Masco Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unless stated otherwise, amounts are in millions of dollars. Comparisons are with the corresponding 2011 periods.
Business context
Masco operates across Cabinets and Related Products, Plumbing Products, Installation and Other Services, Decorative Architectural Products, and Other Specialty Products. Management described strategic priorities as leveraging brands, reducing costs, improving the Installation and Cabinets businesses, and strengthening the balance sheet.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,976 | $1,978 | $5,855 | $5,729 |
| Gross profit | $500 | $495 | $1,510 | $1,452 |
| Operating profit | $101 | $114 | $250 | $236 |
| Income from continuing operations attributable to Masco | $22 | $56 | $3 | $29 |
| Net income (loss) attributable to Masco | $15 | $36 | $(27) | $(2) |
| Diluted EPS | $0.04 | $0.10 | $(0.08) | $(0.01) |
- Gross margin was 25.3% in Q3 and 25.8% for the nine months, versus 25.0% and 25.3%, respectively, in 2011. Reported operating margin was 5.1% and 4.3%, versus 5.8% and 4.1%.
- Sales were flat in Q3 and rose 2% for the nine months. Excluding acquisitions and currency translation, sales increased 2% and 4%, respectively. North American sales increased 4% in Q3 and 5% year to date; international sales fell 12% and 7%, affected by currency and weaker local-currency sales.
- For the nine months, segment sales increased 12% in Installation and Other Services and 8% in Decorative Architectural Products; they declined 5% in Cabinets, 1% in Plumbing, and 3% in Other Specialty Products.
- Operating cash flow was $90, versus $95 in the prior-year period. Capital expenditures were $80. Investing activities used $42 and financing activities used $548. Cash and cash investments declined to $1,166 at September 30 from $1,656 at year-end 2011.
Balance sheet, debt and liquidity
- Current assets were $3,255 and current liabilities $1,967; the current ratio was 1.7, compared with 1.5 at December 31, 2011.
- Notes payable were $207 and long-term debt $3,422 at quarter-end. The carrying value of short- and long-term debt was approximately $3.6 billion; estimated market value was approximately $3.9 billion.
- Masco issued $400 of 5.95% notes due 2022 in March and retired $745 of 5.875% notes at scheduled maturity in July, after repurchasing $46 of those notes in January. The new notes’ effective rate, including swap amortization, is approximately 6.5%.
- The company reported covenant compliance, no borrowings under its credit agreement, and up to $1 billion of additional borrowing capacity subject to availability and agreement terms. Cash held in foreign subsidiaries was $519; repatriation could trigger additional taxes.
Material changes and unusual items
- Nine-month litigation settlement charges were $74, compared with $6 in 2011. The amount principally reflects a $75 settlement of the Columbus Drywall antitrust case, recorded in Q2; court approval followed on October 26, 2012. Masco denied wrongdoing. The Wilson case was settled for an amount described as not material. A related consumer class action remained pending; management did not believe its outcome would be material, while noting no assurance of success.
- Q3 included a $12 increase in expected warranty costs in Other Specialty Products. The warranty liability was $116 at September 30, up from $102 at year-end.
- Business-rationalization costs included in operating profit were $28 in Q3 and $47 for the nine months, versus $13 and $60 in 2011. The company raised its expected full-year 2012 rationalization charges to approximately $65 from its prior estimate of $30, citing additional plant closures and headcount reductions.
- The nine-month effective tax rate was 61%, primarily due to losses in certain jurisdictions receiving no tax benefit and a higher valuation allowance, partly offset by a $21 state tax benefit related to uncertain tax positions. Discontinued operations produced losses of $30 for the nine months, including impairment and disposal charges.
- Other income was lower than in 2011: nine-month 2012 included $20 of private-equity distributions, while 2011 included $41 from the sale of TriMas shares as well as $28 of private-equity distributions.
Outlook, management commentary and risks
Masco expressed confidence in long-term prospects for new-home construction and home improvement, citing improved housing conditions, affordability, and demographics. It provided no specific revenue or earnings forecast in the supplied filing text. Management cautioned that results depend on housing and home-improvement demand, key customers, raw-material costs and availability, international economic conditions, consumer preferences, and execution of cost-saving initiatives. Further rationalization charges, including severance, closures, or asset impairments, remained possible. The company stated that cash, operating cash flow, and potential borrowing and capital-market access were sufficient for working capital and investment needs.
Management reported disclosure controls were effective as of September 30, 2012 and no material change in internal control over financial reporting during the quarter. The filing stated there were no material changes to the risk factors in the 2011 Form 10-K.
Important facts for investors to verify
- Cash conversion and working-capital movements, particularly the substantial receivables-related cash outflow and the decline in cash balances.
- Cash settlement timing and final implications of the $75 Columbus Drywall settlement, plus developments in the pending related case.
- Whether warranty claims support the additional $12 accrual and whether further adjustments to the $116 warranty liability are needed.
- Execution and cost of the increased $65 full-year rationalization plan, and any additional restructuring or impairment charges.
- International sales, currency exposure, and Plumbing segment margins, which weakened despite North American gains.
- Debt maturities, interest costs, covenant capacity, and potential taxes on repatriating foreign-held cash.