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 September 30, 2012
Commission file number: 1-5794
Masco Corporation
(Exact name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of
Incorporation)
(IRS Employer
Identification No.)
21001 Van Born Road,
Taylor, Michigan
(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. Yes x 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). Yes x 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock, par value $1.00 per share
MASCO CORPORATION
INDEX
PART I.
Item 1.
Item 2.
Item 4.
PART II.
Item 1A.
Item 6.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, 2012 and December 31, 2011
(In Millions, Except Share Data)
Current assets:
Cash and cash investments
Receivables
Prepaid expenses and other
Assets held for sale
Inventories:
Finished goods
Raw material
Work in process
Total current assets
Property and equipment, net
Goodwill
Other intangible assets, net
Other assets
Total assets
Current liabilities:
Notes payable
Accounts payable
Accrued liabilities
Liabilities held for sale
Total current liabilities
Long-term debt
Deferred income taxes and other
Total liabilities
Commitments and contingencies
Masco Corporation’s shareholders’ equity:
Common shares, par value $1 per share
Authorized shares: 1,400,000,000; issued and outstanding: 2012 – 348,900,000; 2011 – 347,900,000
Preferred shares authorized: 1,000,000; issued and outstanding: 2012 – None; 2011 – None
Paid-in capital
Accumulated deficit retained earnings
Accumulated other comprehensive income
Total Masco Corporation’s shareholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
See notes to condensed consolidated financial statements.
1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three and Nine Months Ended September 30, 2012 and 2011
(In Millions Except Per Common Share Data)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Charge for litigation settlements, net
Operating profit
Other income (expense), net:
Interest expense
Other, net
Income from continuing operations before income taxes
Income taxes
Income from continuing operations
Loss from discontinued operations
Net income
Less: Net income attributable to noncontrolling interest
Net income (loss) attributable to Masco Corporation
Income (loss) per common share attributable to Masco Corporation:
Basic:
Net income (loss)
Diluted:
Amounts attributable to Masco Corporation:
2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In Millions)
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment
Unrealized gain (loss) on interest rate swaps
Unrealized (loss) on marketable securities
Unrecognized pension prior service cost and net loss, net
Other comprehensive income (loss)
Total comprehensive income (loss)
Less: Comprehensive income (loss) attributable to the noncontrolling interest
Comprehensive income (loss) attributable to Masco Corporation
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2012 and 2011
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations
Increase in receivables
Increase in inventories
Increase in accounts payable and accrued liabilities, net
Net cash from operating activities
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Issuance of Notes, net of issuance costs
Cash dividends paid
Retirement of Notes
Dividend payment to noncontrolling interest
Payment for settlement of swaps
Purchase of Company common stock
Payment of debt
Credit Agreement costs
Net cash for financing activities
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures
Proceeds from disposition of:
Marketable securities
Other financial investments
Businesses
Property and equipment
Purchases of other financial investments
Net cash for investing activities
Effect of exchange rate changes on cash and cash investments
CASH AND CASH INVESTMENTS:
Decrease for the period
At January 1
At September 30
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
For The Nine Months Ended September 30, 2012 and 2011
Balance, January 1, 2011
Shares issued
Shares retired:
Repurchased
Surrendered (non-cash)
Cash dividends declared
Stock-based compensation
Balance, September 30, 2011
Balance, January 1, 2012
Balance, September 30, 2012
See notes to consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Net Sales
Operating loss from discontinued operations
Impairment of assets
Loss on disposal of discontinued operations, net
Loss before income tax
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Cabinets and Related Products
Plumbing Products
Installation and Other Services
Decorative Architectural Products
Other Specialty Products
Total
Other indefinite-lived intangible assets were $174 million at both September 30, 2012 and December 31, 2011, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $19 million (net of accumulated amortization of $55 million) at September 30, 2012 and $22 million (net of accumulated amortization of $54 million) at December 31, 2011, and principally included customer relationships and non-compete agreements.
7
Auction rate securities
Total recurring investments
Private equity funds
Other investments
Total non-recurring investments
The Company’s investments in available-for-sale securities at September 30, 2012 and December 31, 2011 were as follows, in millions:
September 30, 2012
December 31, 2011
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:
8
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 nine months ended September 30, 2012 and the year ended December 31, 2011, in millions:
Fair value at beginning of period
Total losses included in earnings
Unrealized (losses)
Purchases
Settlements
Transfer from Level 3 to Level 2
Fair value at period end
Non-Recurring Fair Value Measurements. Financial investments measured at fair value on a non-recurring basis during the nine-month period ended September 30, 2012 and the amounts for each level within the fair value hierarchy were as follows, in millions:
The remaining private equity investments at September 30, 2012, with an aggregate carrying value of $69 million, were not reviewed for impairment, as there were no indicators of impairment or identified events or changes in circumstances that would have a significant adverse effect on the fair value of the investment.
