MASCO CORP /DE/, 10-Q filed on 7/31/2013
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2013
Jul. 26, 2013
Document Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2013 
 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q2 
 
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
 
356,940,100 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Jun. 30, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash investments
$ 1,223 
$ 1,351 
Receivables
1,255 
933 
Prepaid expenses and other
109 
107 
Assets held for sale
101 
100 
Inventories:
 
 
Finished goods
435 
368 
Raw material
261 
266 
Work in process
95 
92 
Inventories
791 
726 
Total current assets
3,479 
3,217 
Property and equipment, net
1,276 
1,326 
Goodwill
1,894 
1,894 
Other intangible assets, net
149 
151 
Other assets
173 
184 
Assets held for sale
91 
103 
Total assets
7,062 
6,875 
Current liabilities:
 
 
Notes payable
207 
206 
Accounts payable
998 
788 
Accrued liabilities
789 
823 
Liabilities held for sale
48 
45 
Total current liabilities
2,042 
1,862 
Long-term debt
3,421 
3,422 
Deferred income taxes and other
1,050 
1,053 
Liabilities held for sale
 
Total liabilities
6,513 
6,341 
Commitments and contingencies
   
   
Masco Corporation's shareholders' equity:
 
 
Common shares, par value $1 per share Authorized shares: 1,400,000,000; issued and outstanding: 2013 - 349,200,000; 2012 - 349,000,000
349 
349 
Preferred shares authorized: 1,000,000; issued and outstanding: 2013 - None; 2012 - None
   
   
Paid-in capital
 
16 
Accumulated deficit
(40)
(102)
Accumulated other comprehensive income
47 
59 
Total Masco Corporation's shareholders' equity
356 
322 
Noncontrolling interest
193 
212 
Total equity
549 
534 
Total liabilities and equity
$ 7,062 
$ 6,875 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Jun. 30, 2013
Dec. 31, 2012
Statement Of Financial Position [Abstract]
 
 
Common shares, par value
$ 1 
$ 1 
Common shares, shares Authorized
1,400,000,000 
1,400,000,000 
Common shares, shares issued
349,200,000 
349,000,000 
Common shares, shares outstanding
349,200,000 
349,000,000 
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 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Income Statement [Abstract]
 
 
 
 
Net sales
$ 2,149 
$ 1,945 
$ 4,025 
$ 3,751 
Cost of sales
1,540 
1,424 
2,908 
2,746 
Gross profit
609 
521 
1,117 
1,005 
Selling, general and administrative expenses
421 
392 
797 
769 
Charge for litigation settlements, net
   
75 
   
73 
Operating profit
188 
54 
320 
163 
Other income (expense), net:
 
 
 
 
Interest expense
(60)
(68)
(120)
(132)
Other, net
10 
17 
Total other income (expense), net
(57)
(66)
(110)
(115)
Income (loss) from continuing operations before income taxes
131 
(12)
210 
48 
Income taxes
39 
31 
53 
38 
Income (loss) from continuing operations
92 
(43)
157 
10 
Loss from discontinued operations
(5)
(24)
(14)
(33)
Net income (loss)
87 
(67)
143 
(23)
Less: Net income attributable to noncontrolling interest
10 
19 
19 
Net income (loss)
77 
(75)
124 
(42)
Basic:
 
 
 
 
Income (loss) from continuing operations
$ 0.23 
$ (0.15)
$ 0.39 
$ (0.03)
Loss from discontinued operations
$ (0.01)
$ (0.07)
$ (0.04)
$ (0.09)
Net income (loss)
$ 0.22 
$ (0.22)
$ 0.35 
$ (0.12)
Diluted:
 
 
 
 
Income (loss) from continuing operations
$ 0.23 
$ (0.15)
$ 0.38 
$ (0.03)
Loss from discontinued operations
$ (0.01)
$ (0.07)
$ (0.04)
$ (0.09)
Net income (loss)
$ 0.21 
$ (0.22)
$ 0.34 
$ (0.12)
Amounts attributable to Masco Corporation:
 
 
 
 
Income (loss) from continuing operations
82 
(51)
138 
(9)
Loss from discontinued operations
(5)
(24)
(14)
(33)
Net income (loss)
$ 77 
$ (75)
$ 124 
$ (42)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net income (loss)
$ 87 
$ (67)
$ 143 
$ (23)
Less: Net income attributable to noncontrolling interest
10 
19 
19 
Net income (loss) attributable to Masco Corporation
77 
(75)
124 
(42)
Other comprehensive income (loss), net of tax (see Note K):
 
 
 
 
Cumulative translation adjustment
10 
(57)
(26)
(27)
Interest rate swaps, net of income tax of $- and $-, respectively
 
 
Unrecognized pension prior service cost and net loss, net of income tax of $- and $-, respectively
Other comprehensive income (loss)
15 
(53)
(16)
(19)
Less: Other comprehensive income (loss) attributable to noncontrolling interest
(11)
(4)
(4)
Other comprehensive income (loss) attributable to Masco Corporation
11 
(42)
(12)
(15)
Total comprehensive income (loss)
102 
(120)
127 
(42)
Less: Total comprehensive income (loss) attributable to the noncontrolling interest
14 
(3)
15 
15 
Total comprehensive income (loss) attributable to Masco Corporation
$ 88 
$ (117)
$ 112 
$ (57)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Parenthetical) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Income tax on interest rate swaps
   
   
   
   
Income tax on unrecognized pension prior service cost and net loss
   
   
   
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
 
 
Cash provided by operations
$ 299 
$ 109 
Increase in receivables
(348)
(303)
Increase in inventories
(69)
(81)
Increase in accounts payable and accrued liabilities, net
177 
271 
Net cash from (for) operating activities
59 
(4)
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
 
 
Cash dividends paid
(54)
(53)
Dividend payment to noncontrolling interest
(34)
(40)
Purchase of Company common stock
(35)
(8)
New Credit Agreement costs
(4)
 
Issuance of Notes, net of issuance costs
 
396 
Retirement of Notes
 
(46)
Payment for settlement of swaps
 
(25)
Payment of debt, net
 
(1)
Net cash (for) from financing activities
(127)
223 
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
 
