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MASCO CORP /DE/ - Quarter Report: 2013 March (Form 10-Q)

Form 10-Q
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 March 31, 2013

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 April 26, 2013

Common stock, par value $1.00 per share

 

356,866,800

 

 

 


Table of Contents

MASCO CORPORATION

INDEX

 

         Page No.  

PART I.

  FINANCIAL INFORMATION   

Item 1.

 

Financial Statements:

  
 

Condensed Consolidated Balance Sheets – as at March 31, 2013 and December 31, 2012

     1   
 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012

     2   
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2013 and 2012

     3   
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012

     4   
 

Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2013 and 2012

     5   
 

Notes to Condensed Consolidated Financial Statements

     6-20   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21-26   

Item 4.

 

Controls and Procedures

     27   

PART II.

  OTHER INFORMATION      28-30   

Item 1.

 

Legal Proceedings

  

Item 1A.

 

Risk Factors

  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

Item 6.

 

Exhibits

  
 

Signature

  


Table of Contents

MASCO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

March 31, 2013 and December 31, 2012

(In Millions, Except Share Data)

 

 

 

     March 31,     December 31,  
     2013     2012  
ASSETS     

Current assets:

    

Cash and cash investments

   $ 1,032      $ 1,351   

Receivables

     1,174        933   

Prepaid expenses and other

     107        107   

Assets held for sale

     98        100   

Inventories:

    

Finished goods

     408        368   

Raw material

     261        266   

Work in process

     94        92   
  

 

 

   

 

 

 
     763        726   
  

 

 

   

 

 

 

Total current assets

     3,174        3,217   

Property and equipment, net

     1,294        1,326   

Goodwill

     1,891        1,894   

Other intangible assets, net

     150        151   

Other assets

     182        184   

Assets held for sale

     88        103   
  

 

 

   

 

 

 

Total assets

   $ 6,779      $ 6,875   
  

 

 

   

 

 

 
LIABILITIES     

Current liabilities:

    

Notes payable

   $ 206      $ 206   

Accounts payable

     863        788   

Accrued liabilities

     714        823   

Liabilities held for sale

     43        45   
  

 

 

   

 

 

 

Total current liabilities

     1,826        1,862   

Long-term debt

     3,421        3,422   

Deferred income taxes and other

     1,037        1,053   

Liabilities held for sale

     —          4   
  

 

 

   

 

 

 

Total liabilities

     6,284        6,341   
  

 

 

   

 

 

 

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: 2013 – 349,100,000; 2012 – 349,000,000

     349        349   

Preferred shares authorized: 1,000,000; issued and outstanding: 2013 – None; 2012 – None

     —          —     

Paid-in capital

     —          16   

Accumulated deficit

     (103     (102

Accumulated other comprehensive income

     36        59   
  

 

 

   

 

 

 

Total Masco Corporation’s shareholders’ equity

     282        322   

Noncontrolling interest

     213        212   
  

 

 

   

 

 

 

Total equity

     495        534   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 6,779      $ 6,875   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

1


Table of Contents

MASCO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

For the Three Months Ended March 31, 2013 and 2012

(In Millions Except Per Common Share Data)

 

 

 

     Three Months Ended March 31,  
     2013     2012  

Net sales

   $ 1,876      $ 1,806   

Cost of sales

     1,368        1,322   
  

 

 

   

 

 

 

Gross profit

     508        484   

Selling, general and administrative expenses

     376        377   

Income from litigation settlements, net

     —          (2
  

 

 

   

 

 

 

Operating profit

     132        109   
  

 

 

   

 

 

 

Other income (expense), net:

    

Interest expense

     (60     (64

Other, net

     7        15   
  

 

 

   

 

 

 
     (53     (49
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     79        60   

Income taxes

     14        7   
  

 

 

   

 

 

 

Income from continuing operations

     65        53   

Loss from discontinued operations

     (9     (9
  

 

 

   

 

 

 

Net income

     56        44   

Less: Net income attributable to noncontrolling interest

     9        11   
  

 

 

   

 

 

 

Net income attributable to Masco Corporation

   $ 47      $ 33   
  

 

 

   

 

 

 

Income per common share attributable to Masco Corporation:

    

Basic:

    

Income from continuing operations

   $ .16      $ .12   

Loss from discontinued operations

     (.03     (.03
  

 

 

   

 

 

 

Net income

   $ .13      $ .09   
  

 

 

   

 

 

 

Diluted:

    

Income from continuing operations

   $ .16      $ .12   

Loss from discontinued operations

     (.03     (.03
  

 

 

   

 

 

 

Net income

   $ .13      $ .09   
  

 

 

   

 

 

 

Amounts attributable to Masco Corporation:

    

Income from continuing operations

   $ 56      $ 42   

Loss from discontinued operations

     (9     (9
  

 

 

   

 

 

 

Net income

   $ 47      $ 33   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

2


Table of Contents

MASCO CORPORATION

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

For the Three Months Ended March 31, 2013 and 2012

(In Millions)

 

 

 

