XNYS:MAS Masco Corporation Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

Commission file number: 1-5794

 

 

Masco Corporation

(Exact name of Registrant as Specified in its Charter)

 

 

 

Delaware   38-1794485

(State or Other Jurisdiction

of Incorporation)

 

(IRS Employer

Identification No.)

21001 Van Born Road,

Taylor, Michigan

  48180
(Address of Principal Executive Offices)   (Zip Code)

(313) 274-7400

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

     Shares Outstanding at July 26, 2012   

Common stock, par value $1.00 per share

     357,100,000   

 

 

 


Table of Contents

MASCO CORPORATION

INDEX

 

     Page No.  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements:

  

Condensed Consolidated Balance Sheets - as at June 30, 2012 and December 31, 2011

     1   

Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2012 and 2011

     2   

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months and Six Months Ended June 30, 2012 and 2011

     3   

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

     4   

Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2012 and 2011

     5   

Notes to Condensed Consolidated Financial Statements

     6-20   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21-27   

Item 4. Controls and Procedures

     28   

PART II. OTHER INFORMATION

     29-31   

Item 1. Legal Proceedings

  

Item 1A. Risk Factors

  

Item 6. Exhibits

  

  Signature

  


Table of Contents

MASCO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

June 30, 2012 and December 31, 2011

(In Millions, Except Share Data)

 

     June 30,     December 31,  
     2012     2011  
ASSETS     

Current assets:

    

Cash and cash investments

   $ 1,853      $ 1,656   

Receivables

     1,206        914   

Prepaid expenses and other

     68        70   

Assets held for sale

     19        20   

Inventories:

    

Finished goods

     461        390   

Raw material

     288        280   

Work in process

     95        99   
  

 

 

   

 

 

 
     844        769   
  

 

 

   

 

 

 

Total current assets

     3,990        3,429   

Property and equipment, net

     1,489        1,567   

Goodwill

     1,885        1,891   

Other intangible assets, net

     194        196   

Other assets

     196        209   

Assets held for sale

     5        5   
  

 

 

   

 

 

 

Total assets

   $ 7,759      $ 7,297   
  

 

 

   

 

 

 
LIABILITIES     

Current liabilities:

    

Notes payable

   $ 751      $ 803   

Accounts payable

     941        770   

Accrued liabilities

     850        782   

Liabilities held for sale

     9        8   
  

 

 

   

 

 

 

Total current liabilities

     2,551        2,363   

Long-term debt

     3,622        3,222   

Deferred income taxes and other

     967        970   
  

 

 

   

 

 

 

Total liabilities

     7,140        6,555   
  

 

 

   

 

 

 

Commitments and contingencies

    
EQUITY     

Masco Corporation’s shareholders’ equity:

    

Common shares, par value $1 per share

    

Authorized shares: 1,400,000,000; issued and outstanding: 2012 – 348,600,000; 2011 – 347,900,000

     348        348   

Preferred shares authorized: 1,000,000; issued and outstanding: 2012 – None; 2011 – None

     —          —     

Paid-in capital

     50        65   

(Accumulated deficit) retained earnings

     (30     38   

Accumulated other comprehensive income

     61        76   
  

 

 

   

 

 

 

Total Masco Corporation’s shareholders’ equity

     429        527   

Noncontrolling interest

     190        215   
  

 

 

   

 

 

 

Total equity

     619        742   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 7,759      $ 7,297   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

1


Table of Contents

MASCO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

For the Three and Six Months Ended June 30, 2012 and 2011

(In Millions Except Per Common Share Data)

 

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

Net sales

   $ 2,004      $ 1,998      $ 3,879      $ 3,751   

Cost of sales

     1,479        1,466        2,869        2,794   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     525        532        1,010        957   

Selling, general and administrative expenses

     403        431        788        830   

Charge for litigation settlements, net

     75        5        73        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     47        96        149        122   

Other income (expense), net:

        

Interest expense

     (68     (64     (132     (127

Other, net

     2        32        17        53   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (66     (32     (115     (74
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (19     64        34        48   

Income taxes

     30        38        34        51   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (49     26        —          (3

Loss from discontinued operations

     (18     (6     (23     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (67     20        (23     (14

Less: Net income attributable to noncontrolling interest

     8        12        19        24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Masco Corporation

   $ (75   $ 8      $ (42   $ (38
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) per common share attributable to Masco Corporation:

        

Basic:

        

(Loss) income from continuing operations

   $ (.17   $ .04      $ (.06   $ (.08

Loss from discontinued operations

     (.05     (.02     (.07     (.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (.22   $ .02      $ (.12   $ (.11
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

