Masco Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited and generally present continuing operations. Masco completed the tax-planned spin-off of its Installation and Other Services businesses, TopBuild Corp., on June 30, 2015; prior-period comparisons and discontinued-operation results should be read in that context. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $1,929 | $1,876 | $3,588 | $3,506 |
| Gross profit | $637 | $575 | $1,132 | $1,057 |
| Gross margin | 33.0% | 30.7% | 31.5% | 30.1% |
| Operating profit | $279 | $221 | $444 | $374 |
| Operating margin | 14.5% | 11.8% | 12.4% | 10.7% |
| Income from continuing operations attributable to Masco | $109 | $124 | $170 | $202 |
| Diluted continuing-operations EPS | $0.31 | $0.35 | $0.48 | $0.56 |
| Net income attributable to Masco, including discontinued operations | $105 | $139 | $169 | $213 |
- Reported sales rose 3% in Q2 and 2% in the first half. Excluding acquisitions and currency translation, sales increased 6% in both periods.
- North American sales increased 7% in Q2 and 6% in the first half; international sales declined 10% and 9%, respectively, mainly due to the stronger U.S. dollar. International sales grew 5% in local currencies in both periods.
- Q2 segment operating profit improved notably in Cabinets and Related Products, which moved to a 5.6% margin from a 3.2% loss margin. Decorative Architectural Products and Other Specialty Products also improved margins; Plumbing Products’ margin was roughly flat.
- Gross margin gains reflected higher volume, improved selling-price-to-commodity-cost relationships, and cost savings. SG&A was 18.6% of sales in Q2 versus 18.9% a year earlier.
Cash flow, balance sheet and capital
- First-half operating cash flow was $139, up from $61 in 2014. Cash provided by operations was $355; seasonal receivables and inventory increases used $332 and $63, respectively.
- Investing activities used $60, including $70 of capital expenditures and $42 for acquisitions. Financing activities used $159, including $500 of note retirement, $207 of share repurchases, and $62 of dividends.
- At June 30, cash and cash investments were $1,297 and short-term bank deposits were $210, or $1.507 billion combined, down from $1.685 billion at year-end. $605 million was held in foreign subsidiaries; repatriation could create additional taxes.
- Current assets were $3,590 and current liabilities $1,590; the reported current ratio was 2.3:1, versus 1.7:1 at December 31, 2014. Total debt was approximately $3.425 billion ($6 of notes payable and $3.419 billion long-term debt), broadly similar to year-end.
- Masco issued $500 of 4.45% senior notes due 2025 and repaid $500 of 4.8% notes at maturity. Its amended revolving credit commitment is $750, with maturity extended to May 2020; no borrowings were outstanding and $72 of standby letters of credit were outstanding. Masco reported compliance with its covenants.
- Shareholders’ equity fell to $131 from $1,128, principally reflecting the TopBuild separation and other capital actions. Masco repurchased 7.9 million shares for approximately $207 in the first half; 37.1 million shares remained authorized for repurchase at June 30.
Outlook, commentary and risks
- Management expected continued 2015 growth in repair and remodeling and new-home construction in North America and internationally, and cited positive long-term housing fundamentals. No specific financial guidance was provided.
- The Q2 and first-half 2015 effective tax rates were 46% and 43%, above the stated normalized rate of 36%, primarily due to an $18 non-cash valuation allowance against TopBuild deferred tax assets. Discontinued operations also included spin-off-related costs; TopBuild’s reported results may not represent stand-alone results.
- Management cited business rationalization and cost-saving initiatives. Severance and rationalization-related charges were $1 in Q2 and $7 in the first half, compared with $8 and $13 in the respective 2014 periods.
- Risks highlighted include reliance on housing and key customers, raw-material cost and availability, international economic uncertainty and currency, consumer preferences, competitive position, underperforming businesses, and execution of organizational and share-repurchase plans. The filing reported no material change to the prior Form 10-K risk factors.
- Masco is subject to ordinary-course litigation and claims, including product, environmental, construction-defect and employment matters. It believes a material adverse outcome is remote, but cannot assure favorable outcomes. Disclosure controls were considered effective; no material change in internal control was reported.
Important facts for investors to verify
- How the TopBuild spin-off changes the ongoing revenue, earnings, cash-flow, and segment comparisons, and whether the separation receives the anticipated tax-free treatment.
- Whether operating cash flow improves as seasonal receivables and inventory are collected or converted, and how foreign-held cash may be used.
- The sustainability of margin gains and the impact of currency, commodity costs, legal expenses, and housing-market conditions.
- Debt, covenant headroom, share repurchases, and dividends following the spin-off and the decline in reported equity.
- The effect of the TopBuild deferred-tax valuation allowance and other unusual tax items on future effective tax rates and earnings.