During the nine-month period ended September 30, 2011, the Company did not measure any financial investments at fair value on a non-recurring basis, as there was no other-than-temporary decline in the estimated value of private equity funds.
The Company did not have any transfers between Level 1 and Level 2 financial assets in the third quarter or in the first nine months of 2012 or 2011.
9
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:
Realized gains - distributions from private equity funds
Realized gains - sale of TriMas Corporation common stock
Total income from financial investments
Impairment charges - private equity funds
10
Note F – continued:
The Company recognized a net decrease in interest expense of $4 million (including additional expense of $1 million related to the cash flow hedge terminated in March 2012) and $8 million, respectively, for the nine months ended September 30, 2012 and 2011. These decreases to interest expense are related to the amortization of net gains resulting from the terminations (in 2012, 2008 and 2004) of the interest rate swap agreements.
Foreign Currency Contracts. The Company’s net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, and investments in subsidiaries. To mitigate this risk during 2012 and 2011, the Company, including certain European operations, entered into foreign currency forward contracts and foreign currency exchange contracts.
Gains (losses) related to foreign currency forward and exchange contracts are recorded in the Company’s consolidated statements of income in other income (expense), net. In the event that the counterparties fail to meet the terms of the foreign currency forward contracts, the Company’s exposure is limited to the aggregate foreign currency rate differential with such institutions.
Metal Contracts. During 2012 and 2011, the Company entered into several contracts to manage its exposure to increases in the price of copper and zinc. Gains (losses) related to these contracts are recorded in the Company’s consolidated statements of income in cost of goods sold.
The pre-tax gain (loss) included in the Company’s consolidated statements of income is as follows, in millions:
Foreign Currency Contracts
Exchange Contracts
Forward Contracts
Metal Contracts
Total gain (loss)
11
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:
Current assets
Current liabilities
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).
Balance at January 1
Accruals for warranties issued during the period
Accruals related to pre-existing warranties
Settlements made (in cash or kind) during the period
Balance at end of period
12
Note G – concluded:
13
Note H – concluded:
Long-term stock awards
Stock options
Phantom stock awards and stock appreciation rights
Income tax benefit (36 percent tax rate – before valuation allowance)
14
Note I – continued:
Unvested stock award shares at January 1
Weighted average grant date fair value
Stock award shares granted
Stock award shares vested
Stock award shares forfeited
Unvested stock award shares at September 30
15
Option shares outstanding, January 1
Weighted average exercise price
Option shares granted, including restoration options
Option shares exercised
Aggregate intrinsic value on date of exercise (A)
Option shares forfeited
Option shares outstanding, September 30
Weighted average remaining option term (in years)
Option shares vested and expected to vest, September 30
Aggregate intrinsic value (A)
Option shares exercisable (vested), September 30
16
Note I – concluded:
Risk-free interest rate
Dividend yield
Volatility factor
Expected option life
Service cost
Interest cost
Expected return on plan assets
Amortization of net loss
Net periodic pension cost
17
The Company’s operations by segment were:
The Company’s operations by geographic area were:
North America
International, principally Europe
General corporate expense, net
Gain from sale of fixed assets (B)
Charge for litigation settlements, net (B)
Other income (expense), net
Income before income taxes
18
Income from cash and cash investments
Other interest income
Income from financial investments (Note E)
Impairment of financial investments (Note E)
Other items, net
Total other net
Other items, net, included $2 million and $1 million of currency gains for the three months and nine months ended September 30, 2012, respectively. Other items, net, included $1 million and $— million of currency gains for the three months and nine months ended September 30, 2011, respectively.
19
Numerator (basic and diluted):
Allocation to unvested restricted stock awards
Income from continuing operations attributable to common shareholders
Loss from discontinued operations attributable to common shareholders
Net income (loss) available to common shareholders
Denominator:
Basic common shares (based upon weighted average)
Add:
Contingent common shares
Stock option dilution
Diluted common shares
For the three months and nine months ended September 30, 2012 and 2011, the Company allocated dividends to the unvested restricted stock awards (participating securities).
At September 30, 2011, the Company did not include any common shares related to the Zero Coupon Convertible Senior Notes (“Zero Coupon Notes”) in the calculation of diluted earnings per common share, as the price of the Company’s common stock at September 30, 2011 did not exceed the equivalent accreted value of the Zero Coupon Notes.