(Loss) income from continuing operations

   $ (.17   $ .04      $ (.06   $ (.08

Loss from discontinued operations

     (.05     (.02     (.07     (.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (.22   $ .02      $ (.12   $ (.11
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to Masco Corporation:

        

(Loss) income from continuing operations

   $ (57   $ 14      $ (19   $ (27

Loss from discontinued operations

     (18     (6     (23     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (75   $ 8      $ (42   $ (38
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

2


Table of Contents

MASCO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

For the Three and Six Months Ended June 30, 2012 and 2011

(In Millions)

 

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

Net (loss) income

   $ (67   $ 20      $ (23   $ (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss),net of tax:

        

Cumulative translation adjustment

     (57     19        (27     80   

Unrealized loss on marketable securities

     —          (25     —          (38

Unrecognized pension prior service cost and net loss, net

     4        2        8        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (53     (4     (19     47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive (loss) income

     (120     16        (42     33   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Comprehensive (loss) income attributable to the noncontrolling interest

     (3     16        15        42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to Masco Corporation

   $ (117   $ —        $ (57   $ (9
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

3


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MASCO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Six Months Ended June 30, 2012 and 2011

(In Millions)

 

     Six Months Ended  
     June 30,  
     2012     2011  

CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:

    

Cash provided by operations

   $ 109      $ 123   

Increase in receivables

     (303     (293

Increase in inventories

     (81     (151

Increase in accounts payable and accrued liabilities, net

     271        290   
  

 

 

   

 

 

 

Net cash for operating activities

     (4     (31
  

 

 

   

 

 

 

CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:

    

Issuance of Notes, net of issuance costs

     396        —     

Cash dividends paid

     (53     (54

Retirement of Notes

     (46     —     

Dividend payment to noncontrolling interest

     (40     (18

Payment for settlement of swaps

     (25     —     

Purchase of Company common stock

     (8     (30

Payment of debt

     (1     (2

Credit Agreement costs

     —          (1
  

 

 

   

 

 

 

Net cash from (for) financing activities

     223        (105
  

 

 

   

 

 

 

CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:

    

Capital expenditures

     (52     (67

Proceeds from disposition of:

    

Marketable securities

     —          49   

Other financial investments

     30        15   

Property and equipment

     24        10   

Purchases of other financial investments

     (2     (6

Other, net

     (15     3   
  

 

 

   

 

 

 

Net cash (for) from investing activities

     (15     4   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash investments

     (7     28   
  

 

 

   

 

 

 

CASH AND CASH INVESTMENTS:

    

Increase (decrease) for the period

     197        (104

At January 1

     1,656        1,715   
  

 

 

   

 

 

 

At June 30

   $ 1,853      $ 1,611   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

4


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MASCO CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

For The Six Months Ended June 30, 2012 and 2011

 

                                   (In Millions)  
     Total     Common
Shares
($1 par value)
    Paid-In
Capital
    (Accumulated
Deficit)
Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Noncontrolling
Interest
 

Balance, January 1, 2011

   $ 1,582      $ 349      $ 42      $ 720      $ 273      $ 198   

Total comprehensive income (loss)

     33            (38     29        42   

Shares issued

     —          2        (2      

Shares retired:

            

Repurchased

     (30     (2     (28      

Surrendered (non-cash)

     (7     (1     (6      

Cash dividends declared

     (54         (54    

Dividend payment to noncontrolling interest

     (18             (18

Stock-based compensation

     31          31         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

   $ 1,537      $ 348      $ 37      $ 628      $ 302      $ 222   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2012

     742        348        65        38        76        215   

Total comprehensive income (loss)

     (42         (42     (15     15   

Shares issued

     —          2        (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         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

   $ 619      $ 348      $ 50      $ (30   $ 61      $ 190   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

5


Table of Contents

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note A: Accounting Policies
A. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as at June 30, 2012 and the results of operations for the three months and six months ended June 30, 2012 and 2011 and cash flows for the six months ended June 30, 2012 and 2011. The condensed consolidated balance sheet at December 31, 2011 was derived from audited financial statements.

