $12 million increase in expected future warranty claims resulting from the completion of an analysis prepared by the Company based upon its periodic assessment of recent business unit specific operating trends including, among others, home ownership demographics, sales volumes, manufacturing quality, an analysis of recent warranty claim activity and an estimate of current costs to service anticipated claims.

 

     Certain factors and related assumptions in determining our warranty liability involve judgments and estimates and are sensitive to changes in the aforementioned factors. The Company believes that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates thereby requiring adjustments to previously established accruals.
Debt
Debt
H. On March 5, 2012, the Company issued $400 million of 5.95% Notes due March 15, 2022 (“Notes”). Including the interest rate swap amortization, the effective interest rate for the Notes is approximately 6.5%, see Note F. The Notes are senior indebtedness and are redeemable at the Company’s option.

 

     In January 2012, the Company repurchased $46 million of 5.875% Notes due July 16, 2012 in open-market transactions; the Company paid a premium of $1 million for the repurchase. On July 16, 2012, the Company retired all of its $745 million of 5.875% Notes on the scheduled retirement date.

 

     Based on the limitations of the debt to total capitalization covenant in the Company’s credit agreement with a bank group (the “Credit Agreement”), at September 30, 2012, the Company had additional borrowing capacity, subject to availability, of up to $1 billion. Additionally, at September 30, 2012, the Company could absorb a reduction to shareholders’ equity of approximately $547 million and remain in compliance with the debt to total capitalization covenant.
     In order for the Company to borrow under the Credit Agreement, there must not be any default in the Company’s covenants in the Credit Agreement (i.e., in addition to the two financial covenants, principally limitations on subsidiary debt, negative pledge restrictions, legal compliance requirements and maintenance of properties and insurance) and the Company’s representations and warranties in the Credit Agreement must be true in all material respects on the date of borrowing (i.e., principally no material adverse change or litigation likely to result in a material adverse change, since December 31, 2009, in each case, no material ERISA or environmental non-compliance and no material tax deficiency). The Company was in compliance with all covenants and no borrowings have been made at September 30, 2012.
Stock-Based Compensation
Stock-Based Compensation
I. The Company’s 2005 Long Term Stock Incentive Plan (the “2005 Plan”) provides for the issuance of stock-based incentives in various forms to employees and non-employee Directors of the Company. At September 30, 2012, outstanding stock-based incentives were in the form of long-term stock awards, stock options, phantom stock awards and stock appreciation rights. Pre-tax compensation expense and the related income tax benefit for these stock-based incentives were as follows, in millions:

 

                                 
     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2012      2011     2012      2011  

Long-term stock awards

   $ 9       $ 9      $ 28       $ 28   

Stock options

     3         6        12         17   

Phantom stock awards and stock appreciation rights

     2         (5     8         (3
    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 14       $ 10      $ 48       $ 42   

Income tax benefit (36 percent tax rate – before valuation allowance)

   $ 5       $ 4      $ 18       $ 16   

 

     Long-Term Stock Awards. Long-term stock awards are granted to key employees and non-employee Directors of the Company and do not cause net share dilution inasmuch as the Company continues the practice of repurchasing and retiring an equal number of shares in the open market. The Company granted 819,520 shares of long-term stock awards in the nine months ended September 30, 2012.
     The Company’s long-term stock award activity was as follows, shares in millions:

 

                 
     Nine Months Ended
September 30,
 
     2012      2011  

Unvested stock award shares at January 1

     10         10   

Weighted average grant date fair value

   $ 17       $ 19   
     

Stock award shares granted

     1         2   

Weighted average grant date fair value

   $ 12       $ 13   
     

Stock award shares vested

     2         2   

Weighted average grant date fair value

   $ 18       $ 20   
     

Stock award shares forfeited

     1         —     

Weighted average grant date fair value

   $ 17       $ 18   
     

Unvested stock award shares at September 30

     8         10   

Weighted average grant date fair value

   $ 16       $ 17   

 

     At September 30, 2012 and 2011, there was $79 million and $122 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of four years and five years, respectively.

