Masco Corporation — Q1 2015 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Masco sells products and services across five segments: Cabinets and Related Products; Plumbing Products; Installation and Other Services; Decorative Architectural Products; and Other Specialty Products.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $2.018 billion | $1.965 billion |
| Gross profit / margin | $568 million / 28.1% | $547 million / 27.8% |
| Operating profit / reported margin | $171 million / 8.5% | $152 million / 7.7% |
| Income from continuing operations attributable to Masco | $64 million | $76 million |
| Diluted EPS | $0.18 | $0.21 |
| Net cash used in operating activities | $152 million | $244 million |
- Sales rose 3% reported and 7% excluding acquisitions and unfavorable currency translation. North American sales increased 5%; international sales declined 8% reported, while local-currency international sales grew 10%.
- Segment operating profit improved in Cabinets (loss narrowed to $4 million from $12 million), Installation and Other Services (profit of $7 million versus a $4 million loss), Decorative Architectural Products ($83 million versus $76 million), and Other Specialty Products ($6 million versus $5 million). Plumbing Products declined to $111 million from $119 million.
- Cash and cash investments were $1.578 billion, with short-term bank deposits of $197 million at March 31. Current assets were $4.179 billion and current liabilities $2.207 billion; the current ratio was 1.9, up from 1.7 at year-end.
- Notes payable were $506 million and long-term debt $3.418 billion, totaling $3.924 billion, up from $3.424 billion at December 31, 2014. Masco issued $500 million of 4.45% senior notes due April 2025. The company reported up to $1.1 billion of additional borrowing capacity under its credit agreement, subject to availability, and compliance with all covenants.
- Operating cash flow included $244 million of increased receivables and $56 million of increased inventories, reflecting expected seasonal working-capital needs. Financing cash inflow was $362 million, mainly from the notes issuance; investing cash inflow was $11 million.
Changes, outlook, and risks
- Operating profit and gross margin improved year over year, but Masco-attributable continuing earnings and diluted EPS fell. The effective tax rate rose to 37% from 5%; Q1 2014 benefited from a valuation-allowance reduction and a larger state tax benefit. Q1 2015 included anticipated nondeductible costs related to the proposed spin-off.
- Q1 2015 included $10 million of business-rationalization and other initiative costs, including $4 million related to the proposed spin-off, and $6 million of severance charges. Masco acquired an aquatic fitness business for approximately $26 million.
- Masco expected continued growth in new-home construction and repair-and-remodel activity in 2015, in North America and internationally. It provided no specific numerical earnings or sales guidance.
- Masco planned to spin off 100% of Installation and Other Services as TopBuild Corp. through a tax-free distribution, then expected in mid-2015. Completion and realization of expected benefits were subject to risk.
- Management cited exposure to housing and home-improvement demand, key customers, raw-material costs and availability, international economic conditions, consumer preferences, competition, underperforming businesses, and spin-off execution. Ordinary-course litigation and claims were described as unlikely to have a material adverse effect, though outcomes were not assured.
- Other notable items: share repurchases totaled 4.1 million shares for approximately $106 million; foreign-currency translation contributed to a $69 million comprehensive loss attributable to Masco. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Confirm the drivers and sustainability of constant-currency sales growth, including the divergence between North American and international results.
- Assess whether margin gains can continue amid weaker Plumbing Products profitability and ongoing rationalization costs.
- Review working-capital seasonality and operating cash conversion, alongside the effect of added debt and the 2025 notes.
- Track the TopBuild spin-off’s timing, transaction costs, tax treatment, and impact on continuing operations.
- Monitor the effective tax rate and any potential reversal of up to approximately $27 million of state and local deferred-tax valuation allowance.
- Evaluate share repurchases and dividends relative to cash needs, debt levels, and future investment requirements.