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Masco 10-Q 2011 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2011
Commission file number: 1-5794
Masco Corporation
(Exact name of Registrant as Specified in its Charter)
(313) 274-7400
(Registrant’s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date.
MASCO CORPORATION
INDEX
MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, 2011 and December 31, 2010
(In Millions, Except Share Data)
See notes to condensed consolidated financial statements.
1
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the Three Months and Six Months Ended June 30, 2011 and 2010
(In Millions Except Per Common Share Data)
See notes to condensed consolidated financial statements.
2
MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30, 2011 and 2010
(In Millions)
See notes to condensed consolidated financial statements.
3
MASCO CORPORATION and Consolidated Subsidiaries (Unaudited)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the periods ended June 30, 2011 and June 30, 2010
See notes to consolidated financial statements.
4
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
6
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
7
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) Note D — continued:
8
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) Note D — concluded:
9
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) Note E
— concluded:
10
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) Note G
— concluded:
11
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) Note H
— continued:
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MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) Note H — continued:
The Company’s stock option activity was as follows, shares in millions:
13
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) Note H — concluded:
14
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) Note I — concluded:
15
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
16
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
17
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued) Note L — concluded:
18
MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (concluded)
19
MASCO CORPORATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 2011 AND THE FIRST SIX MONTHS 2011 VERSUS
SECOND QUARTER 2010 AND THE FIRST SIX MONTHS 2010 SALES AND OPERATIONS
The following table sets forth the Company’s net sales and operating profit margins by business segment and geographic area,
dollars in millions:
20
MASCO CORPORATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We report our financial results in accordance with generally accepted accounting principles (“GAAP”) in the United States.
However, we believe that certain non-GAAP performance measures and ratios, used in managing the business, may provide users of this
financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP
performance measures and ratios should be viewed in addition to, and not as an alternative for, our reported results.
NET SALES
Net sales decreased one percent and three percent for the three-month and six-month periods ended June 30, 2011 from the
comparable periods of 2010. Excluding the positive effect of currency translation, net sales decreased four percent for both the
three-month and six-month periods ended June 30, 2011 from the comparable periods of 2010. The following table reconciles reported
net sales to net sales excluding acquisitions and the effect of currency translation, in millions:
North American net sales were negatively impacted by lower sales volume of installation and other services, cabinets, paints
and stains and builders’ hardware, which, in the aggregate, decreased sales by six percent for both the three-month and six-month
periods ended June 30, 2011 from the comparable periods of 2010. North American net sales were also negatively affected by the
planned exit of certain cabinet product lines, which decreased sales by three percent for both the three-month and six-month periods
ended June 30, 2011 from the comparable periods of 2010. Such declines were partially offset by selling price increases, which
increased sales by three percent for both the three-month and six-month periods ended June 30, 2011 from the comparable periods of
2010.
In local currencies, net sales from International operations increased five
percent for both the three-month and six-month periods ended June 30, 2011, primarily due to increased sales volume and selling
prices of International plumbing products, offset by lower sales volume related to International cabinets. A weaker U.S. dollar
increased International net sales by 13 percent and six percent, respectively, in the three-month and six-month periods ended June
30, 2011, compared to the same periods of 2010.
21
MASCO CORPORATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales of Cabinets and Related Products decreased in the three-month and six-month periods ended June 30, 2011, due to the
planned exit of ready-to-assemble and other non-core in-stock cabinet product lines, which decreased net sales in this segment by 12
percent and 13 percent, respectively, from the comparable periods of 2010. Net sales in this segment were also negatively affected
by lower sales volumes of both North American and International cabinets, which decreased sales in this segment by ten percent and 11
percent, respectively, in the three-month and six-month periods ended June 30, 2011 from the comparable periods of 2010. A weaker U.S. dollar increased sales in this segment by two
percent and one percent, respectively, for the three-month and six-month periods ended June 30, 2011 from the comparable periods of
2010.
Net sales of Plumbing Products increased, due to increased selling prices in North America, which increased sales by one
percent in both the three-month and six-month periods ended June 30, 2011 from the comparable periods of 2010. In local currencies,
net sales of International operations increased sales in this segment by four percent in both the three-month and six-month periods
ended June 30, 2011 from the comparable periods of 2010. Such increases in International sales were due to increased sales volume
and selling prices. A weaker U.S. dollar increased sales in this segment by six percent and three percent, respectively, for the
three-month and six-month periods ended June 30, 2011 from the comparable periods of 2010.
Net sales of Installation and Other Services decreased for both the three-month and six-month periods ended June 30, 2011,
primarily due to lower sales volume in the new home construction market. Such declines were partially offset by increased selling
prices.
Net sales of Decorative Architectural Products decreased for both the three-month and six-month periods ended June 30, 2011,
due to lower sales volume of paints and stains and builders’ hardware, principally at retail. Such declines were partially offset by
increased selling prices of paints and stains and increased sales of paint products to professional painters.