     Three Months Ended March 31,  
     2013     2012  

Net income

   $ 56      $ 44   

Less: Net income attributable to noncontrolling interest

     9        11   
  

 

 

   

 

 

 

Net income attributable to Masco Corporation

   $ 47      $ 33   
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax (see Footnote K):

    

Cumulative translation adjustment

     (36     30   

Interest rate swaps, net of income tax of $— and $—, respectively

     —          —     

Unrecognized pension prior service cost and net loss, net of income tax of $— and $—, respectively

     5        4   
  

 

 

   

 

 

 

Other comprehensive (loss) income

     (31     34   
  

 

 

   

 

 

 

Less: Other comprehensive (loss) income attributable to noncontrolling interest

     (8     7   
  

 

 

   

 

 

 

Other comprehensive (loss) income attributable to Masco Corporation

   $ (23   $ 27   
  

 

 

   

 

 

 

Total comprehensive income

   $ 25      $ 78   
  

 

 

   

 

 

 

Less: Total comprehensive income attributable to noncontrolling interest

     1        18   
  

 

 

   

 

 

 

Total comprehensive income attributable to Masco Corporation

   $ 24      $ 60   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

3


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MASCO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Three Months Ended March 31, 2013 and 2012

(In Millions)

 

 

 

     Three Months Ended  
     March 31,  
     2013     2012  

CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:

    

Cash provided by operations

   $ 130      $ 90   

Increase in receivables

     (263     (272

Increase in inventories

     (43     (50

(Decrease) increase in accounts payable and accrued liabilities, net

     (34     65   
  

 

 

   

 

 

 

Net cash for operating activities

     (210     (167
  

 

 

   

 

 

 

CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:

    

Purchase of Company common stock

     (35     (8

Cash dividends paid

     (26     (26

New Credit Agreement costs

     (4     —     

Issuance of Notes, net of issuance costs

     —          396   

Retirement of Notes

     —          (46

Payment for settlement of swaps

     —          (25

Payment of debt

     —          (1
  

 

 

   

 

 

 

Net cash (for) from financing activities

     (65     290   
  

 

 

   

 

 

 

CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:

    

Capital expenditures

     (31     (24

Acquisition of companies, net of cash acquired

     (5     —     

Proceeds from disposition of:

    

Other financial investments

     5        23   

Property and equipment

     5        8   

Purchases of other financial investments

     —          (1

Other, net

     (4     (8
  

 

 

   

 

 

 

Net cash for investing activities

     (30     (2
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash investments

     (14     11   
  

 

 

   

 

 

 

CASH AND CASH INVESTMENTS:

    

(Decrease) increase for the period

     (319     132   

At January 1

     1,351        1,656   
  

 

 

   

 

 

 

At March 31

   $ 1,032      $ 1,788   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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MASCO CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

For The Three Months Ended March 31, 2013 and 2012

 

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

Balance, January 1, 2012

   $ 742      $ 348      $ 65      $ 38      $ 76      $ 215   

Total comprehensive income

     78            33        27        18   

Shares issued

     —          2        (2      

Shares retired:

            

Repurchased

     (8     (1     (7      

Surrendered (non-cash)

     (7       (7      

Cash dividends declared

     (26         (26    

Stock-based compensation

     13          13         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

   $ 792      $ 349      $ 62      $ 45      $ 103      $ 233   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2013

   $ 534      $ 349      $ 16      $ (102   $ 59      $ 212   

Total comprehensive income

     25            47        (23     1   

Shares issued

     (7     2        (9      

Shares retired:

            

Repurchased

     (35     (2     (11     (22    

Surrendered (non-cash)

     (10       (10      

Cash dividends declared

     (26         (26    

Stock-based compensation

     14          14         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

   $ 495      $ 349      $ —        $ (103   $ 36      $ 213   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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MASCO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

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 March 31, 2013 and the results of operations and cash flows for the three months ended March 31, 2013 and 2012. The condensed consolidated balance sheet at December 31, 2012 was derived from audited financial statements.

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

Recently Issued Accounting Pronouncements. On January 1, 2013, the Company adopted new accounting guidance requiring disclosure of amounts reclassified from accumulated other comprehensive income. The adoption of this new guidance did not have an impact on the Company’s financial position or its results of operations.

 

B. In the first quarter of 2013, the Company determined that Tvilum, its Danish ready-to-assemble cabinet business, is no longer core to its long-term growth strategy and, accordingly, the Company has embarked on a plan for disposition. The Company has accounted for this business and those which were sold in 2012 as discontinued operations.

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

 

     Three Months Ended  
     March 31,  
     2013     2012  

Net Sales

   $ 59      $ 89   
  

 

 

   

 

 

 

Operating loss from discontinued operations

   $ (3   $ (11

Impairment of assets

     (10     —     

Loss on disposal of discontinued operations, net

     —          (1
  

 

 

   

 

 

 

Loss before income tax

     (13     (12

Income tax benefit

     (4     (3
  

 

 

   

 

 

 

Loss from discontinued operations

   $ (9   $ (9
  

 

 

   

 

 

 

Included in impairment of assets in 2013 is the impairment of fixed assets held for sale. During the first quarter of 2013, the Company estimated the fair value of the business held for sale, using unobservable inputs (Level 3). After considering the deferred gains reported in Accumulated Other Comprehensive Income, the Company recorded an impairment of $10 million in the first quarter of 2013.

