Masco Corporation — Q1 2011 Form 10-Q
Business context and period: Quarter ended March 31, 2011; comparisons are with Q1 2010 unless noted. Masco reports five product and service segments, with operations primarily in North America and Europe. Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Net sales | $1,772 | $1,852; down 4% |
| Gross profit / margin | $425 / 24.0% | $492 / 26.6% |
| Operating profit / reported margin | $21 / 1.2% | $78 / 4.2% |
| Net income (loss), consolidated | $(34) | $4 |
| Net loss attributable to Masco | $(46); $(0.13) per diluted share | $(7); $(0.02) per diluted share |
| Cash from (used for) operating activities | $(160) | $(120) |
SG&A was $404 million versus $414 million. Interest expense was $63 million versus $58 million. Q1 2011 other income included a $17 million net gain from financial investments, including a $14 million TriMas stock sale gain and a $3 million private-equity distribution. The company recorded $13 million of income tax expense despite a pretax loss of $21 million, primarily due to valuation allowances and losses in jurisdictions providing no tax benefit.
At March 31, 2011, cash and cash investments were $1.505 billion, down from $1.715 billion at year-end 2010; current assets were $3.595 billion and current liabilities $1.626 billion, with a 2.2-to-1 current ratio. Long-term debt was $4.030 billion and notes payable $66 million. The company reported covenant compliance, no borrowings under its credit agreement, and up to $984 million of additional borrowing capacity subject to availability. Operating cash use reflected increases in receivables and inventories.
Changes versus the prior period
- Sales declined 4% overall: North America fell 7%, while international sales rose 4% as reported and 5% in local currencies.
- Cabinets and Related Products sales fell 24%, including planned product-line exits and lower cabinet volumes. Plumbing Products sales rose 7%. Installation and Other Services fell 7%; Decorative Architectural Products fell 4%; Other Specialty Products rose 2%.
- Operating profit declined to $21 million from $78 million. Gross margin fell 2.6 percentage points; management cited lower volume, less favorable pricing versus commodity costs, and increased rationalization costs.
- Operating cash use increased by $40 million year over year. Cash dividends were $27 million in each quarter; Q1 2011 share repurchases were $30 million versus $45 million in Q1 2010.
Outlook, commentary, risks and unusual items
- Management continued to expect the second half of 2011 to be stronger than the first, but tempered expectations amid modest job growth, higher energy costs, and reduced economic and housing-start forecasts. No specific sales or earnings forecast was provided.
- Management anticipated approximately $65 million of 2011 business-rationalization charges; Q1 included $32 million, compared with $14 million in Q1 2010. Further charges, including severance, closures, or impairments, remained possible.
- Expected 2011 capital expenditures were approximately $190 million, excluding potential acquisitions. Management said cash, operating cash flows, and available financing were sufficient for working capital and investment needs.
- Risks highlighted include dependence on housing and home improvement markets and key customers, raw-material costs and availability, consumer preferences, and execution of cost-saving initiatives. A pending insulation antitrust class action remained unresolved; Masco said it could not reliably estimate potential liability and that an adverse outcome could be material.
- $513 million of cash was held in foreign subsidiaries; repatriation could result in additional U.S. income or foreign withholding taxes. The company also disclosed $22 million of auction-rate securities valued using Level 3 inputs.
Important facts for investors to verify
- Whether weaker sales and margins—particularly in cabinets and North America—persist, and whether management’s second-half recovery expectation is realized.
- Actual rationalization charges versus the approximately $65 million full-year estimate, and progress and costs of the cabinet integration and other savings initiatives.
- Working-capital trends and operating cash generation, given $160 million of operating cash use in the quarter.
- Debt covenant headroom, funding needs, and any tax cost if foreign-held cash is repatriated.
- Developments in the insulation antitrust litigation and any change in the company’s ability to estimate exposure.