 
Capital expenditures
(59)
(52)
Acquisition of companies, net of cash acquired
(5)
 
Proceeds from disposition of:
 
 
Other financial investments
11 
30 
Property and equipment
24 
Purchases of other financial investments
 
(2)
Other, net
(5)
(15)
Net cash (for) investing activities
(51)
(15)
Effect of exchange rate changes on cash and cash investments
(9)
(7)
CASH AND CASH INVESTMENTS:
 
 
(Decrease) increase for the period
(128)
197 
At January 1
1,351 
1,656 
At June 30
$ 1,223 
$ 1,853 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
In Millions, unless otherwise specified
Total
Common Shares ($1 par value) [Member]
Paid-In Capital [Member]
(Accumulated Deficit) Retained Earnings [Member]
Accumulated Other Comprehensive Income [Member]
Noncontrolling Interest [Member]
Beginning balance at Dec. 31, 2011
$ 742 
$ 348 
$ 65 
$ 38 
$ 76 
$ 215 
Total comprehensive income (loss)
(42)
 
 
(42)
(15)
15 
Shares issued
 
(2)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(8)
(1)
(7)
 
 
 
Surrendered (non-cash)
(8)
(1)
(7)
 
 
 
Cash dividends declared
(53)
 
(27)
(26)
 
 
Dividend payment to noncontrolling interest
(40)
 
 
 
 
(40)
Stock-based compensation
28 
 
28 
 
 
 
Ending balance at Jun. 30, 2012
619 
348 
50 
(30)
61 
190 
Beginning balance at Dec. 31, 2012
534 
349 
16 
(102)
59 
212 
Total comprehensive income (loss)
127 
 
 
124 
(12)
15 
Shares issued
   
(2)
 
 
 
Shares retired:
 
 
 
 
 
 
Repurchased
(35)
(2)
(11)
(22)
 
 
Surrendered (non-cash)
(18)
 
(18)
 
 
 
Cash dividends declared
(54)
 
(14)
(40)
 
 
Dividend payment to noncontrolling interest
(34)
 
 
 
 
(34)
Stock-based compensation
29 
 
29 
 
 
 
Ending balance at Jun. 30, 2013
$ 549 
$ 349 
    
$ (40)
$ 47 
$ 193 
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 June 30, 2013 and the results of operations for the three months and six months ended June 30, 2013 and 2012 and cash flows for the six months ended June 30, 2013 and 2012. The condensed consolidated balance sheet at December 31, 2012 was derived from audited financial statements.

Certain prior-year amounts have been reclassified to conform to the 2013 presentation in the condensed consolidated financial statements. In the Company’s condensed consolidated balance sheets, assets and liabilities related to the 2013 discontinued operations have been separately presented at June 30, 2013 and December 31, 2012. The results of operations related to the 2013 discontinued operations have been separately stated in the accompanying condensed consolidated statements of operations for the three months and six months ended June 30, 2013 and 2012. In the Company’s condensed consolidated statements of cash flows for the six months ended June 30, 2013 and 2012, cash flows from discontinued operations are not separately classified.

Recently Issued Accounting Pronouncements. On January 1, 2013, the Company adopted new accounting guidance requiring disclosure of amounts reclassified from accumulated other comprehensive income. 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. In the first quarter of 2013, the Company determined that Tvilum, its Danish ready-to-assemble cabinet business, is no longer core to its long-term growth strategy and, accordingly, the Company has embarked on a plan for disposition. The Company has accounted for this business and those which were sold in 2012 as discontinued operations. Selected financial information for the discontinued operations, during the period owned by the Company, was as follows, in millions:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  

Net Sales

   $ 60      $ 80      $ 119      $ 169   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss from discontinued operations

   $ (5   $ (10   $ (8   $ (21

Impairment of assets

     —          —          (10     —     

Loss on disposal of discontinued operations, net

     —          (2     —          (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (5     (12     (18     (24

Income tax expense (benefit)

     —          12        (4     9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net

   $ (5   $ (24   $ (14   $ (33
  

 

 

   

 

 

   

 

 

   

 

 

 

Included in impairment of assets in 2013 is the impairment of fixed assets held for sale. During the first quarter of 2013, the Company estimated the fair value of the business held for sale, using unobservable inputs (Level 3). After considering the currency translation gains reported in Accumulated Other Comprehensive Income, the Company recorded an impairment of $10 million in the first quarter of 2013; no further adjustment was made in the second quarter of 2013.

 

The unusual relationship between income tax expense and loss before income tax in 2012 results primarily from the increase in the deferred tax liability associated with the abandonment of tax basis in indefinite-lived intangibles due to the disposition of certain discontinued operations.

The following balance sheet items have been reclassified as held for sale:

 

     June 30,      December 31,  
     2013      2012  

Receivables

   $ 36       $ 32   

Inventories

     64         66   

Prepaid expenses and other

     1         2   

Property and equipment, net

     91         103   
  

 

 

    

 

 

 

Total assets

   $ 192       $ 203   
  

 

 

    

 

 

 

Accounts payable

   $ 36       $ 31   

Accrued liabilities

     12         14   

Deferred income taxes

     —           4   
  

 

 

    

 

 

 

Total liabilities

   $ 48       $ 49   
  

 

 

    

 

 

 

 

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
C. The changes in the carrying amount of goodwill for the six months ended June 30, 2013, by segment, were as follows, in millions:

 

     Gross Goodwill      Accumulated     Net Goodwill  
     At      Impairment     At  
     June 30, 2013      Losses     June 30, 2013  

Cabinets and Related Products

   $ 240       $ (59   $ 181   

Plumbing Products

     541         (340     201   

Installation and Other Services

     1,806         (762     1,044   

Decorative Architectural Products

     294         (75     219   

Other Specialty Products

     983         (734     249   
  

 

 

    

 

 

   

 

 

 

Total

   $ 3,864       $ (1,970   $ 1,894   
  

 

 

    

 

 

   

 

 

 

 

     Gross Goodwill      Accumulated     Net Goodwill                   Net Goodwill  
     At      Impairment     At                   At  
     Dec. 31, 2012      Losses     Dec. 31, 2012      Other (A)     Additions (B)      June 30, 2013  

Cabinets and Related Products

   $ 240       $ (59   $ 181       $ —        $ —         $ 181   

Plumbing Products

     544         (340     204         (3     —           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         —          3         249   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,864       $ (1,970   $ 1,894       $ (3   $ 3       $ 1,894   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(A) Other principally includes the effect of foreign currency translation.
(B) Additions include the acquisition of a U.K. door business in the first quarter of 2013.