 

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Table of Contents

MASCO CORPORATION

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

 

Note B – concluded:

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

 

     March 31,      December 31,  
     2013      2012  

Receivables

   $ 32       $ 32   

Inventories

     64         66   

Prepaid expenses and other

     2         2   

Property and equipment, net

     88         103   
  

 

 

    

 

 

 

Total assets

   $ 186       $ 203   
  

 

 

    

 

 

 

Accounts payable

   $ 31       $ 31   

Accrued liabilities

     12         14   

Deferred income taxes

     —           4   
  

 

 

    

 

 

 

Total liabilities

   $ 43       $ 49   
  

 

 

    

 

 

 

 

7


Table of Contents

MASCO CORPORATION

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

 

C. The changes in the carrying amount of goodwill for the three months ended March 31, 2013, by segment, were as follows, in millions:

 

     Gross Goodwill      Accumulated     Net Goodwill  
     At      Impairment     At  
     Mar. 31, 2013      Losses     Mar. 31, 2013  

Cabinets and Related Products

   $ 240       $ (59   $ 181   

Plumbing Products

     539         (340     199   

Installation and Other Services

     1,806         (762     1,044   

Decorative Architectural Products

     294         (75     219   

Other Specialty Products

     982         (734     248   
  

 

 

    

 

 

   

 

 

 

Total

   $ 3,861       $ (1,970   $ 1,891   
  

 

 

    

 

 

   

 

 

 

 

     Gross Goodwill
At

Dec. 31, 2012
     Accumulated
Impairment
Losses
    Net Goodwill
At

Dec. 31, 2012
     Other(A)     Additions(B)      Net Goodwill
At
Mar. 31, 2013
 

Cabinets and Related Products

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

Plumbing Products

     544         (340     204         (5     —           199   

Installation and Other Services

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

Decorative Architectural Products

     294         (75     219         —          —           219   

Other Specialty Products

     980         (734     246         —          2         248   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,864       $ (1,970   $ 1,894       $ (5   $ 2       $ 1,891   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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

Other indefinite-lived intangible assets were $132 million at both March 31, 2013 and December 31, 2012, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $18 million (net of accumulated amortization of $58 million) at March 31, 2013 and $19 million (net of accumulated amortization of $57 million) at December 31, 2012, and principally included customer relationships and non-compete agreements.

 

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MASCO CORPORATION

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

 

D. Depreciation and amortization expense, including discontinued operations, was $49 million and $55 million, including accelerated depreciation, relating to business rationalization initiatives, of $4 million and $7 million, for the three months ended March 31, 2013 and 2012, respectively.

 

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:

 

     March 31,      December 31,  
     2013      2012  

Auction rate securities

   $ 22       $ 22   
  

 

 

    

 

 

 

Total recurring investments

     22         22   
  

 

 

    

 

 

 

Private equity funds

     67         69   

Other investments

     4         4   
  

 

 

    

 

 

 

Total non-recurring investments

     71         73   
  

 

 

    

 

 

 

Total

   $ 93       $ 95   
  

 

 

    

 

 

 

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

 

            Pre-tax         
            Unrealized      Unrealized      Recorded  
     Cost Basis      Gains      Losses      Basis  

March 31, 2013

   $ 19       $ 3       $ —         $ 22   

December 31, 2012

   $ 19       $ 3       $ —         $ 22   

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

 

            Fair Value Measurements Using  
                   Significant         
            Quoted      Other      Significant  
            Market      Observable      Unobservable  
     Mar. 31,      Prices      Inputs      Inputs  
     2013      (Level 1)      (Level 2)      (Level 3)  

Auction rate securities

   $ 22         —           —         $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22       $ —         $ —         $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Fair Value Measurements Using  
                   Significant         
            Quoted      Other      Significant  
            Market      Observable      Unobservable  
     Dec. 31,      Prices      Inputs      Inputs  
     2012      (Level 1)      (Level 2)      (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 – concluded:

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 the expected maturity date 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 three months ended March 31, 2013 and the year ended December 31, 2012, in millions:

 

     March 31, 2013      December 31, 2012  
     Auction Rate      Auction Rate  
     Securities      Securities  

Fair value at beginning of period

   $ 22       $ 22   

Total losses included in earnings

     —           —     

Unrealized (losses)

     —           —     

Purchases

     —           —     

Settlements

     —           —     

Transfer from Level 3 to Level 2

     —           —     
  

 

 

    

 

 

 

Fair value at period end

   $ 22       $ 22   
  

 

 

    

 

 

 

Non-Recurring Fair Value Measurements. During the three months ended March 31, 2013 and 2012, 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 three months ended March 31, 2013 or 2012.

