Masco Corporation — 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; quarterly figures below include the fourth quarter. Masco manufactures, distributes and installs home improvement and building products across five segments. Approximately 81% of 2014 sales came from North America. The business is exposed to housing construction and repair-and-remodel activity.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $8.521 billion | $8.173 billion |
| Gross profit / margin | $2.387 billion / 28.0% | $2.255 billion / 27.6% |
| Reported operating profit / margin | $788 million / 9.2% | $673 million / 8.2% |
| Adjusted operating profit / margin | $851 million / 10.0% | $721 million / 8.8% |
| Income from continuing operations attributable to Masco | $861 million | $298 million |
| Diluted EPS from continuing operations | $2.39 | $0.83 |
| Net cash from operating activities | $602 million | $645 million |
| Capital expenditures | $128 million | $126 million |
Adjusted operating profit is a company-presented non-GAAP measure excluding specified items, including rationalization costs, spin-off costs and litigation-related income or charges. The reported 2014 operating profit included $66 million of rationalization charges, $6 million of spin-off costs and $9 million of litigation-settlement income.
Cash and cash investments plus short-term bank deposits totaled approximately $1.7 billion at year-end, up from $1.5 billion. Total debt was approximately $3.424 billion, including $505 million classified as current, principally the 4.8% notes due June 2015. The current ratio was 1.7, compared with 2.1 in 2013. Masco reported no revolver borrowings and compliance with credit agreement covenants; stated available borrowing capacity was up to $1.2 billion, subject to availability. Shareholders’ equity was $1.128 billion, versus $787 million.
Material changes and segment results
- Sales increased 4% year over year, driven by higher volumes in plumbing, installation services, paints and stains, hardware and windows, and by some price increases. Currency and acquisition effects were insignificant overall.
- Segment sales were: Cabinets $999 million (down 1%); Plumbing $3.308 billion (up 4%); Installation and Other Services $1.515 billion (up 7%); Decorative Architectural Products $1.998 billion (up 4%); and Other Specialty Products $701 million (up 10%).
- Segment operating profit improved notably in Plumbing, to $512 million from $394 million, and Installation and Other Services, to $58 million from $37 million. Cabinets remained loss-making, with a $62 million operating loss versus a $10 million loss; lower North American volume, mix and rationalization costs weighed on results.
- Gross margin improved, while SG&A declined to 18.9% of sales from 19.4%. Management cited volume, cost savings and a more favorable selling-price/commodity-cost relationship as contributors.
- Operating cash flow decreased to $602 million from $645 million. The 2014 cash-flow reconciliation included a $406 million net decrease in deferred taxes; operating cash flow also benefited from sales growth and accounts-payable management.
Outlook, management commentary and risks
- Management expected continued improvement in North American and international new-home construction and repair-and-remodel activity in 2015, and said Masco was positioned to grow key brands and gain share. No specific revenue or earnings guidance was provided.
- Planned 2015 capital expenditures were approximately $190 million, excluding potential acquisitions. Management expected $400–$500 million of share repurchases in 2015 and approximately $30 million of rationalization and initiative costs, including about $25 million related to the planned spin-off.
- Masco planned to spin off 100% of Installation and Other Services through a tax-free distribution to shareholders, then expected in mid-2015. Completion depended on conditions including board approval, tax counsel’s opinion, registration effectiveness and financing for the separated company. The filing warns of execution, cost, distraction and potential tax risks.
- 2014 continuing-operations income benefited from a $529 million tax benefit from releasing valuation allowances on U.S. federal and certain state deferred tax assets, plus a $12 million benefit related to certain U.K. and Mexican assets. These items materially boosted reported earnings; the effective tax rate was a 58% benefit.
- Key exposures include cyclical housing and remodeling demand, persistent cabinet underperformance, competition and price pressure, customer concentration (Home Depot accounted for about 27% of sales), commodity and foreign-exchange movements, supply-chain dependence, litigation and product claims, and the realization of deferred tax assets.
- Defined-benefit pension plans were underfunded: the qualified-plan deficit was $454 million and the non-qualified obligation was $190 million at year-end. Management anticipated $55–$65 million of pension contributions in 2015.
- The filing disclosed non-material revisions to prior-period presentation: a $96 million reclassification between accrued and other liabilities, and a correction to private-equity investment accounting that increased 2013 income by $16 million. Management stated these revisions were not material to prior-period financial statements.
Most important facts for investors to verify
- Whether reported earnings and cash generation remain strong excluding the $529 million deferred-tax valuation-allowance release.
- Progress in restoring Cabinet segment profitability and whether volume, mix and restructuring pressures persist.
- Completion terms, financing, tax treatment, costs and post-separation effects of the planned Services spin-off.
- Funding and refinancing plans for the $505 million notes due in June 2015, alongside planned capital spending, dividends and share repurchases.
- Assumptions underlying pension funding, deferred-tax-asset recoverability and warranty reserves, including the increased warranty accrual for a business in Other Specialty Products.
- Exposure to Home Depot and other major customers, housing-market conditions, commodities, currency movements and unresolved legal claims.