Additionally, 29 million common shares for both the three months and nine months ended September 30, 2012 and 37 million common shares for both the three months and nine months ended September 30, 2011 related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.
In the first nine months of 2012, the Company granted 819,520 shares of long-term stock awards; to partially offset the dilutive impact of these awards, the Company also repurchased and retired 675,110 shares of Company common stock, for cash aggregating approximately $8 million. At September 30, 2012, the Company had 24 million shares of its common stock remaining under the July 2007 Board of Directors’ repurchase authorization.
On the basis of amounts paid (declared), cash dividends per common share were $.075 ($.075) and $.225 ($.225), respectively, for the three months and nine months ended both September 30, 2012 and 2011.
20
As previously disclosed, a lawsuit was brought against the Company and a number of its insulation installation companies alleging that certain of their practices violated provisions of the federal antitrust laws during the period 1999 through 2004. The case was filed in October 2004 in the United States District Court for the Northern District of Georgia by Columbus Drywall & Insulation, Inc., Leo Jones Insulation, Inc., Southland Insulators, Inc., Southland Insulators of Maryland, Inc. d/b/a Devere Insulation, Southland Insulators of Delaware LLC d/b/a Delmarva Insulation, and Whitson Insulation Company of Grand Rapids, Inc. against the Company, its subsidiaries Masco Contractors Services Group Corp., Masco Contractor Services Central, Inc. (“MCS Central”) and Masco Contractor Services East, Inc., and several insulation manufacturers (the “Columbus Drywall case”). In February 2009, the court certified a class of 377 insulation contractors. In July 2012, the parties reached a settlement in principle in which the Company and its insulation installation companies named in the suit agreed to pay $75 million in return for dismissal with prejudice and full release of all claims, which was recorded by the Company in the second quarter of 2012. The Company and its insulation installation companies continue to deny that the challenged conduct was unlawful and admit no wrongdoing as part of the settlement. A settlement was reached to eliminate the considerable expense and uncertainty of this suit. The settlement was approved by the court on October 26, 2012.
Another suit was filed in March 2003 in the United States District Court for the Northern District of Georgia by Wilson Insulation Company, Wilson Insulation of Augusta, Inc. and The Wilson Insulation Group, Inc. (“Wilson”) against the Company, Masco Contractor Services, Inc., and MCS Central that alleged anticompetitive conduct (the “Wilson case”). The Company settled the Wilson case in September 2012. The settlement amount was not material to the Company.
In March 2007, Albert Von Der Werth and Valerie Good filed suit in the United States District Court for the Northern District of California against the Company, its subsidiary Masco Contractor Services, and several insulation manufacturers seeking class action status and alleging anticompetitive conduct (the “Von Der Werth case”). In the Von Der Werth case, plaintiffs allege that the alleged conspiracy in the Columbus Drywall case indirectly resulted in an increase in the retail price of fiberglass insulation they purchased from retailers from 1999 to 2004. The Von Der Werth case was subsequently transferred to the United States District Court for the Northern District of Georgia and was administratively stayed by the court in February 2010. The Company, along with its insulation manufacturer co-defendants, filed a Renewed Motion for Judgment on the Pleadings in October 2012. Based upon the advice of its outside counsel, the Company believes that the conduct of the Company and its insulation installation companies, which is the subject of the Von Der Werth case, has not violated any antitrust laws. While there cannot be any assurance that the Company will ultimately prevail in this lawsuit, the Company does not believe that the ultimate disposition of the Von Der Werth case will be material to the Company.
21
As a result of tax audit closings, settlements and expiration of applicable statutes of limitations in various jurisdictions within the next 12 months, the Company anticipates that it is reasonably possible that the liability for uncertain tax positions could be reduced by approximately $3 million.
22
THIRD QUARTER 2012 AND THE FIRST NINE MONTHS 2012 VERSUS
THIRD QUARTER 2011 AND THE FIRST NINE 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:
Net Sales:
Operating Profit (Loss) Margins: (A)
Total operating profit margin, as reported
23
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 two percent for the three-month and nine-month periods ended September 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 four percent for the three-month and nine-month periods ended September 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:
Net sales, as reported
Acquisitions
Net sales, excluding acquisitions
Currency translation
Net sales, excluding acquisitions and the effect of currency translation
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 nine-month periods ended September 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 nine-month periods ended September 30, 2012, respectively, from the comparable periods of 2011. Such increases were partially offset by lower sales volume of paints and stains for the three-month period ended September 30, 2012. For the nine-month period ended September 30, 2012, such increases were partially offset by lower sales volume of cabinets, including the exit of certain product lines.