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

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

 

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

 

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

Net Sales

   $ 21      $ 24      $ 41      $ 43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

   $ (3   $ (6   $ (7   $ (11

Loss on disposal of discontinued operations, net

     (2     —          (3     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (5     (6     (10     (11

Income taxes

     13        —          13        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations,net

   $ (18   $ (6   $ (23   $ (11
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

 

 

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

 

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

Cabinets and Related Products

   $ 589       $ (408   $ 181   

Plumbing Products

     535         (340     195   

Installation and Other Services

     1,806         (762     1,044   

Decorative Architectural Products

     294         (75     219   

Other Specialty Products

     980         (734     246   
  

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

   

 

 

 

 

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

Cabinets and Related Products

   $ 589       $ (408   $ 181       $ —        $ 181   

Plumbing Products

     541         (340     201         (6     195   

Installation and Other Services

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

Decorative Architectural Products

     294         (75     219         —          219   

Other Specialty Products

     980         (734     246         —          246   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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

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

 

7


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MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

 

 

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

 

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

 

     June 30,      December 31,  
     2012      2011  

Auction rate securities

   $ 22       $ 22   
  

 

 

    

 

 

 

Total recurring investments

     22         22   

Private equity funds

     74         86   

Other investments

     4         4   
  

 

 

    

 

 

 

Total non-recurring investments

     78         90   
  

 

 

    

 

 

 

Total

   $ 100       $ 112   
  

 

 

    

 

 

 

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

 

            Pre-tax         
            Unrealized      Unrealized      Recorded  
     Cost Basis      Gains      Losses      Basis  

June 30, 2012

   $ 19       $ 3       $ —         $ 22   

December 31, 2011

   $ 19       $ 3       $ —         $ 22   

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

 

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

Auction rate securities

   $ 22         —           —         $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22       $ —         $ —         $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Auction rate securities

   $ 22       $ —         $ —         $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22       $ —         $ —         $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note E – continued:

 

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

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

 

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

Fair value at beginning of period

   $ 22       $ 22   

Total losses included in earnings

               

Unrealized (losses)

               

Purchases

               

Settlements

               

Transfer from Level 3 to Level 2

               
  

 

 

    

 

 

 

Fair value at period end

   $ 22       $ 22   
  

 

 

    

 

 

 

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

 

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

Private equity funds

   $ 2         —           —         $ 2       $ (2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2       $ —         $ —         $ 2       $ (2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

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MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note E – concluded:

 

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

 

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

Realized gains – distributions from private equity funds

   $ 2      $ 6       $ 18      $ 9   

Realized gains—sale of TriMas Corporation common stock

     —          27         —          41   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total income from financial investments

   $ 2      $ 33       $ 18      $ 50   
  

 

 

   

 

 

    

 

 

   

 

 

 

Impairment charges – private equity funds

   $ (2   $ —         $ (2   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

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

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

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

 

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Table of Contents

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note F – continued:

 

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

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

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

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

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

 

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

Foreign Currency Contracts

        

Exchange Contracts

   $ 9      $ 1      $ 4      $ (7

Forward Contracts

     —          (1     (1     1   

Metal Contracts

     (6     (1     1        (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss)

   $ 3      $ (1   $ 4      $ (7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note F – concluded:

 

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

 

     At June 30, 2012  
     

Notional
Amount

     Assets      Liabilities  

Foreign Currency Contracts

        

Exchange Contracts

   $ 143         

Current assets

      $ 5       $ —     

Forward Contracts

     67         

Current assets

        1         —     

Current liabilities

        —           1   

Metal Contracts

     50         

Current assets

        1         —     

Current liabilities

        —           4   
     

 

 

    

 

 

 

Total

      $ 7       $ 5   
     

 

 

    

 

 

 

 

     At December 31, 2011  
     Notional
Amount
     Assets      Liabilities  

Foreign Currency Contracts

        

Exchange Contracts

   $ 108         

Current assets

      $ 8       $ —     

Forward Contracts

     76         

Current assets

        1         —     

Current liabilities

        1         2   

Metal Contracts

     67         

Current assets

        2         —     

Current liabilities

        —           4   
     

 

 

    

 

 

 

Total

      $ 12       $ 6   
     

 

 

    

 

 

 

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

 

12


Table of Contents

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

 

 

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

 

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

Balance at January 1

   $ 102      $ 107   

Accruals for warranties issued during the period

     17        28   

Accruals related to pre-existing warranties

     5        8   

Settlements made (in cash or kind) during the period

     (20     (38

Other, net

     (3     (3
  

 

 

   

 

 

 

Balance at end of period

   $ 101      $ 102   
  

 

 

   

 

 

 

 

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

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

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

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

 

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Table of Contents

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

 

 

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

 

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

Long-term stock awards

   $ 11       $ 9      $ 19       $ 19   

Stock options

     4         6        9         11   

Phantom stock awards and stock appreciation rights

     1         (1     6         2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 16       $ 14      $ 34       $ 32   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income tax benefit (before valuation allowance)

   $ 6       $ 5      $ 13       $ 12   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

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

 