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

 

     Three Months Ended  
     March 31,  
     2013      2012  

Realized gains from private equity funds

   $ 3       $ 16   
  

 

 

    

 

 

 

Total income from financial investments

   $ 3       $ 16   
  

 

 

    

 

 

 

The fair value of the Company’s short-term and long-term fixed-rate debt instruments is based principally upon modeled market prices for the same or similar issues or the current rates available to the Company for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at March 31, 2013 was approximately $4.0 billion, compared with the aggregate carrying value of $3.6 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2012 was approximately $4.0 billion, compared with the aggregate carrying value of $3.6 billion.

 

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MASCO CORPORATION

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

 

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

Interest Rate Swap Agreements. In March 2012, in connection with the issuance of $400 million of debt, the Company terminated the interest rate swap hedge relationships that it entered into in August 2011. These interest rate swaps were designated as cash flow hedges and effectively fixed interest rates on the forecasted debt issuance to variable rates based on 3-month LIBOR. Upon termination, the ineffective portion of the cash flow hedges of approximately $2 million loss was recognized in the Company’s consolidated statement of income in other, net. The remaining loss of approximately $23 million from the termination of these swaps is being amortized as an increase to interest expense over the remaining term of the debt, through March 2022. At March 31, 2013, the balance remaining in Accumulated Other Comprehensive Income was $21 million.

In the three months ended March 31, 2012, the Company recognized a net decrease in interest expense of $3 million resulting from the amortization of net gains related to 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 2013 and 2012, the Company, including certain European operations, entered into foreign currency forward contracts and foreign currency exchange contracts.

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

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

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

 

     Three Months Ended  
     March 31,  
     2013     2012  

Foreign Currency Contracts

    

Exchange Contracts

   $ 7      $ (5

Forward Contracts

     2        (1

Metal Contracts

     (4     7   
  

 

 

   

 

 

 

Total gain

   $ 5      $ 1   
  

 

 

   

 

 

 

 

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

 

     At March 31, 2013  
     Notional                
     Amount      Assets      Liabilities  

Foreign Currency Contracts

        

Exchange Contracts

   $ 162         

Current assets

      $ 4       $ 1   

Forward Contracts

     68         

Current assets

        1         —     

Metal Contracts

     56         

Current liabilities

        —           4   
     

 

 

    

 

 

 

Total

      $ 5       $ 5   
     

 

 

    

 

 

 

 

     At December 31, 2012  
     Notional                
     Amount      Assets      Liabilities  

Foreign Currency Contracts

        

Exchange Contracts

   $ 172         

Current liabilities

      $ —         $ 5   

Forward Contracts

     76         

Current assets

        1         1   

Metal Contracts

     35         

Current liabilities

        1         2   
     

 

 

    

 

 

 

Total

      $ 2       $ 8   
     

 

 

    

 

 

 

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

 

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

 

     Three Months Ended     Twelve Months Ended  
     March 31, 2013     December 31, 2012  

Balance at January 1

   $ 118      $ 102   

Accruals for warranties issued during the period

     9        42   

Accruals related to pre-existing warranties

     1        16   

Settlements made (in cash or kind) during the period

     (10     (38

Other, net

     —          (4
  

 

 

   

 

 

 

Balance at end of period

   $ 118      $ 118   
  

 

 

   

 

 

 

 

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MASCO CORPORATION

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

 

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

The New Credit Agreement provides for an unsecured revolving credit facility available to the Company and one of its foreign subsidiaries, in U.S. dollars, European euros and certain other currencies. Borrowings under the revolver denominated in euros are limited to $500 million, equivalent. The Company can also borrow swingline loans up to $150 million and obtain letters of credit of up to $250 million; any outstanding Letters of Credit reduce the Company’s borrowing capacity. At March 31, 2013, the Company had $78 million of outstanding and unused Letters of Credit, reducing the Company’s borrowing capacity by such amount.

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

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

Based on the limitations of the debt to total capitalization ratio covenant in the New Credit Agreement, at March 31, 2013, the Company had additional borrowing capacity, subject to availability, of up to $858 million. Additionally, at March 31, 2013, the Company could absorb a reduction to shareholders’ equity of approximately $462 million and remain in compliance with the debt to total capitalization covenant.

In order for the Company to borrow under the New Credit Agreement, there must not be any default in the Company’s covenants in the New Credit Agreement (i.e., in addition to the two financial covenants, principally limitations on subsidiary debt, negative pledge restrictions, legal compliance requirements and maintenance of properties and insurance) and the Company’s representations and warranties in the New Credit Agreement must be true in all material respects on the date of borrowing (i.e., principally no material adverse change or litigation likely to result in a material adverse change, since December 31, 2012, in each case, no material ERISA or environmental non-compliance and no material tax deficiency). The Company was in compliance with all covenants and no borrowings have been made at March 31, 2013.