 

     The total market value (at the vesting date) of stock award shares which vested during the nine months ended September 30, 2012 and 2011 was $27 million and $28 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 Company granted 1,080,750 of stock option shares in the nine months ended September 30, 2012 with a grant date exercise price approximating $12 per share. In the first nine months of 2012, 3,539,460 stock option shares were forfeited (including options that expired unexercised).
     The Company’s stock option activity was as follows, shares in millions:

 

                 
     Nine Months Ended
September 30,
 
     2012     2011  

Option shares outstanding, January 1

     36        37   

Weighted average exercise price

   $ 21      $ 21   
     

Option shares granted, including restoration options

     1        2   

Weighted average exercise price

   $ 12      $ 13   
     

Option shares exercised

     1        —     

Aggregate intrinsic value on date of exercise (A)

   $ 4  million    $ 1  million 

Weighted average exercise price

   $ 9      $ 8   
     

Option shares forfeited

     3        3   

Weighted average exercise price

   $ 18      $ 22   
     

Option shares outstanding, September 30

     33        36   

Weighted average exercise price

   $ 21      $ 21   

Weighted average remaining option term (in years)

     5        6   
     

Option shares vested and expected to vest, September 30

     33        36   

Weighted average exercise price

   $ 21      $ 21   

Aggregate intrinsic value (A)

   $ 39  million    $ —    million 

Weighted average remaining option term (in years)

     5        6   
     

Option shares exercisable (vested), September 30

     25        24   

Weighted average exercise price

   $ 24      $ 24   

Aggregate intrinsic value (A)

   $ 17  million    $ —    million 

Weighted average remaining option term (in years)

     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 September 30, 2012 and 2011, there was $19 million and $39 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model) related to unvested stock options; such options had a weighted average vesting period of two years and three years in 2012 and 2011, respectively.
     The weighted average grant date fair value of option shares granted in the period and the assumptions used to estimate those values using a Black-Scholes option pricing model were as follows:

 

                 
     Nine Months  Ended
September 30,
 
     2012     2011  

Weighted average grant date fair value

   $ 4.44      $ 5.10   

Risk-free interest rate

     1.09     2.72

Dividend yield

     2.57     2.34

Volatility factor

     50.97     49.00

Expected option life

     6 years        6 years   
Employee Retirement Plans
Employee Retirement Plans
J. The Company sponsors qualified defined-benefit or defined-contribution retirement plans for most of its employees. In addition to the Company’s qualified defined-benefit pension plans, the Company has unfunded non-qualified defined-benefit pension plans covering certain employees, which provide for benefits in addition to those provided by the qualified pension plans. Substantially all salaried employees participate in non-contributory defined-contribution retirement plans, to which payments are determined annually by the Organization and Compensation Committee of the Board of Directors. The Company participates in 20 regional multi-employer pension plans, principally related to building trades; none of the plans are considered significant to the Company.

 

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

 

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

 

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

Service cost

   $ 1      $ —         $ 1      $ —     

Interest cost

     12        2         12        2   

Expected return on plan assets

     (10     —           (9     —     

Amortization of net loss

     4        —           2        1   

Net periodic pension cost

   $ 7      $ 2         6        3   
     Nine Months Ended September 30,  
     2012      2011  
     Qualified     Non-Qualified      Qualified     Non-Qualified  

Service cost

   $ 4      $ —         $ 2      $ —     

Interest cost

     32        5         34        6   

Expected return on plan assets

     (27     —           (25     —     

Amortization of net loss

     11        1         7        1   

Net periodic pension cost

   $ 20      $ 6       $ 18      $ 7   
Segment Information
Segment Information
K. Information about the Company by segment and geographic area was as follows, in millions:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012      2011      2012     2011     2012      2011      2012     2011  
     Net Sales(A)      Operating Profit (Loss)     Net Sales(A)      Operating Profit (Loss)  

The Company’s operations by segment were:

                    

Cabinets and Related Products

   $ 291       $ 307       $ (35   $ (34   $ 900       $ 944       $ (70   $ (111

Plumbing Products

     736         768         75        91        2,216         2,239         242        270   

