Masco Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012, compared with Q1 2011. Unless noted otherwise, financial amounts are in millions of dollars. Masco operates across Cabinets and Related Products, Plumbing Products, Installation and Other Services, Decorative Architectural Products, and Other Specialty Products.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $1,875 | $1,753 |
| Gross profit / gross margin | $485 / 25.9% | $425 / 24.2% |
| SG&A / percent of sales | $383 / 20.4% | $399 / 22.8% |
| Operating profit / reported operating margin | $102 / 5.4% | $26 / 1.5% |
| Continuing-operations income (loss) attributable to Masco | $38 | $(41) |
| Net income (loss) attributable to Masco | $33 | $(46) |
| Diluted EPS | $0.09 | $(0.13) |
| Net cash used in operating activities | $(167) | $(160) |
- Revenue rose 7% as reported and 8% excluding acquisitions and currency translation. North America sales increased 9%; international sales increased 1% as reported and 5% in local currencies.
- Sales increased in Plumbing Products (5%), Installation and Other Services (18%), and Decorative Architectural Products (16%). Cabinets and Related Products fell 3%, and Other Specialty Products fell 2%.
- Operating improvement reflected higher volume, a more favorable relationship between selling prices and commodity costs, lower SG&A, and reduced rationalization charges. Q1 rationalization and other initiative charges were $12, versus $32 in Q1 2011.
- Other income, net included $16 of gains from private-equity fund distributions in 2012; Q1 2011 included $14 from the sale of TriMas shares and $3 from private-equity distributions. Q1 2012 also included a $21 state income-tax benefit related to uncertain tax positions; reported income-tax expense was $4 on $53 of pretax continuing income.
Cash, liquidity, and debt
- Cash and cash investments were $1,788 at March 31, 2012, up from $1,656 at year-end 2011. The filing says $548 was held in foreign subsidiaries and repatriation could result in additional taxes.
- Net operating cash use was $167, compared with $160 in Q1 2011, reflecting the seasonal increase in receivables and inventories. Financing provided $290, mainly from the new notes; investing used $2.
- Current assets were $3,901 and current liabilities $2,378; the company reported a 1.6-to-1 current ratio. Notes payable were $754 and long-term debt $3,622 at quarter-end.
- Masco issued $400 of 5.95% senior notes due 2022 in March and repurchased $46 of 5.875% notes due July 2012. The transactions anticipated retirement of $745 of 5.875% notes due July 2012. Including swap amortization, the new notes’ effective interest rate is approximately 6.5%.
- The company reported compliance with its credit-agreement covenants, no borrowings under the agreement, and up to $783 of additional borrowing capacity subject to availability and agreement terms.
Outlook, risks, and contingencies
- Management was “cautiously optimistic” about 2012, expected the business to improve even in a flat housing market, and said it believed Masco would outperform as housing recovered. It cited long-term positive fundamentals for new construction and home improvement, while noting that outcomes remain uncertain.
- Management estimated full-year 2012 rationalization charges of approximately $20. It said additional charges, including severance, plant-closure costs, or asset impairments, could arise as it evaluates businesses and market conditions.
- Key stated risks include dependence on new-home construction and home improvement, key customers, raw-material cost and availability, shifts in consumer preferences and purchasing practices, and execution of cost-saving initiatives.
- A class action antitrust case involving insulation installation practices was scheduled for trial in July 2012. Masco disputed the allegations but said it could not reliably estimate potential liability and could not assure a favorable outcome or that an adverse liability would not be material.
- Management said cash, operating cash flows, and, if needed, bank borrowing and future capital-market activity should be sufficient for working-capital and investment needs. This expectation is subject to business and market conditions.
Most important facts for investors to verify
- Whether Q1’s sales and margin improvement persists, particularly in the housing-sensitive cabinet and installation businesses and against commodity-cost changes.
- The timing and funding of the planned $745 million July 2012 debt retirement, and the effect of the refinancing and swap-loss amortization on interest expense and liquidity.
- Whether seasonal working-capital outflows reverse and operating cash flow improves over the rest of the year.
- The outcome and potential exposure from the Columbus Drywall antitrust litigation, including the scheduled July 2012 trial.
- Whether the $21 million state tax benefit and anticipated possible $6 million reduction in uncertain-tax-position liabilities affect comparability of future tax results.
- Whether full-year rationalization charges remain near management’s approximately $20 million estimate, and whether additional restructuring or impairment charges arise.