Masco Corporation — 2010 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2010; fourth-quarter results are separately noted where material. Masco manufactures, distributes, and installs home improvement and building products across five segments. Approximately 78% of 2010 sales came from North America. The business remained exposed to depressed housing construction and remodeling markets.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $7.592 billion | $7.792 billion |
| Gross margin | 24.2% | 25.9% |
| GAAP operating profit (loss) | $(499) million | $55 million |
| Net loss attributable to Masco | $(1.043) billion | $(183) million |
| Diluted loss per share | $(3.00) | $(0.53) |
| Cash from operating activities | $465 million | $705 million |
| Cash and cash investments at year-end | $1.715 billion | $1.413 billion |
| Long-term debt at year-end | $4.032 billion | $3.604 billion |
| Working capital ratio | 2.3 to 1 | 1.9 to 1 |
- Sales declined 3% year over year; excluding currency effects, they declined 2%. Gross margin fell 1.7 percentage points, reflecting lower volume, higher depreciation associated with closures, and less favorable selling-price/commodity-cost relationships.
- Operating results included $721 million of goodwill and intangible-asset impairments, $208 million of rationalization and cost-reduction charges, and $34 million of financial-investment impairments. The $721 million impairment was primarily in Installation and Other Services. A separate $67 million long-lived-asset impairment related to a cabinet facility closure.
- Management reported 2010 operating margin of 5.7% excluding specified impairment and other items, compared with 5.4% in 2009; this is a non-GAAP measure and excludes costs detailed in the filing.
- Operating cash flow declined $240 million from 2009. Capital expenditures were $137 million, and cash increased by $302 million during the year. Dividends paid were $108 million; the declared dividend was $0.30 per share.
- Total debt was approximately $4.098 billion, including current debt. Debt as a percentage of total capitalization rose to 72% from 58%. The company reported no borrowings under its revolving credit facility at year-end.
Material changes versus the prior period
- The net loss attributable to Masco widened from $183 million in 2009 to $1.043 billion in 2010, driven substantially by impairment charges and a $371 million non-cash valuation allowance against U.S. federal deferred tax assets.
- Operating cash flow decreased from $705 million to $465 million. Cash nevertheless rose to $1.715 billion, supported in part by financing activity, including $494 million of net proceeds from a $500 million note issuance.
- Segment sales rose 5% in Plumbing Products and 2% in Other Specialty Products, but fell 13% in Cabinets and Related Products, 9% in Installation and Other Services, and 1% in Decorative Architectural Products.
- Segment operating results were especially weak in Installation and Other Services, with an $834 million loss including the $720 million goodwill and intangible impairment, and in Cabinets, with a $250 million loss.
Outlook, management commentary, and risks
- Management expected a challenging 2011, particularly in the first half, with a stronger second half. Weak new-home construction, lower big-ticket remodeling activity, and commodity-cost pressures had continued into 2011. Housing starts improved to 588,000 units in 2010, but management cautioned that recovery timing and strength remained uncertain.
- Management forecast approximately $230 million of 2011 capital expenditures and approximately $260 million of depreciation and amortization. It expected about $65 million of 2011 rationalization and other initiative costs, including approximately $35 million related to cabinet integration, product-line exits, and facility closures.
- The company combined its builder and retail cabinet operations as Masco Cabinetry and chose to exit product lines with approximately $200 million in 2009 annual sales. It planned to close two associated facilities in the first half of 2011. Further rationalizations could generate additional costs.
- Liquidity and covenant headroom were affected by losses and impairments. A February 2011 credit-agreement amendment, effective as of December 31, 2010, permitted specified 2010 non-cash charges totaling $986 million after tax and up to $350 million of future non-cash charges to be added back for the debt-to-capitalization covenant. Masco reported approximately $1 billion of borrowing capacity after the amendment.
- Debt maturities include $791 million of 5.875% notes due July 2012. Holders of the zero-coupon convertible notes could require cash repurchase of approximately $58 million in July 2011.
- The Home Depot accounted for approximately $2.0 billion, or 26%, of 2010 sales; Lowe’s was the second-largest customer and represented less than 10%. Customer concentration, competition, housing-market weakness, commodity prices, international currency exposure, supplier disruptions, environmental and product regulations, and litigation are identified risks.
- An active insulation-installation antitrust class action remained pending. Masco disputed the claims and said it could not reliably estimate potential liability; an adverse outcome could be material. The filing also identifies warranty, product-liability, and other ordinary-course claims.
- Management cited brand investment, product innovation, operational improvements, and the Masco Business System as strategic priorities. It expressed confidence in long-term market fundamentals but gave no quantified revenue or earnings guidance.
Most important facts for investors to verify
- How much of the 2010 loss reflects non-cash impairments and the deferred-tax valuation allowance, and whether future operating performance supports any reversal or further impairment.
- Whether operating cash flow can remain adequate as housing markets recover slowly, capital spending rises, and debt maturities approach.
- Progress against 2011 rationalization plans, expected costs, facility closures, and the ability to preserve capacity and market share.
- Compliance with credit-agreement covenants and the availability of the reported approximately $1 billion of borrowing capacity.
- Exposure to The Home Depot and the status and potential financial consequences of the insulation antitrust litigation.