Masco Corporation — Q3 2010 Form 10-Q
Business context and reporting period. This unaudited report covers the three and nine months ended September 30, 2010, compared with the same periods in 2009. Masco sells building and home-improvement products and services across five segments. Unless noted otherwise, amounts are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,957 | $2,084 | $5,857 | $5,894 |
| Gross profit | $494 | $567 | $1,532 | $1,523 |
| Operating profit | $102 | $138 | $299 | $252 |
| Income from continuing operations | $7 | $63 | $23 | $60 |
| Net income (loss) attributable to Masco | $(5) | $28 | $(9) | $2 |
| Cash from operating activities | — | — | $236 | $415 |
Q3 gross margin was 25.2%, down from 27.2%; nine-month gross margin was 26.2%, up from 25.8%. Reported operating margin was 5.2% versus 6.6% in Q3, and 5.1% versus 4.3% for the nine-month period. Diluted loss per share attributable to Masco was $0.02 for Q3 and $0.03 for the nine months, versus earnings of $0.14 and $0.09, respectively, in 2009.
At September 30, cash and cash investments were $1.537 billion, compared with $1.413 billion at year-end 2009; current assets were $3.733 billion and current liabilities $1.558 billion. The company reported a current ratio of 2.4:1, up from 1.9:1 at December 31, 2009. Long-term debt was $4.036 billion and notes payable were $66 million, for reported debt of approximately $4.102 billion. Operating cash flow declined $179 million year over year. Capital expenditures were $88 million; net cash used in investing was $87 million and net cash used in financing was $16 million.
Material changes versus prior period
- Q3 sales fell 6%; nine-month sales fell 1%. Excluding currency translation and acquisitions, sales decreased 4% in Q3 and were flat for the nine months.
- Q3 operating profit declined to $102 million from $138 million, while nine-month operating profit rose to $299 million from $252 million. Nine-month results benefited from cost rationalization savings; Q3 was pressured by lower volume, pricing and commodity-cost relationships, and rationalization costs.
- Masco reported a loss attributable to the company in both 2010 periods, versus income in the comparable 2009 periods. The nine-month effective tax rate was 70%, versus 37% in 2009, reflecting lower pretax income and costs and losses that did not generate tax benefits in some jurisdictions.
- Operating cash flow decreased to $236 million from $415 million, including a $64 million inventory cash use compared with a $149 million source in 2009.
- Debt financing changed materially: Masco issued $500 million of 7.125% notes due 2020, retired $300 million of floating-rate notes at maturity, and repurchased $59 million of 5.875% notes due 2012. Interest expense rose $19 million for the nine months.
Outlook, commentary and risks
- Management expected 2010 U.S. housing starts of 575,000–625,000, compared with 554,000 in 2009. It cautioned that recovery in some markets was slower than previously expected, and that repair-and-remodel spending and big-ticket purchases would remain challenged near term.
- Management anticipated approximately $130 million of company-wide rationalization charges for full-year 2010. Cabinetry actions include discontinuing product lines that had about $200 million of 2009 annual sales and closing two facilities in the first half of 2011. Expected related charges were approximately $119 million, including $99 million principally non-cash and $20 million cash; $48 million of accelerated depreciation and inventory reserves had been incurred by September 30.
- Masco stated that cash, operating cash flow and, if needed, bank borrowing and future financing activity should fund working capital and investment needs. Its $1.25 billion revolving credit facility matures January 2014; no borrowings were outstanding and the company reported covenant compliance at quarter-end. The agreement sets a maximum debt-to-total-capitalization ratio of 65% and minimum interest-coverage requirements.
- A federal antitrust class action concerning insulation installation practices remained pending. Masco said it was vigorously defending the case, but could not reliably estimate potential liability; an adverse outcome could be material. Other ordinary-course claims and contingencies also exist.
- Unusual items included $33 million of nine-month financial-investment impairments, principally a $28 million Asahi Tec preferred-stock impairment, and a $3 million Q3 loss on sale of Asahi Tec common stock. The filing also reports foreign-exchange and commodity-hedging effects.
- Management identified risks to its outlook including foreclosure activity, financing access, unemployment, consumer confidence, credit availability and home prices. The filing refers investors to the 2009 Form 10-K for the full risk-factor discussion.
Important facts for investors to verify
- Whether sales and margins stabilize, particularly in Cabinets and Related Products and Installation and Other Services, and whether international growth offsets North American weakness.
- Progress, cash costs and execution of the cabinet product exits, facility closures and broader rationalization program, including whether additional charges arise.
- Operating cash generation, working-capital needs, debt levels and compliance with the credit agreement’s financial covenants.
- Resolution and potential financial exposure of the pending insulation antitrust litigation, for which the company could not estimate a reliable liability.
- Assumptions behind the housing-start outlook and the unusually high 2010 effective tax rate, including whether currently non-benefited losses or uncertain tax positions change.