Installation and Other Services

     312         287         (2     (15     886         792         (25     (71

Decorative Architectural Products

     481         455         96        88        1,432         1,322         264        247   

Other Specialty Products

     156         161         3        12        421         432         4        2   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,976       $ 1,978       $ 137      $ 142      $ 5,855       $ 5,729       $ 415      $ 337   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The Company’s operations by geographic area were:

                    

North America

   $ 1,553       $ 1,496       $ 112      $ 92      $ 4,571       $ 4,349       $ 325      $ 200   

International, principally Europe

     423         482         25        50        1,284         1,380         90        137   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,976       $ 1,978         137        142      $ 5,855       $ 5,729         415        337   
  

 

 

    

 

 

        

 

 

    

 

 

      

General corporate expense, net

           (35     (27           (96     (95

Gain from sale of fixed assets (B)

           —          —                5        —     

Charge for litigation settlements, net (B)

           (1     (1           (74     (6
        

 

 

   

 

 

         

 

 

   

 

 

 

Operating profit

           101        114              250        236   

Other income (expense), net

           (56     (41           (171     (115
        

 

 

   

 

 

         

 

 

   

 

 

 

Income before income taxes

         $ 45      $ 73            $ 79      $ 121   
        

 

 

   

 

 

         

 

 

   

 

 

 

 

(A) Inter-segment sales were not material.
(B) In 2012, gain on sale of fixed assets and in 2011, charge for litigation settlements, net relate to a business unit in the Other Specialty Products segment. For the three months and nine months ended September 30, 2012, the charge for litigation settlements, net, includes $1 million and $76 million, respectively, related to a business unit in the Installation and Other Services segment.
Severance and Early Retirement Program
Severance and Early Retirement Program
L.
As part of the Company’s continuing review of its operations, actions were taken during 2012 and 2011 to respond to market conditions. The Company recorded charges related to severance and early retirement programs of $20 million and $25 million, respectively, for the three months and nine months ended September 30, 2012, and $4 million and $6 million, respectively, for the three months and nine months ended September 30, 2011. Such charges are principally reflected in the statement of operations in selling, general and administrative expenses.
Other Income (Expense), Net
Other Income (Expense), Net
M. Other, net, which is included in other income (expense), net, was as follows, in millions:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012     2011  

Income from cash and cash investments

   $ 1       $ 2       $ 5      $ 5   

Other interest income

     1         1         1        1   

Income from financial investments (Note E)

     2         19         20        69   

Impairment of financial investments (Note E)

     —           —           (2     —     

Other items, net

     2         —           (1     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total other net

   $ 6       $ 22       $ 23      $ 75   
  

 

 

    

 

 

    

 

 

   

 

 

 

Other items, net, included $2 million and $1 million of currency gains for the three months and nine months ended September 30, 2012, respectively. Other items, net, included $1 million and $— million of currency gains for the three months and nine months ended September 30, 2011, respectively.

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Numerator (basic and diluted):

        

Income from continuing operations

   $ 22      $ 56      $ 3      $ 29   

Allocation to unvested restricted stock awards

     (1     (2     (2     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations attributable to common shareholders

     21        54        1        27   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

     (7     (20     (30     (31

Allocation to unvested restricted stock awards

     —          1        1        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations attributable to common shareholders

     (7     (19     (29     (30
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 14      $ 35      $ (28   $ (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Basic common shares (based upon weighted average)

     349        348        349        348   

Add:

        

Contingent common shares

     —          —          —          —     

Stock option dilution

     1        —          1        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted common shares

     350        348        350        349   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

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

Additionally, 29 million common shares for both the three months and nine months ended September 30, 2012 and 37 million common shares for both the three months and nine months ended September 30, 2011 related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.

In the first nine months of 2012, the Company granted 819,520 shares of long-term stock awards; to partially offset the dilutive impact of these awards, the Company also repurchased and retired 675,110 shares of Company common stock, for cash aggregating approximately $8 million. At September 30, 2012, the Company had 24 million shares of its common stock remaining under the July 2007 Board of Directors’ repurchase authorization.

On the basis of amounts paid (declared), cash dividends per common share were $.075 ($.075) and $.225 ($.225), respectively, for the three months and nine months ended both September 30, 2012 and 2011.

