Masco Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Comparisons are with Q1 2009 unless otherwise noted. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial performance and position
| Metric | Q1 2010 | Q1 2009 / prior date |
|---|---|---|
| Net sales | $1,852 | $1,797 |
| Gross profit / gross margin | $492 / 26.6% | $413 / 23.0% |
| Operating profit (loss) / reported margin | $78 / 4.2% | $(2) / (0.1)% |
| Income (loss) from continuing operations attributable to Masco | $(7) | $(85) |
| Diluted loss per share from continuing operations | $(0.02) | $(0.24) |
| Net cash from (used for) operating activities | $(120) | $(48) |
| Cash and cash investments, March 31 | $1,378 | $1,413 at Dec. 31, 2009 |
| Current assets / current liabilities | $3,640 / $1,516 | $3,451 / $1,781 at Dec. 31, 2009 |
| Notes payable plus long-term debt | $4,166 | $3,968 at Dec. 31, 2009 |
Sales increased 3% as reported and 1% excluding currency translation. Operating cash use reflected seasonal increases in receivables and inventory. Financing provided $123 million, including $494 million net proceeds from a notes issuance, offset in part by $300 million of note repayments, $27 million of dividends and $45 million of share repurchases. Investing used $28 million, including $26 million of capital expenditures. The company reported a 2.4:1 current ratio, compared with 1.9:1 at year-end.
Material changes and management commentary
- Plumbing Products sales rose 14% to $663 million and operating profit increased to $84 million from $35 million. Decorative Architectural Products sales were $389 million and operating profit was $87 million, versus $386 million and $75 million.
- Installation and Other Services sales declined 14% to $273 million; its operating loss widened to $42 million from $36 million, primarily reflecting weak new-home construction, lower volume and pricing.
- North American sales were approximately flat; international sales increased 16% reported, including a 7% benefit from currency translation. Management cited improved volume, product mix, pricing relative to commodity costs, and cost-reduction initiatives as factors supporting margins.
- Q1 operating profit included $14 million of rationalization and other initiative costs, versus $24 million in Q1 2009. Management raised expected full-year 2010 rationalization charges to approximately $140 million from the previously announced $70 million.
- Q1 effective tax rate was 82%, primarily due to a $9 million increase in the liability for uncertain tax positions. Excluding that change, management estimated the rate at approximately 41%.
Debt, liquidity, risks and outlook
- Masco issued $500 million of 7.125% senior notes due March 2020 and retired $300 million of floating-rate notes at maturity. It reported compliance with its revolving credit facility covenants, approximately $1.2 billion of additional borrowing capacity, and net worth $900 million above the applicable minimum.
- Management said available cash, operating cash flows and, if needed, bank borrowing and future financing activities were sufficient for working capital and investment needs. Operating cash flow was negative in the quarter, largely attributed to seasonal working-capital needs.
- In late April, Masco Cabinetry decided to discontinue product lines with approximately $200 million of 2009 annual sales and expects to close two related facilities in the first half of 2011. It anticipates approximately $115 million of pre-tax charges, including $90 million of principally non-cash charges and $25 million of other cash charges, mainly over the next 15 months. These actions, together with previously announced integration costs, are expected to bring Cabinetry integration charges to approximately $155 million.
- Management expected modest improvement in 2010 business conditions, housing starts of 600,000–700,000 versus 554,000 in 2009, and modest improvement in repair-and-remodel spending. It cautioned that unemployment, foreclosures, credit access and home prices remained concerns and that consumers could continue deferring big-ticket purchases. No earnings-per-share guidance was provided.
- Contingencies include pending U.S. insulation antitrust class litigation and European antitrust investigations. The company is defending the U.S. cases, cannot reliably estimate potential liability, and states an adverse outcome could be material. It believes European investigation exposure will not result in material liability.
Important facts for investors to verify
- Whether sales, margins and operating cash flow improve beyond the quarter, particularly as seasonal working-capital balances unwind.
- Actual timing, cash versus non-cash composition, and total impact of the announced Cabinetry closures and rationalization charges.
- Debt levels, interest costs and continued compliance with credit-facility covenants and borrowing conditions.
- Resolution of uncertain tax positions and the antitrust matters, including any material change in estimated exposure.
- Whether housing starts and repair-and-remodel demand meet management’s outlook assumptions; the filing identifies these as uncertain forward-looking expectations.