Masco Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Financial amounts are in millions except per-share data. Masco sells home-improvement and building products and services through five business segments.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $1,876 | $1,806 |
| Gross profit / margin | $508 / 27.1% | $484 / 26.8% |
| Operating profit / reported margin | $132 / 7.0% | $109 / 6.0% |
| Continuing-operations income attributable to Masco | $56 | $42 |
| Net income attributable to Masco | $47 | $33 |
| Diluted EPS | $0.13 total; $0.16 from continuing operations | $0.09 total; $0.12 from continuing operations |
| Net cash used for operating activities | $210 | $167 |
| Cash and cash investments at period end | $1,032 | $1,788 |
Gross margin improved 0.3 percentage points; SG&A declined to 20.0% of sales from 20.8%. Operating profit includes $8 million of rationalization and other initiative charges, versus $11 million a year earlier. Q1 operating cash use reflected seasonal increases in receivables and inventory.
Segments and material changes
- Sales rose 4% overall, with no net currency-translation impact and approximately $3 million attributable to acquisitions. North American sales increased 6%; international sales declined 2% in local currencies and U.S. dollars.
- Installation and Other Services sales grew 12%, principally on higher activity in new-home construction and higher prices. Cabinets rose 4%, Plumbing Products 3%, and Other Specialty Products 8%; Decorative Architectural Products was essentially flat.
- Segment operating margins improved in Cabinets (−1.7% versus −7.0%), Installation and Other Services (−1.3% versus −5.0%), Decorative Architectural Products (20.6% versus 16.8%), and Other Specialty Products (−0.7% versus −4.0%). Plumbing Products margin declined to 11.3% from 13.1%, reflecting international mix and pricing/cost pressures, including a $4 million metal-hedge loss.
- Income from continuing operations attributable to Masco increased to $56 million from $42 million. Lower interest expense helped, while other investment income fell to $3 million from $16 million, mainly because private-equity fund distributions were lower.
- Comprehensive income attributable to Masco fell to $24 million from $60 million, primarily reflecting a $36 million foreign-currency translation loss in 2013 versus a $30 million gain in 2012.
Liquidity, debt and capital
At March 31, 2013, cash and cash investments were $1.032 billion, current assets $3.174 billion, and current liabilities $1.826 billion; the reported current ratio was 1.7 to 1. Notes payable were $206 million and long-term debt $3.421 billion, or approximately $3.627 billion combined. The filing estimates debt fair value at about $4.0 billion. Cash declined $319 million during the quarter.
Operating cash use was $210 million; investing cash use was $30 million, including $31 million of capital expenditures and $5 million for a U.K. door-business acquisition. Financing cash use was $65 million, including $35 million of share repurchases and $26 million of dividends. A new unsecured $1.25 billion revolving credit facility matures March 28, 2018. No borrowings were outstanding; $78 million of letters of credit reduced availability. The company reported up to $858 million of additional borrowing capacity under its debt-to-capitalization covenant and compliance with all covenants. Management planned to use available cash to retire $200 million of 7.125% notes due August 2013.
Outlook, risks and unusual items
- Management described long-term fundamentals for new-home construction and home improvement as positive, citing stronger construction activity, improving home prices, affordability and demographics. It emphasized brand investment, innovation, cost reduction, lean principles, and improving the Cabinets and Installation businesses. No specific financial guidance was provided.
- Masco classified its Danish Tvilum ready-to-assemble cabinet business as discontinued operations after deciding it was no longer core and beginning a disposition plan. The business had $59 million of Q1 sales, an operating loss of $3 million, and a $10 million asset impairment; total discontinued-operations loss was $9 million, the same as Q1 2012.
- The effective tax rate was 18%, below the stated normalized rate of 36%, primarily due to partial use of U.S. federal net operating loss carryforwards and a $12 million state tax benefit from expired statutes of limitations. The company said uncertain-tax-position liabilities could decline by approximately $3 million within 12 months.
- Key stated risks include dependence on new-home construction and home improvement and key customers; raw-material cost and availability; international economic uncertainty; changing consumer preferences; and execution in underperforming businesses and competitive markets. Ordinary-course litigation includes product, environmental, construction-defect and other claims; management did not expect a material adverse outcome, but gave no assurance.
- Foreign-subsidiary cash was $522 million; repatriation to the U.S. could trigger additional U.S. income or foreign withholding taxes. The company also uses derivatives to manage currency and copper/zinc exposures.
Investor facts to verify
- Whether the seasonal working-capital outflow reverses and cash generation improves in subsequent quarters.
- Execution and proceeds/timing of the Tvilum disposition, including whether further impairment or operating losses arise.
- Repayment of the $200 million notes due August 2013 and continued compliance with credit-facility covenants.
- How much earnings growth persists after the Q1 tax benefits and whether segment margin trends—especially Plumbing Products—continue.
- Exposure to foreign-currency movements, commodity costs, litigation, and potential taxes on repatriating overseas cash.