     Six Months Ended
June  30,
 
     2012      2011  

Unvested stock award shares at January 1

     10         10   

Weighted average grant date fair value

   $ 17       $ 19   

Stock award shares granted

     1         2   

Weighted average grant date fair value

   $ 12       $ 13   

Stock award shares vested

     2         1   

Weighted average grant date fair value

   $ 17       $ 19   

Stock award shares forfeited

     —           —     

Weighted average grant date fair value

   $ 18       $ 18   

Unvested stock award shares at June 30

     9         11   

Weighted average grant date fair value

   $ 16       $ 17   

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

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

 

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Table of Contents

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note I – continued:

 

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

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

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

 

     Six Months Ended  
     June 30,  
     2012      2011  

Option shares outstanding, January 1

     36         37   

Weighted average exercise price

   $ 21       $ 21   

Option shares granted, including restoration options

     1         2   

Weighted average exercise price

   $ 12       $ 13   

Option shares exercised

     —           —     

Aggregate intrinsic value on date of exercise (A)

   $ 1 million       $ 1 million   

Weighted average exercise price

   $ 9       $ 8   

Option shares forfeited

     3         2   

Weighted average exercise price

   $ 19       $ 22   

Option shares outstanding, June 30

     34         37   

Weighted average exercise price

   $ 21       $ 21   

Weighted average remaining option term (in years)

     5         6   

Option shares vested and expected to vest, June 30

     34         37   

Weighted average exercise price

   $ 21       $ 21   

Aggregate intrinsic value (A)

   $ 29 million       $ 20 million   

Weighted average remaining option term (in years)

     5         6   

Option shares exercisable (vested), June 30

     26         24   

Weighted average exercise price

   $ 24       $ 24   

Aggregate intrinsic value (A)

   $ 15 million       $ 8 million   

Weighted average remaining option term (in years)

     4         5   

 

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

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

 

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Table of Contents

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note I – concluded:

 

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

 

     Six Months Ended  
     June 30,  
     2012     2011  

Weighted average grant date fair value

   $ 4.44      $ 5.10   

Risk-free interest rate

     1.10     2.72

Dividend yield

     2.57     2.34

Volatility factor

     51.00     49.00

Expected option life

     6 years        6 years   

 

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

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

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

 

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

Service cost

   $ 1      $ —         $ —        $ —     

Interest cost

     10        1         11        2   

Expected return on plan assets

     (9     —           (8     —     

Amortization of net loss

     4        1         3        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic pension cost

   $ 6      $ 2         6        2   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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

Service cost

   $ 3      $ —         $ 1      $ —     

Interest cost

     20        3         22        4   

Expected return on plan assets

     (17     —           (16     —     

Amortization of net loss

     7        1         5        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic pension cost

   $ 13      $ 4       $ 12      $ 4   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

16


Table of Contents

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

 

 

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

 

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

The Company’s operations by segment were:

                    

Cabinets and Related Products

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

Plumbing Products

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

Installation and Other Services

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

Decorative Architectural Products

     517         492         95        90        951         867         168        159   

Other Specialty Products

     141         145         6        —          265         271         1        (10
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The Company’s operations by geographic area were:

                    

North America

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

International, principally Europe

     417         459         25        45        861         898         65        87   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

        

 

 

    

 

 

      

General corporate expense, net

           (33     (36           (61     (68

Gain from sale of fixed assets (B)

           5        —                5        —     

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

           (75     (5           (73     (5
        

 

 

   

 

 

         

 

 

   

 

 

 

Operating profit

           47        96              149        122   

Other income (expense), net

           (66     (32           (115     (74
        

 

 

   

 

 

         

 

 

   

 

 

 

(Loss) income before income taxes

         $ (19   $ 64            $ 34      $ 48   
        

 

 

   

 

 

         

 

 

   

 

 

 

 

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

 

17


Table of Contents

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

 

 

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

 

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

Income from cash and cash investments

   $ 2      $ 1      $ 4      $ 3   

Income from financial investments (Note E)

     2        33        18        50   

Impairment of financial investments (Note E)

     (2     —          (2     —     

Other items, net

     —          (2     (3     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other net

   $ 2      $ 32      $ 17      $ 53   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

 

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

Numerator (basic and diluted):

        

(Loss) income from continuing operations

   $ (57   $ 14      $ (19   $ (27

Allocation to unvested restricted stock awards

     (1     (1     (1     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations attributable to common shareholders

     (58     13        (20     (29
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

     (18     (6     (23     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income available to Common shareholders

   $ (76   $ 7      $ (43   $ (40
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Basic common shares (based upon weighted average)