Other indefinite-lived intangible assets were $132 million at both June 30, 2013 and December 31, 2012, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $17 million (net of accumulated amortization of $59 million) at June 30, 2013 and $19 million (net of accumulated amortization of $57 million) at December 31, 2012, and principally included customer relationships and non-compete agreements.

Depreciation and Amortization Expense
Depreciation and Amortization Expense
D. Depreciation and amortization expense, including discontinued operations, was $94 million and $104 million, including accelerated depreciation (relating to business rationalization initiatives) of $9 million for each of the six months ended June 30, 2013 and 2012.
Fair Value of Financial Investments and Liabilities
Fair Value of Financial Investments and Liabilities
E. The Company has maintained investments in available-for-sale securities and a number of private equity funds, principally as part of its tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses. Financial investments included in other assets were as follows, in millions:

 

     June 30,
2013
     December 31,
2012
 

Auction rate securities

   $ 22       $ 22   
  

 

 

    

 

 

 

Total recurring investments

     22         22   

Private equity funds

     65         69   

Other investments

     4         4   
  

 

 

    

 

 

 

Total non-recurring investments

     69         73   
  

 

 

    

 

 

 

Total

   $ 91       $ 95   
  

 

 

    

 

 

 

The Company’s investments in available-for-sale securities at June 30, 2013 and December 31, 2012 were as follows, in millions:

 

            Pre-tax         
            Unrealized      Unrealized      Recorded  
     Cost Basis      Gains      Losses      Basis  

June 30, 2013

   $ 19       $ 3       $ —         $ 22   

December 31, 2012

   $ 19       $ 3       $ —         $ 22   

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

 

            Fair Value Measurements Using  
     June 30,
2013
     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,
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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

The following table summarizes the changes in Level 3 financial assets measured at fair value on a recurring basis for the six months ended June 30, 2013 and the year ended December 31, 2012, in millions:

 

     June 30, 2013
Auction Rate
Securities
     December 31, 2012
Auction Rate
Securities
 

Fair value at beginning of period

   $ 22       $ 22   

Total losses included in earnings

     —           —     

Unrealized (losses)

     —           —     

Purchases

     —           —     

Settlements

     —           —     

Transfer from Level 3 to Level 2

     —           —     
  

 

 

    

 

 

 

Fair value at period end

   $ 22       $ 22   
  

 

 

    

 

 

 

Non-Recurring Fair Value Measurements. During the three months and six months ended June 30, 2013, 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.

During the three months and six months ended June 30, 2012, the Company measured $4 million of private equity investments using level 3 inputs due to an other-than-temporary decline in the estimated value, resulting in a $2 million impairment.

The Company did not have any transfers between Level 1 and Level 2 financial assets in the three months or six months ended June 30, 2013 or 2012.

 

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

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013      2012     2013      2012  

Realized gains from private equity funds

   $ 4       $ 2      $ 7       $ 18   

Income from other investments, net

     1         —          1         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total income from financial investments

   $ 5       $ 2      $ 8       $ 18   
  

 

 

    

 

 

   

 

 

    

 

 

 

Impairment charges – private equity funds

   $ —         $ (2   $ —         $ (2
  

 

 

    

 

 

   

 

 

    

 

 

 

The fair value of the Company’s short-term and long-term fixed-rate debt instruments is based principally upon modeled market prices for the same or similar issues or the current rates available to the Company for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at June 30, 2013 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, 2012 was approximately $4.0 billion, compared with the aggregate carrying value of $3.6 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 June 30, 2013, the balance remaining in Accumulated Other Comprehensive Income was $20 million.

 

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 2013 and 2012, 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 condensed consolidated statements of operations 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 2013 and 2012, the Company entered into several contracts to manage its exposure to increases in the price of copper and zinc. (Losses) gains related to these contracts are recorded in the Company’s condensed consolidated statements of operations in cost of sales.

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

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  

Foreign Currency Contracts

        

Exchange Contracts

   $ —        $ 9      $ 7      $ 4   

Forward Contracts

     —          —          2        (1

Metal Contracts

     (5     (6     (9     1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total (loss) gain

   $ (5   $ 3      $ —        $ 4   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     At June 30, 2013  
     Notional                
     Amount      Assets      Liabilities  

Foreign Currency Contracts

        

Exchange Contracts

   $ 103         

Current assets

      $ 3       $ —     

Forward Contracts

     63         

Current assets

        1         —     

Metal Contracts

     46         

Current liabilities

        —           8   
     

 

 

    

 

 

 

Total

      $ 4       $ 8   
     

 

 

    

 

 

 

 

     At December 31, 2012  
     Notional                
     Amount      Assets      Liabilities  

Foreign Currency Contracts

        

Exchange Contracts

   $ 172         

Current liabilities

      $ —         $ 5   

Forward Contracts

     76         

Current assets

        1         1   

Metal Contracts

     35         

Current liabilities

        1         2   
     

 

 

    

 

 

 

Total

      $ 2       $ 8   
     

 

 

    

 

 

 

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

Warranty
Warranty
G. Changes in the Company’s warranty liability were as follows, in millions:
     Six Months Ended     Twelve Months Ended  
     June 30, 2013     December 31, 2012  

Balance at January 1

   $ 118      $ 102   

Accruals for warranties issued during the period

     18        42   

Accruals related to pre-existing warranties

     4        16   

Settlements made (in cash or kind) during the period

     (20     (38

Other, net

     1        (4
  

 

 

   

 

 

 

Balance at end of period

   $ 121      $ 118   
  

 

 

   

 

 

 
Debt
Debt
H. On March 28, 2013, the Company entered into a credit agreement (the “New Credit Agreement”) with a bank group, with an aggregate commitment of $1.25 billion and a maturity date of March 28, 2018. Upon entry into the New Credit Agreement, the Company’s credit agreement dated as of June 21, 2010, as amended, with an aggregate commitment of $1.25 billion, was terminated.

