Masco Corporation (MAS) — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. Unaudited results; dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $2,094 | $2,511 | $5,923 | $7,560 |
| Gross profit | $570 | $648 | $1,531 | $1,968 |
| Operating profit | $138 | $194 | $251 | $570 |
| Income from continuing operations attributable to Masco | $51 | $35 | $32 | $132 |
| Net income attributable to Masco | $28 | $33 | $2 | $117 |
| Diluted EPS from continuing operations | $0.14 | $0.09 | $0.09 | $0.36 |
| Diluted net EPS | $0.08 | $0.09 | $0.00 | $0.31 |
- Sales fell 17% in Q3 and 22% year to date. Excluding acquisitions and currency effects, declines were 15% and 19%, respectively. Housing weakness and depressed home-improvement spending were principal factors.
- Gross margin was 27.2% in Q3 versus 25.8%; year-to-date margin was 25.8% versus 26.0%. Reported operating margin declined to 6.6% from 7.7% in Q3 and to 4.2% from 7.5% year to date.
- Q3 continuing income attributable to Masco improved, but nine-month continuing income fell substantially. Nine-month net income also included a $30 million discontinued-operations loss, versus a $15 million loss in 2008.
- Segment trends were mixed: Decorative Architectural Products sales rose 6% in Q3 and operating margin improved; Cabinets and Installation and Other Services recorded operating losses. Plumbing Products’ Q3 margin improved, while its year-to-date margin declined.
Cash flow, debt and liquidity
- Nine-month net cash from operating activities was $415, down from $517 in 2008. Capital expenditures were $70; investing activities used $74. Cash and cash investments increased to $1.199 billion from $1.028 billion at year-end 2008.
- Cash dividends paid were $139, and share repurchases were $11. The quarterly dividend was reduced to $0.075 per share from $0.235.
- At September 30, current liabilities were $1.859 billion, long-term debt $3.606 billion, and notes payable $369 million. Total current and long-term debt carrying value was approximately $4.0 billion. The current ratio was 1.9, versus 2.1 at year-end 2008.
- The amended revolving facility provides $1.25 billion of capacity; after $72 million of unused letters of credit, approximately $1.2 billion remained available. Masco reported compliance with covenants and net worth $1.1 billion above the required level.
Outlook, commentary and material items
- Management expected 2009 U.S. housing starts to decline 40% to approximately 550,000 units, with home-improvement spending remaining depressed near term. It expected challenging market conditions during the global recovery; no earnings or sales guidance was provided.
- Rationalization and other initiative costs were $67 million in the first nine months; management anticipated approximately $92 million for full-year 2009. The company closed or sold three manufacturing facilities and reduced headcount by 4,000 employees during the first nine months. Further programs may add costs.
- On July 31, Masco sold a European Plumbing Products business unit for $2 million cash and recognized a $22 million net loss, treated as discontinued operations.
- Masco recorded $10 million of non-cash impairment charges on private equity investments year to date. The company described these investments as largely illiquid and subject to valuation uncertainty.
- Substantially all domestic defined-benefit pension accruals are scheduled to freeze January 1, 2010. A $8 million curtailment charge was recorded; management expected 2009 domestic pension costs to be about $31 million, down from the original $45 million forecast.
- Pending legal matters include a certified class action alleging antitrust violations involving insulation installation practices and European governmental investigations into possible competition issues. Masco was unable to reliably estimate potential liability in the U.S. case.
- Management said available cash, operating cash flow and borrowing capacity should fund working capital and investment needs. It also cautioned that financial-market disruptions could affect the security or availability of cash investments. Disclosure controls were deemed effective; phased ERP deployments will modify some internal controls.
Most important facts for investors to verify
- Whether housing starts and home-improvement demand recover as management expected, and the resulting effects on sales and margins.
- Progress and remaining costs of rationalization plans, including whether expected full-year charges stay near $92 million.
- Cash generation, available revolver capacity and continued compliance with credit-facility covenants.
- Resolution and potential financial exposure from antitrust litigation and European investigations.
- Further losses, liquidity constraints or valuation changes in discontinued businesses and illiquid financial investments.
- Impact of the dividend reduction and pension freeze on capital allocation and future expenses.