     349        348        349        348   

Add:

        

Contingent common shares

     —          —          —          —     

Stock option dilution

     —          1        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted common shares

     349        349        349        348   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

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Table of Contents

MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note M – concluded:

 

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

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

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

 

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

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

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (concluded)

Note N – concluded:

 

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

 

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

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

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2012 AND THE FIRST SIX MONTHS 2012 VERSUS

SECOND QUARTER 2011 AND THE FIRST SIX MONTHS 2011

SALES AND OPERATIONS

The following table sets forth the Company’s net sales and operating profit margins by business segment and geographic area, dollars in millions:

 

     Three Months Ended
June 30,
     Percent
(Decrease) Increase
     

2012

     2011      2012 vs. 2011

Net Sales:

        

Cabinets and Related Products

   $ 312       $ 330       (5%)

Plumbing Products

     738         761       (3%)

Installation and Other Services

     296         270       10%

Decorative Architectural Products

     517         492       5%

Other Specialty Products

     141         145       (3%)
  

 

 

    

 

 

    

Total

   $ 2,004       $ 1,998       —  %
  

 

 

    

 

 

    

North America

   $ 1,587       $ 1,539       3%

International, principally Europe

     417         459       (9%)
  

 

 

    

 

 

    

Total

   $ 2,004       $ 1,998       —  %
  

 

 

    

 

 

    
     Six Months Ended
June 30,
      
     

2012

     2011       

Net Sales:

        

Cabinets and Related Products

   $ 609       $ 637       (4%)

Plumbing Products

     1,480         1,471       1%

Installation and Other Services

     574         505       14%

Decorative Architectural Products

     951         867       10%

Other Specialty Products

     265         271       (2%)
  

 

 

    

 

 

    

Total

   $ 3,879       $ 3,751       3%
  

 

 

    

 

 

    

North America

   $ 3,018       $ 2,853       6%

International, principally Europe

     861         898       (4%)
  

 

 

    

 

 

    

Total

   $ 3,879       $ 3,751       3%
  

 

 

    

 

 

    

 

     Three Months Ended
June 30,
    Six Months
Ended June 30,
 
     

2012

    2011     2012     2011  

Operating Profit (Loss) Margins: (A)

        

Cabinets and Related Products

     (3.8 %)      (8.2 %)      (5.7 %)      (12.1 %) 

Plumbing Products

     9.5     12.5     11.3     12.2

Installation and Other Services

     (3.0 %)      (7.8 %)      (4.0 %)      (11.1 %) 

Decorative Architectural Products

     18.4     18.3     17.7     18.3

Other Specialty Products

     4.3     —       .4     (3.7 %) 

North America

     7.9     6.0     7.1     3.8

International, principally Europe

     6.0     9.8     7.5     9.7

Total

     7.5     6.9     7.2     5.2

Total operating profit margin, as reported

     2.3     4.8     3.8     3.3

 

(A) Before general corporate expense, net, gain from sale of fixed assets, and (charge) income for litigation settlements, net; see Note K to the condensed consolidated financial statements.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

We report our financial results in accordance with generally accepted accounting principles (“GAAP”) in the United States. However, we believe that certain non-GAAP performance measures and ratios used in managing the business may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, our reported results.

NET SALES

Net sales were flat and increased three percent for the three-month and six-month periods ended June 30, 2012, respectively, from the comparable periods of 2011. Excluding the negative effect of currency translation and the sales related to the acquisition of a small hot tub manufacturer, net sales increased two percent and five percent for the three-month and six-month periods ended June 30, 2012, respectively, compared to 2011. The following table reconciles reported net sales to net sales, excluding acquisitions and the effect of currency translation, in millions:

 

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

Net sales, as reported

   $ 2,004      $ 1,998       $ 3,879      $ 3,751   

Acquisitions

     (4     —           (6     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net sales, excluding acquisitions

     2,000        1,998         3,873        3,751   

Currency translation

     45        —           63        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net sales, excluding acquisitions and the effect of currency translation

   $ 2,045      $ 1,998       $ 3,936      $ 3,751   
  

 

 

   

 

 

    

 

 

   

 

 

 

North American net sales were positively impacted by increased sales volume of installation and other services, plumbing products and builders’ hardware, which, in the aggregate, increased sales by three percent and four percent for the three-month and six-month periods ended June 30, 2012, respectively, from the comparable periods of 2011. Net sales in both periods were also positively affected by selling price increases, which increased sales by two percent and three percent for the three-month and six-month periods ended June 30, 2012, respectively, from the comparable periods of 2011. Such increases were partially offset by lower sales volume of cabinets and paints and stains for the three-month period ended June 30, 2012 and lower sales volume of cabinets, including the exit of certain product lines for the three-month period ended June 30, 2012.