The New 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 June 30, 2013, the Company had $95 million of outstanding and unused Letters of Credit, reducing the Company’s borrowing capacity by such amount.

Revolving credit loans bear interest under the New Credit Agreement, at the Company’s option, at (A) a rate per annum equal to the greater of (i) the 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.

The New Credit Agreement contains financial covenants requiring the Company to maintain (A) a maximum debt to total capitalization ratio, as adjusted for certain items, of 65 percent, and (B) a minimum interest coverage ratio, as adjusted for certain items, equal to or greater than 2.5 to 1.0. The debt to total capitalization ratio allows the add-back, if incurred, of up to the first $250 million of certain non-cash charges, including goodwill and other intangible asset impairment charges, occurring from and after January 1, 2012 that would negatively impact shareholders’ equity.

Based on the limitations of the debt to total capitalization ratio covenant in the New Credit Agreement, at June 30, 2013, the Company had additional borrowing capacity, subject to availability, of up to $910 million. Additionally, at June 30, 2013, the Company could absorb a reduction to shareholders’ equity of approximately $490 million and remain in compliance with the debt to total capitalization covenant.

 

In order for the Company to borrow under the New Credit Agreement, there must not be any default in the Company’s covenants in the New 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 New 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, 2012, in each case, no material ERISA or environmental non-compliance and no material tax deficiency). The Company was in compliance with all covenants and no borrowings have been made at June 30, 2013.

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 June 30, 2013, outstanding stock-based incentives were in the form of long-term stock awards, stock options, phantom stock awards and stock appreciation rights. Pre-tax compensation expense and the related income tax benefit for these stock-based incentives were as follows, in millions:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2013      2012      2013      2012  

Long-term stock awards

   $ 11       $ 11       $ 20       $ 19   

Stock options

     5         4         10         9   

Phantom stock awards and stock appreciation rights

     —           1         3         6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16       $ 16       $ 33       $ 34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax benefit (37 percent tax rate – before valuation allowance)

   $ 6       $ 6       $ 12       $ 13   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 1,623,080 shares of long-term stock awards in the six months ended June 30, 2013.

 

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

 

     Six Months Ended  
     June 30,  
     2013      2012  

Unvested stock award shares at January 1

     8         10   

Weighted average grant date fair value

   $ 16       $ 17   

Stock award shares granted

     2         1   

Weighted average grant date fair value

   $ 20       $ 12   

Stock award shares vested

     2         2   

Weighted average grant date fair value

   $ 16       $ 17   

Stock award shares forfeited

     —           —     

Weighted average grant date fair value

   $ 18       $ 18   

Unvested stock award shares at June 30

     8         9   

Weighted average grant date fair value

   $ 17       $ 16   

At June 30, 2013 and 2012, there was $83 million and $92 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of four years in both periods.

The total market value (at the vesting date) of stock award shares which vested during the six months ended June 30, 2013 and 2012 was $32 million and $23 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 869,000 of stock option shares in the six months ended June 30, 2013 with a grant date exercise price approximating $20 per share. In the first six months of 2013, 1,182,470 stock option shares were forfeited (including options that expired unexercised).

 

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

 

     Six Months Ended  
     June 30,  
     2013      2012  

Option shares outstanding, January 1

     30         36   

Weighted average exercise price

   $ 21       $ 21   

Option shares granted, including restoration options

     1         1   

Weighted average exercise price

   $ 20       $ 12   

Option shares exercised

     2         —     

Aggregate intrinsic value on date of exercise (A)

   $ 21 million       $ 1 million   

Weighted average exercise price

   $ 11       $ 9   

Option shares forfeited

     1         3   

Weighted average exercise price

   $ 23       $ 19   

Option shares outstanding, June 30

     28         34   

Weighted average exercise price

   $ 22       $ 21   

Weighted average remaining option term (in years)

     4         5   

Option shares vested and expected to vest, June 30

     28         34   

Weighted average exercise price

   $ 22       $ 21   

Aggregate intrinsic value (A)

   $ 69 million       $ 29 million   

Weighted average remaining option term (in years)

     4         5   

Option shares exercisable (vested), June 30

     23         26   

Weighted average exercise price

   $ 24       $ 24   

Aggregate intrinsic value (A)

   $ 37 million       $ 15 million   

Weighted average remaining option term (in years)

     3         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 June 30, 2013 and 2012, there was $12 million and $24 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 2013 and 2012, respectively.

 

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

 

     Six Months Ended  
     June 30,  
     2013     2012  

Weighted average grant date fair value

   $ 8.33      $ 4.44   

Risk-free interest rate

     1.20     1.10

Dividend yield

     1.47     2.57

Volatility factor

     49.00     51.00

Expected option life

     6 years        6 years   
Employee Retirement Plans
Employee Retirement Plans
J. Net periodic pension cost for the Company’s defined-benefit pension plans was as follows, in millions:

 

     Three Months Ended June 30,  
     2013      2012  
     Qualified     Non-Qualified      Qualified     Non-Qualified  

Service cost

   $ 1      $ —         $ 1      $ —     

Interest cost

     10        2         10        2   

Expected return on plan assets

     (9     —           (9     —     

Amortization of net loss

     4        —           4        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic pension cost

   $ 6      $ 2         6        2   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     Six Months Ended June 30,  
     2013      2012  
     Qualified     Non-Qualified      Qualified     Non-Qualified  

Service cost

   $ 2      $ —         $ 3      $ —     

Interest cost

     20        3         20        3   

Expected return on plan assets

     (18     —           (17     —     

Amortization of net loss

     8        1         7        1   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic pension cost

   $ 12      $ 4       $ 13      $ 4   
  

 

 

   

 

 

    

 

 

   

 

 

 

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.

