Masco Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; compared with the same periods in 2010. Amounts are in millions except per-share data. The financial statements are unaudited.
Financial results
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $2,022 | $2,048 | $3,794 | $3,900 |
| Gross profit | $532 | $546 | $957 | $1,038 |
| Gross margin | 26.3% | 26.7% | 25.2% | 26.6% |
| Operating profit | $91 | $119 | $112 | $197 |
| Net income (loss) attributable to Masco | $8 | $3 | $(38) | $(4) |
| Diluted EPS attributable to Masco | $0.02 | $0.01 | $(0.11) | $(0.02) |
| Cash from (used in) operating activities | Not separately provided for Q2 | $(31) | $67 |
- First-half segment operating profit was $185, before $68 of net corporate expense and a $5 litigation-settlement charge; reported operating profit was $112.
- At June 30, cash and cash investments were $1,611, current assets $3,831, and current liabilities $1,800; management reported a 2.1-to-1 current ratio. Long-term debt was $4,027 and notes payable were $65. The company reported approximately $4.1 billion of total short- and long-term debt.
- First-half investing activities provided $4, including proceeds from investment and fixed-asset sales, versus $67 used in 2010. Capital expenditures were $67. Financing activities used $105, including $54 in dividends and $30 in share repurchases.
Changes and drivers
- Sales declined 1% in Q2 and 3% in the first half; excluding currency effects, both periods declined 4%. North American sales fell 6% in each period, while international sales rose 18% in Q2 and 11% year to date, including currency benefits.
- Plumbing Products sales increased 12% in Q2 and 9% year to date. Cabinets and Related Products fell 18% and 21%, respectively, including the planned exit of non-core cabinet lines. Installation and Other Services sales decreased 5% and 6%.
- Reported operating margin fell to 4.5% in Q2 from 5.8%, and to 3.0% for the first half from 5.1%. Management cited lower volume and fixed-cost under-absorption, less favorable pricing versus commodity costs, advertising and program expenses, litigation settlement costs, and growth-initiative spending.
- First-half operating cash flow declined by $98 year over year and was negative, with higher receivables and inventories among the cash uses.
Outlook, risks and unusual items
- Management said weak job creation, high energy costs, and declining consumer confidence made recovery timing uncertain; it expected second-half 2011 growth to be challenged and housing starts to be flat versus 2010. It expressed longer-term optimism for new-home construction and home improvement markets.
- Management anticipated approximately $65 of full-year 2011 rationalization charges and approximately $190 of capital expenditures, excluding potential acquisitions. Additional rationalization charges may arise.
- Q2 and first-half other income included gains from TriMas stock sales of $27 and $41, respectively, and private-equity distributions of $6 and $9. These gains materially affected reported other income. The 2010 comparison included $33 of financial-investment impairment charges.
- The effective tax rate was 66% for Q2 and 138% for the first half of 2011, which management attributed primarily to valuation allowances on net operating losses and losses in jurisdictions where no tax benefit was available. The first-half rate contributed to the reported loss.
- Masco was in compliance with credit covenants and had no borrowings under its credit agreement at June 30. Covenant-based additional borrowing capacity was up to $987, subject to availability. Nearly all $108 of principal-at-maturity zero-coupon notes puttable in July 2011 were tendered for cash repurchase after quarter-end.
- The company described ongoing insulation-installation antitrust litigation, including a certified class action. It was defending the matter and said potential liability could not be reliably estimated; an adverse outcome could be material. No material changes to previously disclosed risk factors were reported.
- Cash held by foreign subsidiaries was $529; repatriation for U.S. use could incur additional U.S. income or foreign withholding taxes. Management said cash, operating cash flow, and, if needed, borrowing and capital-market access were sufficient for working capital and investment needs.
Key facts for investors to verify
- Whether operating performance and cash conversion improve, given weaker sales, declining margins, and negative first-half operating cash flow.
- How much of reported earnings depends on investment gains, and the durability of results excluding those gains and unusual charges.
- Cash requirements and debt effects of the July 2011 note repurchase, and continued covenant compliance and credit availability.
- Progress against the $65 rationalization-charge and $190 capital-expenditure expectations, including any additional restructuring costs.
- Developments in the antitrust litigation and any resulting financial exposure.