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

As previously disclosed, a lawsuit was brought against the Company and a number of its insulation installation companies alleging that certain of their practices violated provisions of the federal antitrust laws during the period 1999 through 2004. The case was filed in October 2004 in the United States District Court for the Northern District of Georgia by Columbus Drywall & Insulation, Inc., Leo Jones Insulation, Inc., Southland Insulators, Inc., Southland Insulators of Maryland, Inc. d/b/a Devere Insulation, Southland Insulators of Delaware LLC d/b/a Delmarva Insulation, and Whitson Insulation Company of Grand Rapids, Inc. against the Company, its subsidiaries Masco Contractors Services Group Corp., Masco Contractor Services Central, Inc. (“MCS Central”) and Masco Contractor Services East, Inc., and several insulation manufacturers (the “Columbus Drywall case”). In February 2009, the court certified a class of 377 insulation contractors. In July 2012, the parties reached a settlement in principle in which the Company and its insulation installation companies named in the suit agreed to pay $75 million in return for dismissal with prejudice and full release of all claims, which was recorded by the Company in the second quarter of 2012. The Company and its insulation installation companies continue to deny that the challenged conduct was unlawful and admit no wrongdoing as part of the settlement. A settlement was reached to eliminate the considerable expense and uncertainty of this suit. The settlement was approved by the court on October 26, 2012.

Another suit was filed in March 2003 in the United States District Court for the Northern District of Georgia by Wilson Insulation Company, Wilson Insulation of Augusta, Inc. and The Wilson Insulation Group, Inc. (“Wilson”) against the Company, Masco Contractor Services, Inc., and MCS Central that alleged anticompetitive conduct (the “Wilson case”). The Company settled the Wilson case in September 2012. The settlement amount was not material to the Company.

In March 2007, Albert Von Der Werth and Valerie Good filed suit in the United States District Court for the Northern District of California against the Company, its subsidiary Masco Contractor Services, and several insulation manufacturers seeking class action status and alleging anticompetitive conduct (the “Von Der Werth case”). In the Von Der Werth case, plaintiffs allege that the alleged conspiracy in the Columbus Drywall case indirectly resulted in an increase in the retail price of fiberglass insulation they purchased from retailers from 1999 to 2004. The Von Der Werth case was subsequently transferred to the United States District Court for the Northern District of Georgia and was administratively stayed by the court in February 2010. The Company, along with its insulation manufacturer co-defendants, filed a Renewed Motion for Judgment on the Pleadings in October 2012. Based upon the advice of its outside counsel, the Company believes that the conduct of the Company and its insulation installation companies, which is the subject of the Von Der Werth case, has not violated any antitrust laws. While there cannot be any assurance that the Company will ultimately prevail in this lawsuit, the Company does not believe that the ultimate disposition of the Von Der Werth case will be material to the Company.

Income Taxes
Income Taxes
P. The effective tax rate was 61 percent for the nine months ending September 30, 2012 primarily due to losses in certain jurisdictions providing no tax benefit and an increase in the valuation allowance related to net operating losses. This effective tax rate includes a $21 million state income tax benefit resulting from the decrease in the liability for uncertain tax positions primarily from the expiration of applicable statutes of limitations in various jurisdictions and certain audit closings.

As a result of tax audit closings, settlements and expiration of applicable statutes of limitations in various jurisdictions within the next 12 months, the Company anticipates that it is reasonably possible that the liability for uncertain tax positions could be reduced by approximately $3 million.