A stronger U.S. dollar decreased International net sales by nine percent and seven percent in the three-month and six-month periods ended June 30, 2012, respectively, compared to the same periods of 2011. In local currencies, net sales from International operations were flat and increased three percent for the three-month and six-month periods ended June 30, 2012, respectively, primarily due to increased selling prices of International plumbing products, cabinets and windows.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Net sales of Cabinets and Related Products decreased due to lower sales volume of both North American and International cabinets, which reduced sales in this segment by six percent and two percent in the three-month and six-month periods ended June 30, 2012, respectively, from the comparable periods of 2011. Compared to the same period of 2011, net sales in this segment were also negatively affected by the planned exit of ready-to-assemble and other non-core in-stock assembled cabinet product lines (completed in the second quarter of 2011), which decreased net sales in this segment by two percent in the six-month period ended June 30, 2012 from the comparable period of 2011. A stronger U.S. dollar decreased sales by two percent in both the three-month and six-month periods ended June 30, 2012, compared to 2011. Such declines were partially offset by selling price increases.

Net sales of Plumbing Products increased due to increased sales volume in North America and increased selling prices primarily related to International operations, which, on a combined basis, increased sales by four percent and nine percent, respectively, for the three-month and six-month periods ended June 30, 2012, from the comparable periods of 2011. Net sales in this segment decreased due to lower sales volume of International operations, which decreased sales by three percent and one percent, respectively, for the three-month and six-month periods ended June 30, 2012, from the comparable periods of 2011. A stronger U.S. dollar decreased sales by five percent and three percent in the three-month and six-month periods ended June 30, 2012, respectively, compared to 2011.

Net sales of Installation and Other Services increased for the three-month and six-month periods ended June 30, 2012, primarily due to increased sales volume related to a higher level of activity in the new home construction market, as well as increased sales volume of retrofit and commercial sales.

Net sales of Decorative Architectural Products increased for the three-month and six-month periods ended June 30, 2012, due to increased selling prices of paints and stains and builders’ hardware and increased sales volume of builders’ hardware.

Net sales of Other Specialty Products decreased for the three-month and six-month periods ended June 30, 2012, compared with the same period in 2011, due to lower sales volume of North American windows resulting from the exit of certain markets, which more than offset increased sales volume of windows in Western markets in the U.S. and increased selling prices. A stronger U.S. dollar decreased sales by one percent in both the three-month and six-month periods ended June 30, 2012 compared to 2011.

OPERATING MARGINS

Our gross profit margins were 26.2 percent and 26.0 percent for the three-month and six-month periods ended June 30, 2012, respectively, compared with 26.6 percent and 25.5 percent, respectively, for the comparable periods of 2011. Selling, general and administrative expenses, as a percentage of sales, were 20.1 percent and 20.3 percent, respectively, for the three-month and six-month periods ended June 30, 2012, compared to 21.6 percent and 22.1 percent, respectively, for the comparable periods of 2011.

Gross profit margins and selling, general and administrative expenses for both the second quarter and six months ended June 30, 2012 were positively affected by increased sales volume and lower business rationalization costs. Gross profit for the six-month period ended June 30, 2012 was also positively affected by a more favorable relationship between selling prices and commodity costs. The further decrease in selling, general and administrative expenses is principally due to lower advertising and growth initiative expenses.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

We have been focused on the strategic rationalization of our businesses, including business consolidations, plant closures, headcount reductions, system implementations and other initiatives. The majority of such activities related to the Cabinets and Related Products and the Installation and Other Services segments, and were completed in 2011. Operating profit for the three-month and six-month periods ended June 30, 2012 includes $7 million and $19 million, respectively, of costs and charges related to our business rationalizations and other initiatives. For the three-month and six-month periods ended June 30, 2011, we incurred costs and charges of $15 million and $47 million, respectively, related to these initiatives.

We anticipate that full-year 2012 rationalization charges for the entire Company will aggregate approximately $30 million. We continue to evaluate our businesses and the impact of market conditions on our businesses, which may result in additional rationalization charges including severance, plant closure costs and asset impairments.

Operating margins in the Cabinets and Related Products segment for the three-month and six-month periods ended June 30, 2012 reflect decreased business rationalization expenses and the benefits associated with business rationalization activities and other cost savings initiatives.

