Masco Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. Amounts are in millions of dollars, except per-share data and percentages.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $2,004 | $1,998 | $3,879 | $3,751 |
| Gross profit | $525 | $532 | $1,010 | $957 |
| Gross margin | 26.2% | 26.6% | 26.0% | 25.5% |
| Operating profit | $47 | $96 | $149 | $122 |
| Net income (loss) attributable to Masco | $(75) | $8 | $(42) | $(38) |
| Diluted earnings (loss) per share | $(0.22) | $0.02 | $(0.12) | $(0.11) |
Q2 SG&A was $403 (20.1% of sales), versus $431 (21.6%) a year earlier. Reported operating margin was 2.3% for Q2 and 3.8% for the first half. The $75 litigation-settlement charge materially reduced Q2 and first-half results. For the first half, continuing-operations loss attributable to Masco was $19; discontinued operations added a $23 loss.
Six-month operating cash flow was $(4), compared with $(31) in 2011. Cash and cash investments ended June at $1,853, up from $1,656 at year-end. Capital expenditures were $52. Financing cash flow was $223, including $396 of net note proceeds; investing cash flow was $(15). Management attributed first-half operating cash use mainly to seasonal increases in receivables and inventory.
At June 30, current assets were $3,990 and current liabilities $2,551 (current ratio 1.6). Notes payable were $751 and long-term debt $3,622, for total debt of approximately $4.4 billion. Equity was $619. The company reported covenant compliance and no borrowings under its credit agreement; stated additional borrowing capacity was up to $561, subject to availability. On July 16, 2012, it retired $745 of 5.875% notes; afterward, stated available borrowing capacity was approximately $900, subject to availability.
Changes and operating drivers
- Sales were flat year over year in Q2 and up 3% for the half; excluding acquisitions and currency translation, management reported increases of 2% and 5%, respectively.
- North American sales rose 3% in Q2 and 6% in the half. International sales fell 9% and 4% as reported, with currency translation a significant headwind; local-currency sales were flat and up 3%, respectively.
- For the first half, Installation and Other Services sales increased 14% and Decorative Architectural Products increased 10%; Cabinets and Related Products declined 4%. Plumbing Products rose 1%.
- First-half operating profit improved despite the litigation charge. Management cited lower rationalization costs, cost savings and improved pricing-versus-commodity costs; Q2 gross margin nevertheless declined year over year.
- Other income was lower: 2011 included gains on the sale of TriMas stock of $27 in Q2 and $41 for the half; 2012 included private-equity distributions of $2 and $18, respectively, partly offset by a $2 impairment.
Outlook, risks and unusual items
- Management said it expected the second half of 2012 to be less robust than previously anticipated. It expected full-year rationalization charges of approximately $30 and said additional charges could arise as it evaluates businesses and market conditions.
- Management cited positive long-term fundamentals for new-home construction and home improvement, and expected its cost, brand and operational initiatives to support improved 2012 results even in a flat housing market. These statements are forward-looking, not assurances of performance.
- The $75 Columbus Drywall antitrust settlement was recorded in Q2, subject to court approval; Masco denied wrongdoing. The Wilson and Von Der Werth cases remained unresolved, and potential liability could not be reliably estimated.
- The first-half effective tax rate was 100%, unusually high because certain losses, including the settlement charge, provided no tax benefit and the company increased its valuation allowance. The period also included a $21 state tax benefit tied primarily to uncertain-tax-position resolutions.
- Risks identified include exposure to housing and home-improvement demand, key customers, raw-material costs and availability, international economic uncertainty, changing consumer preferences, and execution of cost-saving initiatives. Foreign-held cash could incur additional tax if repatriated.
Key facts for investors to verify
- Settlement approval, payment timing and any developments in the remaining insulation-related litigation.
- Completion and financing impact of the July 16 debt retirement, including actual borrowing availability and covenant headroom.
- Whether operating cash flow improves as seasonal working-capital balances unwind, and whether receivables and inventory remain controlled.
- Progress against the approximately $30 full-year rationalization-charge estimate and the outlook for housing, segment margins and international sales.
- Tax-rate normalization, valuation-allowance changes and possible reductions in uncertain-tax-position liabilities.