 

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MASCO CORPORATION

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

 

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 March 31, 2013, outstanding stock-based incentives were in the form of long-term stock awards, stock options, phantom stock awards and stock appreciation rights. Pre-tax compensation expense and the related income tax benefit for these stock-based incentives were as follows, in millions:

 

     Three Months Ended  
     March 31,  
     2013      2012  

Long-term stock awards

   $ 9       $ 8   

Stock options

     5         5   

Phantom stock awards and stock appreciation rights

     3         5   
  

 

 

    

 

 

 

Total

   $ 17       $ 18   
  

 

 

    

 

 

 

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

   $ 6       $ 7   
  

 

 

    

 

 

 

Long-Term Stock Awards. Long-term stock awards are granted to key employees and non-employee Directors of the Company and do not cause net share dilution inasmuch as the Company continues the practice of repurchasing and retiring an equal number of shares in the open market. The Company granted 1,570,020 shares of long-term stock awards in the three months ended March 31, 2013.

 

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MASCO CORPORATION

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

Note I – continued:

 

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

 

     Three Months Ended  
     March 31,  
     2013      2012  

Unvested stock award shares at January 1

     8         10   

Weighted average grant date fair value

   $ 16       $ 17   

Stock award shares granted

     2         1   

Weighted average grant date fair value

   $ 20       $ 12   

Stock award shares vested

     2         2   

Weighted average grant date fair value

   $ 16       $ 17   

Stock award shares forfeited

     —           —     

Weighted average grant date fair value

   $ 18       $ 18   

Unvested stock award shares at March 31

     8         9   

Weighted average grant date fair value

   $ 17       $ 16   

At March 31, 2013 and 2012, there was $94 million and $103 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of four years in both periods.

The total market value (at the vesting date) of stock award shares which vested during the three months ended March 31, 2013 and 2012 was $32 million and $23 million, respectively.

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

The Company granted 869,000 of stock option shares in the three months ended March 31, 2013 with a grant date exercise price approximating $20 per share. In the first three months of 2013, 453,070 stock option shares were forfeited (including options that expired unexercised).

 

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MASCO CORPORATION

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

Note I – continued:

 

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

 

     Three Months Ended  
     March 31,  
     2013     2012  

Option shares outstanding, January 1

     30        36   

Weighted average exercise price

   $ 21      $ 21   

Option shares granted

     1        1   

Weighted average exercise price

   $ 20      $ 12   

Option shares exercised

     2        —     

Aggregate intrinsic value on date of exercise (A)

   $ 17  million    $ 1  million 

Weighted average exercise price

   $ 11      $ 8   

Option shares forfeited

     —          2   

Weighted average exercise price

   $ 19      $ 18   

Option shares outstanding, March 31

     29        35   

Weighted average exercise price

   $ 22      $ 21   

Weighted average remaining option term (in years)

     4        5   

Option shares vested and expected to vest, March 31

     29        35   

Weighted average exercise price

   $ 22      $ 21   

Aggregate intrinsic value (A)

   $ 82  million    $ 26  million 

Weighted average remaining option term (in years)

     4        5   

Option shares exercisable (vested), March 31

     23        25   

Weighted average exercise price

   $ 24      $ 23   

Aggregate intrinsic value (A)

   $ 45  million    $ 14  million 

Weighted average remaining option term (in years)

     4        4   

 

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

At March 31, 2013 and 2012, there was $17 million and $29 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model) related to unvested stock options; such options had a weighted average vesting period of two years and three years in 2013 and 2012, respectively.

 

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MASCO CORPORATION

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

 

Note I – concluded:

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

 

     Three Months Ended  
     March 31,  
     2013     2012  

Weighted average grant date fair value

   $ 8.33      $ 4.44   

Risk-free interest rate

     1.20     1.10

Dividend yield

     1.47     2.57

Volatility factor

     49.00     51.00

Expected option life

     6 years        6 years   

 

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

 

     Three Months ended March 31,  
     2013      2012  
     Qualified     Non-Qualified      Qualified     Non-Qualified  

Service cost

   $ 1      $ —         $ 2      $ —     

Interest cost

     10        1         10        1   

Expected return on plan assets

     (9     —           (8     —     

Amortization of net loss

     4        1         3        1   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic pension cost

   $ 6      $ 2       $ 7      $ 2   
  

 

 

   

 

 

    

 

 

   

 

 

 

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.

 

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

 

     Amount       

Accumulated Other

Comprehensive

Income (Loss)

   Reclassified       
   March 31,       
   2013      2012     

Income Statement Line Item

Amortization of defined benefit pension:

        

Actuarial losses, net

   $ 5       $ 4       Selling, General & Administrative Expense
     —           —         Tax expense
  

 

 

    

 

 

    
   $ 5       $ 4       Net of tax
  

 

 

    

 

 

    

Interest rate swaps

   $ —         $ —         Interest expense

 

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MASCO CORPORATION

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

 

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

 

     Three Months Ended March 31,  
     2013      2012      2013     2012  
     Net Sales(A)      Operating Profit (Loss)  

The Company’s operations by segment were:

          

Cabinets and Related Products

   $ 236       $ 228       $ (4   $ (16

Plumbing Products

     762         742         86        97   

Installation and Other Services

     312         278         (4     (14

Decorative Architectural Products

     432         434         89        73   

Other Specialty Products

     134         124         (1     (5
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,876       $ 1,806       $ 166      $ 135   
  

 

 

    

 

 

    

 

 

   

 

 

 

The Company’s operations by geographic area were:

          

North America

   $ 1,510       $ 1,431       $ 140      $ 88   

International, principally Europe

     366         375         26        47   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,876       $ 1,806         166        135   
  

 

 

    

 

 

      

General corporate expense, net

           (34     (28

Income from litigation settlements

           —          2   
        

 

 

   

 

 

 

Operating profit, as reported

           132        109   

Other income (expense), net

           (53     (49
        

 

 

   

 

 

 

Income from continuing operations before income taxes

         $ 79      $ 60   
        

 

 

   

 

 

 

 

(A) Inter-segment sales were not material.

