Masco Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; compared with the corresponding 2009 periods. Dollar amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $2,048 | $2,013 | $3,900 | $3,810 |
| Gross profit | $546 | $543 | $1,038 | $956 |
| Operating profit | $119 | $116 | $197 | $114 |
| Income (loss) from continuing operations attributable to Masco | $3 | $67 | $(4) | $(18) |
| Net income (loss) attributable to Masco | $3 | $55 | $(4) | $(26) |
| Diluted continuing-operations EPS | $0.01 | $0.19 | $(0.02) | $(0.06) |
| Gross margin | 26.7% | 27.0% | 26.6% | 25.1% |
| Reported operating margin | 5.8% | 5.8% | 5.1% | 3.0% |
Q2 sales rose 2%; operating profit increased slightly, but income attributable to Masco fell sharply, principally reflecting higher interest expense and a $33 million financial-investment impairment. First-half sales rose 2% and operating profit increased to $197 million, while Masco still reported a $4 million attributable loss. First-half 2009 included an $8 million defined-benefit curtailment charge; 2009 discontinued operations also contributed losses.
Cash flow, six months: Net cash from operating activities was $67 million, versus $110 million in 2009; investing used $67 million, including $62 million of capital expenditures; financing provided $12 million. Cash and cash investments decreased $29 million to $1.384 billion, including a $41 million adverse exchange-rate effect. Seasonal increases in receivables and inventories affected operating cash flow.
Liquidity and debt: Current assets were $3.678 billion and current liabilities $1.618 billion at June 30; the current ratio was 2.3, versus 1.9 at year-end 2009. Notes payable were $66 million and long-term debt $4.038 billion. The company 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. A new $1.25 billion revolving credit facility matures January 2014; no borrowings were outstanding at quarter-end. Masco reported covenant compliance and up to $1.2 billion of additional borrowing capacity, subject to availability.
Material changes and operating drivers
- Q2 segment sales: Plumbing Products increased 8% to $682 million; Cabinets and Related Products fell 5% to $400 million; Installation and Other Services declined 1% to $309 million; Decorative Architectural Products was flat at $505 million; Other Specialty Products rose 4% to $152 million.
- First-half sales growth was strongest in Plumbing Products (+11%) and International operations (+9%); Installation and Other Services declined 7%. Cabinet sales were lower in both periods, primarily due to lower volumes.
- Management cited cost savings and rationalization benefits, partly offset by a less favorable selling-price/commodity-cost relationship. Rationalization and related initiative costs were $51 million in Q2 and $65 million in the first half, compared with $22 million and $46 million, respectively, in 2009.
- Interest expense increased $10 million in Q2 and $12 million in the first half, primarily due to the 2020 note issuance and the premium on the 2012-note repurchase.
Outlook, risks, and unusual items
- Masco lowered its 2010 housing-starts expectation to 575,000–625,000 units, from 600,000–700,000; 2009 starts were 554,000. Management remained concerned about foreclosures and access to financing, and expected repair-and-remodel spending to be challenging in the second half, with big-ticket purchases deferred.
- Masco Cabinetry discontinued ready-to-assemble and other non-core assembled cabinet lines, which had approximately $200 million of 2009 sales. Two facilities are expected to close in the first half of 2011. Expected pre-tax closure charges are approximately $115 million, including about $90 million principally non-cash and $25 million cash; combined with approximately $40 million of integration charges, expected charges related to the cabinet integration total about $155 million. A potential product-line sale could change charge timing. The company anticipated approximately $155 million of total-company rationalization charges in 2010.
- The $33 million first-half financial-investment impairment included $28 million for Asahi Tec preferred stock and $5 million for private and private-equity investments. Following a change in conversion terms, the Asahi Tec preferred stock became mandatorily convertible by February 28, 2011; Masco also reversed a previously recorded $23 million unrealized gain from accumulated other comprehensive income.
- Substantially all domestic qualified and non-qualified defined-benefit plans froze future benefit accruals effective January 1, 2010. Pension assets remain exposed to market, interest-rate, and investment risks.
- Masco is defending U.S. insulation-related antitrust litigation, including a class certified in 2009 covering 377 contractors; the company said potential liability could not be reliably estimated. It received complete immunity in the reported Belgian and European Commission competition investigations after reporting and cooperating.
- Uncertain-tax-position liabilities, including interest and penalties, increased $8 million in the first half; the company said they could decrease by approximately $12 million within 12 months from audit resolutions and statute expirations.
- Management said cash, operating cash flow, and, if needed, borrowing and capital-market access were expected to fund working-capital and investment needs. Forward-looking expectations remain subject to housing, economic, credit, commodity, currency, and other risks.
Important facts for investors to verify
- Whether housing starts and repair-and-remodel demand track the revised outlook, and how segment volumes and pricing develop.
- Progress, timing, cash impact, and final cost of the cabinet product discontinuation, plant closures, and broader rationalization program.
- Ability to generate operating cash while seasonal working-capital needs persist, and continued compliance with credit-facility covenants.
- Further changes in investment valuations, especially the Asahi Tec conversion and private-investment exposures.
- Developments in the U.S. antitrust cases and any resulting financial or operational consequences.