Masco Corporation — FY 2009 Form 10-K
Business context and reporting period. Masco manufactures, distributes and installs home improvement and building products across five segments. This annual filing covers the year ended December 31, 2009; quarterly information identifies fourth-quarter results. Approximately 79% of annual sales came from North America.
Financial performance
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net sales | $7.792 billion | $9.484 billion |
| Gross margin | 25.9% | 24.9% |
| Operating profit, reported | $55 million | $90 million |
| Operating margin, reported | 0.7% | 0.9% |
| Continuing-operations loss attributable to Masco | $140 million; $0.41 per diluted share | $366 million; $1.06 per diluted share |
| Net loss attributable to Masco | $183 million; $0.53 per diluted share | $391 million; $1.13 per diluted share |
| Cash from operating activities | $705 million | $797 million |
| Capital expenditures | $125 million | $200 million |
| Cash and cash investments, year-end | $1.413 billion | $1.028 billion |
| Total debt, year-end | $3.968 billion | $3.986 billion |
Sales fell 18% year over year (16% excluding acquisitions and currency effects). Management’s segment operating-profit measure, before specified corporate charges and impairment charges, was 6.2% of sales versus 7.5% in 2008; consolidated operating margin excluding identified charges was 5.4% versus 6.8%. The reported figures include $262 million of goodwill impairment charges in 2009 and $467 million of goodwill and intangible-asset impairment charges in 2008. Interest expense was $225 million, versus $228 million.
Fourth-quarter 2009 sales were $1.898 billion. The quarter recorded a $173 million loss from continuing operations and a $185 million net loss; the continuing-operations loss included the year’s $262 million pre-tax goodwill impairment charge ($180 million after tax).
Segments and material changes
- Cabinets: sales of $1.674 billion, down 26%; operating loss of $64 million. Lower housing and retail demand, unfavorable mix and fixed-cost under-absorption weighed on results.
- Plumbing: sales of $2.564 billion, down 15%; operating profit of $237 million, up from $110 million. Better price-to-commodity-cost relationships and cost actions supported profit.
- Installation and Other Services: sales of $1.256 billion, down 33%; operating loss of $131 million, as new-home construction weakness reduced volume.
- Decorative Architectural Products: sales of $1.714 billion, up 5%; operating profit of $375 million. Paint and stain growth offset weaker builders’ hardware.
- Other Specialty Products: sales of $584 million, down 18%; operating loss of $199 million, including $223 million of goodwill impairment. Excluding that impairment, segment operating profit was $24 million.
Housing starts fell more than 38% to 554,000 in 2009. The company recorded $94 million of net rationalization and cost-action charges, and a $43 million pre-tax loss on sales of two European plumbing businesses. The quarterly dividend was reduced from $0.235 to $0.075 per share; total dividends declared were $0.30 per share for 2009.
Liquidity, debt and cash flow
Cash and cash investments increased by $385 million during 2009, while operating cash flow declined from $797 million to $705 million. Investing activities used $118 million, including $125 million of capital expenditures; financing activities used $197 million, including $166 million of dividends. The working-capital ratio was 1.9 to 1, compared with 2.1 to 1 a year earlier. Long-term debt was $3.604 billion, with a further $364 million classified as current debt. Debt equaled 58% of total capitalization, versus 57% in 2008.
The amended revolving credit facility expires in February 2011 and provides up to $1.25 billion; Masco reported up to $1.2 billion of additional borrowing capacity, subject to availability, and was covenant-compliant at year-end. The $300 million floating-rate notes were due in March 2010. Management said cash and operating cash flow were sufficient for near-term working-capital and investment needs.
Outlook, risks and unusual items
- Management expected 2010 housing starts of 600,000–700,000, compared with 554,000 in 2009, and modest improvement in repair and remodeling. It cautioned that big-ticket home projects could remain deferred while employment, credit availability and home prices remained weak.
- Management forecast approximately $190 million of 2010 capital expenditures, about $38 million of rationalization costs, and $30–$35 million of additional costs for combining the North American cabinet groups. It expected a 2010 tax rate of approximately 37%.
- Key exposures include housing-market cyclicality, competition and pricing pressure, reliance on major retailers, commodity costs, supply-chain interruptions, foreign-exchange movements and customer credit risk. The Home Depot accounted for approximately $2.053 billion, or 26%, of 2009 sales; loss of that business could materially affect Masco.
- Pending insulation antitrust litigation includes a certified class of 377 contractors; Masco said it could not reliably estimate potential liability. The filing also describes other litigation, product warranty and indemnity obligations, and $37 million of unfunded private-equity commitments subject to capital calls.
- Qualified defined-benefit pension plans were underfunded by $332 million at year-end; the company expected to contribute $20–$25 million to those plans in 2010. Lead-content rules effective in California and Vermont in January 2010 may affect plumbing-product materials and sourcing.
- Goodwill impairment testing depends on estimates of future cash flows, housing activity and discount rates. Management reported that a 5% reduction in estimated reporting-unit fair values could trigger a further impairment analysis for one Installation and Other Services reporting unit.
Most important facts for investors to verify
- Whether housing starts and repair-and-remodel demand met management’s 2010 expectations, and how that affected sales and margins.
- Whether operating cash generation remained adequate after capital spending, dividends and debt maturities.
- Progress on the cabinet combination and rationalization savings, including actual restructuring costs.
- Developments in the insulation antitrust litigation, pension funding, and the $37 million private-equity capital commitment.
- Whether impairment assumptions, particularly for housing-sensitive businesses, remained supportable and whether additional charges were recorded.
- Continued reliance on The Home Depot and any significant changes to customer volumes, pricing or channel relationships.