Masco Corporation — 2012 Form 10-K
Business context and reporting period. Masco manufactures, distributes and installs home-improvement and building products across five segments: Cabinets and Related Products, Plumbing Products, Installation and Other Services, Decorative Architectural Products, and Other Specialty Products. This filing covers the fiscal year ended December 31, 2012; fourth-quarter figures are noted separately where relevant. Approximately 78% of sales came from North America.
Financial results and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $7.745 billion | $7.467 billion |
| Gross profit / margin | $1.951 billion / 25.2% | $1.784 billion / 23.9% |
| Operating profit (loss), reported | $271 million / 3.5% margin | $(295) million / (4.0)% margin |
| Operating margin excluding specified charges and gains | 6.1% | 4.4% |
| Loss from continuing operations attributable to Masco | $(76) million; $(0.22) per diluted share | $(465) million; $(1.34) per diluted share |
| Net loss attributable to Masco | $(114) million; $(0.33) per diluted share | $(575) million; $(1.66) per diluted share |
| Cash from operating activities | $281 million | $239 million |
| Capital expenditures | $119 million | $151 million |
| Cash and cash investments, year-end | $1.351 billion | $1.656 billion |
| Total debt, including current portion | $3.628 billion | $4.025 billion |
| Working-capital ratio | 1.7 to 1 | 1.5 to 1 |
Masco’s reported 2012 results included $42 million of non-cash intangible-asset impairment charges and $77 million of net litigation-settlement charges, partly offset by $8 million of gains on fixed-asset sales. Adjusted operating margin is a company-reported non-GAAP measure. Consolidated loss from continuing operations was $41 million; the larger $76 million loss attributable to Masco reflects amounts attributable to noncontrolling interests.
Cash declined $305 million during 2012. Masco issued $400 million of 5.95% notes due 2022 and retired $791 million of notes due in 2012. The company reported debt at 87% of total capitalization, no borrowings under its $1.25 billion revolving credit facility, and up to $873 million of additional borrowing capacity subject to availability and covenant limits. The facility matures January 10, 2014; Masco reported compliance with its covenants at year-end.
Changes versus the prior comparable period
- Sales rose 4% year over year; excluding acquisitions and currency effects, Masco reported a 5% increase. Selling-price increases and higher volume supported sales, while currency translation reduced reported sales.
- Gross margin improved 1.3 percentage points, reflecting better pricing relative to commodity costs, higher volume and prior cost-saving actions. Reported operating profit improved substantially, with lower impairment charges than in 2011.
- Sales increased in Installation and Other Services (12%), Decorative Architectural Products (9%) and Plumbing Products (1%); Cabinet sales fell 3%, while Other Specialty Products sales were essentially flat.
- Segment operating results improved in Cabinets (loss narrowed to $120 million from $206 million) and Installation (loss narrowed to $19 million from $79 million). Decorative Architectural Products profit increased to $329 million from $196 million; Plumbing profit declined to $307 million from $322 million.
- North American sales increased 7%, while international sales, principally Europe, declined 6%, including the effect of a stronger U.S. dollar.
Outlook, commentary and risks
- Management said strategic initiatives and market conditions should position Masco for improved results in 2013, and expects to outperform as new-home construction and repair-and-remodel activity recover. It described long-term housing and home-improvement fundamentals as positive, while noting demand remained below historical averages. No numerical sales or earnings guidance was provided.
- For 2013, Masco expected capital expenditures of approximately $165 million, depreciation and amortization of approximately $210 million, and rationalization costs of approximately $40 million. It anticipated pension contributions of approximately $50–$60 million.
- In early February 2013, Masco decided to dispose of its Danish ready-to-assemble cabinet business, with 2012 sales of approximately $250 million and an operating loss of approximately $30 million. The sale was expected to be completed within 12 months.
- Unusual and contingent items include the $75 million Columbus Drywall litigation settlement, recorded in 2012 and paid in the fourth quarter; a $12 million increase in expected warranty claims in Other Specialty Products; and a $42 million impairment of an intangible asset. Fourth-quarter 2012 included a $79 million loss from continuing operations and an $87 million net loss; the quarter’s impairment charge was $42 million pre-tax ($27 million after tax).
- Masco increased its valuation allowance on U.S. deferred tax assets by $65 million in 2012; the total valuation allowance was $787 million at year-end. The effective tax rate was unusually high at 198%, primarily due to the valuation allowance and impairment charges that provided no tax benefit.
- Key risks include continued dependence on cyclical housing and remodeling markets, price and product-mix pressure toward lower-priced goods, commodity-cost volatility, intense competition, and reliance on major retail customers. The Home Depot represented approximately 28% of 2012 sales ($2.143 billion); management warned that losing a substantial portion of sales to this customer could materially harm the business. Other risks include European weakness and currency exposure, supply-chain reliance, litigation and product warranties, and possible further impairments.
- The qualified defined-benefit pension plans were underfunded by $462 million and non-qualified plans had $181 million of obligations, for a combined reported net liability of $643 million. The filing also identifies future lead-content requirements for plumbing products, including a federal standard effective January 2014.
Important facts for investors to verify
- Whether housing and remodeling activity, particularly big-ticket projects, recovers enough to sustain sales growth and margins.
- The progress, timing and financial effects of the planned Danish cabinet-business disposition and continuing cabinet-segment improvement.
- Customer concentration and the durability of the relationship with The Home Depot, alongside competitive pricing and product-mix trends.
- Debt maturities, covenant headroom and refinancing plans ahead of the revolving credit facility’s January 2014 maturity.
- Developments in litigation, warranty claims, pension funding and the recoverability of deferred tax assets; these depend on estimates and future performance.
PricewaterhouseCoopers LLP issued unqualified opinions on the 2012 financial statements and internal control over financial reporting.