Masco Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial statement amounts are generally in millions, except per-share data.
Business context
Masco sells home improvement and building products and services through five segments: Cabinets and Related Products; Plumbing Products; Installation and Other Services; Decorative Architectural Products; and Other Specialty Products. The filing describes continued weakness in U.S. housing and home improvement markets, with international sales growth partly offsetting North American declines.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $2,006 | $1,957 | $5,800 | $5,857 |
| Gross profit | $495 | $494 | $1,452 | $1,532 |
| Gross margin | 24.7% | 25.2% | 25.0% | 26.2% |
| Operating profit | $102 | $102 | $214 | $299 |
| Net income (loss) attributable to Masco | $36 | $(5) | $(2) | $(9) |
| Diluted earnings (loss) per share | $0.10 | $(0.02) | $(0.01) | $(0.03) |
- Q3 sales rose 3%; excluding currency effects, sales were flat. Nine-month sales fell 1%, or 3% excluding currency. International sales benefited from a weaker U.S. dollar.
- Q3 consolidated net income was $49 million, of which $13 million was attributable to noncontrolling interests. Nine-month consolidated net income was $35 million, with $37 million attributable to noncontrolling interests, resulting in a $2 million loss attributable to Masco.
- Cash provided by operations before working-capital changes was $210 million for the first nine months, versus $333 million in 2010. Net cash from operating activities was $95 million versus $236 million, reflecting higher cash use for receivables and inventories.
- Capital expenditures were $106 million. Net cash used in investing activities was $9 million; net cash used in financing activities was $190 million. Cash and cash investments were $1.61 billion at September 30, down from $1.72 billion at year-end 2010.
- Total debt was approximately $4.03 billion ($806 million notes payable and $3.22 billion long-term debt), compared with approximately $4.10 billion at year-end 2010. Current liabilities rose substantially, primarily because $791 million of 5.875% notes due July 2012 were reclassified as current. The current ratio was 1.5, versus 2.3 at year-end.
- Masco reported compliance with credit agreement covenants and no borrowings under the agreement. It said it had up to $979 million of additional borrowing capacity, subject to availability and covenant conditions.
Material changes versus the prior comparable period
- Q3 sales growth was led by Plumbing Products (+12%) and Installation and Other Services (+8%); Cabinets fell 14%. For the nine months, Plumbing rose 10%, while Cabinets declined 19% and total sales slipped 1%.
- Q3 operating profit was unchanged at $102 million, but nine-month operating profit fell to $214 million from $299 million. Nine-month segment operating profit declined in Decorative Architectural Products and Other Specialty Products; Cabinets and Installation and Other Services remained loss-making.
- Gross margins contracted in both comparison periods. Management cited a less favorable selling-price/commodity-cost relationship, increased litigation-settlement expense, and growth-initiative spending.
- Attributable earnings improved year over year, but reported results included substantial financial-investment gains: $41 million from the TriMas stock sale and $28 million from private-equity fund distributions in the first nine months of 2011. The prior-year nine-month period included $33 million of financial-investment impairment charges.
- Operating profit included rationalization and other initiative costs of $13 million in Q3 and $60 million for the first nine months of 2011, versus $39 million and $104 million, respectively, in 2010.
Outlook, management commentary, risks and contingencies
- Management expected 2011 housing starts to be flat with 2010, citing foreclosure activity, limited credit availability, declining home values, and weak consumer confidence. It expressed longer-term optimism about home construction and home improvement fundamentals.
- Management forecast approximately $100 million of 2011 company-wide rationalization charges, including an estimated $30 million for announced Milgard plant closures. It cautioned that further rationalization costs, including severance, closures, or impairments, could arise.
- Masco planned to dispose of commercial drywall installation, millwork, and framing businesses deemed non-core. Those businesses had approximately $100 million of combined 2010 sales and $10 million of operating losses, excluding impairment charges. Proceeds are expected to be below net book value; completion was expected within 12 months. A $7 million pretax intangible-asset impairment was recorded in Q3; no goodwill impairment was recorded.
- Masco planned to refinance part of the $791 million of 2012-maturity notes, using interest-rate swaps covering $400 million at an average fixed rate of 2.8%, and expected to redeem the remainder for cash. The filing does not provide a completed refinancing plan or final terms.
- Management expected 2011 capital expenditures of approximately $170 million, excluding potential acquisitions, and stated that cash, operating cash flow, and available borrowing or capital-market activity should fund working-capital and investment needs.
- The company is defending an antitrust class action involving insulation installation practices. Management stated it could not reliably estimate potential liability; an adverse outcome could be material. The filing reported no material changes to previously disclosed legal proceedings or risk factors.
- Other disclosed exposures include commodity costs, dependence on housing and home-improvement markets and key customers, consumer preferences, and the ability to achieve cost savings. Of cash held at September 30, $544 million was in foreign subsidiaries; repatriation could trigger additional taxes.
- The nine-month effective tax rate was 64%, primarily due to valuation allowances on net operating losses and losses in jurisdictions providing no tax benefit. The company said uncertain-tax-position liabilities could possibly decline by about $6 million within 12 months.
Most important facts for investors to verify
- Progress and funding terms for refinancing the $791 million of notes due July 2012, including the planned $400 million swap-hedged issuance.
- Whether operating cash flow improves, given the decline to $95 million and working-capital cash use during the first nine months.
- Performance and margin recovery across segments, particularly continued losses in Cabinets and Installation and Other Services and declining nine-month operating profit.
- Actual costs and savings from the rationalization program, including the announced Milgard closures and any additional charges.
- Disposition timing, proceeds, and any further impairments for the commercial businesses; the filing expects proceeds below book value.
- Outcome and potential financial impact of the antitrust litigation, which Masco cannot reliably estimate.
- How much reported earnings depend on investment gains and whether core operating results improve as housing and consumer demand evolve.