Masco Corporation — Q3 2013 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2013. Masco sells building and home-improvement products and services through five segments: Cabinets and Related Products; Plumbing Products; Installation and Other Services; Decorative Architectural Products; and Other Specialty Products. The company attributed stronger demand partly to improving U.S. new-home construction and repair-and-remodel activity.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2012 period.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $2,150 | $1,913 | $6,175 | $5,664 |
| Gross profit | $607 | $500 | $1,724 | $1,505 |
| Operating profit | $212 | $108 | $532 | $271 |
| Income from continuing operations attributable to Masco | $105 | $26 | $243 | $17 |
| Net income (loss) attributable to Masco | $103 | $15 | $227 | $(27) |
| Diluted net income (loss) per share | $0.29 | $0.04 | $0.63 | $(0.08) |
| Gross margin | 28.2% | 26.1% | 27.9% | 26.6% |
| Reported operating margin | 9.9% | 5.6% | 8.6% | 4.8% |
- Sales and segment performance: Sales increased 12% in Q3 and 9% for the nine-month period. Growth was broad-based; Installation and Other Services had the strongest reported segment growth (19% Q3; 17% year to date). North America sales rose 13% and 10%, respectively. Management said acquisition and currency effects did not change the reported growth percentages materially.
- Margins and costs: SG&A was 18.4% of sales in Q3 and 19.3% year to date, versus 20.4% and 20.5%. Management cited greater sales volume, lower rationalization costs and, for the nine-month period, improved selling-price-to-commodity-cost relationships. Segment conditions varied; Decorative Architectural Products faced pricing/cost pressure and higher promotional spending in Q3.
- Cash flow: Net cash from operating activities was $350 for the first nine months, versus $90 in 2012. Investing used $21, including $88 of capital expenditures; financing used $356. Cash and cash investments declined $29 to $1,011. Short-term bank deposits were $277, bringing cash, cash investments and deposits to about $1.3 billion.
- Balance sheet and liquidity: At September 30, current assets were $3,493 and current liabilities $1,887; the reported current ratio was 1.9, versus 1.7 at year-end 2012. Long-term debt was $3,421 and notes payable $5. Total debt carrying value was approximately $3.4 billion; estimated market value was about $3.7 billion. Masco had no borrowings under its revolving credit facility and reported up to $1.2 billion of additional borrowing capacity, subject to availability.
- Shareholder returns: Cash dividends paid were $81 for the nine months. Masco spent $35 repurchasing shares, principally to offset dilution from stock awards; the quarterly dividend was $0.075 per share.
Material changes and unusual items
- Masco repaid and retired $200 of 7.125% notes at scheduled maturity in August 2013. Management described a $600 net debt reduction from debt actions, including the prior-year retirement of $791 of notes. Interest expense fell $4 in Q3 and $16 year to date.
- Prior-year results included litigation settlement charges of $1 in Q3 and $74 for the first nine months of 2012. This materially affects the year-over-year operating-profit comparison.
- In Q1 2013 Masco designated Danish cabinet business Tvilum for disposition and reported it as discontinued operations. Nine-month discontinued-operations loss was $16, including a $10 asset impairment; Q3 loss was $2. The filing describes a plan for disposition but does not state a completed sale.
- Masco revised prior cash-flow and balance-sheet classifications because certain foreign deposits with maturities of three to twelve months had been classified as cash instead of short-term bank deposits. The company said the errors were not material to prior financial statements and did not affect operating results; further historical cash-flow revisions were planned in future filings.
- The effective tax rate was 25% in 2013, versus 55% for the first nine months of 2012. The 2013 rate reflected partial use of U.S. federal net operating losses and a $12 state tax benefit related to uncertain tax positions. Masco continued to maintain a full valuation allowance against U.S. federal deferred tax assets.
Outlook, risks and contingencies
- Management was encouraged by U.S. housing starts and repair-and-remodel trends, expected demand to continue improving, and viewed long-term housing and home-improvement fundamentals as positive. It also cautioned that U.S. consumer confidence and economic recovery remained uneven and Europe challenging.
- Management raised its estimate for full-year 2013 business-rationalization charges to approximately $55, from its prior estimate of $40, due to additional Plumbing Products plant closures and headcount reductions. Further charges remain possible as the company evaluates cost and process improvements.
- Management said improved U.S. operations could provide evidence to reverse some or all of the deferred-tax valuation allowance, potentially up to approximately $600, as early as Q4 2014; this is conditional, not a forecasted reversal.
- Risks cited include reliance on new-home construction and home improvement, key customers, raw-material cost and availability, international economic uncertainty, shifts in consumer preferences, and the ability to improve underperforming businesses and maintain competitive positions.
- Masco faces ordinary-course litigation and claims, including product, environmental, construction-defect and employment matters. Management did not expect these matters to have a material adverse effect, while noting outcomes remain uncertain. The company reported compliance with credit covenants and effective disclosure controls.
Important facts for investors to verify
- How much of sales and margin improvement reflects sustainable volume and pricing versus housing-market recovery, mix, commodity costs and lower rationalization costs.
- Progress and remaining costs on the revised $55 full-year rationalization plan, particularly in Plumbing Products.
- Tvilum disposition timing, proceeds and any additional impairment or operating losses.
- Operating cash generation and working-capital movements, notably the increase in receivables and inventories.
- Debt maturities, revolver availability and covenant headroom; also the potential tax consequences of repatriating $564 held in foreign subsidiaries.
- Evidence supporting any future release of the U.S. deferred-tax valuation allowance and the timing and amount of any uncertain-tax-position changes.
- Completion and consistency of planned historical cash/deposit classification revisions in subsequent filings.