Accumulated Other Comprehensive Income (loss)
Accumulated Other Comprehensive Income (loss)
K. The reclassifications from accumulated other comprehensive income (loss) to the income statement were as follows, in millions:

 

     Amount Reclassified       

Accumulated Other Comprehensive Income (Loss)

   Three Months Ended      Six Months Ended       
   June 30,      June 30,      Income Statement
   2013      2012      2013      2012     

Line Item

Amortization of defined benefit pension:

              

Actuarial losses, net

   $ 4       $ 4       $ 9       $ 8       Selling, General & Administrative Expense
     —           —           —           —         Tax expense
  

 

 

    

 

 

    

 

 

    

 

 

    
   $ 4       $ 4       $ 9       $ 8       Net of tax
  

 

 

    

 

 

    

 

 

    

 

 

    

Interest rate swaps

   $ 1       $ —         $ 1       $ —         Interest expense
Segment Information
Segment Information
L. Information about the Company by segment and geographic area was as follows, in millions:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013      2012      2013     2012     2013      2012      2013     2012  
     Net Sales (A)      Operating Profit (Loss)     Net Sales (A)      Operating Profit (Loss)  

The Company’s operations by segment were:

                    

Cabinets and Related Products

   $ 265       $ 253       $ 2      $ (5   $ 501       $ 481       $ (2   $ (21

Plumbing Products

     802         738         102        70        1,564         1,480         188        167   

Installation and Other Services

     357         296         8        (9     669         574         4        (23

Decorative Architectural Products

     565         517         104        95        997         951         193        168   

Other Specialty Products

     160         141         11        6        294         265         10        1   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2,149       $ 1,945       $ 227      $ 157      $ 4,025       $ 3,751       $ 393      $ 292   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The Company’s operations by geographic area were:

                    

North America

   $ 1,765       $ 1,587       $ 185      $ 125      $ 3,275       $ 3,018       $ 325      $ 213   

International, principally Europe

     384         358         42        32        750         733         68        79   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2,149       $ 1,945         227        157      $ 4,025       $ 3,751         393        292   
  

 

 

    

 

 

        

 

 

    

 

 

      

General corporate expense, net

           (39     (33           (73     (61

Gain from sale of fixed assets (B)

           —          5              —          5   

Charge for litigation settlements, net (B)

           —          (75           —          (73
        

 

 

   

 

 

         

 

 

   

 

 

 

Operating profit

           188        54              320        163   

Other income (expense), net

           (57     (66           (110     (115
        

 

 

   

 

 

         

 

 

   

 

 

 

Income (loss) before income taxes

         $ 131      $ (12         $ 210      $ 48   
        

 

 

   

 

 

         

 

 

   

 

 

 

 

(A) Inter-segment sales were not material.
(B) In 2012, gain on sale of fixed assets relates to a business unit in the Other Specialty Products segment. For the three months and six months ended June 30, 2012, the charge for litigation settlements, net, includes $75 million related to a business unit in the Installation and Other Services segment.
Severance and Early Retirement Programs
Severance and Early Retirement Programs
M. As part of the Company’s continuing review of its operations to improve cost structure and business processes, actions were taken during 2013 and 2012 to respond to market conditions. The Company recorded charges related to severance and early retirement programs of $12 million and $5 million for the six months ended June 30, 2013 and 2012, respectively. Such charges are principally reflected in the statement of operations in selling, general and administrative expenses.
Other Income (Expense), Net
Other Income (Expense), Net
N. Other, net, which is included in other income (expense), net, was as follows, in millions:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013      2012  

Income from cash and cash investments

   $ 1      $ 2      $ 2       $ 4   

Income from financial investments (Note E)

     5        2        8         18   

Impairment of financial investments (Note E)

     —          (2     —           (2

Other items, net

     (3     —          —           (3
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other net

   $ 3      $ 2      $ 10       $ 17   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other items, net, included $(2) million and $1 million of currency (losses) gains for the three months and six months ended June 30, 2013, respectively. Other items, net, included $— million and $1 million of currency losses for the three months and six months ended June 30, 2012, respectively.

Earnings Per Common Share
Earnings Per Common Share
O. 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
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Numerator (basic and diluted):

        

Income (loss) from continuing operations

   $ 82      $ (51   $ 138      $ (9

Allocation to unvested restricted stock awards

     (2     (1     (3     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations attributable to common shareholders

     80        (52     135        (10
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued Operations, net

     (5     (24     (14     (33
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 75      $ (76   $ 121      $ (43
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Basic common shares (based upon weighted average)

     349        349        349        349   

Add:

        

Contingent common shares

     —          —          —          —     

Stock option dilution

     3        —          3        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted common shares

     352        349        352        349   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months and six months ended June 30, 2013 and 2012, the Company allocated dividends and undistributed earnings (only in 2013) to the unvested restricted stock awards (participating securities).

 

Additionally, 14 million common shares for both the three months and six months ended June 30, 2013 and 34 million common shares for both the three months and six months ended June 30, 2012 related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.

In the first six months of 2013, the Company granted 1.6 million shares of long-term stock awards; to offset the dilutive impact of these awards and awards granted in late 2012, the Company also repurchased and retired 1.7 million shares of Company common stock, for cash aggregating approximately $35 million. At June 30, 2013, the Company had 22.6 million shares of its common stock remaining under the July 2007 Board of Directors’ repurchase authorization.

On the basis of amounts paid (declared), cash dividends per common share were $.075 ($.075) and $.15 ($.15), respectively for the three months and six months ended June 30, 2013 and June 30, 2012.

Other Commitments and Contingencies
Other Commitments and Contingencies
P.
We are subject to claims, charges, litigation and other proceedings in the ordinary course of our business, including those arising from or related to contractual matters, intellectual property, personal injury, environmental matters, product liability, product recalls, construction defect, insurance coverage, personnel and employment disputes and other matters, including class actions. We believe we have adequate defenses in these matters and that the outcome of these matters is not likely to have a material adverse effect on us. However, there is no assurance that we will prevail in these matters, and we could in the future incur judgments, enter into settlements of claims or revise our expectations regarding the outcome of these matters, which could materially impact our results of operations.
Income Taxes
Income Taxes
Q. Our effective tax rate was 30 percent and 25 percent for the three months and six months ended June 30, 2013, respectively, primarily due to the decrease in the valuation allowance resulting from the partial utilization of our U.S. Federal net operating loss carryforward. The effective tax rate for the first half of 2013 includes an $11 million state income tax benefit on uncertain tax positions primarily due to the expiration of applicable statutes of limitation.