Accounting Policies (Policies)
Recently Issued Accounting Pronouncements
Recently Issued Accounting Pronouncements. On January 1, 2012, the Company adopted new accounting guidance requiring more prominent presentation of other comprehensive income items in the Company’s consolidated financial statements. The adoption of this new guidance did not have an impact on the Company’s financial position or its results of operations.
Discontinued Operations (Tables)
Financial Information for Discontinued Operations
B. Selected financial information for the discontinued operations, during the period owned by the Company, was as follows, in millions:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Net Sales

   $ 23      $ 28      $ 64      $ 71   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss from discontinued operations

   $ (3   $ (5   $ (10   $ (16

Impairment of assets

     (3     (7     (3     (7

Loss on disposal of discontinued operations, net

     —          —          (3     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (6     (12     (16     (23

Income taxes

     1        8        14        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

   $ (7   $ (20   $ (30   $ (31
  

 

 

   

 

 

   

 

 

   

 

 

 
Goodwill and Other Intangible Assets (Tables)
Changes in Carrying Amount of Goodwill
C. The changes in the carrying amount of goodwill for the nine months ended September 30, 2012, by segment, were as follows, in millions:

 

     Gross Goodwill      Accumulated     Net Goodwill  
     At      Impairment     At  
     Sep. 30, 2012      Losses     Sep. 30, 2012  

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

Cabinets and Related Products

   $ 589       $ (408   $ 181       $ —         $ 181   

Plumbing Products

     541         (340     201         —           201   

Installation and Other Services

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

Decorative Architectural Products

     294         (75     219         —           219   

Other Specialty Products

     980         (734     246         —           246   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

  (A) Other principally includes the effect of foreign currency translation.
Fair Value of Financial Investments (Tables)
Financial investments included in other assets were as follows, in millions:

 

     September 30,      December 31,  
     2012      2011  

Auction rate securities

   $ 22       $ 22   
  

 

 

    

 

 

 

Total recurring investments

     22         22   
  

 

 

    

 

 

 

Private equity funds

     71         86   

Other investments

     4         4   
  

 

 

    

 

 

 

Total non-recurring investments

     75         90   
  

 

 

    

 

 

 

Total

   $ 97       $ 112   
  

 

 

    

 

 

 

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

 

            Pre-tax         
     Cost Basis      Unrealized
Gains
     Unrealized
Losses
     Recorded
Basis
 

September 30, 2012

   $ 19       $ 3       $ —         $ 22   

December 31, 2011

   $ 19       $ 3       $ —         $ 22   

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

 

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

Auction rate securities

   $ 22         —           —         $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22       $ —         $ —         $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Auction rate securities

     22       $ —         $ —           22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22       $ —         $ —         $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

Fair value at beginning of period

   $ 22       $ 22   

Total losses included in earnings

     —           —     

Unrealized (losses)

     —           —     

Purchases

     —           —     

Settlements

     —           —     

Transfer from Level 3 to Level 2

     —           —     
  

 

 

    

 

 

 

Fair value at period end

   $ 22       $ 22   
  

 

 

    

 

 

 

Financial investments measured at fair value on a non-recurring basis during the nine-month period ended September 30, 2012 and the amounts for each level within the fair value hierarchy were as follows, in millions:

 

            Fair Value Measurements Using         
                   Significant                
            Quoted      Other      Significant         
            Market      Observable      Total         
     Sep. 30,      Prices      Inputs      Inputs      Gains  
     2012      (Level 1)      (Level 2)      (Level 3)      (Losses)  

Private equity funds

   $ 2         —           —         $ 2       $ (2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2       $ —         $ —         $ 2       $ (2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012     2011  

Realized gains - distributions from private equity funds

   $ 2       $ 19       $ 20      $ 28   

Realized gains - sale of TriMas Corporation common stock

     —           —           —          41   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total income from financial investments

   $ 2       $ 19       $ 20      $ 69   
  

 

 

    

 

 

    

 

 

   

 

 

 

Impairment charges - private equity funds

   $ —         $ —         $ (2   $ —     
  

 

 

    

 

 

    

 

 

   

 

 

 
Derivative Instruments and Hedging Activities (Tables)

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Foreign Currency Contracts

        

Exchange Contracts

   $ (4   $ 8      $ —        $ 1   

Forward Contracts

     (1     2        (2     3   

Metal Contracts

     2        (10     3        (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss)

   $ (3   $ —        $ 1      $ (7
  

 

 

   

 

 

   

 

 

   

 

 

 

The notional amounts being hedged and the fair value of those derivative instruments, on a gross basis, are as follows, in millions:

 

     At September 30, 2012  
     Notional                
     Amount      Assets      Liabilities  