A stronger U.S. dollar decreased International net sales by nine percent and seven percent in the three-month and nine-month periods ended September 30, 2012, respectively, compared to the same periods of 2011. In local currencies, net sales from International operations decreased three percent and were flat for the three-month and nine-month periods ended September 30, 2012, respectively. The decrease in local currency sales in the three-month period ended September 30, 2012 is primarily due to lower sales volume of International plumbing products, cabinets and windows, partially offset by increased selling prices.
24
Net sales of Cabinets and Related Products decreased for the three-month period ended September 30, 2012 due to lower sales volume of International cabinets, which decreased sales by four percent from the comparable period of 2011, partially offset by increased sales volume of North American cabinets. Net sales in this segment decreased due to lower sales volume of both North American and International cabinets, which reduced sales in this segment by three percent in the nine-month period ended September 30, 2012 from the comparable period 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 one percent in the nine-month period ended September 30, 2012 from the comparable period of 2011. A stronger U.S. dollar decreased sales by three percent and two percent, respectively, in the three-month and nine-month periods ended September 30, 2012, compared to 2011. Such declines were partially offset by selling price increases in both periods.
Net sales of Plumbing Products decreased due to lower sales volume of International operations, which decreased sales by three percent and two percent, respectively, for the three-month and nine-month periods ended September 30, 2012, from the comparable periods of 2011. Net sales in this segment were positively affected by increased sales volume of North American operations and increased selling prices, primarily related to International operations, which, on a combined basis, increased sales by three percent and five percent, respectively, for the three-month and nine-month periods ended September 30, 2012, from the comparable periods of 2011. A stronger U.S. dollar decreased sales by five percent and four percent in the three-month and nine-month periods ended September 30, 2012, respectively, compared to 2011.
Net sales of Installation and Other Services increased for the three-month and nine-month periods ended September 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 commercial sales.
Net sales of Decorative Architectural Products increased for the three-month and nine-month periods ended September 30, 2012, principally due to increased selling prices of paints and stains and builders’ hardware.
Net sales of Other Specialty Products decreased for the three-month and nine-month periods ended September 30, 2012, compared with the same periods 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. This segment was also negatively affected by lower sales volume of staple guns and other fastening tools in both periods of 2012 compared to 2011. A stronger U.S. dollar decreased sales by one percent in both the three-month and nine-month periods ended September 30, 2012 compared to 2011.
OPERATING MARGINS
Our gross profit margins were 25.3 percent and 25.8 percent for the three-month and nine-month periods ended September 30, 2012, respectively, compared with 25.0 percent and 25.3 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 nine-month periods ended September 30, 2012, compared to 19.2 percent and 21.1 percent, respectively, for the comparable periods of 2011.
25
Gross profit margins for both the third quarter and nine months ended September 30, 2012 were positively affected by a more favorable relationship between selling prices and commodity costs. The increase in selling, general and administrative expenses in the third quarter of 2012 is due to increased business rationalization costs from the comparable period of 2011. Gross profit margins and selling, general and administrative expenses as a percent of sales for the nine months ended September 30, 2012 benefited from increased sales volume and lower business rationalization costs.
We have been focused on the strategic rationalization of our businesses, including business consolidations, plant closures, headcount reductions, system implementations and other initiatives. Operating profit for the three-month and nine-month periods ended September 30, 2012 includes $28 million and $47 million, respectively, of costs and charges related to our business rationalizations and other initiatives. For the three-month and nine-month periods ended September 30, 2011, we incurred costs and charges of $13 million and $60 million, respectively, related to these initiatives. The third quarter of 2012 includes additional costs related to plant closures and severance in the Cabinets and Related Products segment and severance related to corporate office.
We anticipate that full-year 2012 rationalization charges for the entire Company will aggregate approximately $65 million compared to our previous estimate of $30 million. The increase in our full-year estimate of business rationalization expenses is due to additional plant closures and headcount reductions related to the Cabinets and Related Products and the Plumbing Products segments and headcount reductions at our corporate office. 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 period ended September 30, 2012 reflect increased business rationalization expenses. Operating margins in this segment for the nine-month period ended September 30, 2012 benefited from lower business rationalization expenses.
Operating margins in the Plumbing Products segment for the three-month and nine-month periods ended September 30, 2012 were negatively impacted by lower sales volume and a less favorable product mix related to International operations. Such declines more than offset increased North American sales volume, a more favorable relationship between selling prices and commodity costs (including the positive 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 in both periods of 2012 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.