Operating margins in the Plumbing Products segment for the three-month and six-month periods ended June 30, 2012 were negatively impacted by lower international sales volume and a less favorable product mix related to international sales growth. Such declines more than offset increased North American sales volume, a more favorable relationship between selling prices and commodity costs (including the negative impact of the metal hedge contracts) and the benefits associated with business rationalizations and other cost savings initiatives.

Operating margins in the Installation and Other Services segment were positively impacted by increased sales volume and the related absorption of fixed costs, as well as the benefits associated with business rationalizations and other cost savings initiatives.

Operating margins in the Decorative Architectural Products segment for the three-month and six-month periods ended June 30, 2012 reflect an unfavorable relationship between selling prices and material costs. This segment was favorably affected by lower advertising expenses due to the timing of such expenses in 2012 compared to 2011.

Operating margins in the Other Specialty Products segment for the three-month and six-month periods ended June 30, 2012 reflect the benefits associated with business rationalizations and other cost savings initiatives as well as a more favorable relationship between selling prices and commodity costs.

OTHER INCOME (EXPENSE), NET

Interest expense for the three-month and six-month periods ended June 30, 2012 increased $5 million and $6 million, respectively, from the comparable periods of 2011 primarily due to the issuance of $400 million of notes in the first quarter of 2012.

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

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Other, net, for the three-month and six-month periods ended June 30, 2012 included gains of $2 million and $18 million, respectively, related to distributions from private equity funds. Other, net for the three-month and six-month periods ended June 30, 2012 included impairment of $2 million related to a private equity fund. Other, net, for the three-month and six-month periods ended June 30, 2011 included gains of $33 million and $50 million, respectively, related to the sale of TriMas common stock ($27 million and $41 million, respectively) and distributions from private equity funds ($6 million and $9 million, respectively).

(LOSS) INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS – Attributable to

Masco Corporation

(Loss) income for the three-month and six-month periods ended June 30, 2012 was $(57) million and $(19) million compared with $14 million and $(27) million for the comparable periods of 2011. Diluted (loss) earnings per common share for the three-month and six-month periods ended June 30, 2012 was $(.17) per common share and $(.06) per common share, respectively, compared with $.04 per common share and $(.08) per common share, respectively, for the comparable periods of 2011. (Loss) income for both the three-month and six-month periods ended June 30, 2012 included a charge for litigation settlement of $75 million.

In the second quarter of 2012, we incurred income tax expense of $30 million on a pre-tax loss from continuing operations of $19 million and for the first half of 2012 the effective tax rate was 100 percent. The 2012 tax rate is higher than our normalized tax rate of 36 percent primarily due to losses in certain jurisdictions providing no tax benefit, including the charge for the settlement of the Columbus Drywall case, and an increase in the valuation allowance related to net operating losses. The effective tax rate for the first half of 2012 includes a $21 million state income tax benefit resulting from the decrease in the liability for uncertain tax positions primarily from the expiration of applicable statutes of limitations in various jurisdictions and certain audit closings.

The effective tax rate was 59 percent and 106 percent for the three-month and six-month periods ending June 30, 2011, respectively. The tax rate in 2011 was higher than our normalized tax rate of 36 percent primarily due to an increase in the valuation allowance related to net operating losses and losses in certain jurisdictions providing no tax benefit.

OTHER FINANCIAL INFORMATION

Our current ratio was 1.6 to 1 and 1.5 to 1, respectively, at June 30, 2012 and December 31, 2011.

For the six months ended June 30, 2012, cash of $4 million was used for operating activities. First half 2012 cash from operations was affected by an expected and annually recurring seasonal first half increase in accounts receivable and inventories compared with December 31, 2011.

Net cash provided by financing activities was $223 million, primarily due to the issuance of Notes of $396 million, net of issuance costs. Financing activities include $46 million for the repurchase of debt, $53 million for the payment of cash dividends, $25 million for the settlement of interest rate swaps and $8 million for the acquisition of Company common stock in open-market transactions to offset the dilutive impact of long-term stock awards granted in 2012. Net cash used for investing activities was $15 million and included $52 million for capital expenditures and net proceeds from financial investments of $28 million and net proceeds from the sale of fixed assets of $24 million.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

On March 5, 2012, we issued $400 million of 5.95% Notes due March 15, 2022 (“Notes”). The Notes are senior indebtedness and are redeemable at our option. In January 2012, we repurchased $46 million of 5.875% Notes due July 2012 in open-market transactions; we paid a premium of $1 million for the repurchase. The issuance of the Notes and the repurchase of debt were done in anticipation of the retirement of $745 million of 5.875% Notes due July 2012. We repurchased the 5.875% Notes on July 16, 2012.