Foreign Currency Contracts

        

Exchange Contracts

   $ 168         

Current assets

      $ 1       $ —     

Current liabilities

        1         (3

Forward Contracts

     84         

Current liabilities

        1         (1

Metal Contracts

     38         

Current assets

        1         (1
     

 

 

    

 

 

 

Total

      $ 4       $ (5
     

 

 

    

 

 

 
     At December 31, 2011  
     Notional
Amount
     Assets      Liabilities  

Foreign Currency Contracts

        

Exchange Contracts

   $ 108         

Current assets

      $ 8       $ —     

Forward Contracts

     76         

Current assets

        1         —     

Current liabilities

        1         2   

Metal Contracts

     67         

Current assets

        2         —     

Current liabilities

        —           4   
     

 

 

    

 

 

 

Total

      $ 12       $ 6   
     

 

 

    

 

 

 
Warranty (Tables)
Changes in Warranty Liability
G. Changes in the Company’s warranty liability were as follows, in millions:

 

     Nine Months Ended     Twelve Months Ended  
     September 30, 2012     December 31, 2011  

Balance at January 1

   $ 102      $ 107   

Accruals for warranties issued during the period

     28        28   

Accruals related to pre-existing warranties

     21        8   

Settlements made (in cash or kind) during the period

     (31     (38

Other, net

     (4     (3
  

 

 

   

 

 

 

Balance at end of period

   $ 116      $ 102   
  

 

 

   

 

 

 
Stock-Based Compensation (Tables)
Pre-tax compensation expense and the related income tax benefit for these stock-based incentives were as follows, in millions:

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2012      2011     2012      2011  

Long-term stock awards

   $ 9       $ 9      $ 28       $ 28   

Stock options

     3         6        12         17   

Phantom stock awards and stock appreciation rights

     2         (5     8         (3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 14       $ 10      $ 48       $ 42   

Income tax benefit (36 percent tax rate – before valuation allowance)

   $ 5       $ 4      $ 18       $ 16   
     The Company’s long-term stock award activity was as follows, shares in millions:

 

     Nine Months Ended
September 30,
 
     2012      2011  

Unvested stock award shares at January 1

     10         10   

Weighted average grant date fair value

   $ 17       $ 19   

Stock award shares granted

     1         2   

Weighted average grant date fair value

   $ 12       $ 13   

Stock award shares vested

     2         2   

Weighted average grant date fair value

   $ 18       $ 20   

Stock award shares forfeited

     1         —     

Weighted average grant date fair value

   $ 17       $ 18   

Unvested stock award shares at September 30

     8         10   

Weighted average grant date fair value

   $ 16       $ 17   
     The Company’s stock option activity was as follows, shares in millions:

 

                 
     Nine Months Ended
September 30,
 
     2012     2011  

Option shares outstanding, January 1

     36        37   

Weighted average exercise price

   $ 21      $ 21   
     

Option shares granted, including restoration options

     1        2   

Weighted average exercise price

   $ 12      $ 13   
     

Option shares exercised

     1        —     

Aggregate intrinsic value on date of exercise (A)

   $ 4  million    $ 1  million 

Weighted average exercise price

   $ 9      $ 8   
     

Option shares forfeited

     3        3   

Weighted average exercise price

   $ 18      $ 22   
     

Option shares outstanding, September 30

     33        36   

Weighted average exercise price

   $ 21      $ 21   

Weighted average remaining option term (in years)

     5        6   
     

Option shares vested and expected to vest, September 30

     33        36   

Weighted average exercise price

   $ 21      $ 21   

Aggregate intrinsic value (A)

   $ 39  million    $ —    million 

Weighted average remaining option term (in years)

     5        6   
     

Option shares exercisable (vested), September 30

     25        24   

Weighted average exercise price

   $ 24      $ 24   

Aggregate intrinsic value (A)

   $ 17  million    $ —    million 

Weighted average remaining option term (in years)

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

 