Net sales of Other Specialty Products decreased due to lower sales volume of windows in North America and the U.K., which
decreased sales by seven percent and four percent, respectively, for the three-month and six-month periods ended June 30, 2011 from
the comparable periods of 2010. A weaker U.S. dollar increased sales in this segment by two percent and one percent, respectively,
for the three-month and six-month periods ended June 30, 2011 from the comparable periods of 2010.
OPERATING MARGINS
Our gross profit margins were 26.3 percent and 25.2 percent, respectively, for the three-month and six-month periods ended June
30, 2011 compared with 26.7 percent and 26.6 percent, respectively, for the comparable periods of 2010. Results for the three-month
and six-month periods ended June 30, 2011 reflect lower sales volume and the related under-absorption of fixed costs, a less
favorable relationship between selling prices and commodity costs, increased advertising and program costs, increased litigation
settlement expenses and increased expenses related to growth initiatives.
22
MASCO CORPORATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, general and administrative expenses, as a percentage of sales, were 21.8 percent and 22.2 percent, respectively, for
the three-month and six-month periods ended June 30, 2011, compared to 20.8 percent and 21.6 percent, respectively, for the
comparable periods of 2010. The increase in selling, general and administrative costs is primarily due to increased sales incentives
to North American retailers and increased expenses related to growth initiatives.
We have been focused on the strategic rationalization of our businesses, including business consolidations, plant closures,
headcount reductions, system implementations and other initiatives. Operating profit for the three-month and six-month periods ended
June 30, 2011 includes $15 million and $47 million, respectively, of costs and charges related to our business rationalizations and
other initiatives. For the three-month and six-month periods ended June 30, 2010, we incurred costs and charges of $51 million and
$65 million, respectively, related to these initiatives.
We anticipate that full-year 2011 rationalization charges for the entire Company will aggregate approximately $65 million. We
continue to evaluate our businesses and the impact of market conditions on our businesses, which may result in additional
rationalization charges including severance, plant closure costs and asset impairments.
Operating margins in the Cabinets and Related Products segment for the three-month period ended June 30, 2011 benefitted from
lower costs and charges associated with business rationalizations. Such increases were partially offset by lower sales volume and
the related under-absorption of fixed costs, a less favorable relationship between selling prices and commodity costs and increased promotional expenses. Operating margins in this segment
for the six-month period ended June 30, 2011 reflect lower sales volume and the related under-absorption of fixed costs, as well as a
less favorable relationship between selling prices and commodity costs. Such decreases more than offset the benefits associated with
business rationalizations and other cost savings initiatives.
Operating margins in the Plumbing Products segment for the three-month and six-month periods ended June 30, 2011 were
negatively affected by a less favorable relationship between selling prices and commodity costs, a less favorable product mix, increased expenses related to growth initiatives and increased costs related to business rationalizations and other cost savings initiatives. Such declines were partially offset by
the benefits associated with business rationalizations and other cost savings initiatives and increased sales volume of International
operations.
Operating margins in the Installation and Other Services segment were negatively impacted by lower sales volume and the related
under-absorption of fixed costs and increased expenses related to growth initiatives. Such declines offset a more favorable
relationship between selling prices and commodity costs, as well as the benefits associated with business rationalizations and other cost
savings initiatives.
Operating margins in the Decorative Architectural Products segment for the three-month and six-month periods ended June 30,
2011 reflect lower sales volume of paints and stains and builders’ hardware, as well as increased advertising and program costs.
Operating margins in the Other Specialty Products segment for the three-month and six-month periods ended June 30, 2011 reflect
lower sales volume and the related under-absorption of fixed costs,
as well as a less favorable relationship between selling prices and commodity costs, increased
expenses related to growth initiatives and a less favorable product
mix. These decreases offset the benefits associated with business rationalizations and other cost
savings initiatives.
23
MASCO CORPORATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER INCOME (EXPENSE), NET
Other items, net, for the three-month and six-month periods ended June 30, 2011 included $3
million and $1 million, respectively, of currency transaction losses. Other items, net, for the
three-month and six-month periods ended June 30, 2010 included $5 million and $6 million,
respectively, of currency transaction losses.
For the three-month and six-month periods ended June 30, 2011, we recognized gains of $27
million and $41 million, respectively, related to the sale of TriMas common stock and gains of $6
million and $9 million, respectively, related to distributions from private equity funds.
For the three-month and six-month periods ended June 30, 2010, we recognized non-cash, pre-tax
impairment charges of $33 million related to financial investments ($28 million related to Asahi
Tec preferred stock and $5 million related to private equity funds and other private investments).
LOSS PER COMMON SHARE
Income (loss) (attributable to Masco Corporation) for the three-month and six-month periods
ended June 30, 2011 was $8 million and $(38) million, respectively, compared with $3 million and
$(4) million, respectively, for the comparable periods of 2010. Diluted income (loss) per common
share (attributable to Masco Corporation) for the three-month and six-month periods ended June 30,
2011 was $.02 per common share and $(.11) per common share, respectively, compared with $.01 per
common share and $(.02) per common share, respectively, for the comparable periods of 2010.
The effective tax rate was 66 percent and 138 percent, respectively, for the three-month and
six-month periods ending June 30, 2011. The tax rate in 2011 is higher than our normalized tax
rate of 36 percent primarily due to an increase in the valuation allowance related to net operating
losses and losses in certain jurisdictions providing no tax benefit.