 

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

 

     Three Months Ended  
     March 31,  
     2013      2012  

Income from cash and cash investments

   $ 1       $ 2   

Income from financial investments (Note E)

     3         16   

Other items, net

     3         (3
  

 

 

    

 

 

 

Total other, net

   $ 7       $ 15   
  

 

 

    

 

 

 

Other items, net, included $3 million and $(1) million of currency gains (losses) for the three months ended March 31, 2013 and 2012, respectively.

 

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MASCO CORPORATION

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

 

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

 

     Three Months Ended  
     March 31,  
     2013     2012  

Numerator (basic and diluted):

    

Income from continuing operations

   $ 56      $ 42   

Allocation to unvested restricted stock awards

     (1     (1
  

 

 

   

 

 

 

Income from continuing operations attributable to common shareholders

   $ 55      $ 41   

Loss from discontinued operations, net

     (9     (9
  

 

 

   

 

 

 

Net income available to common shareholders

   $ 46      $ 32   
  

 

 

   

 

 

 

Denominator:

    

Basic common shares (based upon weighted average)

     350        349   

Add:

    

Contingent common shares

     —          —     

Stock option dilution

     2        1   
  

 

 

   

 

 

 

Diluted common shares

     352        350   
  

 

 

   

 

 

 

For the three months ended March 31, 2013 and 2012, the Company allocated dividends to the unvested restricted stock awards (participating securities).

Additionally, 15 million and 30 million common shares for the three months ended March 31, 2013 and 2012, respectively, related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.

In the first three months of 2013, the Company granted 1.6 million shares of long-term stock awards. To offset the dilutive impact of these awards and awards granted in late 2012, the Company repurchased and retired 1.7 million shares of Company common stock, for cash aggregating approximately $35 million. At March 31, 2013, the Company had 22.6 million shares of its common stock remaining under the July 2007 Board of Directors’ repurchase authorization.

On the basis of amounts paid (declared), cash dividends per common share were $.075 ($.075) and $.075 ($.075), respectively, for the three months ended March 31, 2013 and 2012.

 

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MASCO CORPORATION

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

 

O. We are subject to claims, charges, litigation and other proceedings in the ordinary course of our business, including those arising from or related to contractual matters, intellectual property, personal injury, environmental matters, product liability, product recalls, construction defect, insurance coverage, personnel and employment disputes and other matters, including class actions. We believe we have adequate defenses in these matters and that the outcome of these matters is not likely to have a material adverse effect on us. However, there is no assurance that we will prevail in these matters, and we could in the future incur judgments, enter into settlements of claims or revise our expectations regarding the outcome of these matters, which could materially impact our results of operations.

 

P. The effective tax rate in the first quarter of 2013 was 18 percent primarily due to a decrease in the valuation allowance resulting from the partial utilization of our U.S. Federal net operating loss carryforward and from a $12 million state income tax benefit on uncertain tax positions due to the expiration of applicable statutes of limitations in various jurisdictions.

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.

 

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MASCO CORPORATION

 

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

FIRST QUARTER 2013 VERSUS FIRST QUARTER 2012

SALES AND OPERATIONS

The following table sets forth our net sales and operating profit (loss) margins by business segment and geographic area, dollars in millions:

 

     Three Months Ended      Percent (Decrease)  
     March 31,      Increase  
     2013      2012      2013 vs. 2012  

Net Sales:

        

Cabinets and Related Products

   $ 236       $ 228         4

Plumbing Products

     762         742         3

Installation and Other Services

     312         278         12

Decorative Architectural Products

     432         434         —  

Other Specialty Products

     134         124         8
  

 

 

    

 

 

    

Total

   $ 1,876       $ 1,806         4
  

 

 

    

 

 

    

North America

   $ 1,510       $ 1,431         6

International, principally Europe

     366         375         (2 %) 
  

 

 

    

 

 

    

Total

   $ 1,876       $ 1,806         4
  

 

 

    

 

 

    

 

     Three Months Ended  
     March 31,  
     2013     2012  

Operating Profit (Loss) Margins: (A)

    

Cabinets and Related Products

     (1.7 %)      (7.0 %) 

Plumbing Products

     11.3     13.1

Installation and Other Services

     (1.3 %)      (5.0 %) 

Decorative Architectural Products

     20.6     16.8

Other Specialty Products

     (0.7 %)      (4.0 %) 

North America

     9.3     6.1

International, principally Europe

     7.1     12.5

Total

     8.8     7.5

Operating profit margins, as reported

     7.0     6.0

 

(A) Before general corporate expense, net and income from litigation settlements; see Note L to the condensed consolidated financial statements.