     Nine Months  Ended
September 30,
 
     2012     2011  

Weighted average grant date fair value

   $ 4.44      $ 5.10   

Risk-free interest rate

     1.09     2.72

Dividend yield

     2.57     2.34

Volatility factor

     50.97     49.00

Expected option life

     6 years        6 years   
Employee Retirement Plans (Tables)
Net Periodic Pension Cost for Defined-Benefit Pension Plans
     Net periodic pension cost for the Company’s defined-benefit pension plans was as follows, in millions:

 

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

Service cost

   $ 1      $ —         $ 1      $ —     

Interest cost

     12        2         12        2   

Expected return on plan assets

     (10     —           (9     —     

Amortization of net loss

     4        —           2        1   

Net periodic pension cost

   $ 7      $ 2         6        3   
     Nine Months Ended September 30,  
     2012      2011  
     Qualified     Non-Qualified      Qualified     Non-Qualified  

Service cost

   $ 4      $ —         $ 2      $ —     

Interest cost

     32        5         34        6   

Expected return on plan assets

     (27     —           (25     —     

Amortization of net loss

     11        1         7        1   

Net periodic pension cost

   $ 20      $ 6       $ 18      $ 7   
Segment Information (Tables)
Company by Segment and Geographic Area
Information about the Company by segment and geographic area was as follows, in millions:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012      2011      2012     2011     2012      2011      2012     2011  
     Net Sales(A)      Operating Profit (Loss)     Net Sales(A)      Operating Profit (Loss)  

The Company’s operations by segment were:

                    

Cabinets and Related Products

   $ 291       $ 307       $ (35   $ (34   $ 900       $ 944       $ (70   $ (111

Plumbing Products

     736         768         75        91        2,216         2,239         242        270   

Installation and Other Services

     312         287         (2     (15     886         792         (25     (71

Decorative Architectural Products

     481         455         96        88        1,432         1,322         264        247   

Other Specialty Products

     156         161         3        12        421         432         4        2   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,976       $ 1,978       $ 137      $ 142      $ 5,855       $ 5,729       $ 415      $ 337   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The Company’s operations by geographic area were:

                    

North America

   $ 1,553       $ 1,496       $ 112      $ 92      $ 4,571       $ 4,349       $ 325      $ 200   

International, principally Europe

     423         482         25        50        1,284         1,380         90        137   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,976       $ 1,978         137        142      $ 5,855       $ 5,729         415        337   
  

 

 

    

 

 

        

 

 

    

 

 

      

General corporate expense, net

           (35     (27           (96     (95

Gain from sale of fixed assets (B)

           —          —                5        —     

Charge for litigation settlements, net (B)

           (1     (1           (74     (6
        

 

 

   

 

 

         

 

 

   

 

 

 

Operating profit

           101        114              250        236   

Other income (expense), net

           (56     (41           (171     (115
        

 

 

   

 

 

         

 

 

   

 

 

 

Income before income taxes

         $ 45      $ 73            $ 79      $ 121   
        

 

 

   

 

 

         

 

 

   

 

 

 

 

(A) Inter-segment sales were not material.
(B) In 2012, gain on sale of fixed assets and in 2011, charge for litigation settlements, net relate to a business unit in the Other Specialty Products segment. For the three months and nine months ended September 30, 2012, the charge for litigation settlements, net, includes $1 million and $76 million, respectively, related to a business unit in the Installation and Other Services segment.
Other Income (Expense), Net (Tables)
Other, Net, Included in Other Income (Expense), Net
Other, net, which is included in other income (expense), net, was as follows, in millions:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012     2011  

Income from cash and cash investments

   $ 1       $ 2       $ 5      $ 5   

Other interest income

     1         1         1        1   

Income from financial investments (Note E)

     2         19         20        69   

Impairment of financial investments (Note E)

     —           —           (2     —     

Other items, net

     2         —           (1     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total other net

   $ 6       $ 22       $ 23      $ 75   
  

 

 

    

 

 

    

 

 

   

 

 

 
Earnings Per Common Share (Tables)
Numerators and Denominators Used in Computations of Basic and Diluted Earnings per Common Share
Reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per common share were as follows, in millions:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Numerator (basic and diluted):

        

Income from continuing operations

   $ 22      $ 56      $ 3      $ 29   

Allocation to unvested restricted stock awards

     (1     (2     (2     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations attributable to common shareholders