The effective tax rate was 25 percent and 58 percent, respectively, for the three-month and
six-month periods ending June 30, 2010. The second quarter of 2010 tax rate includes a $6 million
tax benefit on the anticipated tax loss from the abandonment of certain intangibles costs due to
our decision to discontinue the manufacture of ready-to-assemble and other non-core in-stock
assembled cabinet product lines. The tax rate for the first half of 2010 is higher than our
normalized tax rate of 36 percent primarily due to certain plant closure costs and other losses in
certain jurisdictions providing no tax benefit.
OTHER FINANCIAL INFORMATION
Our current ratio was 2.1 to 1 and 2.3 to 1, respectively, at June 30, 2011 and December 31,
2010.
For the six months ended June 30, 2011, cash of $31 million was used for operating activities.
24
MASCO CORPORATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash used by financing activities was $105 million. Financing activities include $54
million for the payment of cash dividends and $30 million for the acquisition of Company common
stock in open-market transactions to offset the dilutive impact of long-term stock awards granted
in 2011. Net cash provided from investing activities was $4 million and included $49 million of
proceeds related to the sale of TriMas common stock, $9 million of net proceeds related to sale of
other financial investments and $10 million of net proceeds related to the sale of fixed assets,
partially offset by $67 million for capital expenditures.
For 2011, we anticipate capital expenditures, excluding any potential 2011 acquisitions, to be
approximately $190 million.
Our cash and cash investments were $1.6 billion and $1.7 billion at June 30, 2011 and December
31, 2010, respectively. Our cash and cash investments consist of overnight interest bearing money
market demand and time deposit accounts, money market mutual funds and government securities.
Of the $1.6 billion and the $1.7 billion of cash and cash investments held at June 30, 2011
and December 31, 2010, respectively, $529 million and $493 million, respectively, is held in
foreign subsidiaries. If these funds were needed for our operations in the U.S., their
repatriation into the U.S. may result in additional U.S. income taxes or foreign withholding taxes.
The amount of such taxes is dependent on the income tax laws and circumstances at the time of
distribution.
We were in compliance with all covenants and had no borrowings under our credit agreement at
June 30, 2011.
We are subject to lawsuits and claims pending or asserted with respect to matters generally
arising in the ordinary course of business. Note M to the condensed consolidated financial
statements discusses certain specific claims pending against us.
We believe that our present cash balance, cash flows from operations and, to the extent
necessary, bank borrowings and future financial market activities, are sufficient to fund our
working capital and other investment needs.
OUTLOOK FOR THE COMPANY
The
lack of job creation, high cost of energy and declining consumer confidence have made forecasting in the timing and strength of the recovery extremely
difficult. Most economists have reduced their forecasts for 2011, including housing start levels
that are now flat compared with 2010. As such, we believe that growth in the second half of 2011 will be
challenged. Longer-term, however, we are confident about the fundamentals for the new home
construction and home improvement markets and we are optimistic about the future.
We have several new programs that we are funding today that will drive future growth
opportunities across our businesses. We are very encouraged with the progress we are making to
increase our penetration with the North American cabinet dealer and with the professional painter.
We also have exciting new programs that will launch later this year in plumbing, cabinets
and builders’ hardware and we continue to invest in the development of international
opportunities for paint and plumbing. We expect that improvements in our markets and in consumer
spending, together with the changes we are driving across Masco and our financial strength, will
create significant value for our shareholders.
25
MASCO CORPORATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements contained in this report that reflect our views about our future performance
constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by words such as “believe,” “anticipate,” “appear,”
“may,” “will,” “intend,” “plan,” “estimate,” “expect,” “assume,” “seek,” and similar references to
future periods. These views involve risks and uncertainties that are difficult to predict and,
accordingly, our actual results may differ materially from the results discussed in our
forward-looking statements. We caution you against relying on any of these forward-looking
statements. Our future performance may be affected by our reliance on new home construction and
home improvement, our reliance on key customers, the cost and availability of raw materials, shifts
in consumer preferences and purchasing practices, and our ability to achieve cost savings through
the Masco Business System and other initiatives. These and other factors are discussed in detail
in Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K. Our forward-looking
statements in this report speak only as of the date of this report. Factors or events that cause
our actual results to differ may emerge from time to time, and it is not possible for us to predict
all of them. Unless required by law, we undertake no obligation to update publicly any
forward-looking statements as a result of new information, future events or otherwise.
26
MASCO CORPORATION
Item 4. CONTROLS AND PROCEDURES
27
MASCO CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes to the legal proceedings disclosed in Part I, Item 3,
“Legal Proceedings,” of our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 1A. Risk Factors
There have been no material changes to the risk factors of the Company set forth in Item 1A,
“Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
28
MASCO CORPORATION
PART II. OTHER INFORMATION (continued)
Item 6. Exhibits
29
MASCO CORPORATION
PART II. OTHER INFORMATION, concluded
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
30
MASCO CORPORATION
EXHIBIT INDEX
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