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.

 

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MASCO CORPORATION

 

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

 

NET SALES

Net sales increased four percent for the three-month period ended March 31, 2013 from the comparable period of 2012. There was no net impact of currency translation in the first quarter of 2013. The following table reconciles reported net sales to net sales, excluding acquisitions and the effect of currency translation, in millions:

 

     Three Months Ended  
     March 31,  
     2013     2012  

Net sales, as reported

   $ 1,876      $ 1,806   

Acquisitions

     (3     —     
  

 

 

   

 

 

 

Net sales, excluding acquisitions

     1,873        1,806   

Currency translation

     —          —     
  

 

 

   

 

 

 

Net sales, excluding acquisitions and the effect of currency translation

   $ 1,873      $ 1,806   
  

 

 

   

 

 

 

North American net sales increased six percent for the three-month period ended March 31, 2013 from the comparable period of 2012 due to increased sales volume of cabinets, installation and other services, plumbing products and windows. Net sales were also positively affected by selling price increases, which increased sales by two percent for the three-month period ended March 31, 2013 from the comparable period of 2012. Such increases were partially offset by a less favorable product mix related to cabinets and plumbing products, as well as lower sales volume of paints and stains which decreased sales by one percent for the three-month period ended March 31, 2013 from the comparable period of 2012.

In local currencies and in U.S. dollars, net sales from International operations decreased two percent for the three-month period ended March 31, 2013. The decrease in local currency sales in the three-month period ended March 31, 2013 is primarily due to lower sales volume of International plumbing products, cabinets and windows, partially offset by increased selling prices.

Net sales of Cabinets and Related Products increased for the three-month period ended March 31, 2013 due to increased sales volume and selling prices of North American cabinets, which increased sales by 11 percent from the comparable period of 2012, partially offset by a less favorable product mix of North American cabinets, which decreased sales by seven percent from the comparable period of 2012.

Net sales of Plumbing Products increased due to increased sales volume of North American operations, which increased sales by four percent for the three-month period ended March 31, 2013 from the comparable period of 2012, partially offset by lower sales volume of international operations.

Net sales of Installation and Other Services increased for the three-month period ended March 31, 2013, primarily due to increased sales volume related to a higher level of activity in the new home construction market as well as increased selling prices.

Net sales of Decorative Architectural Products decreased for the three-month period ended March 31, 2013, principally due to lower sales volume of paints and stains.

 

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MASCO CORPORATION

 

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

 

Net sales of Other Specialty Products increased for the three-month period ended March 31, 2013 compared with the same period in 2012 due to higher sales volume of North American windows. This segment was negatively affected by lower sales volume of U.K. windows and staple guns and other fastening tools in the same period of 2013 compared to 2012.

OPERATING MARGINS

Our gross profit margins were 27.1 percent for the three-month period ended March 31, 2013 compared with 26.8 percent for the comparable period of 2012. Selling, general and administrative expenses, as a percentage of sales, were 20.0 percent for the three-month period ended March 31, 2013, compared to 20.8 percent for the comparable period of 2012.

Gross profit margins for the first quarter ended March 31, 2013 were positively affected by increased sales volume and a more favorable relationship between selling prices and commodity costs. The decrease in selling, general and administrative expenses as a percent of sales, in the first quarter of 2013 is due to increased sales volume.

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 periods ended March 31, 2013 and 2012 includes $8 million and $11 million, respectively, of costs and charges related to our business rationalizations and other initiatives.

Operating margins in the Cabinets and Related Products segment for the three-month period ended March 31, 2013 reflect a more favorable relationship between selling prices and commodity costs and the benefits associated with our business rationalizations and cost savings initiatives, partially offset by a less favorable product mix.

Operating margins in the Plumbing Products segment for the three-month period ended March 31, 2013 were negatively impacted by lower sales volume and a less favorable product mix related to international operations and a less favorable relationship between selling prices and commodity costs (including the negative impact of $4 million loss related to the metal hedge contracts). Such declines more than offset increased North American sales volume.

Operating margins in the Installation and Other Services segment for the three-month period ended March 31, 2013 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 period ended March 31, 2013 reflect the anniversary of pricing actions and lower program costs.

Operating margins in the Other Specialty Products segment for the three-month period ended March 31, 2013 reflect increased sales volume and the benefits associated with business rationalizations and other cost savings initiatives.

 

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

 

OTHER INCOME (EXPENSE), NET

Interest expense for the three-month period ended March 31, 2013 decreased $4 million from the comparable period of 2012 primarily due to the repurchase and retirement of $791 million of 5.875% Notes in 2012, partially offset by the issuance of 5.95% Notes. This activity resulted in a net debt reduction of $400 million in 2012.

Other items, net, for the three-month period ended March 31, 2013 included $3 million of currency transaction gains. Other items, net, for the three-month period ended March 31, 2012 included $(1) million of currency transaction losses.