Our cash and cash investments were $1.9 billion and $1.7 billion at June 30, 2012 and December 31, 2011, respectively. Our cash and cash investments consist of overnight interest bearing money market demand and time deposit accounts, money market mutual funds and government securities.

Of the $1.9 billion and the $1.7 billion of cash and cash investments held at June 30, 2012 and December 31, 2011, respectively, $454 million and $551 million, respectively, is held in foreign subsidiaries. If these funds were needed for our operations in the U.S., their repatriation into the U.S. may result in additional U.S. income taxes or foreign withholding taxes. The amount of such taxes is dependent on the income tax laws and circumstances at the time of distribution.

We were in compliance with all covenants and had no borrowings under our credit agreement at June 30, 2012.

We are subject to lawsuits and claims pending or asserted with respect to matters generally arising in the ordinary course of business. Note N to the condensed consolidated financial statements discusses certain specific claims pending against us.

We believe that our present cash balance, cash flows from operations and, to the extent necessary, bank borrowings and future financial market activities, are sufficient to fund our working capital and other investment needs.

OUTLOOK FOR THE COMPANY

We expect the second half of 2012 to be less robust than previously anticipated. We believe the major restructuring activities in our Installation and Other Services segment and in our North American cabinet operations have been completed.

We are focused on achieving our 2012 strategic initiatives, which include leveraging our brands, reducing our costs, improving our Installation and Cabinet segments and strengthening our balance sheet. We believe these initiatives, coupled with the actions we have taken over the past several years, should position us for improved results in 2012 even in a flat housing market, and continue to believe that we will outperform as the housing market recovers.

We believe and are confident that the long-term fundamentals for the new home construction and home improvement markets continue to be positive. We believe that our strong financial position, together with our current strategy of investing in leadership brands, including KRAFTMAID and MERILLAT cabinets, DELTA and HANSGROHE faucets, BEHR paint and MILGARD windows, our continued focus on innovation and our commitment to lean principles, will allow us to drive long-term growth and create value for our shareholders.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

Statements contained in this report that reflect our views about our future performance constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “believe,” “anticipate,” “appear,” “may,” “will,” “intend,” “plan,” “estimate,” “expect,” “assume,” “seek,” “should,” “forecast,” and similar references to future periods. These views involve risks and uncertainties that are difficult to predict and, accordingly, our actual results may differ materially from the results discussed in our forward-looking statements. We caution you against relying on any of these forward-looking statements. Our future performance may be affected by our reliance on new home construction and home improvement, our reliance on key customers, the cost and availability of raw materials, uncertainty in the international economy, shifts in consumer preferences and purchasing practices, and our ability to achieve cost savings through business rationalizations and other initiatives. These and other factors are discussed in detail in Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K. Our forward-looking statements in this report speak only as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise.

 

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MASCO CORPORATION

 

Item 4. CONTROLS AND PROCEDURES

 

  a. Evaluation of Disclosure Controls and Procedures.

The Company’s principal executive officer and principal financial officer have concluded, based on an evaluation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 that, as of June 30, 2012, the Company’s disclosure controls and procedures were effective.

 

  b. Changes in Internal Control over Financial Reporting.

In connection with the evaluation of the Company’s “internal control over financial reporting” that occurred during the quarter ended June 30, 2012, which is required under the Securities Exchange Act of 1934 by paragraph (d) of Exchange Rules 13a-15 or 15d-15 (as defined in paragraph (f) of Rule 13a-15), management determined that there was no change that materially affected or is reasonably likely to materially affect internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding legal proceedings involving us is set forth in Note N to our consolidated financial statements included in Part 1, Item 1 of this Report and is incorporated herein by reference. There have been no material changes to the legal proceedings disclosed in Part I, Item 3, “Legal Proceedings,” of our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 1A. Risk Factors

There have been no material changes to the risk factors of the Company set forth in Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

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PART II. OTHER INFORMATION (continued)

Item 6. Exhibits

 

12       Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
31a       Certification by Chief Executive Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
31b       Certification by Chief Financial Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
32       Certification Required by Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code
101       Interactive Data File

 

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MASCO CORPORATION

PART II. OTHER INFORMATION, concluded

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MASCO CORPORATION
By:   /s/ John G. Sznewajs
Name:   John G. Sznewajs
Title:  

Vice President, Treasurer and

Chief Financial Officer

July 31, 2012

 

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EXHIBIT INDEX

Exhibit

 

Exhibit 12    Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
Exhibit 31a    Certification by Chief Executive Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
Exhibit 31b    Certification by Chief Financial Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
Exhibit 32    Certification Required by Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code
Exhibit 101    Interactive Data File

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