     21        54        1        27   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

     (7     (20     (30     (31

Allocation to unvested restricted stock awards

     —          1        1        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations attributable to common shareholders

     (7     (19     (29     (30
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 14      $ 35      $ (28   $ (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Basic common shares (based upon weighted average)

     349        348        349        348   

Add:

        

Contingent common shares

     —          —          —          —     

Stock option dilution

     1        —          1        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted common shares

     350        348        350        349   
  

 

 

   

 

 

   

 

 

   

 

 

 
Financial information for Discontinued Operations (Detail) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Net Sales
$ 23 
$ 28 
$ 64 
$ 71 
Operating loss from discontinued operations
(3)
(5)
(10)
(16)
Impairment of assets
(3)
(7)
(3)
(7)
Loss on disposal of discontinued operations, net
 
 
(3)
 
Loss before income tax
(6)
(12)
(16)
(23)
Income taxes
14 
Loss from discontinued operations
$ (7)
$ (20)
$ (30)
$ (31)
Changes in Carrying Amount of Goodwill (Detail) (USD $)
In Millions, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Goodwill [Line Items]
 
 
Gross Goodwill
$ 4,210 
$ 4,210 
Accumulated Impairment Losses
(2,319)
(2,319)
Net Goodwill
1,891 
1,891 
Other
   1
 
Net Goodwill
1,891 
1,891 
Cabinets and Related Products
 
 
Goodwill [Line Items]
 
 
Gross Goodwill
589 
589 
Accumulated Impairment Losses
(408)
(408)
Net Goodwill
181 
181 
Other
   1
 
Net Goodwill
181 
181 
Plumbing Products
 
 
Goodwill [Line Items]
 
 
Gross Goodwill
541 
541 
Accumulated Impairment Losses
(340)
(340)
Net Goodwill
201 
201 
Other
   1
 
Net Goodwill
201 
201 
Installation and Other Services
 
 
Goodwill [Line Items]
 
 
Gross Goodwill
1,806 
1,806 
Accumulated Impairment Losses
(762)
(762)
Net Goodwill
1,044 
1,044 
Other
   1
 
Net Goodwill
1,044 
1,044 
Decorative Architectural Products
 
 
Goodwill [Line Items]
 
 
Gross Goodwill
294 
294 
Accumulated Impairment Losses
(75)
(75)
Net Goodwill
219 
219 
Other
   1
 
Net Goodwill
219 
219 
Other Specialty Products
 
 
Goodwill [Line Items]
 
 
Gross Goodwill
980 
980 
Accumulated Impairment Losses
(734)
(734)
Net Goodwill
246 
246 
Other
   1
 
Net Goodwill
$ 246 
$ 246 
Goodwill and Other Intangible Assets - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Other indefinite-lived intangible assets
$ 174 
$ 174 
Carrying value of definite-lived intangible assets
19 
22 
Accumulated amortization
$ 55 
$ 54 
Depreciation and Amortization Expense - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Depreciation and amortization expense
$ 154 
$ 188 
Accelerated depreciation
$ 12 
$ 28 
Financial Investments Included in Other Assets (Detail) (USD $)
In Millions, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments, fair value disclosure
$ 97 
$ 112 
Recurring investments
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments, fair value disclosure
22 
22 
Non-Recurring investments
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments, fair value disclosure
75 
90 
Auction rate securities |
Recurring investments
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments, fair value disclosure
22 
22 
Private equity funds |
Non-Recurring investments
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments, fair value disclosure
71 
86 
Other investments |
Non-Recurring investments
 
 
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments, fair value disclosure
$ 4 
$ 4 
Company's Investments in Available-for-Sale Securities (Detail) (USD $)
In Millions, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Cost Basis
$ 19 
$ 19 
Pre-tax Unrealized Gains
Pre-tax Unrealized Losses
   
   
Recorded Basis
$ 22 
$ 22 
Recurring Fair Value Measurements (Detail) (USD $)
In Millions, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
 
 
Investments, fair value disclosure
$ 97 
$ 112 
Recurring investments