Masco Corporation (MAS)

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Masco (MAS)

Q4 2010 Earnings Call

February 15, 2011 8:00 am ET

Executives

Timothy Wadhams - Chief Executive Officer, President and Director

John Sznewajs - Chief Financial Officer, Vice President and Treasurer

Donald Demarie - Chief Operating Officer and Executive Vice President

Analysts

Michael Dahl

Christopher Wiggins - Oppenheimer & Co. Inc.

Peter Lisnic - Robert W. Baird & Co. Incorporated

Josh Levin - Citigroup Inc

William Wong

Chad Bolen - Raymond James

Dennis McGill - Zelman & Associates

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the Masco Corporation 2010 Fourth Quarter Conference Call. [Operator Instructions] If you have not received the press release and supplemental information, they are available on Masco's website, along with today's slide presentation, under the Investor Relations section at www.masco.com.

Before we begin management's presentation, the company wants to direct your attention to the current slide and the note at the end of the earnings release, which are cautionary reminders about statements that reflect the company's views about its future performance and about non-GAAP financial measures. After a brief discussion by management, the call will be open for analyst questions. [Operator Instructions] If we are unable to get to your question during this call, please call the Masco Corporation Investor Relations office at (313) 792-5500.

I would now like to turn the call over to Mr. Timothy Wadhams, President and Chief Executive Officer of Masco. Mr. Wadhams, please go ahead.

Timothy Wadhams

Thank you, Clayton, and thanks to all of you for joining us today for Masco's fourth quarter and full year 2010 earnings call. I'm joined by Donnie Demarie, our Executive Vice President and Chief Operating Officer; and John Sznewajs, our CFO.

And if you please flip to Slide #3, we'll start with the fourth quarter. Fourth quarter sales were off 9%. Excluding unusual items in the quarter, business rationalization charges, impairment charges for goodwill and other intangibles and normalizing our tax rate to 36%, we would have lost $0.08 [per common share] in the quarter compared to $0.05 of income in the fourth quarter of 2009. On an as-reported basis, including those items and a valuation allowance for deferred tax assets, we would have lost approximately $2.96 in the fourth quarter. Gross margins, adjusted for the items that I described earlier, decreased 370 basis points to 23.2%. And for those of you who have had a chance to look at the appendix, we do have a reconciliation of EPS, gross margins, as well as operating income in the appendix.

If you flip to Slide #4, please. We did have some significant charges in the fourth quarter. We had a goodwill and other intangible impairment of $721 million. That primarily relates to our Installation-related business. I think you're all aware that on an annual basis, we do a goodwill impairment test. That's a discounted cash flow, has a lot of assumptions in it. We did tweak a couple of the assumptions in terms of the terminal year, reducing housing starts from 1.6 million to 1.5 million -- that's about a 6% reduction -- and an increase in the discount rate, and those two essentially drove the impairment charge.

In terms of deferred tax assets, this is a very highly technical accounting area. The fact that we are in a three-year cumulative loss position, in large part driven by some of the charges that we've taken over the course of the last couple of years, negates previously identified tax strategies and puts us in a position where we had to record a valuation allowance for those deferred tax assets of $370 million (sic) [$371 million]. Those assets, incidentally, are still available to us from an economic standpoint in terms of limiting cash taxes going forward. Both of those items cost about $2.76 in the quarter. That's the EPS impact, and I would point out, very importantly, that we were able to amend our credit agreement just a couple of days ago. So we continue to have significant availability, I think about $1.1 billion in terms of availability under the line.

If you flip to Slide #5, take a quick look at the full year. Net sales on a full year basis were down 3%. Again, excluding the items I mentioned earlier, adjusting for those, our earnings per share would have been $0.16 in 2010 compared to $0.31 in 2009. I would point out to you, and it is on the reconciliation in the back, that we did have increased other expense this year over last year of about $72 million pretax. That's about $0.13 in terms of earnings per share. That reflects interest, currency translation, losses and impairments for financial investments. Our loss on an as-reported basis in the year would have been $3 per share. And gross margins, as adjusted, would have been down only 10 basis points to 26.4%. Working capital, as a percent of sales, improved to 13.4%. I'll talk a little more about that later. We generated $290 million of free cash flow and very importantly, ended the year with $1.7 billion of cash.

If you please [audio gap] Slide #6. Obviously, 2010 was a very challenging year for us. We came out of 2009 with a relatively strong operating performance offsetting a lot of volume drop with cost reductions and improvement in price/commodity relationships and had some nice momentum going into 2010. The first half was a little more positive. I think our sales were up 2%, 3%, and the second half was much more challenging. We saw housing starts slow in the second half. We saw expenditures for big ticket repair/remodel items continue to be deferred. And I think it's a good point for me to talk about our sales to key retailers.

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