26
Operating margins in the Decorative Architectural Products segment for the three-month period ended September 30, 2012 reflect a favorable relationship between selling prices and material costs partially offset by increased advertising expenses. Operating margins in this segment for the nine-month period ended September 30, 2012 were negatively affected by increases in expenses related to growth initiatives, which offset a favorable relationship between selling prices and material costs. Both the three-month and nine-month periods ended September 30, 2012 were positively affected by the benefits associated with cost savings initiatives and lower program costs related to builders’ hardware.
Operating margins in the Other Specialty Products segment for the three-month and nine-month periods ended September 30, 2012 include $12 million related to incremental warranty expenses, resulting from an analysis of recent warranty claims performed in the third quarter of 2012. This expense offset 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 nine-month period ended September 30, 2012 increased $4 million from the comparable period 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 nine-month periods ended September 30, 2012 included $2 million and $1 million, respectively, of currency transaction gains. Other items, net, for the three-month and nine-month periods ended September 30, 2011 included $1 million and $— million, respectively, of currency transaction gains.
Other, net, for the three-month and nine-month periods ended September 30, 2012 included gains of $2 million and $20 million, respectively, related to distributions from private equity funds. Other, net for the nine-month period ended September 30, 2012 included impairment of $2 million related to a private equity fund. Other, net, for the nine-month period ended September 30, 2011 included gains of $41 million related to the sale of TriMas common stock. Other, net for the three-month and nine-month periods ended September 30, 2011 included gains related to distributions from private equity funds of $19 million and $28 million, respectively.
INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS – Attributable to Masco Corporation
Income for the three-month and nine-month periods ended September 30, 2012 was $22 million and $3 million compared with $56 million and $29 million for the comparable periods of 2011. Diluted earnings per common share for the three-month and nine-month periods ended September 30, 2012 was $.06 per common share and $— per common share, respectively, compared with $.16 per common share and $.08 per common share, respectively, for the comparable periods of 2011. Income for the three-month and nine-month periods ended September 30, 2012 included charges for litigation settlement of $1 million and $74 million, respectively.
The effective tax rate was 61 percent for the nine months ending September 30, 2012 primarily due to losses in certain jurisdictions providing no tax benefit and an increase in the valuation allowance related to net operating losses. This effective tax rate includes a $21 million state income tax benefit resulting from the decrease in the liability for uncertain tax positions primarily from the expiration of applicable statutes of limitations in various jurisdictions and certain audit closings.
27
The effective tax rate was 46 percent for the nine months ending September 30, 2011. 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 1.7 to 1 and 1.5 to 1, respectively, at September 30, 2012 and December 31, 2011.
For the nine months ended September 30, 2012, cash of $90 million was provided by operating activities.
Net cash used for financing activities was $548 million, primarily due to the retirement of $791 million of 5.875% Notes due July 16, 2012, $80 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 partially offset the dilutive impact of long-term stock awards granted in 2012, partially offset by the issuance of Notes of $396 million, net of issuance costs. Net cash used for investing activities was $42 million and included $80 million for capital expenditures and net proceeds from financial investments of $33 million and net proceeds from the sale of fixed assets of $25 million.
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. 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. The issuance of the Notes and the repurchase of debt were done in anticipation of the retirement of $745 million of our 5.875% Notes, which was completed on July 16, 2012, the scheduled retirement date.
Our cash and cash investments were $1.2 billion and $1.7 billion at September 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 $1.2 billion and the $1.7 billion of cash and cash investments held at September 30, 2012 and December 31, 2011, respectively, $519 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 September 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 O 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.
28
OUTLOOK FOR THE COMPANY
We continue to make progress on our strategic initiatives, which include leveraging our brands, reducing our costs, improving our Installation and Cabinets segments and strengthening our balance sheet. We are encouraged by the continued strength in new home construction activity, driven by the stabilization and improvement of home prices in many areas of the U.S., increasing affordability and demographics. These factors should continue to drive demand for new homes over the next several years. Increased new home construction activity benefits virtually all of our businesses.
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.
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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PART II. OTHER INFORMATION
Information regarding legal proceedings involving us is set forth in Note O to our condensed consolidated financial statements included in Part I, Item 1 of this Report and is incorporated herein by reference.
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
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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.
Name:
Title:
John G. Sznewajs
Vice President, Treasurer and Chief Financial Officer
October 31, 2012
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EXHIBIT INDEX
Exhibit