In the second quarter of 2012, the Company incurred income tax expense of $31 million on a pre-tax loss from continuing operations of $12 million and for the first half of 2012 the effective tax rate was 79 percent. The unusual 2012 tax rate is primarily due to losses in certain jurisdictions providing no tax benefit and an increase in the valuation allowance related to net operating losses. The effective tax rate for the first half of 2012 includes a $21 million state income tax benefit on uncertain tax positions primarily from the expiration of applicable statutes of limitations in various jurisdictions and certain audit closings.

As a result of expirations of applicable statutes of limitations in various jurisdictions expected to transpire or occur 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.

 

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 that can be placed on projected taxable income to support the recovery of the deferred tax assets.

In the fourth quarter of 2010, we recorded a $372 million valuation allowance against our U.S. Federal deferred tax assets as a non-cash charge to income tax expense. In reaching this conclusion, we considered the weaker retail sales of certain of our building products and the slower than anticipated recovery in the U.S. housing market which led to U.S. operating losses and significant U.S. goodwill impairment charges, that primarily occurred in the fourth quarter of 2010, causing us to be in a three-year cumulative U.S. loss position.

During 2012 and 2011, objective and verifiable negative evidence, such as U.S. operating losses and significant impairment charges for U.S. goodwill in 2011 and other intangible assets, continued to outweigh positive evidence necessary to reduce the valuation allowance. As a result, we recorded increases of $65 million and $89 million in the valuation allowance related to our U.S. Federal deferred tax assets as a non-cash charge to income tax expense in 2012 and 2011, respectively.

A return to sustainable profitability in the U.S. is required before we would change our judgment regarding the need for a valuation allowance against our deferred tax assets.

Although the recent strengthening in new home construction activity has resulted in profitability in the Company’s U.S. operations during the first half of 2013, we continue to record a full valuation allowance against the U.S. Federal deferred tax assets as the Company is expected to remain in a three-year cumulative loss position throughout 2013.

It is reasonably possible that the continued improvements in our U.S. operations could result in the objective positive evidence necessary to warrant the reversal of all or a portion of the valuation allowance as early as the fourth quarter of 2014. Until such time, the profits from our U.S. operations will be offset by the net operating loss carryforward resulting in a lower U.S. effective tax rate.

Accounting Policies (Policies)
Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements. On January 1, 2013, the Company adopted new accounting guidance requiring disclosure of amounts reclassified from accumulated other comprehensive income. 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)
Selected financial information for the discontinued operations, during the period owned by the Company, was as follows, in millions:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  

Net Sales

   $ 60      $ 80      $ 119      $ 169   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss from discontinued operations

   $ (5   $ (10   $ (8   $ (21

Impairment of assets

     —          —          (10     —     

Loss on disposal of discontinued operations, net

     —          (2     —          (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (5     (12     (18     (24

Income tax expense (benefit)

     —          12        (4     9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net

   $ (5   $ (24   $ (14   $ (33

The following balance sheet items have been reclassified as held for sale:

 

     June 30,      December 31,  
     2013      2012  

Receivables

   $ 36       $ 32   

Inventories

     64         66   

Prepaid expenses and other

     1         2   

Property and equipment, net

     91         103   
  

 

 

    

 

 

 

Total assets

   $ 192       $ 203   
  

 

 

    

 

 

 

Accounts payable

   $ 36       $ 31   

Accrued liabilities

     12         14   

Deferred income taxes

     —           4   
  

 

 

    

 

 

 

Total liabilities

   $ 48       $ 49   
  

 

 

    

 

 

 
Goodwill and Other Intangible Assets (Tables)
Changes in Carrying Amount of Goodwill
The changes in the carrying amount of goodwill for the six months ended June 30, 2013, by segment, were as follows, in millions:

 

     Gross Goodwill      Accumulated     Net Goodwill  
     At      Impairment     At  
     June 30, 2013      Losses     June 30, 2013  

Cabinets and Related Products

   $ 240       $ (59   $ 181   

Plumbing Products

     541         (340     201   

Installation and Other Services

     1,806         (762     1,044   

Decorative Architectural Products

     294         (75     219   

Other Specialty Products

     983         (734     249   
  

 

 

    

 

 

   

 

 

 

Total

   $ 3,864       $ (1,970   $ 1,894   
  

 

 

    

 

 

   

 

 

 

 

     Gross Goodwill      Accumulated     Net Goodwill                   Net Goodwill  
     At      Impairment     At                   At  
     Dec. 31, 2012      Losses     Dec. 31, 2012      Other (A)     Additions (B)      June 30, 2013  

Cabinets and Related Products

   $ 240       $ (59   $ 181       $ —        $ —         $ 181   

Plumbing Products

     544         (340     204         (3     —           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         —          3         249   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,864       $ (1,970   $ 1,894       $ (3   $ 3       $ 1,894   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(A) Other principally includes the effect of foreign currency translation.
(B) Additions include the acquisition of a U.K. door business in the first quarter of 2013.
Fair Value of Financial Investments and Liabilities (Tables)
E. The Company has maintained investments in available-for-sale securities and a number of private equity funds, principally as part of its tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses. Financial investments included in other assets were as follows, in millions:

 

     June 30,
2013
     December 31,
2012
 

Auction rate securities

   $ 22       $ 22   
  

 

 

    

 

 

 

Total recurring investments

     22         22   

Private equity funds

     65         69   

Other investments

     4         4   
  

 

 

    

 

 

 

Total non-recurring investments

     69         73   
  

 

 

    

 

 

 

Total

   $ 91       $ 95   
  

 

 

    

 

 

 

The Company’s investments in available-for-sale securities at June 30, 2013 and December 31, 2012 were as follows, in millions:

 

            Pre-tax         
            Unrealized      Unrealized      Recorded  
     Cost Basis      Gains      Losses      Basis  

June 30, 2013

   $ 19       $ 3       $ —         $ 22   

December 31, 2012

   $ 19       $ 3       $ —         $ 22

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

 

            Fair Value Measurements Using  
     June 30,
2013
     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,
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   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the changes in Level 3 financial assets measured at fair value on a recurring basis for the six months ended June 30, 2013 and the year ended December 31, 2012, in millions:

 

     June 30, 2013
Auction Rate
Securities
     December 31, 2012
Auction Rate
Securities
 

Fair value at beginning of period

   $ 22       $ 22   

Total losses included in earnings

     —           —     

Unrealized (losses)

     —           —     

Purchases

     —           —     

Settlements

     —           —     

Transfer from Level 3 to Level 2

     —           —     
  

 

 

    

 

 

 

Fair value at period end

   $ 22       $ 22   
  

 

 

    

 

 

 

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

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013      2012     2013      2012  

Realized gains from private equity funds

   $ 4       $ 2      $ 7       $ 18   

Income from other investments, net

     1         —          1         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total income from financial investments

   $ 5       $ 2      $ 8       $ 18   
  

 

 

    

 

 

   

 

 

    

 

 

 

Impairment charges – private equity funds

   $ —         $ (2   $ —         $ (2
  

 

 

    

 

 

   

 

 

    

 

 

 
Derivative Instruments and Hedging Activities (Tables)

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

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  

Foreign Currency Contracts

        

Exchange Contracts

   $ —        $ 9      $ 7      $ 4   

Forward Contracts

     —          —          2        (1

Metal Contracts

     (5     (6     (9     1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total (loss) gain

   $ (5   $ 3      $ —        $ 4   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     At June 30, 2013  
     Notional                
     Amount      Assets      Liabilities  

Foreign Currency Contracts

        

Exchange Contracts

   $ 103         

Current assets

      $ 3       $ —     

Forward Contracts

     63         

Current assets

        1         —     

Metal Contracts

     46         

Current liabilities

        —           8   
     

 

 

    

 

 

 

Total

      $ 4       $ 8   
     

 

 

    

 

 

 

 

     At December 31, 2012  
     Notional                
     Amount      Assets      Liabilities  

Foreign Currency Contracts

        

Exchange Contracts

   $ 172         

Current liabilities

      $ —         $ 5   

Forward Contracts

     76         

Current assets

        1         1   

Metal Contracts

     35         

Current liabilities

        1         2   
     

 

 

    

 

 

 

Total

      $ 2       $ 8   
     

 

 

    

 

 

 
Warranty (Tables)
Changes in Warranty Liability
G. Changes in the Company’s warranty liability were as follows, in millions:
     Six Months Ended     Twelve Months Ended  
     June 30, 2013     December 31, 2012  

Balance at January 1

   $ 118      $ 102   

Accruals for warranties issued during the period

     18        42   

Accruals related to pre-existing warranties

     4        16   

Settlements made (in cash or kind) during the period

     (20     (38

Other, net

     1        (4
  

 

 

   

 

 

 

Balance at end of period

   $ 121      $ 118   
  

 

 

   

 

 

 
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      Six Months Ended  
     June 30,      June 30,  
     2013      2012      2013      2012  

Long-term stock awards

   $ 11       $ 11       $ 20       $ 19   

Stock options

     5         4         10         9   

Phantom stock awards and stock appreciation rights

     —           1         3         6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16       $ 16       $ 33       $ 34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax benefit (37 percent tax rate – before valuation allowance)

   $ 6       $ 6       $ 12       $ 13   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Six Months Ended  
     June 30,  
     2013      2012  

Unvested stock award shares at January 1

     8         10   

Weighted average grant date fair value

   $ 16       $ 17   

Stock award shares granted

     2         1   

Weighted average grant date fair value

   $ 20       $ 12   

Stock award shares vested

     2         2   

Weighted average grant date fair value

   $ 16       $ 17   

Stock award shares forfeited

     —           —     

Weighted average grant date fair value

   $ 18       $ 18   

Unvested stock award shares at June 30

     8         9   

Weighted average grant date fair value

   $ 17       $ 16   

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

 

     Six Months Ended  
     June 30,  
     2013      2012  

Option shares outstanding, January 1

     30         36   

Weighted average exercise price

   $ 21       $ 21   

Option shares granted, including restoration options

     1         1   

Weighted average exercise price

   $ 20       $ 12   

Option shares exercised

     2         —     

Aggregate intrinsic value on date of exercise (A)

   $ 21 million       $ 1 million   

Weighted average exercise price

   $ 11       $ 9   

Option shares forfeited

     1         3   

Weighted average exercise price

   $ 23       $ 19   

Option shares outstanding, June 30

     28         34   

Weighted average exercise price

   $ 22       $ 21   

Weighted average remaining option term (in years)

     4         5   

Option shares vested and expected to vest, June 30

     28         34   

Weighted average exercise price

   $ 22       $ 21   

Aggregate intrinsic value (A)

   $ 69 million       $ 29 million   

Weighted average remaining option term (in years)

     4         5   

Option shares exercisable (vested), June 30

     23         26   

Weighted average exercise price

   $ 24       $ 24   

Aggregate intrinsic value (A)

   $ 37 million       $ 15 million   

Weighted average remaining option term (in years)

     3         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 and the assumptions used to estimate those values using a Black-Scholes option pricing model were as follows:

 

     Six Months Ended  
     June 30,  
     2013     2012  

Weighted average grant date fair value

   $ 8.33      $ 4.44   

Risk-free interest rate

     1.20     1.10

Dividend yield

     1.47     2.57

Volatility factor

     49.00     51.00

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 June 30,  
     2013      2012  
     Qualified     Non-Qualified      Qualified     Non-Qualified  

Service cost

   $ 1      $ —         $ 1      $ —     

Interest cost

     10        2         10        2   

Expected return on plan assets

     (9     —           (9     —     

Amortization of net loss

     4        —           4        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic pension cost

   $ 6      $ 2         6        2   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     Six Months Ended June 30,  
     2013      2012  
     Qualified     Non-Qualified      Qualified     Non-Qualified  

Service cost

   $ 2      $ —         $ 3      $ —     

Interest cost

     20        3         20        3   

Expected return on plan assets

     (18     —           (17     —     

Amortization of net loss

     8        1         7        1   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic pension cost

   $ 12      $ 4       $ 13      $ 4   
  

 

 

   

 

 

    

 

 

   

 

 