Other, net, for the three-month period ended March 31, 2013 included gains of $3 million related to distributions from private equity funds. Other, net, for the three-month period ended March 31, 2012 included gains of $16 million related to distributions from private equity funds.

INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS – Attributable to Masco Corporation

Income for the three-month period ended March 31, 2013 was $56 million compared with $42 million for the comparable period of 2012. Diluted earnings per common share for the three-month period ended March 31, 2013 was $.16 per common share compared with $.12 per common share for the comparable period of 2012.

Our effective tax rate in the first quarter of 2013 of 18 percent was lower than our normalized tax rate of 36 percent primarily due to a decrease in the valuation allowance resulting from the partial utilization of our U.S. Federal net operating loss carryforward and from a $12 million state income tax benefit on uncertain tax positions due to the expiration of applicable statutes of limitations in various jurisdictions.

In the first quarter of 2012, we incurred income tax expense of $7 million on pre-tax income from continuing operations of $60 million. The income tax expense includes a $21 million state income tax benefit on uncertain tax positions primarily from the expiration of applicable statutes of limitations in various jurisdictions and certain tax audit closings.

OTHER FINANCIAL INFORMATION

Our current ratio was 1.7 to 1 at both March 31, 2013 and December 31, 2012.

For the three months ended March 31, 2013, cash of $210 million was used for operating activities. First quarter 2013 cash from operations was affected by an expected and annually recurring seasonal first quarter increase in accounts receivable and inventories compared with December 31, 2012.

Net cash used for financing activities was $65 million, primarily due to $26 million for the payment of cash dividends and $35 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 2013 and awards granted in late 2012. Net cash used for investing activities was $30 million and included $31 million for capital expenditures and $5 million for the acquisition of a U.K. door company, offset by net proceeds from the sale of fixed assets and financial investments of $10 million.

 

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

 

Our cash and cash investments were $1.0 billion and $1.4 billion at March 31, 2013 and December 31, 2012, 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 $1.0 billion and the $1.4 billion of cash and cash investments held at March 31, 2013 and December 31, 2012, respectively, $522 million and $572 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.

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

Based on the limitations of the debt to total capitalization covenant in the New Credit Agreement, at March 31, 2013, the Company had additional borrowing capacity, subject to availability, of up to $858 million. Additionally, at March 31, 2013, the Company could absorb a reduction to shareholders’ equity of approximately $462 million and remain in compliance with the debt to total capitalization covenant.

We were in compliance with all covenants and had no borrowings under the New Credit Agreement at March 31, 2013.

We have $200 million of 7.125% Notes due August 15, 2013 (“Notes”). We plan to use available cash to retire the Notes.

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.

 

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

 

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, the uncertainty in the international economy, shifts in consumer preferences and purchasing practices, our ability to improve our underperforming businesses and our ability to maintain our competitive positions in our industries. 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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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 March 31, 2013, 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 March 31, 2013, 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 O to our condensed consolidated financial statements included in Part I, Item 1 of this Report and is incorporated herein by reference.

 

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, 2012.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information regarding the repurchase of Company common stock for the three months ended March 31, 2013:

 

Period

   Total Number
of Shares
Purchased
     Average Price
Paid Per
Common Share
     Total Number of
Shares  Purchased

as Part of
Publicly Announced
Plans or Programs (a)
     Maximum Number of
Shares That May

Yet Be Purchased
Under the Plans

or Programs
 

1/1/13- 1/31/13

     —         $ —           —           24,348,790   

2/1/13- 2/29/13

     —         $ —           —           24,348,790   

3/1/13- 3/31/13

     1,732,810       $ 20.14         1,732,810         22,615,980   
  

 

 

    

 

 

    

 

 

    

Total for the quarter

     1,732,810       $ 20.14         1,732,810         22,615,980   

 

(a) In July 2007, our Board of Directors authorized the purchase of up to 50 million shares of our common stock in open-market transactions or otherwise.

 

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PART II. OTHER INFORMATION (continued)

 

Item 6. Exhibits

 

  10    -      Credit Agreement dated as of March 28, 2013 among Masco Corporation and Masco Europe S.à.r.l., as borrowers, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Citibank, N.A., as Syndication Agent, and Royal Bank of Canada, Deutsche Bank Securities Inc., PNC Bank, National Association, and SunTrust Bank, as Co-Documentation Agents. Incorporated by reference to Exhibit 10 to the Registrant’s Current Report on Form 8-K dated March 28, 2013 and filed on April 3, 2013.
  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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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

May 2, 2013

 

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EXHIBIT INDEX

 

Exhibit

     
Exhibit 10    Credit Agreement dated as of March 28, 2013 among Masco Corporation and Masco Europe S.à.r.l., as borrowers, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Citibank, N.A., as Syndication Agent, and Royal Bank of Canada, Deutsche Bank Securities Inc., PNC Bank, National Association, and SunTrust Bank, as Co-Documentation Agents. Incorporated by reference to Exhibit 10 to the Registrant’s Current Report on Form 8-K dated March 28, 2013 and filed on April 3, 2013.
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