Masco Corporation — FY2011 Form 10-K
Business context and reporting period. Masco manufactures, distributes and installs home-improvement and building products across five segments. This 10-K covers the fiscal year ended December 31, 2011; quarterly figures below are for the fourth quarter. About 76% of annual sales came from North America. Management described housing and repair-and-remodel markets as persistently weak.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $7.467 billion | $7.486 billion |
| Gross margin | 23.9% | 24.5% |
| GAAP operating loss | $295 million | $463 million |
| Operating margin excluding impairment, rationalization and specified other charges | 4.4% | 5.9% |
| Loss from continuing operations attributable to Masco | $465 million; $1.34 per share | $1.022 billion; $2.94 per share |
| Net loss attributable to Masco | $575 million; $1.66 per share | $1.043 billion; $3.00 per share |
| Cash from operating activities | $239 million | $465 million |
| Capital expenditures | $151 million | $137 million |
| Cash and cash investments at year-end | $1.656 billion | $1.715 billion |
| Total debt at year-end | $4.025 billion | $4.098 billion |
| Debt as a share of total capitalization | 84% | 72% |
| Working capital ratio | 1.5 to 1 | 2.3 to 1 |
FY2011 revenue was effectively flat as reported; excluding currency effects, sales declined 1%. Gross margin contracted as lower volume and higher commodity costs outpaced pricing and cost-saving benefits. The $295 million reported operating loss included $494 million of goodwill and intangible-asset impairments and $121 million of rationalization costs. The filing reports $199 million of operating profit excluding impairment charges and specified other items.
Fourth-quarter sales were $1.738 billion, versus $1.716 billion a year earlier. Q4 loss from continuing operations was $494 million, including $335 million after-tax impairment charges; net loss was $573 million. FY2011 included $110 million of loss from discontinued operations, including $86 million of asset impairment.
Material changes and segment performance
- Plumbing Products: sales rose 8% to $2.913 billion; segment operating profit was $322 million versus $331 million. Price and volume gains were offset by commodity costs and mix.
- Cabinets and Related Products: sales fell 16% to $1.231 billion; segment operating loss was $206 million. Weak demand, promotional pricing and product-line exits weighed on results.
- Installation and Other Services: sales rose 3% to $1.077 billion; segment operating loss improved to $79 million from $798 million, which included a large prior-year impairment. Distribution, retrofit and commercial sales helped offset weaker new-home installation volume.
- Decorative Architectural Products: sales declined 1% to $1.670 billion and segment profit fell to $196 million from $345 million, reflecting lower paint and hardware volume, commodity pressure and impairment.
- Other Specialty Products: sales declined 3% to $576 million; segment operating loss was $401 million, including $374 million of impairment charges, principally for North American windows and doors.
International sales rose 8% to $1.798 billion, while North American sales declined 3% to $5.669 billion. The largest customer, The Home Depot, accounted for approximately $1.984 billion, or 27% of consolidated sales.
Outlook, risks and unusual items
- Management was cautiously optimistic about 2012 and said its initiatives should support improved results even in a flat housing market; it emphasized that timing and strength of a housing recovery remain uncertain.
- For 2012, management expected capital expenditures of about $180 million and rationalization costs of about $20 million. It anticipated pension contributions of approximately $60–$70 million.
- Masco had $791 million of 5.875% notes due July 2012. Management planned to refinance a portion and redeem the remainder with cash. A February 2012 credit-agreement amendment increased available borrowing capacity at year-end, on a pro forma basis, to as much as $630 million; the company reported no revolver borrowings and covenant compliance at December 31, 2011.
- U.S. deferred-tax-asset valuation allowances increased by $89 million in 2011; total valuation allowance was $688 million at year-end. Sustained U.S. losses could constrain realization of tax assets.
- Key risks include prolonged housing weakness, commodity-cost volatility and difficulty passing costs through, customer and channel concentration, competition, international and currency exposure, and potential further impairments. A certified antitrust class action involving insulation contractors was scheduled for trial in July 2012; Masco said potential liability could not then be reliably estimated.
- Other notable items: $494 million of continuing-operations impairment charges; $86 million of discontinued-operations asset impairment; $41 million gain from TriMas stock sales and $32 million of private-equity fund distributions; and an underfunded qualified pension position of $439 million.
Most important facts for investors to verify
- Whether operating cash flow can recover from $239 million and support dividends, investment and debt maturities.
- Progress on refinancing or repaying the July 2012 notes, and compliance with amended credit-facility covenants.
- Whether housing demand and segment volumes improve, particularly in cabinets, installation services and windows.
- Whether pricing and cost actions can offset commodity inflation and restore margins.
- Potential additional impairments, realization of deferred tax assets, and outcomes or costs from litigation and divestitures.
- Fourth-quarter and full-year loss figures: the filing’s quarterly table reports Q4 continuing-operations loss of $494 million, while the annual statements report FY continuing-operations loss attributable to Masco of $465 million; confirm attribution and quarterly-to-annual presentation when comparing periods.