 
Accumulated Other Comprehensive Income (loss) (Tables)
Reclassifications from Accumulated Other Comprehensive Income (Loss) to Income Statement
The reclassifications from accumulated other comprehensive income (loss) to the income statement were as follows, in millions:

 

     Amount Reclassified       

Accumulated Other Comprehensive Income (Loss)

   Three Months Ended      Six Months Ended       
   June 30,      June 30,      Income Statement
   2013      2012      2013      2012     

Line Item

Amortization of defined benefit pension:

              

Actuarial losses, net

   $ 4       $ 4       $ 9       $ 8       Selling, General & Administrative Expense
     —           —           —           —         Tax expense
  

 

 

    

 

 

    

 

 

    

 

 

    
   $ 4       $ 4       $ 9       $ 8       Net of tax
  

 

 

    

 

 

    

 

 

    

 

 

    

Interest rate swaps

   $ 1       $ —         $ 1       $ —         Interest expense
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 June 30,     Six Months Ended June 30,  
     2013      2012      2013     2012     2013      2012      2013     2012  
     Net Sales (A)      Operating Profit (Loss)     Net Sales (A)      Operating Profit (Loss)  

The Company’s operations by segment were:

                    

Cabinets and Related Products

   $ 265       $ 253       $ 2      $ (5   $ 501       $ 481       $ (2   $ (21

Plumbing Products

     802         738         102        70        1,564         1,480         188        167   

Installation and Other Services

     357         296         8        (9     669         574         4        (23

Decorative Architectural Products

     565         517         104        95        997         951         193        168   

Other Specialty Products

     160         141         11        6        294         265         10        1   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2,149       $ 1,945       $ 227      $ 157      $ 4,025       $ 3,751       $ 393      $ 292   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The Company’s operations by geographic area were:

                    

North America

   $ 1,765       $ 1,587       $ 185      $ 125      $ 3,275       $ 3,018       $ 325      $ 213   

International, principally Europe

     384         358         42        32        750         733         68        79   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2,149       $ 1,945         227        157      $ 4,025       $ 3,751         393        292   
  

 

 

    

 

 

        

 

 

    

 

 

      

General corporate expense, net

           (39     (33           (73     (61

Gain from sale of fixed assets (B)

           —          5              —          5   

Charge for litigation settlements, net (B)

           —          (75           —          (73
        

 

 

   

 

 

         

 

 

   

 

 

 

Operating profit

           188        54              320        163   

Other income (expense), net

           (57     (66           (110     (115
        

 

 

   

 

 

         

 

 

   

 

 

 

Income (loss) before income taxes

         $ 131      $ (12         $ 210      $ 48   
        

 

 

   

 

 

         

 

 

   

 

 

 

 

(A) Inter-segment sales were not material.
(B) In 2012, gain on sale of fixed assets relates to a business unit in the Other Specialty Products segment. For the three months and six months ended June 30, 2012, the charge for litigation settlements, net, includes $75 million related to a business unit in the Installation and Other Services segment.
Other Income (Expense), Net (Tables)
Other, Net, Included in Other Income (Expense), Net
Other, net, which is included in other income (expense), net, was as follows, in millions:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013      2012  

Income from cash and cash investments

   $ 1      $ 2      $ 2       $ 4   

Income from financial investments (Note E)

     5        2        8         18   

Impairment of financial investments (Note E)

     —          (2     —           (2

Other items, net

     (3     —          —           (3
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other net

   $ 3      $ 2      $ 10       $ 17   
  

 

 

   

 

 

   

 

 

    

 

 

 
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
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Numerator (basic and diluted):

        

Income (loss) from continuing operations

   $ 82      $ (51   $ 138      $ (9

Allocation to unvested restricted stock awards

     (2     (1     (3     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations attributable to common shareholders

     80        (52     135        (10
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued Operations, net

     (5     (24     (14     (33
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 75      $ (76   $ 121      $ (43
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Basic common shares (based upon weighted average)

     349        349        349        349   

Add:

        

Contingent common shares

     —          —          —          —     

Stock option dilution

     3        —          3        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted common shares

     352        349        352        349   
  

 

 

   

 

 

   

 

 

   

 

 

 
Discontinued Operations - Financial Information for Discontinued Operations (Detail) (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Mar. 31, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Discontinued Operations And Disposal Groups [Abstract]
 
 
 
 
 
Net Sales
$ 60 
 
$ 80 
$ 119 
$ 169 
Operating loss from discontinued operations
(5)
 
(10)
(8)
(21)
Impairment of assets
(10)
 
(10)
 
Loss on disposal of discontinued operations, net
 
 
(2)
 
(3)
Loss before income tax
(5)
 
(12)
(18)
(24)
Income tax expense (benefit)
 
 
12 
(4)
Loss from discontinued operations, net
$ (5)
 
$ (24)
$ (14)
$ (33)
Discontinued Operations - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Mar. 31, 2013
Jun. 30, 2013
Discontinued Operations And Disposal Groups [Abstract]
 
 
 
Impairment of assets
$ 0 
$ 10 
$ 10 
Discontinued Operations - Balance Sheet Items Reclassified as Held for Sale (Detail) (Held For Sale [Member], USD $)
In Millions, unless otherwise specified
Jun. 30, 2013
Dec. 31, 2012
Held For Sale [Member]
 
 
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
 
 
Receivables
$ 36 
$ 32 
Inventories
64 
66 
Prepaid expenses and other
Property and equipment, net
91 
103 
Total assets
192 
203 
Accounts payable
36 
31 
Accrued liabilities
12 
14 
Deferred income taxes
 
Total liabilities
$ 48 
$ 49 
Goodwill and Other Intangible Assets - Changes in Carrying Amount of Goodwill (Detail) (USD $)
In Millions, unless otherwise specified
Jun. 30, 2013
Dec. 31, 2012
Goodwill [Line Items]
 
 
Gross Goodwill
$ 3,864 
$ 3,864 
Accumulated Impairment Losses
(1,970)
(1,970)
Net Goodwill
1,894 
1,894 
Other
(3)
 
Additions
 
Net Goodwill
1,894 
1,894 
Cabinets and Related Products [Member]
 
 
Goodwill [Line Items]
 
 
Gross Goodwill
240 
240